Willis and Bowring v Ziade Investments No. 2 and 2 Ors

[2005] NSWSC 952

CITATION:	Willis & Bowring v Ziade Investments No. 2 & 2 Ors [2005] NSWSC 952
HEARING DATE(S):	29, 30, 31, August 2005 & 1, 5 September 2005.
JUDGMENT DATE :	23 September 2005
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	White J
DECISION:	1. Order that the plaintiff bring in short minutes of order in relation to its statement of claim and the fourth cross-claim in accordance with these reasons; 2. dismiss the cross-claim of the third cross-claimant to the second cross-claim with no order as to costs.

CATCHWORDS:	MORTGAGES - Claim for money owing under guarantees - Application for writ of possession for mortgaged land - Cross-claim seeking to set aside guarantees of loan obligation - Whether breach of loan contract discharged sureties - Allegation that lender was obliged to lend on terms other than the written contract - Loan contract construed - Whether advice given to wife allows lender to enforce guarantee under principles of Garcia v National Australia Bank Ltd - Whether otherwise unconscionable for lender to enforce guarantees - Held that plaintiff could enforce guarantees.
LEGISLATION CITED:	Bankruptcy Act 1966 (Cth) Corporations Act 2001 (Cth)
CASES CITED:	Garcia v National Australia Bank Ltd (1998) 194 CLR 395 Fitzgerald v Masters (1956) 95 CLR 420 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Yerkey v Jones (1939) 63 CLR 649
PARTIES:	Willis & Bowring Mortgage Investments Ltd v Ziade Investments No. 2 Pty Ltd & 2 Ors
FILE NUMBER(S):	SC 50165/04
COUNSEL:	Plaintiff: C Harris 2nd Defendant: In Person 3rd Defendant: M B Duncan
SOLICITORS:	Plaintiff: Watson Mangioni Defendant: N/A

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

WHITE J

Friday, 23 September 2005

50165/04 Willis & Bowring Mortgage Investments Ltd v Ziade Investments No. 2 Pty Ltd & 2 Ors

JUDGMENT

1 HIS HONOUR: In 2002 and 2003, Neaf Ziade was a property developer. On 6 November 2002, Ziade Investments No. 2 Pty Ltd entered into contracts to buy three parcels of land at 11-15 Alexander Street, Coogee for $6,000,000. Completion was due in twelve months. Mrs Ziade became the director and sole shareholder of Ziade Investments No. 2 on 24 January, 2003. Mr Ziade intended to build units on the property.

2 On 24 September 2003, Willis & Bowring Mortgage Investments Ltd (“WBMI”) offered to lend him $11,500,000 to assist with the purchase and the construction of 19 residential units. The parties entered into a formal loan agreement. The loan was for twelve months, and was secured by a first mortgage over the Alexander Street properties. The borrower was Ziade Investments No. 1 Pty Ltd. Mr Ziade was the director and sole shareholder of that company.

3 On 6 November 2003, Ziade Investments No. 1 drew down $4,632,443.79 from its facility with WBMI. The money was used by Ziade Investments No. 2 complete the purchase. The balance of the purchase price was provided by a number of lenders through a separate loan to Ziade Investments No. 1, secured by a second mortgage over the Alexander Street properties, paid the moneys to Ziade Investments No. 2. Ziade Investments No. 2, Mr Ziade and Mrs Ziade guaranteed both loans.

4 On 18 March, 2004, the second mortgagees asserted that Ziade Investments No. 1 was in default under the second mortgage. WBMI gave notice of default on the basis there had been default under the second mortgage. On 1 April 2004, WBMI alleged that Ziade Investments No. 1 was in default in not paying interest which it claimed was then due. No payments of interest were made after 1 March, 2004. The loan was not repaid at the expiry of twelve months, as required by the contract. WBMI sued each of Ziade Investments No. 2, Mr Ziade and Mrs Ziade on their guarantees. It seeks to enforce its mortgage by obtaining an order for possession of the Alexander Street properties.

5 Ziade Investments No. 2 has gone into liquidation. On the first day of the hearing the liquidator filed a submitting appearance.

6 Mr Ziade has been declared bankrupt. An order was obtained from the Federal Magistrates Court giving leave to WBMI to proceed against Mr Ziade. He defended the proceedings in person.

7 There is no issue that the advance to Ziade Investments No. 1 has not been repaid. There is no issue that Ziade Investments No. 2, Mr Ziade and Mrs Ziade guaranteed the repayment of the loan. Mr Ziade denied that the guarantors were liable under their guarantees. He claimed that:

(a) representations were made to him by his finance broker, Mr Tozer, and by officers of WBMI, that they would fund the Alexander Street development on the same basis that they had funded another project of Mr Ziade’s, being a development at 84 Dudley Street, Coogee;

(b) by reason of this representation, WBMI was obliged to lend 100% of the costs required to acquire the land and to complete the construction, provided that the total amount lent did not exceed 66.6% of the gross value of the completed development;

(c) notwithstanding that the term of the loan for the Dudley Street development was twelve months, WBMI was obliged to provide its loan for a term which was reasonably sufficient to enable the development of the Alexander Street property to be completed and the units sold to enable the loan to be repaid;

(d) because WBMI did not honour the alleged representations made to him as to the terms upon which it would lend, it could not enforce the guarantees given in respect of its loan;

(e) the terms of the loan on which WBMI insisted were improvident and it was unconscionable for WBMI to insist on them;

(f) the guarantees were unenforceable because the loan was an improvident bargain for the defendants;

8 Mr and Mrs Ziade also contend that:

(g) the loan agreement of 6 November 2003 was void for uncertainty;

(h) WBMI breached the contract of loan by not paying a progress claim of $140,000 submitted on 5 February 2004;

(i) as a result of the breach, the guarantees are discharged;

(j) alternatively, the damages to which Ziade Investments No. 1 is entitled can be set off against its liability for the debt, so that the guarantors are liable only for the amount ascertained after the damages are set off.

9 Mrs Ziade contends that her guarantee is not binding because she provided it to support her husband’s business activities, she did not understand its purport and effect, she did not receive independent advice in respect of it, and no one on behalf of Willis & Bowring Mortgage Investments ever spoke to her about her guarantee. She relied upon Garcia v National Australia Bank Ltd (1998) 194 CLR 395.

10 Mr Ziade contends that his guarantee is unenforceable because it was to be one of three guarantees, and the guarantees given by Mrs Ziade and Ziade Investments No. 2 are unenforceable owing to Mrs Ziade not having received independent advice about the transaction.

11 Ziade Investments No. 2, Mr Ziade and Mrs Ziade also brought cross-claims against the finance broker who acted for Mr Ziade in obtaining the loans. The liquidator of Ziade Investments No. 2 discontinued its cross-claim at the hearing. The cross-claim by Mr Ziade is stayed pursuant to s 60(2) of the Bankruptcy Act. Mrs Ziade’s cross-claim was heard. It was brought against Platinum Capital Mortgages Pty Ltd and Mr Tozer. Although they filed a defence to the cross-claim, they did not appear at the hearing.

12 Platinum Capital Mortgages also brought a cross-claim against Mr Ziade. It is stayed pursuant to s 58(3) of the Bankruptcy Act.

Promise to Provide Funding on Same Terms as Dudley Street Development

13 Mr Ziade was an experienced real estate agent and property developer. For many years, he had assisted his father, who was also a property developer. Mr Ziade’s first property development on his own account was at 12-16 Alexander Street, Coogee, where he converted three properties into thirteen home units. This development was made between 1995 and 1998 and was profitable. In 2000, Mr Ziade purchased 145 Brook Street, Coogee and re-developed the site. In November 2001, he purchased the site known as 84 Dudley Street, Coogee. The purchase price was $1,000,000. He provided $750,000 from his own funds and borrowed $250,000 from the National Australia Bank. He intended to develop the site by constructing three apartments.

14 In June 2002, Mr Ziade attended a property seminar at which Mr Tozer spoke. Mr Tozer discussed financing for property developments. Mr Ziade met with Mr Tozer in August or September 2002 and told him of his proposed development at Dudley Street. At that time, he was still waiting for the development application approval. Mr Tozer recommended that he refinance the Dudley Street development so that he could take out his $750,000 equity and discharge the loan from the National Australia Bank. Mr Tozer said that the application for finance should be made to WBMI.

15 Mr Tozer worked for Morgan Pacific Finance Pty Ltd which is now called Platinum Capital Mortgages Pty Ltd. I will call it Morgan Pacific. On 8 October 2002, Morgan Pacific confirmed that WBMI had approved two loans for the 84 Dudley Street development. One was for $750,000. The other, called a “Construction Loan Approval” was for $1,935,000. The offer for the second loan from WBMI was not in evidence. The offer for the $750,000 loan included a term that the maximum loan to value ratio would be 66.6% of the current value of the proposed security property as determined by a registered valuer acceptable to WBMI. It appears that the advance of $1,935,000 was offered not only to meet the costs of the construction of the three apartments, but also to assist Mr Ziade in refinancing the existing advance from the National Australia Bank. Although the terms of the loan of $1,935,000 were not in evidence, I infer that it was also subject to a loan-to-valuation ratio of 66.6%.

16 Later, in October 2002, Mr Ziade had his first meeting with officers of WBMI. During the meeting, they discussed the Dudley Street development. Mr Ziade said that he was interested in a larger site in Coogee with a rough cost of $12,000,000, which he estimated would roughly gross $18,000,000 in sales. Mr Tosolini, a director of WBMI, told Mr Ziade that when he was ready, WBMI would be more than happy to talk about it.

17 Mr Ziade drew down $1,000,000 of the facilities provided by WBMI secured over Dudley Street. He used the money to discharge the mortgage to the NAB and pay himself the $750,000 which he had invested in the purchase of the Dudley Street property.

18 On 15 May 2003, Ziade No. 1 signed a building contract for the construction of three units on the Dudley Street property. The builder was Tricon Projects Pty Ltd. The principal under that contract was Ziade Investments No. 1.

19 Prior to 6 June 2003, Mr Ziade made a new loan application to WBMI for the Dudley Street project. On 6 June 2003, WBMI conditionally approved a $3,000,000 facility for the development. The term of the loan was twelve months to expire on 20 June 2004. It was a term of the loan that the principal sum must not exceed 66.6% of the value of the security as advised by the valuer from time to time. It was a term of the loan that progressive advances would be made on the basis of progressive valuations undertaken by a registered valuer acceptable to WBMI, and the principal amount advanced was not to exceed 66.6% of the current value of the security as advised by the valuer from time to time. There were no other conditions to progressive drawdowns of the facility. The loan was to carry interest at 12% reducible to 9% if interest was paid when due. Interest was payable monthly in advance. A formal loan agreement was signed on 10 June 2003. Mr Ziade was the borrower. The formal loan agreement stipulated conditions precedent to making subsequent drawdowns from the facility. They were not onerous. Apart from the condition that the loan not exceed 66.6% of the most recent valuation of the security property and not exceed the facility limit, the conditions were that there be satisfactory insurance, that representations and warranties made by the borrower remain true, that there be no event of default, and that all necessary authorisations for the making of the drawdown had been obtained.

Purchase of 11-15 Alexander Street

20 Meanwhile, on 6 November 2002, Ziade Investments No. 2 had entered into a contract to purchase the three properties at 11, 11A and 15 Alexander Street Coogee for $6,000,000. It paid a 1% deposit. The completion date for the contracts was 6 November 2003.

21 No relevant representation was made to Mr Ziade by WBMI before he caused Ziade Investments No. 2 to enter into the contract to buy 11-15 Alexander Street. According to Mr Ziade, he relied upon a representation made to him by Mr Tozer in August or September 2002. Mr Ziade told Mr Tozer that he thought the properties were worth about $4,500,000 to $5,200,000 without development approval to build a block of apartments, but with the DA they were worth well in excess of $6,000,000. Mr Ziade told Mr Tozer that it was a “good deal”, with an approximate value of $12,000,000 for the acquisition and development, and $18,500,000 gross realisation. However, he could not afford a 10% deposit and stamp duty as well as the consultants’ costs, let alone the interest to get the project off the ground. Mr Tozer advised him to negotiate the purchase of the property on an extended settlement whilst he obtained development approval. He advised him that the $750,000 of equity which Mr Ziade had in the Dudley Street project would cover a 1% deposit, stamp duty, advertising and consultant costs. He said that if Mr Ziade could organise a 1% deposit, Mr Tozer would arrange 100% finance through WBMI. He told Mr Ziade:

“ [WBMI] don’t normally fund projects this big. But I know the way they work. We do these deals with them all the time and I’m sure they will finance it at 9% interest. Why wouldn’t you buy the property? They don’t require pre-sales, and the interest you pay will be capitalised. Also the progress claims are made at the value of the improvements so you can ‘claw back’ your money. That’s why developers are using these kinds of lenders. The only thing you have to worry about is getting the DA and I will do the rest. ”

22 As noted above, Mr Tozer did not defend the claim. I accept this evidence.

23 The representations made by Mr Tozer were not made by or on behalf of WBMI. The defendants pleaded that Mr Tozer was WBMI’s agent. There was no evidence to support that allegation. On 11 October 2002 and 6 May 2003, Mr Ziade signed documents called “Service Agreement and Irrevocable Authority” which acknowledged that Morgan Pacific Finance had sourced mortgage finance on his behalf and that he agreed to pay its fees. Later, when Mr Tozer was retained to obtain finance to complete the purchase of the Alexander Street properties, Mr Ziade and Ziade Investments No. 1 signed another agreement to the same effect. There was no evidence that Morgan Pacific or Mr Tozer, were WBMI’s agents.

24 Between December 2002 and June 2003, Mr Ziade asked Mr Tozer on a number of occasions when loan applications would be submitted to WBMI for the Alexander Street project. Mr Tozer said that he would arrange it closer to the date of settlement, as he did not want WBMI to change the terms of the loan.

Representations by WBMI about Finance for Alexander Street

25 Mr Ziade said that representations about the funding of the Alexander Street project were made to him by officers of WBMI in June and August 2003. He said that at a lunch in June 2003, he asked how things were looking for the Alexander Street project, and Mr Tosolini said that it was a big project, that WBMI had looked at the numbers and it looked good and they didn’t see any problems. Mr Tosolini said that they were just waiting on the valuation and a quantity surveyor’s report. According to Mr Ziade, he said:

“ I’ve been told it will be same structure as Dudley Street. I would rather do everything sooner rather than later as Dudley Street’s finance ended up taking up some time, especially with the QS report. ”

And Mr Tosolini replied:

“ Yes, we’re happy with it. It looks like a good quality project. ”

26 Mr Tosolini said that he had no recollection of discussing the Alexander Street project at a lunch with Mr Ziade in June 2003. He also said that the lunch did not take place in the restaurant which Mr Ziade identified. Two of the other persons who Mr Ziade identified as having been present at the lunch, Messrs Mattiusi and Hatheier, were not present. I do not accept that the conversation deposed to by Mr Ziade took place. Even if it did, it could not seriously be suggested that by a preliminary comment over lunch, WBMI had bound itself to provide finance on any particular terms. Indeed, such objective evidence as there is, suggests that by June 2003, no formal application had been made by Mr Tozer for finance for the Alexander Street project. It was not until 28 August 2003, that Mr Tozer sent WBMI a project feasibility study for WBMI’s review and inquired as to “W & B’s appetite to fund this deal”.

27 The second alleged representation on behalf of WBMI is said to have been made by Mr Hatheier of WBMI. Mr Ziade says that he met with Mr Hatheier on 28 August 2003 and that he showed Mr Hatheier the progress of the Dudley Street development. They then walked around to the Alexander Street site. According to Mr Ziade, Mr Hatheier said to him:

“we have received the application and plans from the broker and done our numbers. We are going to fund this project the same way we funded Dudley Street.”

28 Mr Hatheier denied making this statement. I accept his denial. Mr Hatheier said that the meeting with Mr Ziade took place on 29 August. He said that he told Mr Ziade that he thought that WBMI would be interested in funding the project but that a level of pre-sales of about $4,600,000 would be required before funding commenced. He also told him that progress advances would be on the basis of a quantity surveyor’s certificate and that WBMI would not provide funding on a progress valuation basis as it had done at Dudley Street. Mr Hatheier’s evidence is consistent with a facsimile transmission received by WBMI from Morgan Pacific on 28 August 2003, and the handwritten notes on that fax.

29 Mr Ziade was not a satisfactory witness in a number of respects. He often failed to answer questions directly. His evidence was often confused. In some respects, for example in relation to whether he obtained legal advice on WBMI’s letter of offer of 24 September 2003, he gave contradictory evidence. His evidence of being the author of a file note of a meeting of 27 February 2005 is implausible having regard to the terms of the file note. Where his evidence conflicted with that of Mr Hatheier, I prefer Mr Hatheier’s evidence. In my view, the alleged representation of Mr Hatheier to Mr Ziade of 28 August 2003 was not made.

30 However, even if it had been made, it could only have been a preliminary observation which was not intended to create a legal relationship between WBMI and Mr Ziade or his companies. It could not have obliged WBMI to provide funding for the Alexander Street project, let alone, specified the terms upon which funding would be provided. If the statement made by Mr Hatheier had been made, it was only a statement of intention. It was not a commitment by WBMI to lend an unspecified amount of money on the same terms as the Dudley Street project.

31 Further, even if the representation had been made, and even if WBMI had been committed to funding the Alexander Street development on the same terms as it had funded the Dudley Street project, it would not have meant that WBMI was required to provide all of the funds needed by Ziade Investments No. 2 and Mr Ziade to complete the purchase of the Alexander Street properties on 6 November 2003. Mr Ziade submitted that WBMI was obliged to provide him with funds as required, up to 66.6% of the estimated gross realisations of the development as determined by the valuer. On 3 November 2003, the valuer, Mr Stamoulis, valued the completed development at $18,450,000. Mr Ziade submitted that WBMI was obliged to lend up to 66.6% of this amount as and when the funds were required, thus providing 100% finance for the acquisition of the property on 6 November 2003. Had it done so, there would have been no need for Ziade Investments No. 1 to borrow money on second mortgage at extremely high rates of interest. However, this submission fails at every step. The representation relied upon by Mr Hatheier was not made. Even if it had been made, it could not have been a binding commitment. Even if it had been a binding commitment, the commitment would not have been to provide a loan on the terms Mr Ziade contends for. The Dudley Street advance was expressly on terms that the principal amount would not exceed 66.6% “of the current value of the security as advised to us by the valuer from time to time”. It was not made on the basis that the advance would not exceed 66.6% of the estimated completed value of the development. There are also other problems with the submission. Mr Ziade wanted the interest on the Alexander Street loan to be capitalised. Interest on the Dudley Street loan was payable monthly.

32 In any event, Mr Ziade’s contentions are inconsistent with the applications for finance made by Morgan Pacific Finance on his behalf. He said that he did not agree with the information supplied to WBMI by Mr Tozer. Whether that is so or not, WBMI were entitled to act on the basis of the representations made to them by Mr Tozer.

Offers of Finance for Alexander Street

33 The first project feasibility study provided to WBMI on 28 August 2003 showed estimated total project costs exceeding $14,306,000. The amount of funding sought was $11,500,000, being 63.19% of an estimated gross realisations of $18,200,000. After taking into account of the costs already paid by Mr Ziade for stamp duty and a deposit on the purchase, there was still a shortfall of about $2,400,000 which would have had to be met either from Mr Ziade’s own resources or from another lender. On 15 September 2003, Ziade Investments No. 1 applied for a loan of $11,500,000. The loan application for that amount was signed by Mr and Mrs Ziade on 12 September 2003. A revised project feasibility study dated that day and supplied to WBMI, included provision for mezzanine funding of $1,400,000.

34 Mr Ziade was aware of the need to borrow money on second mortgage. On 12 September 2003, he asked Mr Tozer to try to lower the brokerage fees having regard to the high rates of interest on the first and second mortgages. On 17 September 2003, an organisation called Sirius Capital offered to arrange second mortgage finance of $1,400,000. The finance was for a term of fifteen months from initial drawdown at an interest rate of 35% per annum reducing to 30% per annum upon receipt of interest payments on the due dates. Interest was payable upon maturity of the facility. If the loan were to be repaid before twelve months, a full twelve months’ interest was payable. Sirius Capital was to be paid a fee of $77,000. The loan was subject to conditions. These included that onsite construction by an acceptable builder commence within ninety days of initial drawdown, and that the borrower, or their adviser, review the building contract and find it satisfactory prior to the commencement of construction. The offer was accepted by Mr Ziade on behalf of Ziade Investments No. 1, despite its onerous terms.

35 On 24 September 2003, WBMI offered to lend Ziade Investments No. 1 $11,500,000. The term of the mortgage was twelve months. They were terms of the offer that before the facility could be drawn down, the valuation of the security property was to be undertaken by a registered valuer acceptable to WBMI and that the loan to valuation ratio was not to exceed 66.6%. It was a further term of the offer that the borrower was to provide evidence of proposed mezzanine funding arrangements, the terms of which were to be satisfactory to WBMI. There were further conditions precedent to any further development funding to which I will refer when dealing with the issue of whether WBMI breached the loan agreement by failing to pay a progress claim.

36 WBMI’s offer stated that the proposed initial advance would be $5,028,300. That was 66.6% of $7,550,000. $7,550,000 was a value which the valuer, Mr Stamoulis, had placed on the land in a valuation made on 31 August 2003. It was clear that WBMI was not offering to lend 100% of the acquisition costs.

37 It is clear that Mr Ziade understood the terms of WBMI’s offer and that he agreed to them. In his affidavit of 6 October 2004, he deposed to having consulted his uncle, Mr Anthony Ziade, who is a solicitor, about the offer. He said that he and Mrs Ziade attended the solicitor’s office for an hour while Mr Anthony Ziade explained the terms of the proposed loan to them. In his oral evidence he initially agreed that he received legal advice in relation to the letter of offer, but later retracted that evidence. However, there is no doubt that he understood the terms of the loan which he agreed to accept.

38 His contention was that the terms were oppressive, and that he was forced to accept the terms because he had no other available sources of finance. In submissions, Mr Ziade contended that WBMI had taken advantage of his vulnerable position to extract unreasonably severe terms. Because he had already borrowed from WBMI for the Dudley Street project, WBMI had security over his assets and the assets of Ziade Investments and Ziade Investments No. 1 to secure those borrowings. Even if finance from another lender had been available, he could only have offered second mortgage security over any assets other than the Alexander Street property, and this would have been insufficient.

39 There is no allegation in the pleadings that the terms of WBMI’s loan were harsh or oppressive. Nor was there any evidence that the terms were not such as could reasonably have been required by a lender in WBMI’s position. Nor would it, in any case, be a defence available to Mr Ziade, who was fully aware of the terms of the loan, that the terms were harsh or oppressive.

40 Rather, the defence pleads that WBMI represented that it would provide finance for the Alexander Street development on the same terms as for the Dudley Street development, that there would be no need for any other financier, and that it would provide 100% acquisition finance and capitalise interest until the moneys advanced could be repaid out of sales. No such representations were made by WBMI. But even if they had been made, Mr Ziade, Ziade Investments No. 1 and Ziade Investments No. 2 did not alter their position on the basis of any such representations between 28 August 2003 when the representations were allegedly made, and 24 September 2003 when Mr Ziade received the formal letter of offer.

41 The defendants pleaded that the documents presented to the defendants for their execution, being the loan agreement, guarantees and mortgage from Ziade Investments No. 2, constituted an improvident bargain on their part. No submissions were advanced to explain why the agreements were not binding on the defendants if they were improvident. In any event, there was no evidence that the terms of the loan or the security documents were “improvident”.

42 The defendants pleaded that the terms of the letter of offer were improvident because before funds would be advanced for construction, pre-sales totalling $4,600,000 had to be obtained which were satisfactory to WBMI, and interest would not be capitalised until WBMI was satisfied that construction had commenced and it had made the first progressive payment of construction funding. The defendants pleaded that pre-sales could not be achieved until the construction went ahead. However, the evidence did not support this contention. Mr Tozer represented to WBMI that Mr Ziade had advised that he could sell around ten units off-the-plan, through his own various sources. On 15 September 2003, Mr Tozer advised WBMI that the borrower would secure a minimum of $4,600,000 in pre-sales prior to requesting a construction drawdown. In other words, not only did Mr Ziade agree to the condition, but, through Mr Tozer, he represented that it could be met.

43 Mr Ziade said that he told Mr Tozer in September 2003 that it would be very difficult to achieve pre-sales in the market without heavy discounts and that he left it to Mr Tozer to negotiate with WBMI. I see no reason to doubt that the condition that there be $4,600,000 of pre-sales before construction funding would be advanced was a prudent condition for the lender. The fact that it may have created difficulties for the borrower is not to the point. In any event, the condition was relaxed on 10 October 2003.

44 The next basis for complaint that the documents presented by WBMI were an “improvident bargain”, was that the interest rates contained in the second mortgage transaction were usurious. They are certainly very high. However, that cannot be a cause for complaint against WBMI, given my rejection of Mr Ziade’s contention that WBMI was required to advance 100% of the acquisition and construction costs.

45 Other complaints were made about the terms of the mortgage given by Ziade Investments No. 2 over the Alexander Street properties, but none of them could affect Mr Ziade’s obligations as a guarantor. Mr Ziade’s defence includes a complaint that the mortgage from Ziade Investments No. 2 contains a warranty that each relevant party is solvent and can pay its debts as and when they fall due. I do not understand the contention that it is unconscionable or unfair for a lender to obtain such a warranty. Mrs Ziade alleges that WBMI knew that the warranty was false. There is no evidence to support that contention. Mr and Mrs Ziade signed a joint statement of their financial position on 12 September 2003, knowing that it was to be supplied to WBMI, which disclosed net assets of $3,871,000.

46 Although Mr Ziade contended that WBMI was required to advance funds on the same basis as it advanced funds on the Dudley Street project, he complained that the term of the loan which WBMI offered was only twelve months. He said that this was an unreasonably short period in which to both obtain the necessary consents required by loan contract, and also carry out the construction and sell the units from the completed development. As I understood the submission, he contended that WBMI was required to offer a loan for a longer period because of Mr Hatheier’s alleged representation that it would make finance available on the same basis as it had funded the Dudley Street project. I have rejected the submission that this representation was made. In any event, the contract of loan for Dudley Street provided that the loan was for a term of twelve months. There is no substance to the complaint about the terms upon which WBMI was prepared to lend.

47 For these reasons, I reject the first six contentions advanced by Mr Ziade referred to in paragraph [7] above.

48 The defence included a contention that the following clauses of the mortgage were improvident and unconscionable, namely:

(a) a representation that Ziade Investments No. 2 obtained and continued to receive a valuable commercial benefit by entering into the mortgage. I do not understand why that is said to be unconscionable. Ziade Investments No. 2 stood to benefit from the development, as it was the owner of the land on which the units were to be constructed;

(b) that there was no material fact relating to the affairs of any relevant party, the mortgage or the mortgaged property, which might, if disclosed, be reasonably expected to affect the decision of the mortgagee to provide financial accommodation. Again I do not understand the contention that the inclusion of this term was unconscionable;

(c) that to the maximum extent permitted by law, the mortgagor dispensed with any notice or lapse of time required by law prior to the mortgagee enforcing the mortgage or any collateral security, including notices under s 57 of the Real Property Act or s 111 of the Conveyancing Act. Again, the presence of this clause is not unconscionable. It applies only to the extent to which the law permits requirements of notice to be dispensed with. It does not affect the liability of the guarantors, except Ziade Investments No. 2. Ziade Investments No. 2 has now entered a submitting appearance;

(d) that the mortgage and each collateral security is a principal obligation and is independent of and not prejudicially affected by any other security interest or guarantee which the mortgagee may hold. No argument was advanced as to why this term was unconscionable;

(e) that the mortgagee might amend any Transaction Document or provide further accommodation to any borrower or otherwise increase the limit of accommodation in its discretion without notice to or consent by the mortgagor being necessary. Again, no argument was advanced as to why this provision was unconscionable. Nor does it affect the rights of Mr or Mrs Ziade as guarantors.

49 I need not consider whether the defence that a contract is an “improvident bargain” is sound in law. It is not established that any of the provisions were “unconscionable”, or more appositely, that WBMI took an unconscionable advantage of the defendants’ position.

Loan Agreement of 6 November 2003 Not Uncertain

50 It was submitted by counsel for Mrs Ziade that the loan agreement of 6 November 2003 was void for uncertainty. The only consequence of this submission being upheld would be that the contract of loan was governed by the letter of offer of 24 September 2003, as varied by the subsequent correspondence between Morgan Pacific and WBMI of 2 and 10 October 2003. The only possible significance of the argument, assuming it were correct, would be to rebut a contention that the variation of 10 October 2003 was superseded by the formal loan agreement of 6 November 2003 which did not include the variation.

51 Counsel for Mrs Ziade submitted that the loan agreement was void for uncertainty because no sense could be made of a number of clauses in it. First, it was undated when signed. That did not make the agreement uncertain. WBMI dated the agreement on 6 November 2003, being the date of drawdown. Interest became payable for each interest period which was measured from the date of drawdown. There was nothing uncertain about the date of drawdown. The loan was repayable on the earlier of 6 November 2004, or twelve months after any advance by WBMI to the borrower. Again, there was nothing uncertain about the period of the loan. The fact that the document was undated when signed did not make it uncertain.

52 Next, reference was made to clause 2.1 which refers to the lender making available drawings under the facility by way of cash advances “in the manner set out in item 4 of the particulars”. Item 4 of the particulars sets out the purpose of the loan. The reference to item 4 is clearly a mistake. Item 11 deals with the manner of drawdown and plainly is the item which should have been referred to in clause 2.1. Any other construction would be absurd. Without the need for rectification, the agreement can be construed by supplying, omitting or correcting words to avoid absurdity or inconsistency. (Fitzgerald v Masters (1956) 95 CLR 420 at 426-427).

53 On the same ground, each of the other defects in the document can be corrected. None of them leads to the agreement being void for uncertainty.

54 It is alleged that the obligation to repay the loan is void for uncertainty because clause 3.2 provides that the borrower must repay any moneys “in the absence of any other arrangements than on demand”. The word “than” is a typographical error for “then”. There is no merit to this submission that this renders the agreement void for uncertainty.

55 The same principle is applicable to each of the other defects identified in the submissions, namely, the definition of Interest Payment Date, which refers to item 9 in the particulars instead of item 8; clause 4.3.2(c) which refers to an Event of Default defined by reference to clauses “0 and 0” instead of clauses 11.1 and 11.2; and clause 18.1(5) which refers to conditions precedent set out in item 14 of the particulars, instead of item 15 of the particulars. None of these defects in drafting makes the agreement uncertain.

56 It was also submitted that clause 4.4 was uncertain. It provides “interest must be computed on the basis of the actual number of days”. That clause is not uncertain. It means that interest must be computed on the basis of the actual number of days on which the loan or any other part of the secured money, is outstanding.

57 Next, it was submitted that the agreement was void for uncertainty because clause 18.1(28) refers to the Corporations Law which was not in force at the time the document was entered into, having been replaced by the Corporations Act. The reference to the Corporations Law was for the purpose of a definition of the expression “responsible entity”, which was said to have the same meaning as in s 9 of the Corporations Law. There is no reason that the parties by their agreement cannot use an expression defined by reference to a repealed Act, even assuming the reference to Corporations Law was not patently intended to be a reference to the Corporations Act, which I think it was. In any event, an ambiguity in the definition of “responsible entity”, and none was suggested, would not render the agreement uncertain by that fact alone.

58 Finally, reference was made to the Note at the conclusion of the document which stated that a right to draw down the Facility by more than one drawing would only apply if there were provision to that effect in item 11 of the Schedule. It was said that there was no “Schedule”. The “Schedule” was the particulars on pages 20 to 23 of the agreement, item 11 of which set out the manner in which drawdowns could be made.

59 The submission that the loan agreement of 6 November 2003 is void for uncertainty has not made out.

Breach of Contract by not Paying a Progress Claim Submitted on 5 February 2004

60 Clause 17 of WBMI’s letter of offer of 24 September 2003 provided:

“ It shall be a condition precedent for any further development costs funding that the following conditions are satisfied:
(a) Execution of a Builders Side Deed by all parties;
(b) You are to provide us with a complete copy of the Construction Certificate;
(c) You are to provide us with evidence of appropriate Home Owners Warranty Insurance and Construction Insurance for the development;
(d) A copy of Development Application, Construction Certificate, plans and building contract are to be reviewed by Quantity Surveyor and considered satisfactory to WBMIL with no erroneous conditions;
(e) Pre-sales of $4.6m which are to be satisfactory to WBMIL in all respects;
(f) Building contract is to Fixed Price;
(g) The development is proceeding in accordance with agreed cashflow and project feasibility statements;
(h) Capitalisation of interest is not to commence until WBMI is satisfied that construction has begun and WBMI has made the first progressive drawing of construction funding. All monthly interest payments due until that time are the responsibility of the borrower as and when they fall due. Should WBMI consider that construction has ceased or has been suspended, then WBMI reserves the right to suspend the capitalisation of interest.
(i) The form and substance of progress claims which must be in writing and must:
- specify trade, the percentage of work completed, the amount claimed and the cost to complete;
- be supported by a certificate from a quantity surveyor appointed by WBMI verifying the value of works completed (excluding unfixed materials on site) and the cost to complete;
- authorise WBMI to pay the amount of the claim to the builder;
- all sundry costs will be made available upon production of invoices; and
- provide 14 days (sic) notice specifying the amount of the drawing and the date that payment is required. ”

61 On 2 October 2003, Mr Tozer wrote to WBMI. He said that Mr Ziade had advised of a development program which included obtaining a staged construction certificate to undertake demolition, excavation and piling work within three to five days and completing the work of “demolition etc” by Christmas at a cost of approximately $450,000 to $500,000. The program included finalising builder negotiations and signing a contract with a builder by 30 January for immediate commencement of construction. Mr Ziade said that he did not agree with Mr Tozer’s statements, but that is irrelevant to the present issue. Mr Tozer continued:

“ We are cognizant of your requirement to achieve the prescribed level of pre-sales prior to the payment of the 1st construction drawdown, however, given the development program means the site will not lie idle for approximately three months and therefore reduce the timing for completion of construction, and the relatively minor cost involved, we request your approval to waive the pre-sale requirement for funding of the demolition and associated works.

In respect of marketing, we advise Neaf has released 13 units for sale, but aiming to secure only 10 pre-sales. Ten units have been released to one organization/group, two units to an agent and a single unit to a 2nd agent. In the event the ‘block’ of ten units are sold first then the other three units will be withdrawn from sale.
While there is reasonable expectation that the your pre-sale requirement (sic) can be satisfied prior to the demolition works commencing, an approval to our request will ensure a smooth development program without undue pressure being placed on the sale prices. ”

62 The request was considered by WBMI’s lending committee. Mr Hatheier made a submission to the committee. He said that with the proposed development program, it was unlikely that the pre-sale requirement would be complied with until after the completion or partly through the first stage of the project; this being the demolition, excavation and piling. He noted that Home Owners Warranty and Construction Insurance, along with the Builders Side Agreement, would also not be in place prior to that stage of work, until the builder arrangements were finalised. That internal memorandum cannot be used to construe the correspondence of 2 and 10 October 2003. However, it does show what the subjective intentions of WBMI were, in relation to the request made to it. This would be relevant to any claim for rectification of the loan agreement of 6 November 2003, if such a claim can be considered.

63 On 10 October 2003, WBMI responded to Mr Tozer’s letter of 2 October. They said:

“ Willis & Bowring Mortgage Investments Limited (WBMI) is pleased to confirm that it will provide initial construction funding to assist with the demolition and excavation/piling on the site detailed above. Funding lines for this purpose only may be utilised prior to the satisfactory completion of the agreed pre sales condition precedent of $4,600,000.
Following this further funding will not be provided until the pre sale condition and all other conditions precedent have been satisfied in accordance with our letter of offer dated 24th September 2003.
All other terms and condition (sic) remain as stated with the above letter of offer. ”

64 Mr and Mrs Ziade say that all of the conditions precedent in clause 17 of the letter of offer were waived in relation to the initial construction funding for demolition, excavation and piling, including the condition in clause 17(i) about the form and substance of progress claims. They say that because WBMI stated that all other conditions precedent had to be satisfied before further funding would be provided, it should be implied that none of the conditions precedent had to be satisfied before funding for demolition, excavation and piling would be made available.

65 I do not agree with this submission. The letter of 10 October 2003 has to be read with the letter from Morgan Pacific Finance of 2 October 2003. The only condition precedent which Morgan Pacific Finance asked to be waived in relation to the funding for demolition, excavation and piling work was the condition requiring the prescribed level of pre-sales before any construction funding would be provided. That was the only condition precedent expressly waived by WBMI. The agreement to provide funding for demolition, excavation and piling in advance of other construction funding, and before a builder had been identified, may also have carried with it the implication that such funding would be provided before a builder’s side deed was executed, a fixed price building contract was entered into, and home owners warranty insurance and construction insurance were obtained. However, there was no request for clause 17(i) to be varied. The letter of 10 October 2003 did not contain an agreement to waive or vary clause 17(i). Therefore, before WBMI could be required to pay a progress claim, the progress claim had to specify the relevant trade, the percentage of work completed, the amount claimed, and the cost to complete, and be supported by a certificate from a quantity surveyor verifying the value of works completed and the cost to complete.

66 Mr Ziade said that in addition to this correspondence, Mr Hatheier orally agreed to waive the requirements relating to a quantity surveyor’s certificate and the provision of invoices. He gave that evidence for the first time when pressed in cross-examination about the terms of Mr Tozer’s letter of 2 October 2003. Initially in cross-examination, he said that Mr Hatheier orally waived the requirements for a quantity surveyor’s certificate or the production of invoices on or about 21 or 22 September 2003. He said that Mr Hatheier told him the progress claims could be done in the same way as for Dudley Street. However, no progress claims for the Dudley Street development were tendered. Later in his cross-examination, Mr Ziade said that the representations made to him by Mr Hatheier in relation to the form of progress claims were made both before and after the letter of 24 September. He said that Mr Hatheier told him that it would take too long for WBMI’s legal division to redraft condition 17(i) in the 24 September letter in accordance with the representation, and that he accepted Mr Hatheier’s assurance that the representation would prevail, and acted on that basis.

67 Mr Ziade swore affidavits on 6 October 2004, 15 March 2005 and 17 June 2005 and did not refer to such conversations. No questions were put to Mr Hatheier about it when Mr Hatheier gave evidence. Indeed, Mr Ziade asked no questions of Mr Hatheier.

68 On the other hand, Mr Hatheier did not give evidence in reply. Counsel for the plaintiff said that he had believed that Mr Hatheier had covered the matter in his evidence in chief. Mr Hatheier deposed in his affidavit that in August 2003, he told Mr Ziade that progress advances would be on the basis of a QS certificate and that WBMI would not provide funding on a progress valuation basis as they had at Dudley Street. Mr Hatheier did not deal in his evidence in chief with the contention that he had agreed with Mr Ziade after 24 September that Mr Ziade could put in progress claims in the same form as they had been submitted for the Dudley Street project. When he swore his affidavit, that contention had not been advanced by Mr Ziade.

69 I accept that the reason for not calling Mr Hatheier in reply was that given by counsel for the plaintiff. I do not accept Mr Ziade’s evidence of such a conversation. It is inconsistent with the memorandum Mr Hatheier wrote to the lending committee on 7 October in which he identified the respects in which clause 17 of the letter of offer would not apply to the initial funding for demolition, excavation and piling if the borrower’s request were accepted. I do not consider that Mr Hatheier would have departed from the conditions stipulated by the lending committee.

70 In any event, to allow the defendants to rely upon the alleged conversations between Mr Hatheier and Mr Ziade to contradict the terms of the written contract would be contrary to the parol evidence rule. The agreement between the parties was reduced to a formal written contract on 6 November 2003. It is a formal instrument which appears to document the contract between the parties in its final form. Evidence of discussions between the parties before 6 November 2003 about what was required of each of them under the contract is not admissible to contradict or vary the terms of the formal agreement. (Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 347). Unless the agreement of 6 November 2003 were to be rectified to make it accord with a prior agreement of the parties or their common intention, it governs the obligation of WBMI to pay progress claims.

71 It is here that a difficulty arises. The loan agreement dated 6 November 2003 did not include the variation acknowledged by WBMI in its letter of 10 October 2003, let alone the alleged further variation to the terms of the letter of offer said to have been orally agreed to between Mr Hatheier and Mr Ziade. The loan agreeemnt stipulated that it would be a condition for any further development cost funding that all of the conditions which are to be found in condition 17 of the letter of 24 September 2003 be satisfied. That included not only the condition as to the form and substance of progress claims, but also the condition that there be pre-sales of $4,600,000 satisfactory to WBMI before any further development cost funding was provided. It is only if the agreement of 6 November 2003 were rectified that the defendants could complain of the alleged non-payment of a progress claim.

72 The defendants’ defence did not include a contention that the agreement of 6 November 2003 should be rectified. Nor did Mrs Ziade seek such an order in her cross-claim. No cross-claim by Mr Ziade was filed, although one was served. If it had been filed, it would have been stayed. Ziade Investments No. 1 is a party to the loan agreement, but is not a party to the proceedings. Ziade Investments No. 2 filed a cross-claim against WBMI which did not include a claim for rectification. The liquidator of Ziade Investments No. 2 discontinued that cross-claim. Accordingly, no order could be made for rectification of the loan agreement of 6 November, 2003.

73 In any event, rectification could not be obtained to give effect to any continuing common intention in relation to funding for demolition, excavation and piling works. The parties did not have a common intention on that topic. WBMI’s intention was to waive only the conditions relating to pre-sales, the builder’s side agreement, and home owners warranty and construction insurance. Mr Ziade’s intention was that all of the conditions precedent to providing funding for demolition, excavation and piling work be waived.

74 An instrument may be rectified either to give effect to the parties’ common intention, or their prior concluded agreement, where that intention or agreement has been mistakenly omitted from the instrument. The parties may mistakenly have omitted to include the agreement recorded in the correspondence of 2 and 10 October, 2003 in the formal agreement of 6 November, 2003. However, the defendants did not raise this issue and no evidence was directed to it.

75 In my view, the short answer to the defendants’ claim that WBMI breached its agreement, is that the agreement in the correspondence of 2 and 10 October 2003 is not included in the loan agreement of 6 November 2003.

76 I should add, that any claim to rectify the instrument of 6 November 2003 to include the alleged oral agreement made between Mr Hatheier and Mr Ziade about the form of progress claims would be doomed to fail. It is clear that the persons whose intentions should be imputed to WBMI are its board or lending committee. Even if Mr Hatheier told Mr Ziade that he should send in progress claims in the same form as was submitted for the Dudley Street project, and I do not accept that he did, that would not be a sufficient basis on which to rectify the loan agreement of 6 November 2003.

77 In case I am wrong that the claim for damages for failure to pay a progress claim is defeated by the terms of the agreement of 6 November 2003, I will deal with the issue on the basis that the parties were bound by the terms of the correspondence of 2 and 10 October 2003.

78 Mr Ziade submitted a progress claim on 5 February 2004. He advised that demolition had been completed and that he was preparing to excavate. The claim was in the following terms:

“ PROGRESS CLAIM 5 February, 2004
11-15 ALEXANDER ST. COOGEE
Work in Progress

· Demolition – completed $36,000.00

· Hoarding – Hire $ 1,000.00

· Council Permits $10,000.00

· Long Service Levy $ 8,000.00

· Dilapidation Reports – completed $ 3,000.00

· Signboards – Safety, etc.. $ 1,000.00

· Site office/Shed – Hire $ 1,000.00

· Insurance $80,000.00

TOTAL CLAIM: $140,000.00 ”

79 It is clear that WBMI was not required to pay the claim as submitted. Not all of it related to demolition work. In particular, the amounts of $10,000 for council permits, $8,000 for long service levy, and $80,000 for insurance did not fall within WBMI’s agreement of 10 October 2003 to provide construction funding to assist with demolition. Moreover, although hoardings, dilapidation reports, signboards and shed hire were all incidental to or necessary for the carrying out of demolition work, they were all included in the quantity surveyor’s description of work for preliminaries. WBMI did not agree to provide funding for that work in advance of the borrower meeting the pre-sales condition. Mr Ziade appeared to contend that he was entitled to draw down funding to meet any of the expenses which needed to be met before the work of demolition, excavation and piling could be completed. His submission assumed that WBMI was required to provide 100% of the finance to meet the construction costs. That assumption is not warranted.

80 If the progress claim complied with the requirements of the contract, and if WBMI was required to comply with the terms of its letter of 10 October 2003, notwithstanding that those terms were not included in the loan agreement of 6 November 2003, the only part of the progress claim which was payable was the claim of $36,000 for demolition work.

81 The progress claim was not accompanied by invoices. Nor was there a quantity surveyor’s certificate verifying the value of the works completed and the cost to complete.

82 On or about 12 February 2004, Mr Ziade asked Mr Hatheier if WBMI could make payment for the demolition works. Mr Hatheier said that Mr Ziade had to provide him with a copy of the invoices. Mr Ziade said he would fax them to Mr Hatheier when he got back to the office. Mr Hatheier did not ask for the quantity surveyor’s certificate. Mr Ziade gave oral evidence that the invoices were hand delivered to WBMI that afternoon. Mr Hatheier deposed in his affidavit that at the meeting of 12 February, Mr Ziade had said that he would fax the invoices to WBMI when he got back to the office, but that the invoices were not received. He said it was for that reason that WBMI had not made any payment for the progress claim. Mr Hatheier was not cross-examined on this evidence. Mr Ziade produced copies of the invoices which he said were delivered to WBMI. After the close of submissions, he tendered an invoice for demolition work from Nicholas & Khoury dated 2 February 2004 with a fax imprint of 24 March 2004. The invoice was for the amount of $40,000 in respect of the demolition of three houses. There was no corroboration of Mr Ziade’s evidence that the invoices were delivered to WBMI. Moreover, notwithstanding the date on the invoice of 2 February 2004, I am not satisfied that Mr Ziade had the invoice in his possession on 5 March 2004 when he lodged the progress claim. If he did, I would expect him to have claimed $40,000 for demolition work, not $36,000. Although the figure of $36,000 was in accordance with the quantity surveyor’s estimate, my understanding of Mr Ziade’s position is that he had been told that a quantity surveyor’s certificate was not required and that progress claims would be dealt with in the same way as the Dudley Street project. That being so, there was no reason why he would not have claimed the full amount for the demolition cost incurred if he had received the invoice. Because of the lateness of the tender, WBMI was not able to cross-examine Mr Ziade on the document. The fax imprint of 24 March 2004 is unexplained. It is consistent with the document only being faxed to Mr Ziade on that day.

83 Further, in the weeks that followed, Mr Ziade made no further request that WBMI pay the progress claim. If Mr Ziade had complied with Mr Hatheier’s request, and if he had still wished to draw down the funding, there is no explanation as to why he did not make a further request for the progress claim to be paid.

84 In summary, even if the parties were bound by the terms agreed on in the correspondence of 2 and 10 October 2003, WBMI was not in breach of the agreement in failing to pay the progress claims, because Mr Ziade did not supply the invoices referable to the claim. In any event, the only component of the claim which WBMI would have been required to pay, (assuming it was bound by the correspondence of 2 and 10 October 2003), was the sum of $36,000 for demolition.

85 On 17 February 2004, Mr Ziade terminated the building contract between Tricon and Ziade No. 1 for the Dudley Street project. On 27 February 2004, a meeting was held between Mr Ziade, his father Mr Jack Ziade, Mr Hearnden of WBMI and Mr Hatheier. On that day, WBMI received a report from Mr Stamoulis, advising of a progress inspection made of the Alexander Street site on 10 February 2004 and recommending payment of 66.6% of his estimated percentage and value of the work completed, in a sum of $151,348. This certificate was not in accordance with the agreement relating to the Alexander Street project. It was not submitted that WBMI was required to pay on the basis of Mr Stamoulis’s report of 10 February 2004.

86 There was a dispute as to what was said at the meeting of 27 February 2004. Most of the detail is irrelevant. Mr Ziade, belatedly, tendered a file note which he said he prepared immediately following that meeting. The note included the following:

“ Peter said that Neaf still had approx. $130,000 that was able to be drawn. I told them that Neaf would not be borrowing any more or drawing any more and I don’t want them to lend or allow to draw down for Neaf .”

87 This was a reference to the Dudley Street project where WBMI had offered Mr Ziade further finance. He did not take up the offer. Although Mr Ziade said that the file note was his, at least parts of it appear to have been composed by Mr Jack Ziade. I infer that it was Mr Jack Ziade who said that he did not WBMI to lend any more money to Neaf and that Neaf would not be borrowing any more. Although the immediate context of that remark was the Dudley Street project, both projects were discussed at the meeting. It appears from the file note, as well as from the evidence given by the witnesses about the meeting, that no request was made by Mr Ziade for payment of the progress claim. In my view, Mr Jack Ziade asserted strenuously that Neaf Ziade was over-exposed on both projects and that he was not to draw any further funds on either project. Mr Neaf Ziade acquiesced, and did not make any further request for payment. In his letter of 28 May 2004 in which Mr Ziade complained about WBMI’s handling of the loan application and the terms of the loan, he made no complaint about the non-payment of the progress claim and made no further request for payment.

88 To recapitulate, I consider that the correspondence of 2 and 10 October, 2003 was superseded by the formal loan agreement of 6 November, 2003. There has been no claim to rectify that agreement. I reject Mr Ziade’s evidence of his oral agreement with Mr Hatheier about progress claims, but even if such an agreement had been made, the formal loan agreement would override it. If, contrary to my view, the issue is governed by the correspondence of 2 and 10 October, 2003, WBMI was still not obliged to pay the progress claim in the absence of supporting invoices and a quantity surveyor’s certificate. Even if it had been liable, the only amount for which it would have been liable was $36,000. Mr Ziade did not press for the payment of the progress claim, but acquiesced to his father’s assertion to WBMI that WBMI should not advance more money to Mr Ziade.

89 It follows that Mr and Mrs Ziade have not established that WBMI breached its contract by not paying the progress claim.

90 I do not accept that it was the non-payment of the progress claim of 5 February 2004 that led to cessation of work on the project. I do not accept that if the progress claim had been paid, Mr Ziade would have been able to procure the $4,600,000 of pre-sales which were a pre-condition to further construction funding. He would not have attempted to do so. He was in any event facing a claim by the second mortgagees that there had been default under the second mortgage which entitled the second mortgagee to possession of the property.

91 I should add that even if WBMI had been in breach of contract, the breach would not have discharged the guarantors. The breach would not have been a fundamental breach of the contract of loan, or a repudiation of the contract of loan, which authorised the borrower to terminate the contract. Nor did Ziade Investments No. 1, or any of the defendants, purport to accept the breach and terminate the contract of loan. The guarantors would have remained liable under their guarantees. It was submitted for Mrs Ziade that the alleged breach of the promise to pay the progress claim wrought a fundamental change to the principal obligations of which she was a guarantor so that she was discharged from her contract of guarantee. If the non-payment of the progress claim had been a breach of contract, it was not of that character. It is unnecessary to consider whether the suggested ground for discharge of the guarantee would be sufficient to bring about that result.

Representation by Letter of 10 October 2003

92 It was submitted for Mrs Ziade that WBMI engaged in trade or commerce in contravention of s 52 of the Trade Practices Act by sending the letter of 10 October 2003 as it did not intend to release the funds without the condition precedent of a QS report being satisfied. It was said that the letter contained a misrepresentation that the funds would be released without the need to comply with any of the conditions precedent. For the reasons given, I do not consider that this is the correct construction of the letter. Accordingly, the claim that WBMI engaged in misleading or deceptive conduct in sending the letter must fail. In any event, no damage was suffered by any of the defendants by reason of the making of the representation. Nor is it established that any of the defendants or Ziade Investments No. 1 suffered damage as a result of the progress claim not being paid. I have rejected the contention that it was the non-payment of the progress claim that triggered default under the second mortgage and brought the project to a halt.

93 The second mortgagees gave notice of default on 18 March 2004. The default relied upon was non-compliance with clause (D) of the “Other Conditions” of the Loan Agreement with the second mortgagees. The condition required:

“ Confirmation of commencement of Construction on-site by an acceptable builder within 90 days of initial drawdown. The Borrower or their adviser is to review the builder and the proposed Building Contract and find both satisfactory prior to the commencement of construction .”

94 The ninety-day period expired on 4 February 2004. No builder had been appointed by that date. No building contract had been proposed. Construction had not commenced. That default was not triggered in any way by the non-payment of the progress claim of 5 February 2004. I do not accept that had the progress claim been made either in whole, or in the sum of $36,000 to pay demolition costs, that the defendants or Ziade Investments No. 1 would have complied with condition D of the loan agreement with the second mortgagees before 18 March 2004.

Garcia v National Australia Bank Ltd

95 Counsel for Mrs Ziade submitted that Mrs Ziade did not understand the purport and effect of the documents which she signed, that she signed the documents at the request of her husband without an adequate explanation from him about them and about the risks she would incur by signing the documents, and that she received no independent advice from a stranger about the transaction. It was submitted that it was unconscionable for WBMI to enforce her guarantee against her in those circumstances. Reliance was placed upon Garcia v National Australia Bank Ltd (1998) 194 CLR 395.

96 In that case, Gaudron, McHugh, Gummow and Hayne JJ said (at 408-409) that the principles applied in Yerkey v Jones (1939) 63 CLR 649 involved no departure from accepted principle, and were as follows:

“ Yerkey v Jones begins with the recognition that the surety is a volunteer, a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee. It holds, in what we have called the first kind of case, that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that:

(a) in fact the surety did not understand the purport and effect of the transaction;

(b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed);

(c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet

(d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.”

97 However, Mrs Ziade was not a volunteer. Moreover, she understood the purport and effect of what she signed. The fact that the solicitor who explained the documents to her and the potential consequences of her signing the documents was her husband’s uncle, and not a stranger to her, does not mean that she can escape liability on her guarantees.

98 Ziade Investments No. 2 owned the land on which the units were to be constructed. Mrs Ziade was the beneficial owner of the shares in Ziade Investments No. 2. Although Ziade Investments No. 2 was not the borrower from WBMI, it was the borrower of funds from Ziade Investments No. 1, being the funds borrowed by Ziade Investments No. 1 from WBMI. If the project had been successfully completed, Ziade Investments No. 2 stood to make a profit from the development. Mrs Ziade as the beneficial shareholder of Ziade Investments No. 2 had a financial interest in the successful completion of the project for which the money was borrowed and repayment of which she guaranteed.

99 Although Mrs Ziade gave a confused account of the borrowing arrangements as explained to her by her accountant, Anthony Bell, the conclusion of the explanation the accountant gave was that any excess profit would be held as residential units left over from the sale of the project in Mrs Ziade’s name. This must have been a reference to Ziade Investments No. 2.

100 Further, Mrs Ziade understood the essential elements of the transaction, so far as they affected her. She knew that she was asked to sign documents which had to do with borrowing money for the purchase of 11-15 Alexander Street. She said that she did not understand that she was signing a guarantee. I do not accept that evidence. She agreed that in 2003 she understood what a guarantee was. It was plain from the words against which she signed, that she was signing a guarantee. She went to a solicitor to do so.

101 In any event, she gave evidence that she thought she was borrowing money. She understood that she might be required to repay whatever moneys were borrowed under the documents which she and her husband were asked to sign. By 2003, she understood what a mortgage was and what a guarantee was. I find she did understand that she was signing as a guarantor and that that meant that she could be called upon to repay the loan. She was warned by her solicitor that if the loan was not paid, the finance company could come after everything including her jewellery and their house.

102 Her only concern was whether the unit, in which she and her husband and children resided, could be sold if the loan was not paid. Her solicitor warned her that it could be. Mr Ziade, however, assured her that the accountant had structured things so that the home was protected and that the lender could only go after their other assets. Her solicitor did not accept that that was so. In response to Mr Ziade’s statement that the home was protected, her solicitor said “I don’t know about that – it isn’t explained that way in the contract.” She accepted her husband’s assurance that the home was protected rather than the warning given by her solicitor. That does not mean that she did not understand the consequences of signing the guarantee.

103 In fact, the unit was not put at risk by her signing the guarantee. The unit was unit 12, 12-16 Alexander Street. It was owned by Ziade Investments Pty Ltd, not by her. She was not a shareholder of Ziade Investments Ltd. It was not a party to the transaction documents for the Alexander Street project. In July 2003, there was a proposal that Ziade Investments Pty Ltd transfer the unit to her, but there is no evidence that that was done. Ziade Investments Pty Ltd was already at risk in relation to the Dudley Street development. That risk was not increased by Mrs Ziade signing a guarantee for the Alexander Street loan.

104 It was submitted for Mrs Ziade that she did not receive an adequate explanation of the risks because she did not receive an explanation of the effect of what were called the cross-guarantees, being, as I understood it, the effect on Ziade Investments Pty Ltd if there was default by Ziade Investments No. 1. The charge given by Ziade Investments Pty Ltd provided that if an “Event of Default” occurred, all of the “Secured Money” became immediately payable. An “Event of Default” included the failure by any “Relevant Entity” to pay any amount payable by it under any “Collateral Security”. Ziade Investments No. 1 was a “Relevant Entity”. A “Collateral Security” included any agreement created at any time as security for any “Secured Moneys”. If the charge given by Ziade Investments No. 1 on 6 November 2003 or the loan agreement of 6 November 2003 was a “Collateral Security” within the meaning of the contract containing the charge given by Ziade Investments Pty Ltd on 14 June 2003, then Ziade Investments Ltd would be exposed to a default by Ziade Investments No. 1 in respect of that borrowing. However, it does not appear to me that the money borrowed by Ziade Investments No. 1 on 6 November 2003 in respect of the Alexander Street project would fall within the definition of “Secured Money” in clause 6 of the charge given by Ziade Investments Pty Ltd. I was not taken to any specific part of the definition of “Secured Money” which would have that effect. In my view, the unit at 12-16 Alexander Street was not put at further risk either by Mrs Ziade’s giving her guarantee or by Ziade Investments No. 1’s borrowing. The house was at risk by the later default under the Dudley Street project.

105 However, if I am wrong about this, it was not necessary, in order for Mrs Ziade to be bound by her guarantee, that she be taken through the minutiae of the transaction documents. Nothing could be clearer than the advice she received from her solicitor that if the loan were not repaid WBMI would come after everything, including her jewellery and her home. If she preferred to accept Mr Ziade’s assurance that the accountant had arranged things otherwise, she at least understood from what her solicitor told her that there was a risk that she would lose everything, including the unit.

106 Accordingly, WBMI does not have to rely upon a reasonable belief that the purport and effect of the guarantee had been explained to Mrs Ziade by a competent, independent and disinterested stranger. I accept that Mr Anthony Ziade was not a stranger within this principle, and that if Mrs Ziade had not received sufficient advice, so that she understood the purport and effect of what she was doing, and if she were a volunteer, WBMI would not be entitled to rely upon the fact that she received advice from Mr Anthony Ziade. However, Mrs Ziade’s defence based on Garcia v National Australia Bank Ltd fails at each of the first two stages.

107 It follows that Mr Ziade is not entitled to be discharged from his guarantee on the basis that Mrs Ziade’s guarantee was discharged. That defence would in any event be defeated by clause 6.2(2) of the guarantee.

Conclusion on the Plaintiff’s Claim

108 It follows that the plaintiff is entitled to judgment against the first, second and third defendants. The plaintiff tendered a certificate as to the amounts due. The certificate is conclusive as to the amount due, in the absence of manifest error, (Loan Agreement clause 14.1), or is prima facie evidence of the facts stated (Guarantee clause 17.1)). No evidence was adduced to show that any part of the amount claimed was not owing. The amount outstanding as at 29 August 2005 was $6,020,784.08. I will direct the plaintiff to bring in short minutes of order at a date convenient to the parties, with a calculation of the amount owing as at that date. The plaintiff is also entitled to judgment against the first defendant for possession of the land at 11-15 Alexander Street, Coogee. It appears that the second mortgagees have taken possession of the premises. The plaintiff does not at this stage seek leave for the issue of a writ of possession. The short minutes of order should provide for liberty to apply. The fourth cross-claim will be dismissed. The second and third defendants should pay the plaintiff’s costs of the proceedings.

Mrs Ziade’s Cross-Claim Against Platinum Capital Mortgages Pty Ltd & Mr Tozer

109 Platinum Capital Mortgages was formerly known as Morgan Pacific Finance. Mrs Ziade had no dealings with it. She was not its client. I will continue to call it Morgan Pacific.

110 The cross-claim against Morgan Pacific and Mr Tozer does not plead the representation made by Mr Tozer to Mr Ziade in August or September 2002 contained in paragraph 24 of Mr Ziade’s affidavit of 6 October 2004 and referred to in paragraph [21] above. The cross-claim alleges that in late August to September 2003, Mr Tozer represented that WBMI would provide finance for the Alexander Street development on the same terms as for the Dudley Street development; that WBMI would provide 100% finance for acquisition and construction with capitalised interest and repayment out of sales on completion; and there would be no need for any other financier to be involved.

111 Mr Tozer and Morgan Pacific did not defend the proceedings. I accept the evidence given by Mr Ziade in relation to the representations which he said were made to him by Mr Tozer. There was no contrary evidence. However, that evidence does not show that Mr Tozer made the alleged representations in August or September 2003. To the contrary, in August and September 2003, Mr Tozer prepared project feasibility studies in support an application for a loan of $11,500,000 from WBMI, with that loan not providing 100% finance for the project. He advised Mr Ziade of WBMI’s requirements for pre-sales before funds for construction could be drawn down. He advised Mr Ziade of his negotiations for mezzanine finance.

112 No application was made to amend the cross-claim to plead the earlier alleged representation in August or September 2002. The cross-claim might contain a typographical mistake. However, it is plain from the terms of the defence to the cross-claim that Morgan Pacific and Mr Tozer understood the allegation to relate to representations made in 2003. If there had been a mistake it should have been corrected immediately after the defence was filed. It is not possible to decide the cross-claim against Mr Tozer and Morgan Pacific on grounds which were not pleaded.

113 Difficult questions would have arisen if it had been sought to establish that loss suffered by Mrs Ziade through being liable to WBMI as a guarantor of Ziade Investments No. 1, was caused by the representations made 15 months earlier by Mr Tozer to Mr Ziade, which resulted in Ziade Investments No. 2 purchasing the Alexander Street land. These were not addressed. They do not arise as Mrs Ziade has not established that the representations pleaded were made.

114 No submission was made on behalf of Mrs Ziade that she was entitled to damages against Mr Tozer or Morgan Pacific for the tort of negligence. It was not submitted that any duty of care was owed to her. Indeed, the pleading alleged that Mr Tozer owed Mrs Ziade a duty of care if he had been acting as her agent, but denied that he had been so acting. Nor had he been. His client was Mr Ziade or Ziade Investments No. 1.

115 The cross-claim alleges that Mr Tozer, who at all times acted as agent for Morgan Pacific, failed to ensure that Mrs Ziade was given proper legal and financial advice as to the nature and effect of the transaction, the documents, particularly the guarantees, and a proper opportunity to examine them and ask questions about them. In submissions, this allegation was enlarged to include a claim that Morgan Pacific, being a financial services licensee within the meaning of s 991A of the Corporations Act, breached Part 7.7 of that Act by failing to provide information and advice required by ss 942B, 945A, 945B, 946A and 947B. It was submitted that Mrs Ziade was entitled to damages under s 953B.

116 The second cross-claim does not allege a breach of any of these provisions and does not include a claim under s 953B of the Corporations Act. Accordingly this claim could not be entertained unless Mrs Ziade sought and was granted leave to amend the second cross-claim, which could only be done if notice were given to Morgan Pacific and Mr Tozer. However, that would be a futile exercise. Section 942B deals with the required contents of the Financial Services Guide which a financial services licensee must provide to its retail client. Mrs Ziade was not a client of Morgan Pacific. The only basis upon which it was contended that she was a client of Morgan Pacific was that the loan application to WBMI was filled in by Mrs Ziade as well as by Mr Ziade. It was said that Mr Tozer acted on her behalf in submitting the loan application. Mrs Ziade only signed the loan application in her capacity as guarantor. The loan application was sent to Mr Tozer by Mr Ziade, not by her. Her signing the application as a prospective guarantor did not make her a retail client of Morgan Pacific.

117 Sections 945A, 945B, 946A and 946C also relate to the advice which a financial services licensee must provide to its client. For the same reason those sections are inapplicable to the cross-claim by Mrs Ziade against Morgan Pacific.

118 No other basis was articulated as to why it was contended that either Mr Tozer or Morgan Pacific was required to ensure that Mrs Ziade was given proper legal and financial advice as to the nature and effect of the transaction and her guarantee. In my view, there was no such duty.

119 The cross-claim also alleged that Mr Tozer owed a duty to his principal to ensure that the transactions were binding and of full legal effect and he failed to do so. I have found that the transactions were binding and of full legal effect. In any event, Mrs Ziade was not Mr Tozer’s principal.

120 It follows that the cross-claim by Mrs Ziade against Mr Tozer and Morgan Pacific must be dismissed. I make no order as to costs of that cross-claim.

121 I order that the plaintiff bring in short minutes of order in relation to its statement of claim and the fourth cross-claim in accordance with these reasons. I dismiss the cross-claim of the third cross-claimant to the second cross-claim with no order as to costs.

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