Stephen Hill and Arvi Heikkonen Trading As Benchmark Homes v Canberra Centre Holdings Limited [1994] ACTSC 139 (23 December 1994)

SUPREME COURT OF THE ACT

STEPHEN HILL AND ARVI HEIKKONEN Trading as BENCHMARK HOMES v. CANBERRA CENTRE
HOLDINGS LIMITED
No. SC437 of 1990
Number of pages - 15
Contract

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
MILES CJ

CATCHWORDS

Contract - agreement for loan - written agreement - parole evidence rule - extent to which conduct of parties sheds light on meaning of ambiguous terms.

Contract - loan for building purposes - borrower's right to drawn down instalments according to value of work completed - how value ascertained - whether method used in contemplation of parties.

Contract - breach of contract - repudiation - whether lender's failure to pay instalment due constitutes breach - accompanying words and conduct - repudiation and breach established.

Contract - loan - clause giving lender right to decide any dispute arising - whether clause renders contract void for incompleteness or lack of consideration - it does not but severable clause is void.

Codelfa Constructions Proprietary Limited v. State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 351-352
Hoyt's Proprietary Limited v. Spencer [1919] HCA 64; (1919) 27 CLR 133
Shevill and Another v. The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 625

Godecke and Another v. Kirwan [1973] HCA 38; (1973) 129 CLR 629 at 646-7
Chitty on Contracts (26th ed), para.170

HEARING

CANBERRA, 14-16 March 1994
23:12:1994

Counsel for the plaintiffs: Mr. R. Parker, QC with
Mr. G. Waugh

Solicitors for the plaintiffs: Snedden Hall and Gallop

Counsel for the defendant: Mr. A. Meagher

Solicitors for the defendant: Mallesons Stephen Jaques

ORDER

The Court orders that:
The plaintiffs be at liberty to enter interlocutory judgment for damages to be assessed.

DECISION

MILES CJ This is an action for damages for breach of an agreement for a loan. The defendant was at all relevant times known as Canberra Permanent Co-operative Building Society Limited. The plaintiffs in their statement o f claim allege that the agreement was constituted by letter dated 19 August 1988 signed by Paul A. Kane, Assistant General Manager - Lending, for and on behalf of the defendant and forwarded to the plaintiffs, a copy of which was signed by the plaintiffs and returned to the defendant. The alleged breach is the refusal of the defendant, after advancing about $689,000, to lend the balance of about $61,000.

2. It is agreed that the issue of liability should be determined in advance of the issue of damages and that only if there is a finding for the plaintiffs on the issue of liability should the Court inquire into the question of damages.

3. By its further amended defence, the defendant concedes that there was an agreement to lend money to the plaintiffs but alleges that the terms of the loan are to be found in a number of documents in addition to the letter of 19 August 1988. According to the further amended defence, the effect of the documents was that the defendant would lend to the plaintiffs a total amount not exceeding $750,000 by advances to be made from time to time in accordance with Special Condition 9(b) of the letter of 19 August 1988 and clause 9 of the defendant's Notes of Guidance for Loan Applicants. The defendant contends that at all relevant times it advanced to the plaintiffs an amount which was in excess of the plaintiffs' entitlement under the terms of the agreement.

4. The factual background may be outlined as follows:
It is common ground that it was a term of the agreement, or at least within the contemplation of the parties, that the funds advanced would be used for the purpose of financing the construction of a group of townhouses, known as "Lachlan Estate" on land at Isabella Plains. The second plaintiff, Mr. Arvi Heikkonen, was the lessee from the Commonwealth of the land in question, for which he had paid a purchase price of $155,000.

5. The plaintiffs were in business as builders and developers, trading as Benchmark Homes. They had obtained the necessary approvals for the development. (In most of the correspondence and documents the development is referred to as a townhouse development, although it is more accurately described as a cluster housing development.) They had arranged finance through AGC (Advances) Limited (AGC) and they had commenced work on the construction of the townhouses which comprised the development project. In June 1988 the plaintiffs saw an advertisement by the defendant in a trade magazine for "a special finance package for builders". Amongst its attractions were "loan amounts up to 75% of your 'sale price' without mortgage insurance" and "no commitment fees on the undrawn balance of the loan during the fixed rate period".

6. In response to the advertisement the plaintiffs saw Mr. Kane. Mr. Heikkonen said that they wanted to borrow $750,000. Mr. Kane was responsive to the request but wanted a valuation. The plaintiffs signed an application for a loan on about 4 August 1988. A valuation report had already been prepared for AGC by Mr. Brodrick, a partner in a firm of valuers, Messrs McCann and Associates. With the consent of the plaintiffs, the defendant obtained a copy of the valuation report dated 6 June 1988. In a conversation on 16 August 1988 Mr. Kane told the plaintiffs that when they required a "progress draw", the defendant would "send McCanns out to do an inspection". Mr. Kane suggested that if the plaintiffs gave notification of their requirement for funds on a Thursday, the inspection or valuation would be organized by the defendant and a cheque would be ready on the Friday for "up to 75 percent of the value of the work done at the time of inspection".

7. The plaintiffs received an offer for a loan in a letter from the defendant dated 19 August 1988. They accepted the offer by signing a copy and sent it back. It does not appear to have reached the relevant department of the defendant until about 22 August 1988.

8. The letter of 19 August 1988 commenced with the following paragraph:

"I am pleased to confirm that your application for a loan to
assist with the construction of your Isabella Plains Townhouse
Development, from the Society has been approved on the following
terms and conditions:
Principal Sum: Seven Hundred and Fifty Thousand
Dollars ($750,000)
Term: 9 months
Interest Rate: 15.0 per centum per annum
(fixed for 9 months)
Monthly Repayment: Interest only
Date of Approval: 19 August, 1988."

9. The letter set out a number of other terms and conditions in a series of numbered paragraphs or clauses. They included the following:

"1. SECURITY
(a) You will be required to execute a collateral mortgage
(in a form approved by the Society and containing such covenants
and conditions as it may reasonably require) over the subject
properties as security for the loan.
.....
2. ADVANCES
The loan funds will be available on a progressive draw
basis when documentation is in order.
3. TERM
3.1 The term of the loan will be nine (9) months commencing
from the date of approval.
.....
4. INTEREST
4.1 Interest will commence to be charged daily from the date
of each draw on the amount of each draw.
....
9. SPECIAL CONDITIONS
.....
(b) The Society will advance up to 75% of the value of units
1, 2, 3, 4 and 5 respectively and up to 50% of the value of units
6, 7, 8, 9 and 10. Once unconditional contracts have been
exchanged on the 5 units, the Society will increase the 50%
lending ratio to 75% on the remaining 5 units.
10. RULES
The Society's Rules and any subsequent amendments
thereto are binding on you while you are a member of the Society.
A copy of the Rules may be obtained from the Society on request.
11. LAPSING OF OFFER
The Society may cancel its loan approval if the loan is
not drawn within three (3) months from the Date of Approval. The
Society may extend this period but in such cases, reserves the
right to vary the loan terms and conditions."

10. Mr. Heikkonen also executed a mortgage of his leasehold interest in the land in favour of the defendant. The mortgage was signed by him and Mr. Hill as "borrowers". The mortgage bears date 24 August 1988.

11. In his original valuation dated 6 June 1988 prepared for AGC, Mr. Brodrick prepared what he called a market value assessment and feasibility study of the development project referring to the value of the land, building cost estimate (including builder's profit) and gross realisation on sale of the individual townhouses in the proposed development. He assessed the current market value of the leasehold interest in the land at $170,000 and the likely building cost at $730,218. He assessed the total value of the development when completed at $1,021,000, made up of seven units of three bedrooms at $100,000 each, and three units of four bedrooms at 107,000 each.

12. On 19 August 1988 Mr. Brodrick again visited the site and observed that there were ten townhouses at various stages of construction. He valued the work satisfactorily completed at $256,000, which, deducted from the estimated total cost of construction, left an estimated cost to complete of $474,218.

13. On 24 August 1988 the defendant advanced the sum of $207,999.76 to the plaintiffs, of which about $115,000 was used to pay out AGC and $93,000 was used to finance the work on the townhouse development.

14. Until 28 October 1988 the plaintiffs asked for progress payments on some ten occasions and on each occasion payment was made by the defendant. The total of progress payments until that date was $343,000. Each payment was made after Mr. Brodrick inspected the work in progress and certified to the defendant the value of the work done to that particular stage. By 28 October 1988 the work had progressed to the extent that Unit No. 1 was complete, Units 2 to 5 were nearly complete and Units 6 to 10 were still in the early stages of construction. However, contracts had not been exchanged for the sale of any unit. In fact contracts were not exchanged for the sale of five units during the 9 month period of the loan.

15. On 27 October 1988 Mr. Heikkonen met Mr. Kane in the defendant's office. Mr. Kane said that the original McCann valuation had been based on the anticipated value of the units when sold as individual units, whereas the valuation should have been of the units "in one line". As a consequence, said Mr. Kane, "the loan amount is not $750,000, it is $689,999" and "based on the new valuation there isn't any money available for the loan at all". Mr. Heikkonen expressed his concern. There was further discussion. Mr. Kane said that a further $30,000 would be advanced by way of "extra loan" to cover the plaintiffs' existing commitments to sub-contractors. Mr. Kane also took steps to alter the amount shown on the Progress Payment document from $750,000 to $689,000 as the Approved Loan Amount.

16. There were further transactions between the parties after which the defendant advanced further amounts to the plaintiffs to enable the construction of the townhouses to be completed. The plaintiffs complain that the refusal to continue progress payments in accordance with the procedures followed up until 28 October 1988 constitutes a breach of contract, and that despite the advance of further monies according to new contractual arrangements, the consequent delays in paying sub-contractors and completing the project led to considerable losses on the part of the plaintiffs.

17. The first question to decide is whether the plaintiffs have established that the contract was constituted by the letter of 19 August 1988 as alleged in the statement of claim or by the various documents relied upon in the further amended defence. The case conducted on behalf of the plaintiffs did not resile from the allegation in the statement of claim that the whole of the contract was contained in the letter. However, it was submitted that evidence of the surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous: Codelfa Construction Proprietary Limited v. State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 351-352. There is no doubt of the accuracy of the principle so stated, but it does not answer the question whether the contract is constituted by the document in question: rather it assumes that the answer is in the affirmative. In any event, evidence of the surrounding circumstances must be admitted in order to decide the preliminary question whether the whole of the contract is constituted by the document in question. Evidence of the surrounding circumstances was allowed in the present case in order to decide that preliminary question, but it was treated at the end of the case as it might also be used to shed light on what the parties meant by the terms of the written contract. In any event, it was not contended by the defendant that the contract was other than in writing, but in writing which went beyond the letter of 19 August 1988.

18. Clause 1 of the terms and conditions of the letter of 19 August 1988 provides that the plaintiffs will be required to execute a collateral mortgage over the "subject properties" as security for the loan and that the personal guarantees of each of the plaintiffs are also required. Para.10 of the terms and conditions provides that the Society's Rules and any subsequent amendments thereto are binding on the plaintiffs whilst they are a "member of the Society" and that a copy of the Rules was available on request.

19. As far as the contention by the defendant as to the indicia of the contract is concerned, I think that the mortgage must be taken to be part of the overall agreement between the parties. But for the security provided by the execution of the mortgage by Mr. Heikkonen as mortgagor and by both plaintiffs as "borrowers", it may be inferred that the defendant would have been unwilling to lend the money. Although it has been said that a collateral contract cannot be inconsistent with the principal contract: Hoyt's Proprietary Limited v. Spencer [1919] HCA 64; (1919) 27 CLR 133, the only inconsistency between the mortgage and the letter of 19 August 1988 is the provision in the mortgage that the mortgagor and the borrower acknowledge receipt of the advance of $750,000. That acknowledgment is clearly in the face of the provision in the letter in clause 2 that the funds will be available on a progressive draw basis when documentation is in order and starkly in contrast with the established fact that until the time of executing and signing the mortgage, the plaintiffs had not received any advance at all. (They may have received an advance of nearly $208,000 as a first progress payment at the time of executing and signing the mortgage, but that was well short of the $750,000 which the mortgagor acknowledges to have been advanced.)

20. I conclude that the mortgage was part of the contract but that it does not advance the case for either side on what the terms of the contract were in relation to the questions whether and in what circumstances the plaintiffs were entitled to call upon the defendant to advance the sum of $750,000, or sums totalling that amount.

21. The terms of the mortgage itself provide that "the parties will perform and observe the provisions of the Memorandum of Provisions filed in the offices of the Registrar of Titles as No. 543598, which provisions are hereby incorporated into or form part of this mortgage". Again, whilst I would conclude that the provisions of the Memorandum of Provisions were part of the mortgage and therefore part of the overall agreement, neither party made any reference to anything relevant in the Memorandum of Provisions and for present purposes it may be ignored.

22. Likewise the provisions in clause 10 of the Terms and Conditions in the letter of 19 August 1988 that the Society's Rules were binding whilst the borrower remained a member of the Society may be ignored. There is no evidence that the plaintiffs were ever members of the Society (the Society being the defendant). Neither counsel relied upon any of the provisions in the Rules and indeed the Rules were not even part of the evidence. Similarly the Notes of Guidance for Loan Applicants referred to in the further amended defence were neither the subject of evidence nor of counsel's submissions and may be ignored.

23. Hence, I conclude that the written agreement consisted of the letter of 19 August 1988, the mortgage of 24 August 1988 and the Memorandum of Provisions. However, there was nothing in anything but the letter which is of any assistance in determining what the crucial terms of the agreement were.

24. The plaintiffs did not contend for an interpretation of the contract which entitled them to an immediate advance of $750,000 as soon as the contract was entered into or the mortgage executed and signed. In particulars furnished by letter dated 12 March 1991, the plaintiffs' solicitors alleged that the sum of $750,000 was to be advanced by instalments and that the defendant was obliged to make the instalments available as required by the plaintiffs subject to Special Condition clause 9(b) of the letter of 19 August 1988. Clause 2 of the Terms and Conditions provided for the availability of loan funds "on a progressive draw basis when documentation is in order" and clause 4.1 provided that interest was payable not on the whole of the $750,000 immediately or from any particular date but only "on the amount of each draw" to be charged on a daily basis from the date of each draw. The contingency from the point of view of the defendant that the whole of the $750,000 might not be drawn and the defendant's expectation of the payment of interest denied, was avoided by the provision in clause 11 that if "the loan" was not drawn within three months of the date of approval, then the defendant might cancel its loan approval. "The loan" in this context clearly meant the full amount of $750,000.

25. The major dispute is on the meaning of Special Condition 9(b). It must be emphasised that the case for the defendant was not as had been contended by Mr. Kane at the meeting of 28 October 1988 that the defendant was entitled to reduce the maximum amount of the loan funds available, whether because of some error in previous valuation or otherwise. The defendant's case was that, on a proper construction of Special Condition 9(b), it had advanced to the plaintiffs all that it was obliged to advance and that no breach had occurred on its part.

26. It was common ground at the hearing that the term "value" is ambiguous in the context and the surrounding circumstances must be taken into account in order to ascertain its meaning in the contractual arrangement between the parties. The particulars furnished by the plaintiffs on 12 March 1991 allege that it was an implied term of the agreement either (1) that the value of Lachlan Estate was to be determined by Messrs McCann and Associates in accordance with the methodology adopted in the valuation report previously prepared by them and available and known to the defendant on 19 August 1988, or (2) that the value of Lachlan Estate was to be determined only in such a way that 75 percent of its value when completed would be or would exceed $750,000.

27. As I understood the submissions on behalf of the plaintiffs, it is the first of these alternatives that is pressed. The second indeed, if it is a true alternative, is of no assistance to the plaintiffs because on the facts the townhouse development was never completed within the loan period of nine months. Again, as I understand the submissions on behalf of the defendant, it accepted that there was an implied term as contended for by the plaintiffs. (The allegation in the particulars of an implied term is contrary to the allegation in the statement of claim that the whole of the contract was contained in the writing, but I approach the particulars as if they allege that, in the light of the surrounding circumstances, Special Condition clause 9(b) meant what the particulars allege.) It remains then to ascertain, on the evidence, what was the methodology adopted in the McCann valuation report, apply it to the facts and then measure what were the amounts of the advances to which the plaintiffs were entitled against the amounts of the advances they in fact received.

28. It is necessary first to go back to the terms of the contract as they relate to the entitlement of the plaintiffs to advances of loan funds at any particular time.

29. It was conceded on behalf of the plaintiffs that Special Condition clause 9 stood in the way of immediate entitlement to the full amount but it was contended that that clause did give rise to a two stage entitlement based on the anticipated value of the units at the time of their completion. In June 1988 Mr. Brodrick had valued the total development based on anticipated sale prices of completed units (including land) at $1,021,000. In pre-contractual conversations between the defendant and Mr. Heikkonen both parties acknowledged that Mr. Brodrick's valuation would be used for the purposes of enabling the defendant to decide whether the development provided adequate security for the loan. Hence, when the term "value" was used in Special Condition clause 9, it was in the same sense as it had been used in Mr. Brodrick's valuation of 6 June 1988.

30. It was submitted on behalf of the plaintiffs that the valuation could be applied to split the value of the development into halves and that by rounding out the value of the whole from $1,021,000 to $1,000,000, the value of Units 1-5 was $500,000 and the value of Units 6-10 was $500,000 also. Until unconditional contracts had been exchanged on Units 1-5, the plaintiffs were entitled to draw an amount calculated as the sum of 75 percent of the value of Units 1-5 (75 percent of $500,000 = $375,000) together with 50 percent of the value of Units 6-10 (50 percent of $500,000 = $250,000) or $625,000 in all. After the exchange of contracts, the plaintiffs' entitlement would increase by the application of the formula provided in Special Condition clause 9(b) to the full amount of the available loan, $750,000. During the first stage (Stage 1) the plaintiffs were entitled to borrow up to $625,000 which they could choose to draw down in a single advance or by way of a number of advances of lesser amounts on such occasions as they chose. The second stage (Stage 2) never eventuated because the first five units were not the subject of exchange of contracts during the period of the loan. However, so it was submitted, the defendant was never entitled during the period of the loan to change the terms of the loan in such a way as to reduce the maximum of $750,000, which maximum would become available as soon as stage 2 was reached and remain available during the life of the agreement subject to the requirements of Special Condition clause 9(b).

31. The case for the defendant on this issue was that during stage 1 the plaintiffs were entitled to advances of up to a maximum of $639,000. This figure was arrived at by adding 75 percent of the anticipated value of Units 1-5 when complete and 50 percent of the anticipated value of Units 6-10 when complete. The anticipated value of the land component over the whole development at completion was assessed by Mr. Brodrick at $170,000, and this figure was, according to the argument, apportioned as between the group of units 1 to 5 and the group of units 6 to 10 at $85,000 per group, or among all units at $17,000 per unit. There was no basis for differentiation in value as between units so far as the land component was concerned. Adding together the anticipated value of each unit when complete, the completed value of Units 1-5 was assessed at $514,000 (made up of a land component of $85,000 and a construction component of $429,000). Likewise the completed value of Units 6 to 10 was $507,000 (made up of a land component of $85,000 and a construction component of $422,000). Applying the percentages provided for in Special Condition 9(b), 75 percent of the completed value of Units 1-5 was $385,500, 50 percent of the completed value of Units 6-10 was $253,500, and the total of the two was $639,000.

32. In this respect I think that the defendant's approach is to be preferred. Not only does it favour the plaintiffs but it correctly recognizes that the value of stage 1 was greater than the value of stage 2 because units 1 to 5 contained two of the more valuable four bedroom units whereas units 6 to 10 contained only 1 of the more valuable four bedroom units.

33. Furthermore, it was submitted on behalf of the defendant, that the agreement contemplated not that the plaintiffs would be entitled during stage 1 to the whole of the $639,000 at any time they chose to call for it, but that their entitlement was to be restricted to the appropriate percentage of completed value of the units as it was at the time the advance was called for. In other words, if at the time of seeking the advance, Units 1-5 were half complete and Units 6-10 were one third complete, the plaintiffs would be entitled to an advance calculated as follows:

Units 1-5: 75 percent of one half of $514,000
Plus
Units 6-10: 50 percent of one third of $507,000
Less the total amount of any advances already made.

34. Although this is to some extent a rough and ready approach (the value of a half completed unit might not be exactly one half of the value of a fully completed unit), I think that the submission on behalf of the defendant is well founded. It is consistent with clauses 2, 3 and 4 of the letter of 19 August 1988 but more importantly it follows from the conduct of the parties that the plaintiffs and defendant envisaged that every time the plaintiffs sought an advance, an inspection of the site and a valuation needed to be made. That was what Mr. Kane said at the very beginning and it was what happened in fact. From time to time the plaintiffs told Mr. Kane or Mr. Kane's secretary what sum they sought by way of advance, Mr. Brodrick was then requested by the defendant to make an inspection and evaluation, Mr. Brodrick then reported to the defendant, and up until 28 October 1988, the defendant paid the plaintiffs the advance sought. Mr. Brodrick himself on each occasion assessed the value of the relevant units in terms of the progress towards completion and expressed this in terms of a percentage.

35. Counsel for both parties accept that it was mutually contemplated that the valuations to be made for the purpose of each progress payment were to be made by Mr. Brodrick in accordance with the "methodology" used in the valuation report dated 6 June 1988 and received by the defendant on 17 August 1988. The concession, if it be such, is well founded. Although there is no evidence that the plaintiffs ever saw the report or a copy of it, or that they were aware of its precise terms, the conduct of the parties during the currency of the agreement is explicable only on the basis that each expected that an inspection and assessment of value by Mr. Brodrick was required before the defendant would make the progress payment requested by the plaintiffs. This was so, despite the fact that the defendant was aware or should have been aware of Mr. Brodrick's methodology, whereas the plaintiffs can be taken to have known only that Mr. Brodrick used some sort of methodology in the valuation report of 6 June 1988, which, whatever it was, they accepted and were entitled to assume would continue to be used for the purpose of progress payments.

36. The fact of the matter, however, is that the valuation of 6 June 1988, whilst clear as to Mr. Brodrick's methodology as to the valuation of the development and of the units upon future completion, was silent as to what method of valuation would or should be adopted during the progress of construction, except to the extent that Mr. Brodrick recommended that the development be "staged, i.e. five (5) townhouses per stage".

37. The further fact is that when Mr. Brodrick began valuing the work in progress, he used a method which was inconsistent with the fundamental term of the contract that the plaintiffs were entitled to borrow a maximum of $750,000. The method he first used would never have permitted the plaintiffs to be advanced as much as $750,000. Mr. Brodrick disclosed his method of valuation in each report made for the purpose of progress payments, but that method of valuation does not appear in the printed progress payment forms which accompanied the defendant's cheque each time a progress payment was made to the plaintiffs. In the earlier reports Mr. Brodrick took as a premise what he had estimated in his report of 6 June 1988 as building costs of $730,218. He then assessed the extent to which the construction work had progressed as a percentage of the total work necessary to bring the development to a stage where the units could be sold, and he then applied that percentage to the $730,218. The resultant figure was what he called in his earlier reports "the overall value of works satisfactorily completed" at the date of inspection.

38. For instance, in his first report for the purpose of progress payments on 19 August 1988, Mr. Brodrick set out in summary form the stage of construction of each unit and estimated the progress of the whole to be 35 percent in relation to the estimated cost of improvements of $730,218, that is $256,000, leaving "an estimated cost to complete" of $474,218.

39. Acting on that report, the defendant then made a progress payment to the plaintiffs of $207,999.76 (in subsequent calculations treated as $208,000.) Of this sum, $115,000 was allocated by the defendant to the total value of the land and repaid direct to AGC. The balance of $93,000 was paid to the plaintiffs in respect of the work done to date. (The actual amount paid to AGC appears to have been slightly greater than $115,000, but $115,000 appears to be the figure used by the defendant in all the printed progress payment forms that accompanied all subsequent progress payments.)

40. The defendant did not call evidence and I draw the following inferences with that in mind. The early method of valuation by Mr. Brodrick was used by the defendant in order to calculate whether each progress payment requested by the plaintiffs should be paid to them in accordance with their entitlement. It continued until about 30 September 1988, by which time the defendant adopted the attitude that the method of evaluation was inappropriate. Mr. Kane's secretary had a conversation with Mr. Brodrick on that date which caused Mr. Brodrick to change his method of valuation from a "cost of improvements" basis to an "added value" basis. Why the defendant came to conclude that the previous method of valuation was inappropriate does not appear, but there is good reason for the conclusion. In itself the cost of improvements method would never have allowed the plaintiffs' entitlement to reach $750,000. The maximum advance which it would have permitted was 75 percent of $730,218, that is $547,664. However, (and there is no evidence whether or not the defendant took this further factor into account) $115,000 had been advanced to pay out AGC, so in principle it was still possible that in all up to $750,000 might be advanced.

41. In accordance with instructions received on 29 September 1988, Mr. Brodrick reassessed the anticipated value of the development on completion. He maintained the market value of three bedroom units at $100,000 each and of four bedroom units at $107,000 each. He valued the land component of these figures at $17,000 per unit. He then apportioned as to the total value of the development of $1,021,000, a total land component of $170,000 and a total "added value component" of $851,000. In his report dated 30 September 1988, he estimated the value of work completed at that date to be $408,480, being 48 percent of the "added value" of $851,000. I infer that the new concept of "added value" became a reference point for his valuations in subsequent reports. Progress payments of $10,000 and $110,000 were made on 30 September and 7 October 1988 respectively. I infer that the latter, and less clearly the former, was made taking into account the valuation made on the new "added value" basis.

42. However, the payment of $110,000 on 7 October 1988 had apparently caused the defendant to believe that the plaintiffs had or may have exhausted their entitlement to progress payments. By then the defendant had advanced $298,000 in progress payments, which was in addition to the $115,000 paid to AGC.

43. A file note of the defendant indicates that on 12 October 1988 the plaintiffs requested another progress payment of $25,000 and that between then and 14 October Mr. Kane requested Mr. Brodrick to change the basis of valuation yet again, using as a basis the expected sale price of the units if sold on an "in one line" basis. This meant assessing the value of the units when sold, not one by one to individual buyers (essentially to live in) but in one lot to a single buyer (essentially as an investment). That was a simple operation for Mr. Brodrick as all he considered he had to do was to reduce the formerly assessed total value of the development of $1,021,000 by a factor of 10 percent, leaving a one line total value of $918,000 as the expected price when the project was completed and sold as one lot.

44. It was at this stage that for the first time Mr. Brodrick was asked by the defendant to divide the assessment of the value of the partly completed units as between units 1-5 on the one hand and units 6-10 on the other. He did this without expressing in his report any opinion about the percentage of the work done towards completion, but simply by certifying the value of the work completed to date on units 1-5 to be $271,872, based on a costing of $377,600 (on a one line basis) and for units 6-10 $126,242, based on a costing of $371,300 (also on a one line basis). In the light of that new approach, the defendant continued to make progress payments as follows:

$15,000 on 14 October 1988
$10,000 on 18 October 1988
$20,000 on 21 October 1988.

45. On 25 October 1988 Mr. Brodrick certified the value of "works completed to date" as $327,341 on Units 1-5 and $153,052 on Units 6-10. He considered that Units 1-5 were completed to the extent of 86.69 percent and Units 6-10 completed to the extent of 41.22 percent.

46. On 28 October 1988, as already outlined, Mr. Heikkonen asked for a progress payment of $50,000. Mr. Kane informed him that the method of "in one line" valuation which, he said, should have been used from the time the loan agreement came into being, meant that the plaintiffs were not entitled to any further payments. He did not say anything to indicate to Mr. Heikkonen the possibility that in the immediate future, with more work done on the construction, the further increase in value thereby brought about, might entitle the plaintiffs to more progress payments. What he did do and say was described in the evidence of Mr. Heikkonen (which I accept) as follows:

"Mr. Kane said that we approved the original loan based on a
telephone conversation with Mr. McCann regarding the valuation.
Since then I have had a - or just now, I had a look of the
actual letter of the valuation and realised that the units
should have been valued in one line rather than as individual
units. Then he said that the approval loan - the loan amount is
not $750,000, it is $689,000.
Then he said, 'based on this new valuation there isn't any money
available from the loan at all ....."
Well, I said to him, 'We need money to carry on work. We had to
pay our subbies and to for the project to continue, we had to -
we needed money'. .....
He said that we will pay your subbies but after this there will
not be any more money unless it is in line with the new - the
work is in line with the new valuation. .....
I said that, well, after this there was a lot of haggling about
how much money we were going to get, we needed to pay the
subbies and he finally agreed to pay us $30,000 to cover our
existing commitments for subbies. He made it clear that this
was an extra loan that would have to - but after that
everything would have the .....
Well, that was - he then went outside to get the cheque for
$30,000 and he returned from outside with the cheque for $30,000
and a progress payment advice which had $30,000 written on it.
A progress payment advice and he gave them both to me. Then I
said you can't cut the loan amount. ....
And he said, 'Well, watch me". He took the piece of paper and
the cheque off me. He went outside again. He came back and
gave them back to me with the approval loan amount crossed out
and he said, 'There it is done'. Then he said, 'From now on we
will have to work with the new'. He said, 'We have to work in
our guidelines, from now on we will have to work with the new
loan amount and that is it'."

47. On the progress payment form then shown to Mr. Heikkonen the space alongside the words "Approved Loan Amount" had been altered from $750,000 to $689,000. The space alongside the words "Amount available for construction" had been altered from $635,000 to $575,000. Alongside those alterations are some initials which I conclude are those of the person who signed alongside the word "calculated". The signature is that of someone with the surname Jobling, which was the surname of Mr. Kane's secretary. The space alongside "total amount for construction purposes is now" contained the figure $373,000, from which $343,000 was deducted for progress payments to date, showing a net amount payable of $30,000.

48. It may be noted that $689,000 is 75 percent of the on line valuation of the project of $918,000 by Mr. Brodrick on 14 October 1988. However, how the defendant arrived at $373,000 as the total amount available is not apparent. Nor indeed is it apparent on any of the previous progress payment forms how the figure placed in that space has been arrived at. On the progress payment form immediately previously dated 21 October 1988, there is an amount of $343,000 shown as the total amount available at that date.

49. Before considering whether the conduct of Mr. Kane during the meeting on 28 October 1988 amounted to a breach of the contract for loan, I give consideration to what the plaintiffs' entitlement to progress payments was immediately before the meeting.

50. The maximum available to the plaintiffs during stage 1, that is to say, until contracts had been exchanged on five units, was the total of 75 percent of the completed value of Units 1-5 and 50 percent of Units 6-10, that is:

Units 1-5 - 75 percent of $514,000 $385,500
Units 6-10 - 50 percent of $507,000 $253,500
Total: $639,000

51. When Mr. Brodrick certified on 28 October 1988 as to the percentage of the total value of both groups of townhouses in the estate of part completion, the amount available to be drawn down by the plaintiff at that stage is to be calculated as follows:

75% of ((86.6% of 429,000) + 85,000) = $342,385
50% of ((41.2% of 422,000) + 85,000) = $129,432
$471,817
Less
Progress payments to date $343,000
Paid to AGC $115,000 $458,000
Net amount available for draw down $ 13,817

52. It therefore follows that at the time of the request for the progress payment on 28 October 1988, the plaintiffs were not entitled to the $50,000 requested, but were entitled to $13,817. The defendant should have made a further progress payment in the amount to which the plaintiffs were entitled. But Mr. Kane told Mr. Heikkonen that "based on the new valuation" there was "no money available from the loan at all", and only after further discussion did he agree to pay $30,000 for "subbies", which, he made it clear, was "an extra loan". The $30,000, in my view, was not paid in pursuance of the pre-existing loan agreement between the parties. There was no provision in the pre-existing loan agreement for payment to sub-contractors. The conduct of the parties to that date indicated that the agreement contemplated that, providing that the value of the work completed to date fell within Special Condition 9(b), the plaintiffs' request for a progress payment, if made on (or by) a Thursday would be paid on Friday. This was an important part of the mutual understanding about how payment was to be made in accordance with the loan agreement. That agreement had been made following the defendant's advertising for customers to borrow under its "special finance package for builders" loan amounts up to 75 percent of the builder's sale price. The defendant abruptly and without authority refused to make the progress payment to which the plaintiffs were entitled, and asserted that no further payments would be made in pursuance to the loan agreement. A new contractual arrangement was entered into, whereby the plaintiffs were lent the sum of $30,000. The terms or some of the terms of the new arrangement were recorded by Mr. Kane or Ms. Jobling altering the documentation to indicate that the plaintiffs' maximum entitlement under the new arrangement was $689,000, that amount to include what had already been advanced under the repudiated agreement.

53. Although the defendant made subsequent payments of $23,500 after a request for more than $50,000 on 11 November 1988 and $18,500 after a request for "as much as was available" on 25 November 1988, these amounts were, in my view, not advanced pursuant to the agreement constituted by the letter of 19 August 1988, but by some other arrangement between the parties. The defendant is not entitled, by relying on payments made pursuant to an agreement or agreements entered into on or after 28 October 1988, to excuse its breach on that date of the agreement constituted by the letter of 19 August 1988 and the associated documents already referred to. No waiver by the plaintiffs of the breach by the defendant is relied upon. Breach on 28 October 1988 is simply denied. It was submitted on behalf of the defendant that Mr. Kane's action in altering the terms of the progress payment document had no contractual consequences. Strictly speaking that may be so, insofar as it affected the pre-existing contract for loan, already repudiated by Mr. Kane's words and conduct. The alteration of the document confirmed the breach already committed, and the repudiation, as well as providing evidence of the terms of the new arrangement.

54. Repudiation of a contract is a serious matter, and not to be lightly found. For repudiation, a party must evince an intention no longer to be bound by the contract, or that he intended to fulfil the contract only in a manner inconsistent with his obligation and not in any other way: Shevill and Another v. The Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 625 per Gibbs CJ. In such a case the innocent party is entitled to accept the repudiation, thereby discharging himself from further performance, and sue for damages. The fact that the innocent party might, after the repudiation by the promisor, then enter into further contractual relationships with the promisee, does not, in my view, reinstate the repudiated contract although, as I have already suggested, the conduct of the innocent party may be such as to waive the breach or repudiation and the parties might then continue to treat the contract as on foot. However, it is quite clear from the evidence in the present case that the subsequent conduct of the parties is more consistent with new contractual arrangements being entered into than the acceptance of a continuance of the contract, the terms of which were contained essentially in the letter of 19 August 1988. Mr. Kane did not give evidence, even though he was in the precincts of the court during the trial. I have no hesitation in accepting the evidence of Mr. Heikkonen regarding the role played by Mr. Kane. This evidence supports the plaintiffs' case that the breach on the part of the defendant, in its expression of intention not to be bound by its existing obligations under the existing contract and in its rejection of the plaintiffs' request to be paid a further progress payment, was clear and equivocal. Whether the advance of $30,000 on 28 October 1988 and subsequent advances and different contractual arrangements go to mitigate the plaintiffs' loss, is another matter, but in my view the plaintiffs are entitled to damages to be assessed.

55. I have given some consideration as to the plaintiffs' claim as formulated in the statement of claim. As formulated it alleges a failure to pay a balance of $61,000 after paying a total of $689,000. My finding is that anything paid on and after 28 October 1988 was not paid pursuant to the contract sued on. However, I think that the matters on which I base my finding were fully canvassed at the hearing and the fact, as found, that repudiation and breach occurred long before the defendant had paid $689,000 does not stand in the way of the plaintiffs being entitled to judgment on their statement of claim.

56. I should also mention that the defendant neither abandoned nor sought to justify para.8 of the further amended defence in which it raised clause 32(8) of the Memorandum of Mortgage provisions:

"If any dispute shall arise concerning the amount of any advance
which the Society should made from time to time or at the time
which such should be made the decision of the Society (for which
the Society need not give reasons) shall be final and
conclusive."

57. In their reply the plaintiffs say that this clause is void. And, in my view, so it is. It transgresses the principle mentioned by Gibbs J (as he then was) in Godecke and Another v. Kirwan [1973] HCA 38; (1973) 129 CLR 629 at 646-7 that "where words which by themselves constitute a promise are accompanied by words which show that the promisor is to have a discretion or option as to whether he will carry out that which purports to be the promise, the result is that there is no contract on which an action can be brought."

Chitty on Contracts (26th ed) puts it this way at para.170:
"Consideration would again be illusory where it was alleged to
consist of a promise the terms of which left performance
entirely to the discretion of the promisor. A person does not
provide consideration by promising to do something 'if I feel
like it' or 'unless I change my mind'."

58. Clause 32(8) of the Mortgage provisions may be severed from the rest of the mortgage and therefore disregarded, fortunately, without affecting the validity of the rest of the mortgage.

59. In accordance with these findings, I propose to order that the plaintiffs be at liberty to enter interlocutory judgment for damages to be assessed. However, there is a good deal of arithmetical calculation involved in reaching my conclusions. I will list the matter on Friday, 3 February 1995 at 9.30 a.m. for further hearing to enable either party on that date to draw to my attention any suggestion of arithmetical error, and for further submissions on the pleadings, if any.