Re Rodney Paul Freeman and Fighill Pty Limited v Metropolitan Permanent Building Society [1991] FCA 94 (25 March 1991)

FEDERAL COURT OF AUSTRALIA

Re: RODNEY PAUL FREEMAN and FIGHILL PTY LIMITED
And: METROPOLITAN PERMANENT BUILDING SOCIETY
No. G433 of 1987
FED No. 104

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Einfeld J.(1)

HEARING

SYDNEY
25:3:1991

ORDER

The respondent to pay to the applicants the sum of $80,000 for damages for breach of contract.

Cross claim dismissed.

The respondent to pay the applicants costs.

DECISION

The applicants Rodney Paul Freeman (R.P. Freeman) and Fighill Pty Ltd (Fighill) seek various forms of declaratory and mandatory relief arising out of a loan taken out on 15 November 1984 (the loan) by Fighill from the Metropolitan Permanent Building Society (the society). It is now known as Metway Bank. R P Freeman guaranteed a mortgage entered by Fighill to secure the loan (the mortgage). He was a shareholder and director of Fighill. Fighill sought the loan to enable it to buy a block of land at Waterford West on the outskirts of Brisbane (the land) and to construct sixteen 2 bedroom townhouses.

2. Fighill was a shelf company established for this transaction. Its directors were R.P. Freeman, his brother Stanford Freeman, and his father-in-law Thien Fook Ngui. The shareholders were the directors and the Freeman brothers' father, Stanley Freeman (since deceased) who was also its General Manager. This was the first joint venture of these individuals although in their own ways, each had had some previous experience of dealing in real estate or project funding. At the time the society was new to commercial lending of this kind and was seeking to break into the market by offering terms which made it more than competitive with other established financiers.

3. The loan was ostensibly for 3 years for $398,536 (the loan). It was made up of a basic loan of $390,000 and the premium for the Housing Loans Insurance Corporation (HLIC) of $8,536. The first part of the loan funds ($48,000) was used to enable the purchase of the land itself on 21 November 1984. The balance was to finance most of the cost of construction of the townhouses. These were expected to be completed by about May 1985. The parties' intention also embraced the idea that when this project was completed and the borrowed moneys repaid, the same amount would be applied to a similar project on adjoining blocks. That is one of the reasons why the period of the loan was more theoretical than actual as there was to be no penalty for early repayment.

4. This much but not much else in this case is agreed. The applicants allege that the loan had or was intended to have these features:
1. Interest would be fixed at 16% flat for the term of the loan.
2. Interest was only to be calculated on the capital drawn down.
Interest would accrue monthly but would, if the applicants wished,

be capitalised at each accrual until construction was complete and
the townhouses sold. Thus no instalments of interest would be
enforceable until this occurred, and interest and capital would be
paid out of the proceeds of sales as concluded.

3. The entire loan moneys (less the HLIC premium) would be made

available progressively through the land purchase and house
construction period.

4. The loan was fully repayable in 3 years.
5. The loan was fully insured by the HLIC in the event of default by

Fighill.

5. These are all statements or undertakings which the applicants allege, but the society denies, were represented to them by the society's representatives on a number of occasions. In the event, the applicants allege, the society failed to honour these undertakings and thus contravened section 52 of the Trade Practices Act and were in breach of contract. The applicants also allege a wrongful exercise of the power of sale under the mortgage and a breach of section 85 of the Queensland Property Law Act. There is a cross claim by the society against the applicant R.P Freeman personally for enforcement of the guarantee signed by him. He answers that the personal guarantee is not binding because of the misrepresentations and breaches of contract.

6. The specific alleged contraventions of the agreement were:
1. The quantum of advances and their method of calculation were

varied in February 1985, after 3 months of the loan.

2. The society refused to capitalise the interest.
3. Only $348,000 of the loan moneys was actually advanced and the

rest was withheld and credited as due payments of interest.

4. The society exercised a power of entry and conducted a sale of t he

townhouses before the 3 year period expired.

5. R.P. Freeman was not insured with the HLIC against default by

Fighill.

7. This case has many extraordinary features. One of the more extraordinary is that there was no loan agreement and the mortgage entered into by the parties clearly does not reflect, on any view, the agreement between them. Yet both sides to the litigation rely on some of its terms. The practical as well as legal consequence of these facts has been that any agreement there was is vague and uncertain. Another is that the evidence has many inconsistencies as to dates and events that were not resolved. A chronology of events submitted which gave incorrect references to evidentiary material has not assisted the necessary fact finding in the matter.

8. Evidence of the parties' agreement, if any, is provided by several sources. They include the initial negotiations conducted in conversations and by correspondence, the mortgage documents ultimately signed and the subsequent conduct of the parties. In view of the matters in dispute, all this has made for a most difficult case to resolve.

9. I have earlier recorded Fighill's submission that the loan agreement was to provide $390,000 with interest at 16% per annum to be capitalised each month. This was to have had the effect, in Fighill's submission, of adding the amount constituting each month's interest to the capital sum thus drawn down. The following month's interest would be calculated on the basis of the 'new' capital amount which included the earlier unpaid interest component. The most important feature of this arrangement, as far as Fighill was concerned, was that no repayments of either interest or capital were to be actually payable, in the sense of enforceable, until after the loan was fully drawn and the units sold. Fighill anticipated the full amount of its indebtedness to the society at the time of the units' completion to be $390,000 plus interest so accrued.

10. As the parties' respective views of these matters often contradict, any determination as to the terms of the agreement must therefore involve an evaluation of the credibility of the witnesses.

11. As I see it, there are four possible conclusions to be drawn:
1) no mutuality of accord: the parties viewed the contract in

different terms and never reached agreement at all

2) what Fighill submitted the contract to be was correct, and the

society later unilaterally changed its terms

3) what the society submitted was the true contract and Fighill later

re-interpreted it

4) there was an agreement but it did not contain any terms relating

to the question of when and how interest was to be paid and the
maximum size of the loan

12. The following appear to be the critical factual allegations by the applicants. In late August or early September 1984 Mr Wilkie, a society employee, invited the late Mr Freeman senior to discuss a new commercial loan arrangement which the society was offering. During the course of the discussion, Mr Wilkie offered a loan with a 16% flat rate of interest to be capitalised and paid out of the proceeds of the sale of the properties built with the borrowed money. Mr Wilkie, in his affidavit of 24 June 1988, says that he "cannot recall the conversation alleged to have taken place". On 11 October 1984 Messrs R P Freeman, Stanford Freeman and Ngui went to Brisbane where, together with Mr Freeman senior, they met with Mr Wilkie at his office. Again, the applicants contend, Mr Wilkie informed them that the interest accruing on the loan would be capitalised. Again Mr Wilkie does not "recall that the meeting alleged to have taken place ever took place" (paragraph 18 of his affidavit). Mr Wilkie was a most unpersuasive and uncertain witness. I believe that the meetings and conversations occurred as alleged by the applicants.

13. On 30 October 1984 the society sent a letter to the applicants approving the loan. The significant parts of this letter were as follows:

A loan as detailed below was approved on 30 October 1984 and is
offered to you for acceptance to enable you to construct townhouses
for investment purposes at Lot 23 Bourke Street, Waterford West.
Basic Loan $390,000
Housing Loans Insurance
Corporation Premium $ 8,536
Total Loan $398,536
Term approximately 3 years.
Interest rate is 16% per annum on daily balances capitalised monthly
and calculated as from the date of issue of the Society's cheque for
some part of the loan to you or on your account.
Your repayments will be $5,402.00 per calendar month.
Date of commencement of your repayments will be advised to you upon
issue of the Society's cheque for any part of the advance.

14. On 1 November the directors of Fighill had a meeting in Sydney to discuss the letter of offer. They decided to instruct Mr Freeman senior, who was living in Brisbane, to write to the respondent to request certain changes. On 2 November such a letter was written. Its terms were:

The approval in its present form is unacceptable to our
company. Whereas we agree to all the requirements listed 1
to 13 on pages 1 and 2 of your letter dated 30th Oct 1984,
EXCEPTING personal guarantee by SUZANNE FREEMAN, we wish the
paragraph regarding Interest (PAGE 1) amended as follows.-
the word "capitalised" deleted and replaced with the word
payable, and the following added -
INTEREST TO BE PAID MONTHLY EITHER BY DIRECT PAYMENT
BY FIGHILL PTY LTD or DEDUCTED MONTHLY from progress
building draw payments during construction of the project.
The paragraphs regarding the repayment of loan (PAGE
1) to be deleted completely and replaced with the following.
REPAYMENT or REDUCTION of loan monies shall be made by
way of Metropolitan Building Society retaining 85% of Sale
Price of Individual Town Houses on settlement of such sales
until either loan is discharged or transferred to further
developments on Lots 24/25 Bourke St., Waterford West.

15. Messrs R.P. and Stanford Freeman both testified that this letter erroneously related Fighill's decision and that what was intended was that interest be capitalised to the end of the loan and be paid out of the proceeds of sales. I accept Fighill's assertion that this was the crux of its decision. Fighill had no other income in prospect except from this project. Despite some untidy features of the relevant minutes, I do not believe that it was ever truly intended that the directors would supply the money to pay interest on the way. Most of them did not have liquid funds of this kind and the whole deal would have been much less attractive in that form.

16. Mr Stanford Freeman gave evidence that he telephoned Mr G.R. Faulkner, then Senior Manager of Customer Services of the society when he realised that the letter of 2 November was incorrect. Of this conversation, he testified inter alia at page 184 of the transcript:

I said to Mr Faulkner, "Mr Faulkner, Mr Ngui has asked me
what is going to be the amount of the debt." Mr Faulkner
replied, "the debt will be the principal loan plus unpaid
interest up to the value of 85% total of the project."

17. Mr Faulkner, when cross examined, did not recall the conversation at all, and specifically did not recall that Mr Freeman asked what the total debt was going to be (transcript p 261). I accept the evidence of Mr Freeman as to this conversation which is generally supported by a letter to Fighill from Mr Faulkner of 6 November. This letter was obviously intended to be an explanation of the terms of the loan. The relevant part of the letter is as follows:

Interest is capitalised each month and provided payments are
made there will be no change in the balance of the account.
If interest is not paid by the required time, then future
interest is charged on the basis of the higher debt. To
replace the work "capitalised" with the word "payable" does
not provide the Society with the right to charge interest on
the overdue amount. The interest amounts are payable
monthly and are to be capitalised regardless of whether or
not a progress payment is due. The Society could not allow
the option of these payments to be deducted from progress
payments that may become available some time in the future.
The letter of approval and offer sets a specific amount for
the repayment, and this is on the basis of a fully drawn
loan. Until the loan is fully drawn, then the repayment
amount required will be reduced accordingly.

18. What this letter says the society "could not allow" - i.e. deduction of interest from progress advances - was precisely what in fact the society itself came to do. Despite the confusing contents and confused logic of this letter, no doubt on the basis of this further explanation and believing that what Mr Faulkner was saying more or less accorded with its own understanding of and wishes for the arrangement, Fighill replied on 8 November 1984 accepting the loan offered on 30 October. On 15 November 1984 the mortgage by Fighill and the guarantee by R.P. Freeman were executed.

19. Although the Society sent out some notices for the repayment instalments of $5,402 per month stipulated in the mortgage document and the 30 October offer, the first one being on 26 November 1984 (see exhibit GF7 to Mr Faulkner's affidavit of 24 June 1988), both parties actually agree that this did not reflect their agreement. When later the society came to deduct interest, this figure was quite irrelevant. How it was originally calculated has not been explained.

20. The mortgage contained some similar provisions to the 30 October offer as affected by correspondence and personal conversations but there were also some differences. One example was that the advances were to be made on the basis of 90% of the value of work done as certified from time to time by the valuer appointed for that purpose by the society as opposed to the earlier understanding of 85% of actual expenditure (see inter alia annexure F to R.P. Freeman's affidavit of 7 April 1988, two undated letters which must have been sent between 29 August and 6 October 1984). This reference to 85% was itself apparently confused by everyone. At one stage the whole loan was to be limited to 85% of the total value of the completed project. Perhaps that is how the $390,000 was arrived at - it is difficult to say - but if so, it could only have been based on Fighill's estimate because the society seems to have done little itself to establish the value or even the cost of the project. Another time 85% was mentioned was in setting the proportion of the sale prices of the townhouses which the society was to take in reduction of the debt.

21. The society submitted that its "agreement" was to provide a maximum of $390,000 to Fighill. It said that the advance is described in the mortgage as being $390,000 and not as $390,000 plus interest. That is literally true but the mortgage clearly did not represent the agreement between the parties. Neither did it say $390,000 including unpaid interest. Notwithstanding the letter of 6 November 1984, the society submitted that interest was to be deducted from progress payments. This meant that once Fighill was indebted for $390,000 (for loan advances and interest), no more capital was to be made available and interest became payable on the entire sum. The society's conduct in the immediate aftermath of the commencement of the loan is quite inconsistent with this approach. It also must have known that the project could not have been funded on such a basis.

22. The society said that 'capitalisation' meant that the bank had the right to compound interest. In other words, it was entitled to have Fighill pay interest as it fell due, but if Fighill did not pay, the bank could compound it. Therefore, it was said, Fighill must show that the contract means that they would have the option of deferring interest, i.e. that Fighill could elect to pay or not to pay interest during the term of the loan. I accept that Fighill did establish that this was a term of the agreement.

23. I found the society's witnesses most unconvincing especially Mr Faulkner. They were at best vague on matters where a degree of precision of recollection and plan might have been expected. Some of them had what appeared to be convenient memory lapses on matters they have known for 5 years were disputed. In several instances, I believe they were covering up their roles in contributing to the collapse of the project, thereby causing their employer considerable loss (the losses caused to the applicants were probably not uppermost in their concerns), and in masterminding or assisting in what was from the society's viewpoint at best a most clumsy and incompetent entry into this type of lending. I had little difficulty in rejecting their accounts where there was conflict with the evidence called by the applicants.

24. From all the evidence and documentation, I find as a fact that the parties reached agreement substantially as alleged by the applicants. Interest on the loan was to be capitalised, at Fighill's option, to the completion of the project and the sale of the townhouses. I also find that the agreement comprised an undertaking by the society to pay the whole of the loan moneys by way of the capital, and not to treat some of it as unpaid capitalised interest.

25. After the first advance of $48,000 was made on or about 21 November 1984 to the applicants to finalise the land purchase, other payments of $42,000 and $60,000 were made on 21 December 1984 and 24 January 1985 respectively. These were accepted proportions of the claims submitted. Also on 24 January 1985 $1,203 was paid by way of interest by Mr Freeman senior to the society apparently after a request by someone there. This payment seems to have been a mistake in the sense that Fighill had not resolved to make any payments of interest at all. Certainly how it was calculated has not been explained.

26. Another advance of $24,000 was made by the society on or about 7 February 1985 in respect of a claim for $48,000 lodged on 5 February 1985. If payments were to be made monthly by Fighill, whether repayments of capital and interest at the rate of $5,402 or interest only at the 16% rate provided for in the documents, why were any of these loan moneys advanced at all? Except for the mistaken payment of $1,203, Fighill had by then paid nothing.

27. On 26 February a letter from Mr Faulkner to Fighill enclosed $15,000 in payment of a claim for $75,000 (on occasion said to be $78,591). The applicants say that from this time on, the respondent commenced to pay only a small proportion of each claim submitted, much less than had previously been the case. It appears that the society had unilaterally changed the arrangements for calculating the proportion of the loan to be advanced from 90% of the value of the work done in the previous period to a cost to complete basis. Overdue or due interest was for the first time to be deducted and a limit was placed on the total amount to be paid out to $390,000 including interest. This clearly conflicted with the society's own understanding of the loan (see inter alia exhibit GF1 to Mr Faulkner's affidavit of 24 June 1988). The society's explanation in the evidence for the change was at best confusing and inconsistent with its previous statements and conduct. It appeared to me to be an attempt to justify retrospectively a favourable variation of even their own various and shifting explanations of the agreement.

28. Despite the ruinous consequences of this change for the applicants, there seems to have been little protest from them for some time and even then it was not really a protest. I do not think that this was because they agreed to it or acknowledged that it was within their agreement with the society. On the contrary, it is more likely that they did not immediately understand its consequences; certainly no reading of any of the documentation and no evidence of verbal exchanges between the parties at any time provided legal justification for the change.

29. The dispute as to the deduction, as opposed to the capitalisation, of interest and the new method of assessing and paying claims continued over the ensuing months without resolution. The consequences for Fighill were disastrous. It was left without funds to complete the construction and associated works and even the cost of registration of the strata titles. Contractors withdrew their labour because they were not being paid and my impression was that the project became impossible to control or complete for several months. Ultimately some $50,000 was withheld from the loan moneys. Some $8,000 was made available for the costs of strata titling the units but this may have been an additional sum advanced. Eventually in order to complete the construction of the units and proceed to their sale with strata titles, money was supplied by directors as partners in the venture.

30. The society issued a notice of default under the mortgage on 13 June 1986 on the basis of the applicants' failure to make payments of principal and interest. After several abortive efforts to effect a private sale, an auction of the property, arranged and authorised by the society, was held on 25 October 1986. It also failed to effect a sale, with the applicants claiming before me that this was caused by incompetent and inadequate advertising and techniques of sale.

31. Much like the extraordinary confusion on both sides as to the terms of their agreement, the evidence left me with the clear impression that the attempts to sell these properties were almost comical, albeit with tragic and costly consequences for all concerned. The units were eventually sold in September 1987 for $470,000 by way of exercise of the society's supposed power of sale as mortgagee. By this time the real estate market was for various reasons apparently not as buoyant as it had been 2 years earlier. The applicants say that the market price at the time that the townhouses would have been sold if the society had not defaulted on its agreement was of the order of $576,000, and there was credible evidence to support such a figure. I accept that evidence in general terms although both these figures are subject to sales commissions and the natural optimism of the applicants and the normal professional effervescence of valuers and real estate agents. I find that the breach by the society of its agreement with the applicants led to a consequent delay in the completion of the units. I also find that this delay caused Fighill financial loss that would otherwise not have occurred. These findings make it unnecessary to rule on the other heads of claim presented by the applicants. I am actually doubtful that the circumstances represent a breach of section 52 of the Trade Practices Act. The applicants were not induced to enter the agreement by deceptive or misleading conduct. Their loss was sustained because the society did not keep to its agreement with them as it presumably intended to do when the mortgage was executed and the money advanced. In any event, the consequences and damages appear to be the same in this particular case.

32. The applicants' claim for damages was most confusing. They argued several alternative but often inconsistent claims which would have fixed the damages across a very broad range of figures. The evidence was that the units were originally intended to be sold off the plan. If so, no delay in their completion from the expected May 1985 to the actual August/September 1985 (or May 1986 when the strata titling was completed) could have affected that intention. On the other hand, until the titles were secured, no sales could actually have been completed. The applicants also originally projected six months following the completion of the construction as the anticipated selling time needed. Further, the final amount due, capital and interest, at the time of eventual sale was just over $570,000, only fractionally less than the originally expected sale price, although if the project had finished at the expected time the total debt would obviously have been less, just as it was so much more by the time of actual sale. How much less and what other factors affected the exact timing of sale and quantum of sale price are impossible to say from the evidence. The valuation and real estate evidence was of little help in these regards. Thus on one view of the matter the change in the timing of sale might not have adversely affected the return to Fighill.

33. I think the better view to be that the applicants are entitled to some amount relevant but not equivalent to the difference between the actual and expected sale prices. Some discounting for the matters already referred to is appropriate. Two other events are of significance here. One is that the applicants had to outlay personal moneys for the completion of the works the claimed amount of which exceeded the approximately $50,000 of the loan withheld by the society for interest. The other is that some of the townhouses were rented from October 1985 onwards although this was not universal or for the whole period up to the sale. The rents went to the society against interest due.

34. Despite a careful and painstaking effort to do so, I have not found it possible on the evidence to calculate with any degree of precision the applicants' nett loss from the breach of contract. Counsel's submissions have not been of much assistance in this regard. However, I am bound by authority to do the best I can on the evidence presented. Enzed Holdings Ltd v Wynthea Pty Ltd [1984] FCA 373; (1984) 4 FCR 450 but not reported on this point - see unreported decision of Full Court of this Court (Sheppard, Morling and Wilcox JJ) 6 December 1984 pp 38-40 and the cases there cited. For the common law principle, see Lombardo v Henne NSW Court of Appeal unreported 2 December 1973 per Glass JA at p 11. With this counselling in mind, I believe that $80,000 represents the nearest loss to Fighill that I can discern from the evidence. I order that that sum be paid by the society to Fighill by way of damages for breach of contract.

35. The cross claim fails because it was the society's own actions as mortgagee which prevented the repayment of the loan.

36. The respondent will pay the applicants' costs.