Commonwealth Bank of Australia v Terence Golby & Anor [1998] FCA 229 (18 March 1998)

Last Updated: 19 March 1998

FEDERAL COURT OF AUSTRALIA

CONTRACT - banker and customer - letter of approval for facility - three borrowers - provision that advance be cleared from initial sale of sub-divided lots - whether two of the borrowers able to enforce term against the bank.

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, cited.

COMMONWEALTH BANK OF AUSTRALIA V TERRENCE GOLBY AND TIMOTHY HUBERT GOLBY

NG 692 OF 1997

BEAUMONT, BRANSON, SACKVILLE JJ.

SYDNEY

18 MARCH, 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 692 of 1997

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	COMMONWEALTH BANK OF AUSTRALIA Applicant
AND:	terrence golby AND timothy hubert golby Respondents
JUDGES:	BEAUMONT, BRANSON, SACKVILLE JJ
DATE OF ORDER:	18 march, 1998
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellant pay the respondents' costs of the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 692 of 1997

oN APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	COMMONWEALTH BANK OF AUSTRALIA Applicant
AND:	TERRENCE GOLBY and TIMOTHY HUBBERT GOLBY Respondent

JUDGES:	BEAUMONT, BRANSON AND SACKVILLE JJ.
DATE:	18 MARCH 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

BEAUMONT J:

I have had the benefit of reading the reasons of Sackville J, and I agree with them. I would only wish to emphasise that the case turns entirely on the express terms of the contract; that is to say, the case does not call for consideration of the liability of a financier to a surety under the general law (see, e.g., C E F Rickett,"The Financier's Duty of Care to a Surety", (1998) 114 LQR 17).

The appeal should be dismissed, with costs.

I certify that this page is a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont

Associate:

Dated: 18 March 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 692 of 1997

BETWEEN:	COMMONWEALTH BANK OF AUSTRALIA AppELLANT
AND:	TERRENCE GOLBY AND TIMOTHY HUBERT GOLBY Respondents

JUDGE(S):	Beaumont, branson and sackville jJ
DATE:	18 MARCH 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

BRANSON J

I have had the advantage of seeing in draft the reasons of Sackville J. I agree with those reasons and with the orders proposed.

The appeal should be dismissed with costs.

I certify that this page is a true copy of the Reasons for Judgment herein of the Honourable Justice Branson.

Associate:

Dated:

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 692 of 1997

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:	COMMONWEALTH BANK OF AUSTRALIA Applicant
AND:	terrence GOLBY and timothy hubert golby RespondentS

JUDGES:	BEAUMONT, BRANSON, SACKVILLE JJ
DATE:	18 MARCH, 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

SACKVILLE J:

The Issue

The present proceedings arise out of financial accommodation granted by the appellant (the "Bank") to three borrowers, namely the two respondents (Mr Terrence Golby and Mr Timothy Golby) and Mr G L Barry. The advance, in the form of a bills discount facility of up to $470,000, was granted to the borrowers to assist them with the development of a subdivision on land known as "Abington Park" at Ingebyne in New South Wales. Mr Barry was the registered proprietor of Abington Park, and mortgaged that property to secure the advance. However, the Golbys also mortgaged properties they owned to provide security for the advance.

The sole issue in this appeal concerns the construction of a term in the Bank's letter of approval for the facility, dated 22 March 1990. The critical paragraph of the letter was as follows:

"Clearance of the advance is to be from the initial sale/settlements of subdivided lots. These are expected to take place in approx 6 months time."

I shall refer to this as the "clearance paragraph".

The primary Judge held that, having regard to the surrounding circumstances, the clearance paragraph imposed an obligation on the Bank to ensure that funds received from the initial sales of lots in the subdivision were applied to reduce the advance to the three borrowers. His Honour found that the Bank had breached its contractual obligations to the Golbys, by crediting the nett proceeds of sale of three lots in the subdivision to Mr Barry's personal account without the consent of the Golbys. This was a breach for which the Bank was liable to the Golbys in damages, notwithstanding that Mr Barry was the registered proprietor of the lots that were sold.

The Bank contends that the letter of 22 March 1990 cannot be read as requiring it to have withheld consent to the grant of partial discharges of the mortgage over Abington Park unless it was satisfied that the nett proceeds of sale would be applied in reduction of the advance. It says that the clearance paragraph was intended primarily to require the borrowers to clear their liability progressively from the sales of lots in the subdivision. According to the Bank, the letter did not impose any obligation on it in relation to the application of funds received from sales of lots in the subdivision.

The orders made by his Honour provide that, upon payment of the sum of $38,441.57 by the Golbys to the Bank, the Bank is to discharge the security it holds over the Golby's property. This and accompanying orders were made after allowing for the damages to which his Honour held that the Golbys were entitled by reason of the Bank's breach of contract. No issue arises on the appeal as to the quantum of damages or the form of orders made by the primary Judge.

The Golbys filed a notice of contention seeking to support the primary Judge's orders on bases other than breach of contract. However, Mr Walmsley SC, who appeared with Ms Gormly for the Golbys, did not press the notice of contention.

The Facts

The primary Judge made detailed findings of fact. These included findings concerning a number of conversations between the Golbys and officers of the Bank before the advance was approved. Having regard to my view of the matter, it is not necessary to canvass the facts in the same depth.

The Golbys carried on a business of earthmoving contractors in partnership. In late 1989 they were approached by Mr Barry, a cousin of theirs, who was undertaking the subdivision of his land at Abington Park. Mr Barry asked the Golbys whether they would provide additional security for the project and take over development work. As I have noted, Mr Barry was the registered proprietor of Abington Park.

Conversations took place between Terrence Golby and officers of the Bank in February and March 1990. The substance of the conversations, as found by the primary Judge, was contained in a statement by Terrence Golby to Mr Alston, then the officer in charge of the Jindabyne sub-branch of the Bank:

"The loan will have to be paid back from the sales of the lots when the subdivision is completed. If we can get the amount requested we will be leaving half the construction costs to come out at a later time. What we borrow is to be repaid out of the sales of the lots and the loan should be in all three names and you are to act only on the instructions of all three of us. The account will be operated by Tim and I with either of us to sign."

On 12 March 1990, the manager of the Bank's Cooma branch prepared a memorandum in respect of an application for accommodation that had been received from the Golbys and Mr Barry. The memorandum noted that a joint borrowing of $470,000 was required to complete the subdivision, and that the Golbys were offering as security a farm property valued at $650,000. The memorandum also stated that contracts for the sale of five lots had been exchanged. The "reduction arrangements" were recorded as

"Clearance in full from sale of subdivision blocks".

Approval for the advance by way of a progressive bill discount facility was recommended on the basis that

"Borrowing is to be cleared from initial property settlements over a period of 12 months maximum."

The memorandum also recorded that Mr Barry had received a loan of $130,000 from the Bank to pay out private debt and stockfirm borrowing. It noted that the Golbys had the necessary expertise and machinery to complete the subdivision and that they were to join in and complete all associated works.

On 20 March 1990, the Bank established a joint bank account in the name of the Golbys and Mr Barry. On the same day the Golbys and Mr Barry applied to the Bank for accommodation. The form stated that if there were more than one applicant, their liability to the Bank would be joint and several.

On 22 March 1990, the Bank wrote the letter of approval to the Golbys and Mr Barry. The material parts of the letter are as follows:

"We refer to our recent discussions concerning the proposed development of Abington Park subdivision and are pleased to confirm approval of accommodation totalling $470,000 to assist with your development costs.

Approval is of course subject to the Bank's usual terms and conditions which includes the following:

* Accommodation being approved on a Bills Discount Facility of $470,000 (gross) subject to progressive drawdowns.

* Rollover expenses to be met, with the total facility to be repaid within 12 months of initial funding.

...

* Security for the advance is to be to the Bank's satisfaction and is to comprise of

1. A mortgage by G L Barry over the proposed subdivision property.

2. A letter of acknowledgment by G L Barry supported by a mortgage over his farming property.

3. A letter of acknowledgment by T M & T H Golby supported by a mortgage over their farm and home properties.

* Clearance of the advance is to be from the initial sale/settlements of subdivided lots. These are expected to take place in approx 6 months time.

...

Loan funds will be made available once documentation has been completed and executed."

On or about 9 April 1990, the Golbys and Mr Barry commenced to draw down under the facility granted by the Bank . On 12 April 1990, the Golbys executed a mortgage of their farming property to secure (inter alia) the advance in respect of Abington Park. Mr Barry executed a mortgage over Abington Park in favour of the Bank, although the precise date of the mortgage does not appear from the evidence.

While discussions between the Golbys and the Bank were taking place, prolonged negotiations were taking place between the Golbys and Mr Barry concerning the terms of the joint venture agreement to govern the development and sale of Abington Park. The Golbys and Mr Barry were each represented by solicitors. The negotiations culminated in the execution of two deeds, on 26 April 1990.

Under the first deed, the Golbys took over the responsibility of Emby Developments Pty Ltd, a company in which Mr Barry's son was interested and which had provided financial assistance for the project. The Golbys reimbursed the company for amounts it had expended on the project. The second deed was between the Golbys and Mr Barry. Under that deed, the Golbys agreed to carry out all necessary work to complete the subdivision, including registration of the plan of subdivision in accordance with a development approval. The deed provided for the work to be completed within eight months. The Golbys were to negotiate the sale of the lots and the proceeds of sale were to be paid to Mr Barry's solicitor and applied as follows:

"(a) For a period of 12 months from the date of registration of the plan of subdivision hereinbefore referred to at the office of the Registrar General or until the developer shall have been repaid in full all moneys expended by it on the development (which were agreed at the sum of SIX HUNDRED AND FIFTY THOUSAND DOLLARS ($650,000.00) (whichever shall happen the sooner) the said solicitors shall pay the nett proceeds of the sale of each allotment (being the gross proceeds of sale after deducting therefrom agent's commission and legal costs) to the developers or as they direct PROVIDED THAT IN ANY EVENT NO PAYMENT SHALL BE MADE TO THE OWNER OR UNTIL THE DEVELOPER HAS RECEIVED THE SUM OF $476,000 PURSUANT TO THIS SUB CLAUSE."

The deed provided for the next $260,000 to be paid to Mr Barry and for the apportionment of the balance of proceeds of sale between Mr Barry and the Golbys. It was not disputed that the Bank did not see this deed until a considerable time after its execution.

Major construction work on the subdivision was substantially completed in February 1991, at an overall cost of $605,000. Delays occurred in registering the plan of subdivision, which was not finally registered until 24 January 1992.

During this period, Mr Barry's solicitor repeatedly complained to the Golbys concerning the delays and threatened to apply moneys received from sales of the lots for the benefit of his client. Nonetheless, in March 1992 the sale of a number of lots was completed and the proceeds credited to the joint account of the Golbys and Mr Barry. By 23 March 1992 the debit balance of the account stood at about $105,000, a total of about $470,000 having been paid to the credit of that account from the proceeds of sales.

By late March 1992, Mr Barry's solicitor unilaterally decided that all future receipts from sales would be paid to or for Mr Barry. On 2 April 1992, the Bank authorised the partial discharge of its mortgage over Abington Park to permit completion of the sale of an additional lot. The Bank attended settlement, and credited the bulk of the purchase price to Mr Barry's account with the Bank. These events took place without the Bank referring the matter to the Golbys' solicitors.

The Golbys became aware of what had occurred and sought an explanation from the Bank. In view of the Golbys' attitude the Bank initially decided to attend further settlements, but to place any proceeds of sale in a suspense account until the dispute between the Golbys and Mr Barry was resolved. In the event, the Bank changed its mind. It attended a settlement on 13 July 1992 and applied the nett proceeds in reduction of Mr Barry's indebtedness to the Bank. A similar course was adopted at the settlement of a sale on 16 December 1992. In all, the Bank credited Mr Barry's account with the sum of $145,963.16, being substantially the nett proceeds of sales of the three lots settled in April, June and December 1992.

In November 1992, the Golbys took action against Mr Barry in this Court, in the Australian Capital Territory Registry. Those proceedings were ultimately settled. The Bank was joined as a party, but the proceedings were discontinued against it.

Reasoning

There was no dispute that there was a contract in force between the Bank, on the one hand, and the Golbys and Mr Barry, on the other, on the terms and conditions set out in the letter of 22 March 1990. Whether that letter constituted an offer which was accepted by the subsequent conduct of the borrowers, or whether (as the primary Judge suggested) the letter accepted the borrower's initial offer, is a question that need not be resolved. Nor did Mr Bennett QC, who appeared with Mr Murr for the Bank, dispute that the clearance paragraph was intended to have legal effect.

It was also common ground between the parties that the principles governing the extent to which surrounding circumstances can be taken into account in construing the terms of the agreement were stated by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337, at 352:

"The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.

Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these facts at the expense of the actual language of the written contract."

It will be recalled that the clearance paragraph of the letter stated that "[c]learance of the advance is to be from the initial sale/settlements of subdivided lots". Mr Bennett accepted that this wording was capable of imposing some obligations on the Bank. For example, the Bank was plainly required to apply the proceeds of sale in reduction of the borrowers' indebtedness, should they ask for that course to be adopted. But Mr Bennett contended that the paragraph was never intended to prevent the Bank from assenting to the partial discharge of its mortgage over Abington Park, where Mr Barry as the registered proprietor, requested the Bank to allow the sale of one or more lots to proceed and to apply the nett proceeds to him. The clearance paragraph could not be understood as an undertaking by the Bank that it would take "somebody else's money" and apply it for the benefit of the Golbys.

Much of Mr Bennett's argument was directed to the proposition that the primary Judge had erred in taking into account circumstances that he was not entitled to consider as an aid to construction, in particular the conversations that took place between the Golbys and the Bank. But even if attention is confined to the terms of the letter of 22 March 1990 itself, the Bank's construction of the clearance paragraph cannot be supported. The language of the paragraph is peremptory. It does not say that the proceeds of sale are to be applied, at the Bank's option, to reduction of the advance. Rather, the clearance paragraph lays down a requirement that is evidently intended to regulate the relationship between the borrowers and the Bank and to impose obligations on all parties to the agreement. It is true, as Mr Bennett pointed out, that the letter identified the paragraph as one of the Bank's "usual terms and conditions". But that does not convert a term which is framed so as to impose obligations on all parties into a term for the exclusive benefit of one of the parties.

This construction of the clearance paragraph is reinforced when the letter is read as a whole. The letter clearly indicates that the Bank was to advance funds to the three borrowers to enable completion of the proposed development of Abington Park. It also recognises that Mr Barry was the sole registered proprietor of the "proposed subdivision property", but that the Golbys were to mortgage their farm and home properties to provide security for the advance. The obvious inference is (as was the fact) that the Golbys and Mr Barry were engaged in a joint venture to develop the property and that the Golbys' contribution, at the least, included the provision of security. It is also clear from the borrowers' application and from the letter that the liability of the co-venturers to the Bank was to be joint and several. In the event of default, for example, the Bank was entitled to have recourse to the mortgaged properties, which were owned by different parties to the venture. The letter as a whole, therefore, supports the conclusion that the clearance paragraph was intended to prevent the Bank from granting partial discharges of its mortgage over Abington Park, where to do so would permit one of the co-venturers, Mr Barry, to receive the proceeds of sale otherwise than for the purpose of reducing the amounts due by all co-venturers to the Bank.

In my opinion, the position becomes even clearer when regard is had to extrinsic circumstances of the kind contemplated by Mason J in Codelfa. The Bank was aware, prior to the letter of 22 March 1990, that the Golbys were not only contributing their properties to the venture as security for the advance, but that they were providing their expertise and undertaking earthmoving works. The Bank was also aware that Mr Barry had been granted a loan by it in 1989 to "pay out private accommodation and stockfirm borrowing". The Bank's memorandum of 12 March 1990 recorded that Mr Barry was then indebted to the Bank in the sum of $130,000.

These objective circumstances, known to the Bank, strengthen the view that the clearance paragraph of the letter was not merely intended to provide the Bank with additional protection, but was intended to impose obligations and to confer benefits on all parties to the agreement. Unless the Bank acted in accordance with the requirement that clearance of the advance was to be from the initial sales of subdivided lots, the co-venturers and especially the Golbys, were at risk that their indebtedness to the Bank would continue notwithstanding the sale of lots. In particular, if the Bank permitted Mr Barry to receive the proceeds of sale for his own benefit, without the Golby's consent, the Golbys would remain liable to pay interest on the outstanding loan to the Bank. Indeed, depending on Mr Barry's overall financial position, they would be at risk of bearing a disproportionate share of the moneys due to the Bank.

This is not a case of the Bank being required to ignore the instructions of a customer as to the application of the customer's own money. It may well be that the Golby's contributions to the venture gave them an equitable interest in the land to be subdivided, although this was not a matter explored at the trial or in argument before this Court. In any event, both the Bank and Mr Barry were parties to the agreement constituted by the letter of 22 March 1990. That agreement provided for the proceeds of sale of the lots in the subdivision to be applied in a particular manner. Mr Barry, notwithstanding that he was the registered proprietor of Abington Park, was bound by the agreement. It is therefore hardly accurate to describe the proceeds of sale of the lots as simply his own money.

Three further points should be mentioned. First, Mr Bennett sought to gain some comfort from the terms of the deed between the Golbys and Mr Barry. There is in my view nothing in the deed that is inconsistent with what I regard as the correct construction of the letter of 22 March 1990. In any event, not only was the deed executed after the letter, but it did not come to the attention of the Bank until very much later. It can be of no assistance in construing the letter.

Secondly, although the primary Judge took into account the conversations between the Golbys and the Bank on the question of construction, I have reached the same conclusion on that question without regard to those conversations. There is therefore no need to consider whether the primary Judge was correct in taking them into account.

Thirdly, in the course of oral argument Mr Bennett raised but did not develop a submission that the clearance paragraph did not apply to the proceeds of sale of the subdivided lots because more than twelve months had elapsed between the date of the agreement and the sales. The argument seemed to be that, because the letter provided that the facility was to be repaid within twelve months, the clearance paragraph was to be operative only during that period. But that paragraph, although expressing an expectation about when settlements would take place, was not subject to a time limit. Doubtless this was because the requirement that clearance of the advance be from initial sales of subdivided lots was important to the parties, not only during the twelve month period, but so long as any portion of the advance remained unpaid.

In the event, the Bank renewed or extended the advance from time to time. There was no evidence that the Bank had called up the balance of the loan by the time the lots in question were sold. The clearance requirement was clearly capable of applying to the proceeds of sale of those lots and, in my view, was intended to apply to those proceeds.

Conclusion

The appeal should be dismissed, with costs.

I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Associate:

Dated: 18 March, 1998

Counsel for the Applicant:	Mr D M J Bennett QC with Mr D Murr
Solicitor for the Applicant:	L E Taylor
Counsel for the Respondent:	Mr S L Walmsley SC with Ms T Gormly
Solicitor for the Respondent:	McCabe Brown
Date of Hearing:	9 March, 1998
Date of Judgment:	18 March, 1998