Burns & v AMP Finance Ltd [2004] NSWCA 469 (17 December 2004)

CITATION: Burns & Ors v AMP Finance Ltd [2004] NSWCA 469 revised - 15/12/2004

FILE NUMBER(S):

40291/04

HEARING DATE(S): 7 December 2004

JUDGMENT DATE: 17/12/2004

PARTIES:

John Burns - First Appellant

Dolroy Pty Ltd - Second Appellant

O'Malleys Aquariums Pty Ltd - Third Appellant

JUDGMENT OF: Giles JA Hodgson JA Burchett AJA

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S): ED 4194/03

LOWER COURT JUDICIAL OFFICER: Gzell J

COUNSEL:

J W Stevenson SC & E C Muston - Appellants

S White SC & J White - Respondent

SOLICITORS:

Foleys - Appellants

Kemp Strang - Respondent

CATCHWORDS:

Contract - loan agreement - provision for release of two lots from security - request for release - whether in subsequent conversations lots allowed to remain as security until needed by borrower - finding of agreement to that effect - lender excused from performance - no breach of contract - whether finding correct - finding upheld - no question of principle - order that damages be tried separately - consideration of whether necessary to establish suffered some damage - under normal procedure would have been necessary - proposal for "boundary adjustment" - exchange of land over which lender held security - needed lender's endorsement of linen plan - request for endorsement - whether implied obligation that lender would act in good faith in relation to endorsement - whether breach of obligation in failing to consider whether or not to endorse - assuming obligation, breach not established - again no question of principle. D

LEGISLATION CITED:

DECISION:

Appeal dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT

OF NEW SOUTH WALES

COURT OF APPEAL

CA 40291/04

SC 4194/03

GILES JA

HODGSON JA

BURCHETT AJA

Friday 17 December 2004

BURNS & ORS v AMP FINANCE LTD

Judgment

1 GILES JA: Dolroy Pty Ltd (“Dolroy”), a company controlled by Mr John Burns, owned land at Duns Creek in the Port Stephens Shire in New South Wales. It wished to develop the land as a residential subdivision. It obtained finance for that purpose from the respondent, then known as GIO Finance Ltd. Mortgage security was provided by Dolroy over the land and by O’Malleys Aquariums Pty Ltd (“O’Malleys”), another company controlled by Mr Burns, over other land. Repayment was guaranteed by Mr Burns and by O’Malleys.

2 The finance was provided under a Commercial Equity Facility Agreement (“the Agreement”) dated 16 November 1995. The initial facility limit was $875,000. The course of the development was prolonged. The facility limit was increased from time to time, reaching $4,283,000 in November 2001 including an interest reserve. After the interest reserve was used up Dolroy paid interest for a time, then ceased paying interest. In March 2003 the respondent served notices under s 57(2)(b) of the Real Property Act 1900. In July 2003 it demanded immediate repayment of $4,515,654.29.

3 In August 2003 the appellants Mr Burns, Dolroy and O’Malleys brought proceedings against the respondent. Their principal claim was that in April 2000 the respondent had agreed to a facility limit of $5,307,000, of which the subsequent increases were instalments, so that Dolroy was not in default. The respondent cross-claimed for possession of the security properties and for money judgments. Gzell J dismissed the appellants’ claim and upheld the respondent’s cross-claim.

4 This appeal is concerned only with two of the appellant’s other claims in the proceedings, which his Honour also dismissed. They were claims to damages for breach of contract in relation to (a) release by the respondent from its security of two lots part of the Duns Creek land; and (b) endorsement of consent on a so-called boundary adjustment plan with respect to the land.

The release of the lots

5 The land comprised lot 1 in DP 605862, lot 112 in DP 752445 and lots 108 and 140 in DP 752497. Clause 23 of the Agreement provided -

“FUTURE SUBDIVISION

The Lender acknowledges that the Customer proposes to consolidate Lot 108 DP 752497, Lot 140 DP 752497 and Lot 112 DP 752445 into Lot 11, as shown on the plan annexed and marked ‘A’ which proposed sub-division is currently lodged with the Port Stephens Council as DA J685/95

The Lender agrees that upon registration of the proposed subdivision then on receipt of written request bv the Customer and Guarantors, the Lender will release from its security pursuant to this agreement, that portion of land marked ‘x’, as shown on the plan annexed hereto and marked ‘A’, without the Customer and Guarantors needing to repay any part of the loan facility.”

6 The plan was registered as DP 875533 on 18 August 1998. The land marked “X” became lots 1 and 2 in DP 875533, being two parcels each of about 1.33 ha in the north-western corner of the consolidation with frontages to Duns Creek Road. The remainder of the consolidation, lot 3 in DP 875533, was a large parcel of about 166.1 ha.

7 In their statement of claim the appellants alleged that the respondent was in breach of cl 23 of the Agreement because on 9 September 1998 they requested in writing that the lots be released from the security, but the lots were not released until 22 November 2001.

8 By a letter dated 9 September 1998 Dolroy’s solicitors wrote to the respondent’s solicitors -

“We refer to our letter of 24th July in relation to the Section 88B Instrument.

Please advise when the new Instrument has been registered.

Following registration, our client would like to have released from the Mortgage the two parcels of land which were specifically referred to as capable of being released free from encumbrances from GIO Mortgage Security and we would appreciate you advice as to when this might be affected [sic].”

9 The respondent did not submit that the request was ineffective for the purposes of cl 23 because it was not shown to have been written on behalf of Mr Burns and O’Malleys as well as Dolroy. Nor did it submit that the request was ineffective because sent to the respondent’s solicitors rather than to the respondent at the address for communications in the Agreement. The reference to outstanding registration of a s 88B instrument was obscure, but the respondent did not submit that the request was conditional upon registration of the instrument.

10 No further written request was made until a letter dated 30 April 2001 from Mr Burns to Mr Bryan Boyd of the respondent. That request was soon displaced when on 27 June 2001 Mr Burns wrote to Mr Boyd suggesting a “land swap”, part of which was that the two lots should remain as security and other lots identified as Q and G should be released. The respondent agreed. Then at a meeting on 11 October 2001 Mr Burns said that Dolroy wished to have the lots released rather than made subject to the land swap, and discharges from the respondent’s security were provided on 22 November 2001. The appellants did not allege that there was breach in failing promptly to act upon the letter of 30 April 2001. Their case was of breach in failing to act upon the letter of 9 September 1998.

11 His Honour dismissed the claim on two bases.

12 First, his Honour found that despite the letter of 9 September 1998 it was agreed that the lots should remain within the respondent’s security, effectively until Mr Burns asked for their release at the meeting of 11 October 2001. The agreement was found in conversations between Mr Burns and Mr Peter Saunders, the respondent’s manager for the Newcastle region. His Honour said -

“44 Mr Saunders discussed this matter with Mr Burns on a number of occasions. He said he recalled approximately three or four conversations over the period from 1996 to 1998 in which Mr Burns inquired when the two blocks were to be released and Mr Saunders responded that the blocks would be released when the subdivision came through and Mr Burns said: “Really I don’t really need them right now, I guess you can hold onto them for now though”. Mr Burns denied the conversations. He said at no time did he inform AMP that it could “hold onto” the two lots.

45 In cross examination, Mr Saunders said that he recalled conversations to like effect between 1998 and 2001. He said that he made an administrative decision not to release the two lots as the facility was increasing and further security might be required and if that was so, the lots were already there. Mr Saunders said that no pressure was being exerted for their release at that time.

46 That conversations had taken place over an extended period of time is clear from the only other written request for the release of the lots on 30 April 2001. In it Mr Burns referred to the discussions he had had with Mr Saunders over the previous two to three years and requested the release of the two lots as they were required immediately.

47 While cavilling with Mr Saunders’ recollection of the conversations, Mr Burns did not assert that he had made any request for the release of the lots between the solicitor’s letter of September 1998 and Dolroy’s letter of April 2001. In my view, the likelihood is that Dolroy, through Mr Burns, allowed the lots to remain under security until they were needed.

48 The approach taken by Mr Saunders had merit in a climate of increasing facility limits and while Dolroy was drawing its funds under those facilities there was little likelihood that it required the lots to raise finance elsewhere.

49 That the need for the lots was not urgent is apparent from the later history. On 27 June 2001, Dolroy wrote to AMP suggesting a land swap of lots G and Q for lots 1 and 2. To this suggestion AMP agreed. But Mr Burns changed his mind. At the meeting of 11 October 2001, Dolroy reverted to its request for the release of lots 1 and 2 to which AMP agreed at the meeting and on 22 November 2001 the discharges of mortgage in respect of lots 1 and 2 were forwarded to Dolroy. The lots were not used to raise finance until late 2003.

...

53 In my judgment, the plaintiffs have failed to establish that the release of the two lots on 22 November 2001 constituted a breach of the facility agreement. I am satisfied that in discussions between Mr Burns and Mr Saunders there was agreement that the lots should remain under security until they were required. I am satisfied that following the request for their release on 30 April 2001, there was a change of plan and it was not until the meeting 11 October 2001 that an effective request for release of the lots was made. Performance of that request on 22 November 2001 was not in breach of contract. The plaintiffs are not entitled to damages and there is no matter to be referred to a Master for inquiry and determination.”

13 Secondly, his Honour held that the appellants had not proved that Dolroy had suffered loss because the lots had not been released until 22 November 2001. His Honour said -

“50 The plaintiffs asserted that AMP knew or should have known that the release of the lots was required by Dolroy to further finance the subdivision. That allegation has not been made out on the evidence.

51 It was further alleged that the plaintiffs suffered damage as a result of the failure of AMP to release the lots before 22 November 2001. That allegation has not been made out.

52 The plaintiffs argued that an order had been made that the question of damages, if any, were [sic] to be determined separately and after hearing the balance of the proceedings and that the question whether the plaintiffs sustained damage was an issue for later determination. I reject that submission. As the plaintiffs have failed to establish that any damage was sustained as a result of the alleged failure of release before November 2001, an inquiry by a Master as to damages is pointless.”

14 The appellants submitted that his Honour’s finding of agreement that the lots should remain within the appellants’ security was erroneous, and that if breach of contract were made out his Honour was in error in requiring that they establish at the trial that Dolroy had suffered loss.

15 As to the breach of contract, the appellants submitted that his Honour’s finding was flawed in two particular respects. They were related, and can conveniently be seen together. The first was the statement in his Honour’s [45] that Mr Saunders “said that he recalled conversations to like effect between 1998 and 2001”, which the appellants said was not supported by the evidence. The second was the statement in his Honour’s [47] that Mr Burns “did not assert that he had made any request for the release of the lots between the solicitor’s letter of September 1998 and Dolroy’s letter of April 2001”, which the appellants said was contrary to the evidence. These were, however, facets of his Honour’s overall finding, and it is the overall finding which is in question.

16 It is apparent that his Honour accepted, over Mr Burns’ denial, that in conversations with Mr Saunders in 1996-1998, prior to the registration of the plan of subdivision, Mr Burns said that he did not then need the two lots and the respondent could “hold onto them for now”. However, the plan of subdivision was still to be registered, and after its registration the written request of 9 September 1998 clearly enough conveyed that Mr Burns wanted the two lots and was no longer content that the respondent hold onto them.

17 The letter of 9 September 1998 to the respondent’s solicitors was marked for the attention of Ms Cheryle Eube. She did not give evidence. Mr Saunders said he did not know of the letter, and his evidence of later conduct and conversations with Mr Burns must be understood in that light.

18 Mr Burns’ evidence of later conversations was imprecise. When agreeing that the letter of 30 April 2001 was about two and a half years after the letter of 9 September 1998, he non-responsively added “notwithstanding my clients [sic] communications with the manager of GIO in Newcastle on a repeated basis”. The reference to “clients” is probably a transcript error. Then when being asked about October 2001 he said as to past discussions about release of the two lots that Mr Saunders “commenced procrastinating as I kept asking for the release of those lots through the nineties”.

19 Mr Burns agreed that Mr Saunders told him from time to time that the lots would be released, but -

“Q. As a consequence of the increase of the additional land valuation, additional titles and all Mr Saunders was saying to you that until the position was made clearer the defendant was desirous that the lots remain within the security, didn’t he?

A. No, that was then the view they took.

Q. And you agreed with that proposition, didn’t you?

A. Not at all.”

20 Mr Saunders did not give direct evidence of conversations between 1998 and 2001 in which Mr Burns agreed that the respondent could hold onto the two lots for the time being. He agreed that between 1998 and 2001 there were several telephone conversations in which Mr Burns “requested follow-up in respect of release of the two lots” and “would ask you about the progress of the release of the 2 lots and he indicated to you that he wanted them to be released”. When it was put to him that he decided unilaterally “to keep the two lots to bolster up your position”, he answered -

“A. From a management point of view it’s always prudent when you release securities or release any part of your securities that you ensure that the remaining value of securities are in order. It’s an administrative management check and balance requirement that I would have taken on myself. The other reason would have been that the amounts were increasing over time and if John needed further securities to be put into place, they were already there. In my mind there was no exertion or need, if you like, to release them because it wasn’t of an urgent nature, I thought at the time. So it was an administrative thing that I took on to ensure that our remaining securities would have been in order because of the changes that were occurring.”

21 Mr Saunders’ thinking is revealed by a file note he made in November 2000, in connection with revaluation of the land for an increase in the facility limit. It should be recalled that he was unaware of the letter of 9 September 1998. The note, in which the words in brackets were written in and may or may not have been a later addition, referred to the agreement to release the two lots and added -

“Comment

Whilst we have a mortgage registered on Lots 1 and 2 in DP 875533 it is our prerogative to retain the registered mortgage and release them, as per our original decision with Burns, only when we are comfortable with our position. Whilst these two (2) lots do not form part of the Valuer’s valuation, nevertheless we should have an option to hold them if, by any change, the current loan amount continues to increase by way of interest being capitalised and, therefore, eroding our current security value whilst the houses are not being built giving added value.

It is my comment that this should happen [until we are satisfied on our position] and this file note is clarifying the current position.”

22 Mr Saunders’ indirect evidence in cross-examination of conversations with Mr Burns, in addition to the answer set out above, was -

“Q. But you were aware whilst making this – in respect of this management position, as you’ve earlier indicated, that it was diametrically opposed to the contractual position?

A. Yes, in a sense that it was agreed that we would release them. Following on from that I simply put into my thinking mode, if you like, the need for any signing discharge of mortgages to ensure that nothing around you is changing dramatically that will affect that you’re doing by lending further dollars. ...

A. I had always said to John that ---

WHITE: Let him finish.

OBRART: Your Honour ---

HIS HONOUR: Q. He’s responding to the question?

A. --- over the period of time which could have been at least a two, three-year period before I left, maybe even four, perhaps three and a half. I had always said to John, ‘We will release the securities. There’s no problem.’ I had formed the impression in my mind that it wasn’t of a great urgent nature that we do release them. My thinking at the time was it’s not urgent. I’m not being pushed to release them but I had always alluded to the fact in conversations over time that even if we did release them we still have to have our checks and balances in place to ensure remaining positions such as more dollars being advanced was adequately protected.”

23 In re-examination Mr Saunders was asked for the basis of his impression that it was not urgent to release the lots. He said (the transcript may at times be imperfect) -

“A. I think, well, I think through various discussions with John over the periods of time, probably the lack of badgering on John’s part consistently to release them, I had already made it quite clear that we would release them.

...

I had always agreed with John that we would release the lots. I had the basis of forming my opinion was the fact that there was never really any pushing by John to me every day of the week or every month of the year to release them. ...

...

Q. In response to the question I put to you, you said that one of the reasons for the impression you held was that Mr Burns had said to you. What was it that Mr Burns said to you which was one of the reasons that caused you to believe that the release of the lots was not urgent.

A. I think in being, I suppose, one of them was that when John said to me one day that ‘I hope you blokes aren’t going to hang onto them for all time’. That was in essence still saying to me that, you know, ‘I want them, give them to me’.

Q. You were asked some questions that you had telephone calls from Mr Burns 1998 to 2001 in which he indicated the lots to be released; do you remember that question?

A. Yes.

Q. You agreed you did have conversations with him to that effect?

A. Hmmm.

Q. What did you tell him when he asked you during the conversations that he wanted them released?

A. I would – I said and would have said word purporting to the process that me, as a manager, having to go through, to release property or in fact signed discharge of mortgage documents because the – and I remember discussing with John this because the limits were increasing from time to time and ideas were changing from time to time, but if we held onto them, it wasn’t make any difference and I wasn’t being pushed on it totally.

Q. What was his response to what you told him in those circumstances?

A. I can’t be specific but it ended, it was never –

...

WHITE: Q. [You have] Given evidence that from time to time from 1998 to 2001, you agreed that you had telephone calls with Mr Burns in relation to the release of lots 1 and 2?

A. Hmmm.

Q. You have told his Honour what you said from time to time in response to his request that the lots be released?

A. Hmmm.

Q. I want the response as best as you can recall that Mr Burns gave to you when you explained to him your position?

A. Right. The response would have been, I need -

OBJECTION.

...

HIS HONOUR: Q. Can you recall a response that was given to you by Mr Burns on one occasion.

WITNESS: ‘I hope you guys or blokes aren’t going to hang onto these for all time’ which I think I said in my affidavit.”

24 With respect, I do not think it correctly reflects the evidence to say that Mr Burns did not assert that he made any request for the release of the lots between the letters of 9 September 1998 and 20 April 2001. Although imprecise, his evidence supported requests for release of the lots, albeit requests which may have not been pressed. More to the point, Mr Saunders agreed that requests were made. There were no further written requests, and if that is what his Honour meant he was correct. Nor do I think it correctly reflects the evidence to say that Mr Saunders recalled conversations between 1998 and 2001 to the effect that the lots were not needed and the respondent could hold onto them for the time being. Mr Saunders’ evidence was rather to the effect that, when presented with the management decision, Mr Burns went along with it, with a degree of reluctance indicated by his hope that the respondent would not hold onto the lots for all time.

25 However, these are ways of looking at rather unsatisfactory evidence, and its substance must be assessed. It does not follow that his Honour’s overall finding was in error. To repeat, Mr Saunders’ evidence must be understood against the background that he did not know of the letter of 9 September 1998. When he did not know that a written request had been made in accordance with cl 23 of the Agreement, his thinking at the time is understandable, as is his belief that Mr Burns went along with his management decision. It made sense that, with the facility limit increasing, the two lots should remain within the respondents’ security, subject to activation of cl 23 by an appropriate written request. To Mr Saunders’ eyes, there had not been a written request, and in going along with the management decision Mr Burns held back from activating cl 23.

26 A written request had been made in September 1998. As I have indicated, no point was taken that it was ineffective for the purposes of cl 23. It is curious that there was not explored in the evidence the transmission of the letter of 9 September 1998, or its contents, from the respondent’s solicitors to a responsible officer within the respondent. Mr Burns must have known of it, but failed to tell Mr Saunders of it. From the evidence of Mr Saunders, which the judge evidently accepted in preference to that of Mr Burns where there was conflict, in that knowledge Mr Burns concurred in the respondent not releasing the two lots.

27 Mr Burns may have done so reluctantly, raising from time to time the release of the lots, but there was good reason for Mr Burns not to insist on release of the lots but to go along with the position as explained by Mr Saunders. The facility limit was increased to $1,452,000 in April 1997, to $1,515,000 in August 1998 and to $3,000,000 in November 1998. There were later increases to the $4,283,000 in November 2001. According to the appellants, although not accepted by the judge, there was agreement in April 2000 on a facility limit of $5,307,000. With the ongoing need for more money, there was clearly a prospect that the two lots would be needed to top up the respondent’s security, and so long as Dolroy was getting further finance from the respondent it made sense for Mr Burns to agree that the respondent could hold onto the two lots until, temporarily in April 2001 and finally in October 2001, he required their release.

28 In my opinion, therefore, although through a slightly different view of the evidence, I consider that his Honour was correct in finding in his [47] “that Dolroy through Mr Burns, allowed the lots to remain under security until they were needed”. The evidence was not explicit, but his Honour could assess its import with the benefit of seeing and hearing the witnesses. That Mr Burns was content to allow the lots to remain is supported by the suggested land swap in June 2001, and by the prompt release of the lots when Mr Burns made his position clear in October 2001.

29 Mr Burns did not allow the lots to remain under protest, reserving for the appellants that the respondent was in breach of contract: on the evidence of Mr Saunders, the lots would have been released if Mr Burns had insisted, and Mr Burns did not insist. The respondent was excused from performance pursuant to cl 23 of the Agreement until there was insistence, and when that occurred in October 2001 it released the lots. The claim of breach of contract was not made out.

30 It is unnecessary to consider the second basis on which his Honour dismissed the claim.

The “boundary adjustment”

31 In their statement of claim the appellants pleaded three implied terms as part of the Agreement. The first, said to be implied by operation of law, was that the respondent “would act in good faith with respect to the Facility Agreement”. The second, said to be implied to give business efficacy to the agreement, was that the respondent “would do all things necessary to enable the registration of the Plan of Subdivision”. The Plan of Subdivision was the subdivision of the land into residential lots. The third, also said to be implied to give business efficacy to the Agreement, was that the respondent “would not cause any unreasonable delay in the obtaining of registration of the Plan of Subdivision”. It was alleged that registration of the Plan of Subdivision was contingent on registration of a plan of Boundary Adjustment, that it was necessary for the respondent to endorse the Boundary Adjustment plan in order that it be registered, and that in breach of the implied terms it “refused or failed to endorse the linen plan for the Boundary Adjustment”. It was also pleaded that the respondent was estopped from denying that it had consented to the Boundary Adjustment.

32 In the appeal only breach of the first of the implied terms was maintained. For reasons which will appear, the substance of the appellant’s claim involved not endorsement of the linen plan alone, but endorsement of the linen plan as part of an exchange of land over which the respondent held security.

33 The appellants’ case on appeal differed from that at the trial, as their counsel readily and properly acknowledged.

34 First, they descended from the generality of good faith “with respect to the Facility Agreement”, and relied on an implied obligation to act in good faith in the exercise of rights or powers under the Agreement. They specified the right or power in cl 20.15 of the Agreement, and tied their submissions to it. Clause 20.15 provided -

“Where the consent or approval of GIO Finance is required, such consent or approval may be given conditionally or unconditionally or withheld in the absolute discretion of GIO Finance, unless this Agreement expressly provides otherwise.”

35 Secondly, the breach of the implied term was said to lie not in the pleaded refusal or failure to endorse the linen plan, but in failure to give consideration to whether or not to endorse the linen plan. The appellants accepted that, if breach of the implied term in that respect were made out, they had also to establish that the consideration would have brought endorsement. Again, the substance was that the consideration would have brought agreement to the exchange of land over which the respondent held security.

36 Port Stephens Shire Council (“the Council”) had approved a subdivision of part of the land into residential lots in May 1998. There were twenty-five residential lots and a further lot for a large remaining area of undeveloped land. The approved subdivision was overtaken by DP 875533, although that plan did not affect the proposed subdivision. Lot 3 in DP 875533 encompassed nine residential lots in the approved subdivision plus the further lot for the undeveloped land.

37 Lot 3 was traversed by a reserved road. The road reserve was vested in the Crown.

38 Dolroy’s town planning consultant advised that the Burns interests should acquire the road reserve, lest a third party do so and impede the residential subdivision. In early 2000 Dolroy acquired the road reserve from the Crown. It became lot 1 in DP 1003257.

39 In meetings with an officer of the Council in May and June 2001, and then with the Council’s Development Assessment Panel, it became apparent that the Council would not allow registration of the plan of subdivision into residential lots while the former road reserve was a lot separate from lot 3 in DP 875533. The placement of some of the residential lots and the topography were thought to be such that, if lot 1 in DP 1003257 became subject to separate ownership, access could not be had to that part of the remainder of lot 3 in DP 875533 to the south of the former road reserve. The Council said that it was up to Dolroy to overcome the problem, but suggested a “boundary adjustment”. This was something of a misnomer. Dolroy owned both parcels. The Council’s concern could be met by incorporation of lot 1 in DP 1003257 within lot 3 in DP 875533.

40 The conditions of consent in the approval of May 1998 had not included that there be a boundary adjustment. Dolroy did not question whether the Council was entitled to impede registration of the plan of subdivision into residential lots in the absence of a boundary adjustment. No doubt it was good sense to concur with the Council.

41 On 27 June 2001 Dolroy wrote to the respondent proposing the land swap earlier mentioned. Apart from exchanging lots 1 and 2 in DP 875533 for lots G and Q, it proposed exchanging lot 1 in DP 1003257 for two new lots 101 and 102. The letter said -

“(2) Lot 1 DP 1003257 for new Lot 101 and a new additional title 102. This size difference takes account of the hectares I never took up from the original Lot 1 and Lot 2 boundary re-adjustment where I could have taken up at least a further 15 hectares (approx.). I recall that we agreed I could work it out at a later time in the future as the opportunity arose. Remember the original 2 lots/titles retained were Lot 140 (45 acres) and Lot 112 (72 acres). Instead, I reduced Lots 1 and 2 in the boundary re-alignment to 1.5 hectares each (3 hectares altogether) to maximise the lot yield available, so there was more value and security in the remaining 2 large lots (108 on the east and Lot 1 of portion 149 on the west) thus giving us a 25 lot sub-division availability.

(3) Enclosed is an A4 of the preliminary super-title sub-division proposal which was presented to the Port Stephens Council’s GM and staff in preview before lodgement in order to gain feedback, on Monday 25th June 2001. This will be lodged in the next week after some minor adjustments and refinements. It will be lodged with DA for the golf course and condominiums (approx 145 hectares) of the land abounding [sic] the northern boundary of the current Lot 3 (eastern portions).”

42 The plan enclosed as the “preliminary super-title subdivision proposal” involved changes to the subdivision approved in May 1998, quite apart from incorporation of the former road reserve within lot 3 in DP 875533. The land swap proposed to the respondent was of land as the respondent’s security. It did not have security over lot 1 in DP 1003257, which Dolroy had acquired in 2000. By reference to the plan, the land swap meant the respondent obtaining security over lot 1 in DP 1003257 as part of lot 3, but in exchange for release from its security of two new lots carved out of lot 3 shown on the plan as lots 101 and 102. Lots 101 and 102 were 16 ha in total.

43 There was no other evidence about Mr Burns not taking up hectares at an earlier time, as stated in para (2) in the letter of 27 June 2001.

44 The respondent’s initial internal reaction was unfavourable. Lot 101 was thought to be the most valuable portion of the land, having direct road access and being generally level and with elevated views. Lot 102 was also elevated and with good views. The respondent was unwilling to give up its security over these prime portions of the land.

45 The respondent obtained its valuer’s advice. This confirmed that lots 101 and 102 (although in a manner unexplained it seems the valuer referred to lots differing from the lots in the June 2001 plan) were prime portions of the land. But it pointed out that if the former road reserve was not incorporated into lot 3, its “separate ownership existence” could restrict the use of the land to its south and “prevent Council from approving the current land subdivision or any further development opportunities over the land”. The valuer said -

“To quantify the impact on value if the above is not pursued is difficult to say, however, we can indicate that without access to the rear land value ... its value could be reduced by more than half.”

46 On 29 August 2001 an “analyst” within the respondent prepared a report to Mr Peter Kearns, the respondent’s national lending manager, upon the proposed land swap. In a manner again unexplained, the analyst referred only to lot 102. He concluded -

“Whilst the effect of releasing proposed Lot 102 is not clear we are in the position that, failing to do so, will adversely affect our security position to a dramatic and unacceptable degree as it land locks the bulk of the land we hold as security and significantly reduces the value of englobo land retained.

As the best source of clearance of our debt is from the sale of lots from the completed subdivision, we have little alternative but to agree with clients [sic] request in this instance.”

47 Then Mr Rod Leeson, a manager within the respondent, prepared a recommendation to Mr Kearns. It was not in terms of an exchange of land over which the respondent held security, but only of “a boundary re-alignment so far as it applies to an unformed road reserve which traverses the larger parcel of the undeveloped residential land parcel east of Dunns [sic] Creek Road”. Mr Leeson did not refer to the valuer’s report, but to an earlier valuer’s report in March 2000. He said -

“Gio [sic] Panel Valuer Knight Frank in their earlier updated report of March 9, 2000 (page 3) covers this boundary re-adjustment. They report that the proposed re-adjustment could enable the provision of another rural/residential lot. Which could also provide added value of between $120k to $220k (dependant on position) to the development.

Additionally, it is important to note that this boundary re-adjustment is required to be processed, prior to the lodgement of the linen plan covering the completed 26 lot subdivision with Council.

In general terms not only will the boundary re-adjustment potentially improve the value of GIO’s security (as per valuers advices), it will also enable the linen plan for 26 lot subdivision to be lodged with Council, therein enabling registration & issuance of individual titles, allowing selldown of the project and reduction under our current facility.

Your approval in enabling this boundary re-adjustment to be processed is recommended ... “

48 Mr Kearns approved Mr Leeson’s recommendation on 16 October 2001. Mr Leeson did not give evidence, but it is apparent that he did not appreciate that more was involved than the so-called boundary adjustment and had no appreciation of the concomitant exchange of land within the respondent’s security. The same is evident from a memorandum from Mr Leeson to Mr Kearns dated 22 November 2001 recommending an increase in the facility limit to allow capitalisation of interest, in which the boundary realignment is referred to only as something for Dolroy to address in order to get the plan of subdivision registered. Mr Kearns did give evidence. There is no indication in his evidence that when he approved Mr Leeson’s recommendation he appreciated that more was involved than the boundary adjustment; he was not asked about receipt or knowledge of the analyst’s report. While the matter was not explored at the trial, it seems to me likely that in November 2001 sight had been lost of the link between the boundary adjustment and the exchange of land within the respondent’s security.

49 On 20 November 2001 the respondent wrote to the Council advising that it “will consent to an application for approval for a boundary adjustment in accordance with the attached Plan”. The plan was that of June 2001.

50 On 8 March 2002 Mr Burns sent to Mr Kearns a “copy of plan as requested”. There was no evidence of the circumstances in which Mr Kearns requested it. The plan differed from the June 2001 plan, in that lots 101 and 102 became a single lot 101 and the area of the new lot 101 was 20.28 ha compared to the 16 ha of the former lots 101 and 102. There was no further evidence about this plan.

51 In early December 2002 Mr Max Burlington, acting on behalf of Dolroy, raised with Mr Kearns uplifting the linen plan for the boundary adjustment. Mr Kearns said that the respondent had never been asked to endorse the linen plan. On 11 December 2002 Mr Burns sent to the respondent a copy of a plan for “endorsement to Port Stephens Council, in letter form identifying the plan”. The plan was similar to the March 2002 plan, although the area of lot 101 had increased from 20.28 ha to 21.37 ha.

52 There followed communications between Mr Battese of the respondent and Mr Burlington. Mr Battese reiterated the consent of 20 November 2001. Both spoke of boundary adjustment, and a long letter from Mr Battese was consistent only with an adjustment within security as distinct from an exchange of security. Neither of them seems to have appreciated any question of exchange of land over which the respondent held security.

53 So far as the evidence showed, nothing more occurred until 20 June 2003. According to Mr Burns, he telephoned Mr Kearns, said that he had the linen plan for the boundary adjustment and asked that it be endorsed, and Mr Kearns replied in the affirmative and that the linen plan should be delivered to the respondent. According to Mr Kearns, his reply was “If you send it down to us I’ll have a look at it”. The linen plan was delivered.

54 The respondent did not endorse and return the linen plan. Mr Burns gave evidence of an “understanding” that the respondent “would not agree to allowing the boundary realignment to secure [sic: occur]”.

55 Mr Kearns gave no evidence in chief as to why the respondent did not endorse and return the linen plan, only saying in his affidavit that “I have reviewed” the plans of June 2001 and June 2003 and “note that the two plans are entirely different”: the review appears to have been at a time proximate to the affidavit. Mr Kearns was not asked in cross-examination anything about why the respondent did not endorse and return the linen plan. In re-examination there was only -

“Q. Did you receive any advice or did you carry out any analysis as to what effect the linen plan at 1240 would have on the security held by the defendant?

A. No.”

56 The judge said, dealing with all three implied terms and estoppel -

“60 It was argued on behalf of the plaintiffs that Mr Kearns understood that the original plan would be followed by a formal survey plan which might differ from it and AMP’s consent to the original plan bound it to endorse the linen plan when presented to it. It was argued that the endorsement of the linen plan was necessary to effect a boundary adjustment before registration of the subdivision, registration of the subdivison would greatly enhance the value of AMP’s security and, in consequence, AMP would have suffered no detriment by endorsing the linen plan.

61 I reject that argument. No doubt the substitution of residential lots for open space would have increased the value of AMP’s security. But the appropriate question is whether AMP was disadvantaged by excising from its security lot 101 on the linen plan as compared with lots 101 and 102 on the original plan.

62 In my view the plaintiffs have failed to establish a breach by AMP of an implied term that they would not cause any unreasonable delay in obtaining registration of the plan of subdivision by its refusal to endorse the linen plan and plaintiffs have failed to establish that AMP is estopped from denying that it consented to the boundary adjustment shown in the linen plan.

63 Furthermore, when the linen plan was presented for endorsement in June 2003, Dolroy was in default under the finance facility and AMP was entitled to call up the amount owing and take steps to possess and sell the land and was no longer obliged to endorse any linen plan.”

57 This did not expressly deal with the first of the implied terms; indeed, whether the implied terms were to be implied in the Agreement was in issue at the trial, and was not decided. His Honour plainly enough considered, however, that it had not been shown that in refusing or failing to endorse the linen plan the respondent failed to act in good faith.

58 As I have said, the substance of the appellants’ claims involved not endorsement of the linen plan alone, but endorsement of the linen plan as part of an exchange of land over which the respondent held security. I think this was acknowledged by the appellants in submissions, but even if it was not I do not think any other view is reasonably open. The so-called boundary adjustment was proposed to the respondent not as a rearrangement of lots within its security, but as a “land swap”, and by agreeing to the boundary adjustment in the linen plan the respondent would be agreeing to an exchange by which the land over which it had security included lot 1 in DP 1003257 but no longer included the new lot 102.

59 The appellants faced a number of hurdles. First, it is debateable whether an implied term of good faith in the respondent exercising its right or power under cl 20.15 of the Agreement can be implied in law, when cl 20.15 was in the emphatic terms of an absolute discretion: cf Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 at [195]. Secondly, even if the term could be implied it is by no means clear that cl 20.15 governed the request made of the respondent to endorse the linen plan. Clause 20.15 begins “Where the consent or approval of GIO Finance is required ... “, and appears to mean required under the terms of the Agreement: there are many provisions in the Agreement referring to consent or approval of the respondent. It may be that cl 20.12 of the Agreement would have been a better vehicle for the implied term in the present case. It provides that the respondent may accept other security in substitution for existing security, but it also is stated as an absolute discretion. Thirdly, breach in failing to give consideration to endorsement of the linen plan is materially different from breach in refusing or failing to endorse the linen plan, and the respondent submitted that the appellants should not be permitted to mount on appeal a case outside the case which was pleaded and put at the trial.

60 I do not think it necessary to decide whether the implied term is to be implied in law or as to the reach of cl 20.15. I will assume for the purposes of the appeal that it was an implied term of the Agreement that the respondent would act in good faith in deciding whether or not to agree to the exchange of the portions of land within its security.

61 The appellants submitted that the respondent had agreed upon the exchange in November 2001, by the consent it sent to the Council, and that if its consideration at that time favoured agreement then consideration in June 2003 was bound to bring it to the same conclusion. They said that there was no rational basis on which the respondent could have refused to endorse the linen plan, since its interests and those of the appellants all dictated that it do so.

62 This was a difficult submission when, as the parties with the burden of proving lack of good faith, the appellants did not in cross-examination of Mr Kearns or otherwise explore why the respondent did not endorse the linen plan. I do not accept it.

63 The starting-point is in my view flawed. The appellants had the problem that the Council would not allow the plan of subdivision into residential lots to be registered while the former road reserve was in a separate title. One solution was for Dolroy to incorporate lot 1 in DP 1003257 within lot 3 in DP 875533 without any release of other security held by the respondent. It is not easy to see that lot 1 in DP 1003257 was of independent value to Dolroy. Another solution was to revise the plan of subdivision so that that part of lot 3 in DP 875533 to the south of the former road reserve was no longer landlocked, again without any release of other security. The valuer’s statement that the value of that southern part would be reduced if it was landlocked did not mean that the solution had to include release of lots 101 and 102. No doubt registration of the plan of subdivision into residential lots would increase the value of the land, and let Dolroy get on with the development and start selling the lots. But that could clearly be achieved by Dolroy simply incorporating the former road reserve into the development, or perhaps by Dolroy adjusting its subdivision, and the evidence did not make out a need for release of lots 101 and 102 in the June 2001 plan to help overcome the problem. Good faith did not require that the respondent confer a fortuitous benefit on the appellants.

64 At least in the analyst’s report, that was not the way it was seen; it was thought that the respondent had no alternative but to agree. On further consideration in June 2003, that may well have been seen to be unfounded, as it seems to me it was.

65 Further, the agreement in November 2001 does not appear to have been a product of the analyst’s report. Rather, it appears to have been a product of Mr Leeson’s report, as I have suggested at a time when sight had been lost of the link between the so-called boundary adjustment and the exchange of land within the respondent’s security. If this be so (and it is odd that nothing was made of it at the trial), it was all the more necessary for the appellants to address lack of good faith in June 2003 in the circumstances then existing. The consent sent to the Council in November 2001 was not a sound foundation for an argument that, with recognition in June 2003 of the link with an exchange of land within the respondent’s security, the respondent should have decided to endorse the linen plan.

66 I do not overlook the appellant’s submission to the effect that the land swap proposed in June 2001 made up for something earlier foregone by them, as explained by Mr Burns in para (2) of the letter of 16 June 2001. What was said to have been foregone is not easy to understand, it was not explained and it was not shown that something was indeed foregone.

67 Whatever the starting-point, by June 2003 the circumstances had changed.

68 Although it is not clear that the respondent was made aware of it, in June 2002 Dolroy had transferred lot 1 in DP 1003257 to another company controlled by Mr Burns, Miritin Equities Pty Ltd (“Miritin”) for $6,000. In July 2002 it had entered into an agreement with Miritin under which it agreed to pay Miritin $15,000,000 “in the event the boundary adjustment of Miritin’s land is not completed”. The reasons for these obscure transactions were not explored in the evidence.

69 Mr Burns had made a number of forecasts of completion of the subdivision, none of which had proved accurate, and so far as the evidence went there was no real explanation for the time that passed from the first proposal of a boundary adjustment in June 2001. Two years had gone by without Dolroy bringing to a resolution the problem presented by the separate title for lot 1 in DP 1003257, and in fact some force would have been given to the problem, in the eyes of the Council and beyond, by the transfer of the lot to Miritin.

70 Of particular importance, Dolroy had fallen into default, and in March 2003 the s 57(2)(b) notices had been served. As at June 2003 the notice of July 2003 demanding $4,515,654.29 must have been in contemplation. Lot 101 in the linen plan was a prime portion of the land, and its area was considerably greater than the area of lots 101 and 102 in the June 2001 plan. The respondent must have been mindful of having adequate security for the debt of its defaulting borrower, and good faith did not require that it compromise its own position.

71 These changed circumstances again made it necessary for the appellants to address lack of good faith in June 2003 in the circumstances then existing. They had the burden of proof of lack of good faith, and I do not think they discharged it. There may well have been good reason, consistent with the exercise of good faith, for the respondent to decline as at June 2003 to agree to the exchange of land within its security. The appellants did not establish, and I would not infer, to the contrary.

72 In my opinion, the appellants can not escape from this by changing their case to failure to give consideration to whether or not to endorse the linen plan. The change may be attributable to Mr Kearns’ evidence in re-examination that he did not in June 2003 obtain advice or undertake an analysis as to the effect on the respondent’s security position. I do not think it could properly be found, from that one answer, that Mr Kearns failed to consider whether or not to agree upon an exchange of the portion of land within its security, or that the respondent failed to act in good faith in that respect. It may be that at this time sight was still lost of the link between the so-called boundary adjustment and the exchange of land within the respondent’s security, by Mr Burns as well as Mr Kearns, but it was not explored. It would be unsafe to enter upon the changed case, and I accept the respondent’s submission that, had the breach alleged been failure in consideration rather than failure to endorse, its conduct of the trial may have been different. On the principles sufficiently identified as those in Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1, the appellants should not be permitted to rely on the changed case on appeal.

Orders

73 I propose that the appeal be dismissed with costs.

74 HODGSON JA: I agree with Giles JA.

75 In my opinion also, the appellants would not in any event have been entitled to an enquiry as to damages on the “release of the lots” issue.

76 On the approach to be taken when considering whether an enquiry as to damages should be ordered, I adhere to what I said (with the concurrence of Heydon JA) in National Engineering Pty. Ltd. v. Chilco Enterprises Pty. Ltd. [2001] NSWCA 291. In that case, a party to a contract which had been breached by the other party had the benefit of a forfeited deposit of $144,000.00, and the primary judge had ordered an enquiry as to damages. The point was not taken by the party in breach that there would be no useful purpose to such an enquiry unless there was a reasonable probability that the loss otherwise exceeded that sum. I said this:

3 The orders appealed from were orders made following a hearing in which the issue was liability only, and Windeyer J made orders providing for the future determination of damages. It would seem therefore that strictly the appeal should have been by leave: see Triden Properties Limited v. Capita Financial Group Limited (Unreported, Court of Appeal, 26 November 1993). However, no point was taken about this, and this is not the subject of my comment.

4 The effect of the dismissal of the appeal is that the orders made by Windeyer J providing for determination of damages stand, and the process contemplated by those orders will go ahead.

5 Normally, an enquiry as to damages will not be ordered unless the Court is satisfied that it will serve a useful purpose; and this generally means that the Court needs to be satisfied that some substantial damages flowed from the relevant breach: see ICT Pty. Limited v. Sea Containers Limited (1994) 39 NSWLR 640 at 660.

6 In the present case, the respondent has the benefit of the forfeited deposit of $144,000.00, and so would not normally be entitled to an enquiry as to damages unless it showed a reasonable probability that the loss otherwise due to the respondent’s breach of contract exceeded that sum. Entitlement to damages for breach of contract generally requires proof that the person claiming damages was entitled to relevant benefits from the party in breach, or would but for the breach have done, or at least been ready willing and able to do, what was necessary on its part to become so entitled: in the present case, that means actually supplying a crane in substantial performance of the contract. Although the appellant failed to prove that there was no possibility as at 23 March 1997 that the respondent would substantially perform its contract, the respondent did not prove on the balance of probabilities that, but for the appellant’s breach, it would have done so or been ready willing and able to do so. At best, on the evidence before Windeyer J, the respondent showed that there was a chance that it may have been able to perform its contract, and that it was deprived of that chance: cf. Sellars v. Adelaide Petroleum NL [1994] HCA 4; (1992-4) 179 CLR 332.

7 If the normal procedure had been followed in this case, it would in my opinion have been necessary, before ordering an enquiry as to damages, for the Court to make a preliminary assessment of whether or not there was a reasonable probability that the value of that chance would exceed $144,000.00. Otherwise it seems to me that the Court would not be satisfied that an enquiry as to damages would serve a useful purpose. It is not clear why this did not happen in this case, but it seems that the procedure adopted in this case was acquiesced in by the appellant, and certainly no complaint about it was made on appeal. In those circumstances, the enquiry will presumably go ahead, unless the respondent chooses not to pursue it. It is unclear whether or not, on such enquiry, the respondent will be permitted to revisit in any way the question of the probability of its being able to supply a crane in substantial performance of its contract: this will I suppose depend upon the basis on which the original hearing was conducted. Presumably, in any event, any such enquiry will be at both parties’ risk as to costs.

8 I mean by these comments to point out the desirability of clearly defining the parameters of a hearing limited to liability. At the very least, if such a hearing is to be conducted other than on the usual basis, namely that the person seeking an enquiry as to damages has an onus to prove that there will be a useful purpose to such an enquiry, there should in my opinion be an order made under Pt.31 clearly setting out what is the question for separate determination.

77 Unfortunately, the suggestion made in the first sentence of the last paragraph was not taken up in this case. The order providing for separation of liability and damages was a consent order in the following terms:

The question of what damages, if any, the plaintiffs might have allegedly suffered is to be determined separately after the trial of balance of the proceedings.

78 In my opinion, that order is insufficient to displace the usual basis on which such matters are dealt with in the Equity Division, as set out in ICT and National Engineering.

79 The primary judge was correct to say that the appellants did not show that there would be a useful purpose in an enquiry as to damages. They did not show they could have done anything with the lots that would have improved their position. In any event, having been told the lots would be released, the appellants could have proceeded to negotiate such transactions with the lots as they thought to be to their advantage, and then asked for the formality of release to enable these transactions to be carried into effect. The fact that they did not do this is a further indication that they suffered no damage.

80 At the most then, the appellants could have been entitled to nominal damages; and that would not have made any difference to the costs orders in the proceedings.

81 If this had been the only basis for refusing an enquiry as to damages, there may have been a question as to whether the appellants should have been afforded a further opportunity to prove the probability of some damage so as to justify an enquiry, because there are indications in the submissions before the primary judge that the need to do this was not addressed. However, because of the other point decided by Giles JA, with whose decision I agree, it is not necessary to pursue this.

82 BURCHETT AJA: I agree with both the preceding judgments. With regard to the discussion by the presiding judge of the question whether the trial judge was right in holding that Mr Burns acquiesced in Mr Saunders’ retention within the security of the lots which were due for release, I would emphasize the weight to be accorded to the impression of oral evidence received by the tribunal before which it is given. The logic of the well known rule as to the credibility of such evidence is also of particular relevance in respect of its effect where conflicting witnesses both speak in rather vague generalities, as happened here.

83 His Honour’s understanding of the evidence is also supported, in my opinion, by the terms in which Mr Burns himself referred to the relevant conversations in his letter of 30 April 2001. It does not read as a demand, following a series of unsatisfied previous demands, made under the applicable contractual provision. It begins:

“As discussed with you [a Mr Boyd] and Peter Saunders over the last 2 to 3 years, I would like you to release the 2 blocks of land that were reserved from the mortgage....”

This bland language is quite consistent with Mr Saunders’ evidence of requests discussed and put aside by mutual consent. Furthermore, the failure, yet again as in the case of the only earlier written request, to conform to the terms of the contract, particularly as to the involvement of the guarantor company, is consistent not with an insistence upon contractual rights, but with an application for a release to which further repeated borrowings had given something of the aspect of an indulgence.

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LAST UPDATED: 17/12/2004