FEDERAL COURT OF AUSTRALIA
BANKING - Nature of banker/customer relationship examined - whether notice of demand must be given - what is adequate notice.
MORTGAGES - what demand is required - whether notice of demand may be given simultaneously with demand on principal debtor - what particulars are required in a s 57 notice - whether a s 57 notice may operate as a demand for other purposes - possession.
GUARANTEES- what demand is required - whether notice may be given simultaneously with demand on principal debtor - whether demand may be made for moneys not due and payable by principal debtor - whether nature of guarantee overridden by indemnity clause.
Federal Court of Australia Act 1976 (Cth) - ss 22, 23 and 32
Real Property Act (NSW)1900, ss 57, 58 and 60
Trade Practices Act 1974 (Cth)
"The Law relating to Bank and Customer in Australia", Weaver & Craigie ,1st ed, pp 193-4
Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549
Anshun Pty Ltd v Port of Melbourne Authority [No 2] (1981) 147 CLR 589
Bunbury Foods Pty Limited v National Bank of Australasia Ltd (1984) 153 CLR 491
Commonwealth Bank of Australia v Stow (Supreme Court of New South Wales, 21 February 1989, unreported), Brownie J
Cripps (R.A.) & Son Ltd v Wickenden [1973] 1 WLR 944
Photo Production Ltd v Securicor Transport Ltd [1980] AC 287
Rouse v Bradford Banking Co [1894] AC 586
Williams and Glyn's Bank v Barnes [1981] Com LR 205
PARRAS HOLDINGS PTY LIMITED
& ORS v COMMONWEALTH BANK OF AUSTRALIA
Davies J.
12 June 1998
Sydney
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 478 of 1992
GENERAL DIVISION )
BETWEEN: PARRAS HOLDINGS PTY LIMITED
(A.C.N. 003 546 807)
First Applicant/First Cross-Respondent
FULANGA PTY LIMITED
(A.C.N. 001 796 354)
Second Applicant/Second Cross-Respondent
PHONTOS INVESTMENTS PTY LIMITED
(A.C.N. 000 870 762)
Third Applicant/Third Cross-Respondent
ILANZ PTY LIMITED
(A.C.N. 001 885 392)
Fourth Applicant/Fourth Cross-Respondent
P & E PHONTOS PTY LIMITED
(A.C.N. 000 870 771)
Fifth Applicant/Fifth Cross-Respondent
DOVIZO PTY LIMITED
(A.C.N. 003 932 269)
Sixth Applicant/Sixth Cross-Respondent
PETER PHONTOS
Seventh Applicant/Seventh Cross-Respondent
ELLI PHONTOS
Eighth Applicant/Eighth Cross-Respondent
HARRYPHILLIP COSTAS
Ninth Applicant/Ninth Cross-Respondent
MARY COSTAS
Tenth Applicant/Tenth Cross-Respondent
MICHAEL PHONTOS
Eleventh Applicant/Eleventh Cross-Respondent
SIBARD PTY LIMITED
(A.C.N. 003 575 291)
Twelfth Applicant
SHIMCOST PTY LIMITED
(A.C.N. 003 355 048)
Thirteenth Applicant
SPOTEK PTY LIMITED
(A.C.N. 050 325 212)
Fourteenth Applicant/Twelfth Cross-Respondent
AND: COMMONWEALTH BANK OF AUSTRALIA
(A.C.N. 123 123 124)
Respondent/Cross-Claimant
Coram: Davies J
Date: 12 June 1998
Place: Sydney
MINUTES OF ORDER
ON THE CROSS-CLAIM
THE COURT ORDERS THAT:
1. There be judgment for the Cross-Claimant:
(a) Against each of the first to tenth Cross-Respondents in the sum of $7,203,496.42.
(b) Against the eleventh Cross-Respondent in the sum of $7,474,740.26.
(c) Against the twelfth Cross-Respondent in the sum of $55,925.49.
2. The Cross-Claimant have possession of the whole of the lands contained in:
(a) Folio Identifier 1/SP39048, being the lands known as and situated at Unit 1, 13-15 Wharf Road, Gladesville.
(b) Folio Identifier 2/SP39048, being the lands known as and situated at Unit 2, 13-15 Wharf Road, Gladesville.
(c) Folio Identifier 2/SP33486, being the lands known as and situated at Townhouse 2, 16 Bannerman Street, Cremorne.
(d) Folio Identifier 2/12055, being the lands known as and situated at 4 Garrick Avenue, Hunters Hill.
(e) Folio Identifiers A/331102 and B/186122, being the lands known as and situated at 1-3 Linsley Street, Gladesville.
(f) Folio Identifier 3/12055, being the lands known as and situated at 4 Crescent Street, Hunters Hill.
(g) Folio Identifier 2/SP35236, being the lands known as and situated at Unit 2, 1st Floor, Linsley Street, Gladesville.
3. The Cross-Claimant have leave to issue forthwith a writ of execution in respect of the said lands.
4. The Cross-Respondents pay the Respondent's/Cross-Claimant's costs of the cross-claim.
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 ) No. NG 478 of 1992
GENERAL DIVISION )
BETWEEN: PARRAS HOLDINGS PTY LIMITED
(A.C.N. 003 546 807)
First Applicant/First Cross-Respondent
FULANGA PTY LIMITED
(A.C.N. 001 796 354)
Second Applicant/Second Cross-Respondent
PHONTOS INVESTMENTS PTY LIMITED
(A.C.N. 000 870 762)
Third Applicant/Third Cross-Respondent
ILANZ PTY LIMITED
(A.C.N. 001 885 392)
Fourth Applicant/Fourth Cross-Respondent
P & E PHONTOS PTY LIMITED
(A.C.N. 000 870 771)
Fifth Applicant/Fifth Cross-Respondent
DOVIZO PTY LIMITED
(A.C.N. 003 932 269)
Sixth Applicant/Sixth Cross-Respondent
PETER PHONTOS
Seventh Applicant/Seventh Cross-Respondent
ELLI PHONTOS
Eighth Applicant/Eighth Cross-Respondent
HARRYPHILLIP COSTAS
Ninth Applicant/Ninth Cross-Respondent
MARY COSTAS
Tenth Applicant/Tenth Cross-Respondent
MICHAEL PHONTOS
Eleventh Applicant/Eleventh Cross-Respondent
SIBARD PTY LIMITED
(A.C.N. 003 575 291)
Twelfth Applicant
SHIMCOST PTY LIMITED
(A.C.N. 003 355 048)
Thirteenth Applicant
SPOTEK PTY LIMITED
(A.C.N. 050 325 212)
Fourteenth Applicant/Twelfth Cross-Respondent
AND: COMMONWEALTH BANK OF AUSTRALIA
(A.C.N. 123 123 124)
Respondent/Cross-Claimant
Coram: Davies J.
Date: 12 June 1998
Place: Sydney
REASONS FOR JUDGMENT
ON THE CROSS-CLAIM
On 24 October 1997, I expressed my findings on the applicants' claims in these proceedings. I incorporate those findings in these reasons. Judgment dismissing the application was given on 17 December 1997. These present proceedings concern the cross-claim brought by the Commonwealth Bank of Australia ("the Bank") against all the applicants save Sibard Pty Limited and Shimcost Pty Limited.
The Bank seeks judgment for moneys owing and orders for the possession of certain properties which were the subject of mortgages given to the Bank. The claims rely upon certain finance facilities, mortgages and guarantees. It is not in dispute that, subject to the issues which have been raised on behalf of the applicants, the sums of money which are set out in the submissions dated 17 March 1988 lodged on behalf of the Bank are the figures on which the judgment should be based.
On the hearing of the cross-claim, reliance was placed upon the evidence which had been adduced during the hearing in 1997 of the applicants' claims. Further oral evidence was given only by Mr Ross Dearing, an officer of the Bank who was called to verify the sums which were owing to the Bank and who was shortly cross-examined. The consideration of some of the issues which had been raised as issues in the cross-claim was made difficult by the fact that they were not the subject of investigation during the 1997 trial and the evidence and cross-examination of witnesses which then occurred were not directed specifically to them. On some issues, I have drawn inferences of fact where ordinarily one would expect there to have been examination and cross-examination on the point. However, the cross-claim proceeded on the footing that it could be resolved by the evidence of Mr Dearing and by the evidence already given and I deal with the matter on that basis.
THE PARRAS FACILITIES
On 31 August 1988, the Bank sent to Michael Phontos, as representative of the Phontos' group of companies, a letter which stated, inter alia:
" I refer to our recent telephone conversation and am pleased to confirm that the Commonwealth Bank of Australia (CBA) has approved the following finance package:
Progressive Fully Drawn Loan $2,600,000
Fully Drawn Loan 2,000,000
Bank Guarantee 182,700
$4,782,700
The above lines of finance are in addition to and not substitution of the Group's existing facilities with our Gladesville branch and will be on CBA's usual terms and conditions, together with the specific conditions, together with the specific conditions detailed in the `Terms Sheet' attached hereto."
(emphasis added)
Accompanying that letter was a terms sheet which read, inter alia:
"TERMS SHEET
Commonwealth Bank of Australia is pleased to offer the Phontos Group of Companies a finance package of $4,782,700 on the following terms and conditions:
BORROWER: PARRAS HOLDINGS PTY LTD (PARRAS)
LENDER: Commonwealth Bank of Australia (CBA)
FACILITIES: Progressive Fully Drawn Loan of $2,600,000
Fully Drawn Loan of $2,000,000
Bank Guarantee of $182,700.
Progressive Fully Drawn Loan - To assist -
PURPOSE: . acquire a property at Wharf Road, Gladesville NSW for $945,000;
. restore the cottage thereon at a cost of approximately $50,000;
. construct 12 units and four townhouses on the Gladesville property at a total cost of approximately $1,360,000; and
. capitalise interest during the construction phase.
Fully Drawn Loan - To assist refinance existing facilities with the ANZ and a private mortgage.
Bank Guarantee - Provide a back to back guarantee in respect to a guarantee issued by the ANZ in favour of the Housing Commission of NSW.
INTEREST RATES,
FEES, ETC: Progressive Fully Drawn Loan and Fully Drawn Loan
CBA's reference rate plus 1.5% pa. Interest will be calculated on a daily balance outstanding and charged in March, June, September and December each year. CBA's reference is presently 15.0% pa.
CBA's normal account keeping and maintenance fee/charges to apply.
Note: An undrawn commitment fee of 0.15% per month will be levied against the Progressive Fully Drawn Loan. The fee will commence three months from initial drawdown and be charged monthly in advance on the undrawn commitment of the Progressive Fully Drawn Loan while such exceeds $25,000. The facility limit will be set at $2,300,000 for the purpose of calculating this fee (ie capitalisation of interest amount excluded).
Bank Guarantee - Fee of 0.5% per half year charged six monthly in advance.
REDUCTION
ARRANGEMENTS: Progressive Fully Drawn Loan - Capitalisation of interest during construction and marketing stages (say 9 months) subject to limit ceiling of $2,600,000 not being exceeded. Repayment in full within three months thereafter (ie overall term not to exceed 12 months) from sale of the proposed units, town houses and restored cottage.
Fully Drawn Loan - Progressive reduction and ultimate clearance from sale of residual townhouses at Bannerman Street, Cremorne and profits from Housing Commission contracts and the Gladesville development.
Bank Guarantee - Annual review.
SECURITY: . Registered First Mortgage (third party) by Phontos, Peter and Elli over freehold house property at Hunters Hill NSW.
. Registered first mortgage (third party) by Costas, Harry and Mary and Phontos Investments Pty Ltd over freehold house property at Hunters Hill NSW.
. Unregistered first mortgage (third party) by Fulanga Pty Ltd over two townhouses at Cremorne NSW.
. Registered First Mortgage by Parras over freehold property at Gladesville (purchase property).
. Guarantee, unlimited as to amount, noting:
Debtors Guarantors
All companies All companies
Phontos, Peter & Elli
Costas, Harry and Mary
Note: CBA's valuation of the properties to be taken as security to achieve a combined `on completion' figure of at least $6,400,000. In this respect the opinion of CBA's valuers will be final.
OTHER
CONDITIONS: . Front-end fee of $9,000. This fee is payable on your written acceptance of this loan offer.
. Progressive Fully Drawn Loan - Funds will be released on a progressive basis against architects or quantity surveyors certificates.
. Proceeds of up to $1,000,000 if forthcoming in respect of the disputed claim with the Housing Commission (Ryde project) being directed to reduction of Parras' facilities with CBA.
. Written confirmation that no outstanding taxation will be payable in respect of fiscal years 1986, 1987 and 1988.
. P & E Phontos Pty Ltd's existing overdraft arrangement with CBA to remain undisturbed.
..."
(emphasis added)
It is not entirely clear what were the Bank's "usual terms and conditions" but I take them to be or to include the terms set out in the form S22 a form of application for accommodation which was filled out on each occasion when accommodation was sought. The form S22 completed by Parras on 15 September 1988 included these provisions:
"1. Application is hereby made to the Commonwealth Bank of Australia (the Bank) to grant accommodation to the applicant(s) from time to time by way of overdraft, accepting, endorsing or discounting bills of exchange or other engagements drawn by the applicant(s) or in the applicant's (s') favour or other accommodation approved by the Bank from time to time.
2. It is clearly understood that the following terms and conditions shall apply to all accommodation granted to the applicant(s) by the Bank from time to time:-
(a) Such accommodation shall be granted on the Bank's usual terms and conditions, the terms and conditions set out elsewhere in this Application and on such other terms and conditions as the Bank may from time to time impose.
...
(c) The Bank may from time to time at its pleasure cancel or vary the limit of accommodation granted to the applicant(s) and/or vary the rate of interest and/or rate of discount and the charge for accepting or endorsing bills of exchange or other engagements applicable to the accommodation granted to the applicant(s)."
The conditions set out in the terms sheet were accepted by the applicants, each of whom executed the document. The guarantees and mortgages required were subsequently given.
In these proceedings, the progressive fully drawn loan of $2.6m has been referred to as "FDL 1", the fully drawn loan of $2,000,000 has been referred to as "FDL 2" and the bank guarantee of $182,707 has been referred to as "FDL 3". Subsequently, the precise sums were varied. An additional sum was required to pay out the ANZ Bank and FDL 2 was increased accordingly. FDL 1 was, at the same time, reduced to $2.5m. It was subsequently increased as additional funds were required for the Wharf Road project. FDL 2 was to be used to pay out the ANZ, FDL 3 was to take over the liability of the ANZ in respect of a guarantee to the Housing Commission and the progressive fully drawn loan, FDL 1, was to be used to acquire the Wharf Road property for $945,000 and to develop units and townhouses thereon. The cost of development, as originally calculated by Michael Phontos, was $1,410,000. The outgoings anticipated in relation to FDL 1 therefore totalled $2,355,000. This sum and the $248,800 estimated by an officer of the Bank, Mr Marshall, for interest over 12 months approximated $2.6m.
The terms sheet anticipated a development which would be concluded within 12 months. This follows from the amount available for interest, the provision for capitalisation and the reference to an overall term "not to exceed 12 months". No precise starting date was placed upon this 12 months period but a year was the general period which the parties had in mind and on which the figures were calculated. That understanding accorded with the figures which had been put forward to the Bank by Michael Phontos in his feasibility study.
No specific time limit was expressed with respect to FDL 2 and nothing was said about either payment of or capitalisation of interest thereon. The terms sheet contemplated a progressive reduction and discharge of the liability from the sale of assets and from profits received. I need not discuss FDL 3.
On 16 September 1988, the day after the mortgages and guarantees had been executed, the Wharf Road property was acquired and FDL 1 was drawn down. Later, funds were drawn as moneys were required for the development. Building approval was granted by the Ryde Council on 1 June 1989 but substantial work on construction did not commence until after August 1989.
The builder of the project, P & E Phontos Pty Ltd ("PEP"), took advantage of the relationship with the Bank by drawing moneys on its account at the Bank not only for the purpose of the Wharf Road project but also for other purposes. By 6 June 1989, before construction of the Wharf Road units had commenced, PEP's overdraft, the authorised limit of which had been increased on 7 December 1988 to $370,000, had in fact increased to $1,123,096.
On 30 August 1989, the Bank stipulated a number of conditions before it would provide any more moneys to the Phontos' group of companies. These conditions have been termed in the proceedings "the Mason conditions". The letter of 30 August 1989 read, inter alia:
"We advise that the Bank has agreed to honour its commitment to the company by further release of funds on the company’s Fully Drawn Loan No. 1 for development of the 13-15 Wharf Road Gladesville, development project. Such decision carries with it certain terms and conditions which will apply in respect of the Group’s overall borrowings, for which the Bank will require prior formal acceptance by all of the Group’s borrowing companies, and also by yourself and all 3rd party mortgagors. Such conditions are set out hereunder:-
1. Funds which are to be provided will be for the express purpose of completing the Wharf road development project.
2. Borrowings on the Company’s No. 1 Fully Drawn Loan will be limited to a maximum of $2.5M being the level of the commitment previously given.
3. Progress payments will only be made against original invoices which are to be submitted to the Bank for approval.
4. It being clearly understood and acknowledged that any shortfall in funds which may occur in completion of the project are to be provided from the company’s own resources or by outside borrowing.
5. Proceeds of up to $3,000,000 if forthcoming in respect of the disputed claim with the Housing Commission (Ryde project) are to be directed to a bulk reduction of Parras Holdings Pty Ltd facilities, or to any other of the Group’s borrowings as the Bank may require.
6. Sale of the Wharf Road units are to be effected as soon as possible after completion and a written undertaking to be given to the Bank to meet the market in respect of any units remaining unsold after 6 months from date of completion. Sale proceeds of the units to be applied in permanent reduction of the company's borrowing.
7. All existing Group accounts to be placed on an “In Reduction” basis with no further drawings permitted other than on the “Progressive” Fully Drawn Loan No. 1 of Parras Holdings Pty Ltd.
8. Debts on all such accounts to be contained within present levels with interest to be met as charged each quarter commencing September 1989. In this regard, cash flow projections from all building projects in hand and any other income source are to be made available to the Bank as soon as possible to demonstrate the Group’s ability to meet such interest payments.
...
10. An unlimited guarantee supported by the security referred to in (9) above to be given to the Bank by Mr Michael Phontos in favour of all the Groups borrowings.
11. Remaining units at Bannerman St Cremorne to be sold as soon as possible with proceeds applied in permanent reduction of the Parras Holdings Pty Ltd No. 2 F/D/L."
These conditions were reluctantly accepted.
Thereafter the project proceeded, but very slowly for the reasons explained in my reasons of 24 October 1997. By a letter of 19 October 1990, the Bank agreed to a further increase of $300,000 in FDL 1 to enable the Wharf Road development to be completed. Conditions specified for the increase included:
"Sale of at least four home units of the Wharf Road project by 15 December 1990.
Written undertaking signed by company directors to meet the market by reducing sale price of Wharf Road units, if necessary, to achieve sales as above.
Written acknowledgment signed by directors of Fulanga Pty Limited that sale of Cremorne units (2) are to be placed on the market on 15 December at an asking price of no less than $450,000 each, if Wharf Road units (4) are not sold as above. Then, if no sales eventuate in the short term, Cremorne units are to be listed for auction by mid to late February 1991."
The units were made progressively fit for occupation from 5 July 1991 until final completion on 14 October 1991. During this period, funds for the completion of a unit were usually not made available by the Bank until a sale of the unit had been effected. The first contract for the sale of a unit was exchanged on 28 November 1990 and another on 21 December 1990. Those sales ultimately did not proceed. The first settlement occurred on 12 July 1991. The settlement of another six units to one buyer was effected on 22 July 1991. Sales continued until unit 10 was sold on 16 April 1992. Two units remain unsold. By the time the project was completed on 14 October 1991, it was clear that proceeds from the sale of the units would not extinguish the total debt due to the Bank.
On 19 December 1991, the Bank gave notice to Parras and to each of the cross-respondents that it demanded payment within 14 days of the amount outstanding by the debtor. The notice to Parras read, inter alia:
"I the undersigned Manager of the Gladesville NSW branch of the Commonwealth Bank of Australia situated at 219 Victoria Road Gladesville NSW being duly authorised, demand payment by you to the Bank at that branch of the sum of Four Million One Hundred Thousand Seven Hundred and Fifty Six Dollars and Fifty Three Cents ($4,100,756.53) being the amount now owing by you to the Bank under and by virtue of the undermentioned security/securities.
Unless the abovementioned sum together with interest accruing from the date of this notice at the rate of $1,606.44 per day be paid to the Bank at the abovementioned branch within 14 days from the date of this notice the Bank will take action to recover payment of the total amount payable and any costs incurred in respect of such recovery."
There were eleven notices claiming a payment of $4,100,756 together with interest at the rate of $1,606.44 per day. Other demands were made which I need not detail.
On 30 January 1992, eight notices under s 57(2)(b) of the Real Property Act 1900 were served. The notice to Parras read, inter alia:
"You are hereby required to pay to Commonwealth Bank of Australia at its Gladesville NSW branch the sum of Three Million Seven Hundred and Fifty Seven Thousand Eight Hundred and Twenty Eight Dollars and Sixty Two Cents ($3,757,828.62) being the amount now due and owing by you to the Bank under and by virtue of the undermentioned security. You are in default under that security because of your continuing failure to pay that amount. Take Notice that unless the said sum together with the sum of $100 being the costs of preparing and serving this Notice is paid to this Bank within one month after service of this Notice it is proposed to exercise power of sale in respect of the land referred to in the undermentioned security -
Security
Registered Mortgage No. X935983 dated 15 September 1988 over Strata Title property located at Units 1, 2, 5 & 10/13-15 Wharf Road Gladesville NSW"
A further seven notices were served under s 57(2)(b) of the Real Property Act on 18 June 1992 claiming $3,751,100 together with interest of $1,276.50 per day. A further notice was given to Michael Phontos on the same day claiming $3,873,111 under four facilities.
The making of a loan by a bank to a customer creates an obligation on the part of the customer to repay. That obligation will usually be expressed but, if not, it will be implied from the nature of the transaction. The time at which repayment is required will be ascertained by the application of contractual principles. In relation to an ordinary overdraft, Weaver & Craigie in "The Law relating to Bank and Customer in Australia", 1st ed, pp 193-4 state:
"The arrangements are usually expressed to be `at the pleasure of the Bank, or some similar words, thus indicating that even when some period of time has been set for the arrangement, it can, nevertheless, be terminated by the Bank at an earlier time. However, as long as the Bank-Customer relationship continues, the Bank cannot terminate the arrangement arbitrarily without giving adequate notice."
The principle is expressed somewhat differently but to the same effect at para 7.120 of the current edition. See also Cripps (R.A.) & Son Ltd v Wickenden [1973] 1 WLR 944 at 952-3, where Goff J proceeded on the footing that, although an overdraft may be repayable on demand, the customer must be given reasonable notice before it is withdrawn.
The nature of the transaction reflects the banker/customer relationship. The grant of an overdraft facility provides a contractual relationship in the context of which moneys are lent by the banker to the customer but there is more to the relationship than the making of a simple loan. The grant of an overdraft operates as the grant of a finance facility. In Rouse v Bradford Banking Co [1894] AC 586 at 596, Lord Herschell LC said in relation to an overdraft:
"The transaction is of course of the commonest. It may be that an overdraft does not prevent the bank who have agreed to give it from at any time giving notice that it is no longer to continue, and that they must be paid their money. This I think at least it does; if they have agreed to give an overdraft they cannot refuse to honour cheques or drafts, within the limit of that overdraft, which have been drawn and put in circulation before any notice to the person to whom they have agreed to give the overdraft that the limit is to be withdrawn. That effect I think it has in point of law; whether it has more that that in point of law it is unnecessary to consider. Even if it has no greater effect in point of law it is obvious that neither party would have it in contemplation that when the bank had granted an overdraft it would immediately, without notice, proceed to sue for the money; and the truth is that whether there were any legal obligation to abstain from doing so or not, it is obvious that, having regard to the course of business, if a bank which had agreed to give an overdraft were to act in such a fashion, the results to its business would be of the most serious nature."
The same general principle applies in relation to facilities such as FDL 1 and FDL 2. Such facilities do not automatically come to an end at the expiration of a reasonable period. A notice of demand is required. That is because, while the facility continues, the relationship of banker and customer continues. If the customer is not at the limit of its overdraft, and has not had notice of the termination of the facility, the customer is entitled to draw cheques upon the bank and the bank is obliged to meet them.
It is common for banks to include in their contracts with their customers a condition that the indebtedness is payable on demand or that the facility may be cancelled at pleasure. That was so in the present case where the S22 forms of application for finance contained the provision that: "the Bank may from time to time at its pleasure cancel or vary the limit of accommodation granted ..." However, there may also be another express term to the contrary in the arrangement between the parties or the circumstances in which the loan is granted may be such that a term to the contrary is necessarily implied. The express or implied term may abrogate or restrict the other provision. See Williams and Glyn's Bank v Barnes [1981] Com LR 205. A printed clause such as clause 2(c) in the S22 forms may play a subservient role to a specific provision as to reduction which is handwritten or typed or may be treated as subservient to the main object of the transaction. See Photo Production Ltd v Securicor Transport Ltd [1980] AC 287. The usual principles for the interpretation of the contract apply.
When acting to terminate a facility, banks usually give a notice which calls for the payment of the outstanding indebtedness. This notice serves both as a notice of termination of the facility and as a notice of demand for payment. Reasonable notice must be given. This does not mean that the customer must be given time to arrange finance with another financier or time to sell assets to meet the debt. What is required is reasonable time to transfer the appropriate money from wherever the customer may have it to the bank. In Bunbury Foods Pty Limited v National Bank of Australasia Ltd (1984) 153 CLR 491, Mason, Murphy, Wilson, Brennan , Deane and Dawson JJ considered the situation where the contractual requirement between the parties required that there be an actual demand. For the reasons I have given, I take it this to be a circumstance ordinarily implied by the relationship of banker and customer. Their Honours said at 502-3:
"However, it is now a well established principle of law that a debtor required to pay a debt payable on demand must be allowed a reasonable time to meet the demand. Even in a case where a deed provided that the debt was payable "immediately upon demand thereof in writing" it was held that the provision must be given a reasonable construction so that the debtor had a reasonable time to get the money from some convenient place (Toms v. Wilson (1862) 4 B & S 442, at pp 453-455 ( 122 ER 524 , at p 529) ). This does not mean that the notice calling up the debt is invalid unless it requires payment `within a reasonable time'. It means no more than that the debtor must be allowed a reasonable opportunity to pay before it can be said that he has failed to comply with the demand. A notice requiring payment forthwith will be regarded as allowing the debtor a reasonable time within which to comply. Until a reasonable time in the sense discussed has elapsed the creditor cannot enforce his security. As Pigott B. stated in Massey v. Sladen (1868) LR 4 Ex, at p 19 :-
'It is not necessary to define what time ought to elapse between the notice and the seizure. It must be a question of the circumstances and relations of the parties, and it would be difficult, perhaps impossible, to lay down any rule of law on the subject, except that the interval must be a reasonable one. But it is quite clear that the plaintiff did not intend to stipulate for a merely illusory notice, but for some notice on which he might reasonably expect to be able to act." See also per Kelly C.B. (1868) LR 4 Ex, at pp 17-18 ; Wharlton v. Kirkwood (1873) 29 LT, at p 646 , per Kelly C.B.; and Ronald Elwyn Lister Ltd. v. Dunlop Canada Ltd. (1982) 135 DLR (3d) 1, at pp 16-17 .'"
At 504, their Honours said:
"In determining whether the debtor has had such an opportunity [to pay] it will be relevant to take account of the debtor`s knowledge, lack of knowledge and means of knowledge of the amount due and of the information which the creditor has provided in that respect, including the response which he has made to any inquiry by the debtor."
In Bond v Hong Kong Bank of Australia Ltd (1991) 25 NSWLR 286, Gleeson J explained that the concept of reasonable time as enunciated in Bunbury Foods is directed to the mechanics of complying with the demand, not to matters such as time to obtain finance from another source or time to raise money by selling assets or any such matter. At 295, Gleeson CJ said:
"The matter was considered by Walton J in Bank of Baroda v Panessar [1987] 1 Ch 335. His Lordship pointed out that the English authorities treat the concept of a reasonable time to comply with a demand as being a rather narrow one related to giving the debtor an opportunity of implementing whatever reasonable mechanics of payment he may need to employ to discharge the debt. Where, for example, as in the present case, a very large amount of money is involved, it is evidently necessary for a debtor to pay by some form of banking transaction. The appellant, being obliged by contract to pay on demand, was entitled to such time as was reasonably necessary for implementing the mechanics of arranging the necessary bank transfers of funds: Toms v Wilson (1862) 4 B & S 442 at 443; 122 ER 524 at 525; RA Cripps & Son Ltd v Wickenden [1973] 1 WLR 944; [1973] 2 All ER 606. He was not, however, entitled to time to go out and try to borrow the money necessary to enable him to discharge his obligations.
When regard is had to what is involved in the concept of reasonableness in this context, and especially when one puts to one side any suggestion that the appellant was entitled to be given time to try to borrow the necessary funds from some third party, then the number of hours allowed by the second notice of demand was not unreasonable.” (emphasis added)
In the present case, the reduction arrangements expressed with respect to FDL 1 were that there was to be repayment in full within a term not to exceed 12 months. That term, however, had ceased to apply by the time the Bank gave notice of demand on 16 December 1991.
It was put on behalf of the cross-respondents that it was a contractual term applying to the Group's overall borrowings that payment would not be called for until at least six months after the date of completion of the development and until Parras had had an opportunity to meet the market in respect of any units then remaining unsold. Clause 6 of the Mason conditions was relied upon. It was contended that, by cl 6, the Bank contracted that it would not call for payment of the indebtedness until at least six months from the date of completion of the development had expired and thereafter until Parras had had an opportunity to meet the market in respect of any units remaining unsold. It was further submitted that, in the circumstances, that would have been reasonable notice, and that anything less was not.
However, the Mason conditions which were set out in the letter of 30 August 1989 and accepted on 6 September 1989 were directed to ensuring that funds advanced would be used only for the purpose for which they were lent and that the Phontos' group would take steps to reduce the indebtedness in the various ways which were indicated. I do not read the Mason conditions as changing the basic contractual arrangements between the Bank and Parras. In particular, I do not read cl 6 of the Mason conditions as contractually extending the time before which the Bank could call for repayment of its advances. Rather, the Bank was requiring an acknowledgment that all accounts other than FDL 1 were to be treated as being "In Reduction" and that the indebtedness to the Bank would be reduced at least in the manner stated in clauses 5, 6 and 11. The letter of 30 August 1989 did not express or imply a commitment on behalf of the Bank that it would not call for payment of the sums outstanding otherwise than in accordance with the express provisions of the Mason conditions. The Bank's usual terms and conditions continued to apply.
Nor do I accept the submission put on behalf of the cross-respondents that it was an implied term of the arrangement between the parties that the cross-respondents should have a time such as six months after the date of the completion of the last unit within which to sell the units prior to the Bank's terminating its facilities and calling for payment of the amount outstanding. In the first place, I think that a concept such as reasonable time for payment is inconsistent with the general relationship of banker and customer and that the terms governing such contractual arrangements are generally to be found in the provisions expressly agreed upon. Secondly, the term as suggested by the cross-respondents is inconsistent with the position taken by the Bank which was that it was seeking payment at a much earlier stage. See, for example, the Mason conditions in the conditions of the letter of 19 October that at least four home units were to be sold by 15 December 1990, that the Cremorne units were to be put on the market on 15 December 1990 and that, if sales did not eventuate, they were to be listed for auction by mid to late February 1991. The Bank made it clear that it was seeking payment before the expiration of the period suggested by the cross-respondents.
Condition 6 of the Mason conditions required Parras to sell the Wharf Road units as soon as possible after completion and to "meet the market" in respect of any units remaining unsold after six months from the date of completion. The term "meet the market" is probably not a technical term but it conveys that the vendor must be prepared to accept whatever is the market price of the units at that time. One way of complying with the condition would have been for Parras to have put up the unsold units for auction without reserve and to have accepted whatever were the highest bids. If it is relevant, I agree with the submission put by counsel for the Bank that, if Parras had taken steps to meet the market, all units would have been sold prior to 5 November 1992, the date of the filing of the cross-claim.
Counsel for the Bank submitted that the Bank was not required to give notice of demand and that the arrangements between the parties incorporated an implied term that the total indebtedness of Parras was repayable within a reasonable time from the expiration of 19 October 1990, the date on which the Bank, in the letter I have set out above, extended the facility by a further $300,000. In my opinion, such a term is inconsistent with the ordinary relationship of banker and customer and would be so imprecise in its application that it ought not to be implied. The Bank was, in my opinion, required to give notice if it terminated the facilities.
In December 1991, the Bank had an entitlement to terminate FDL 1 at its pleasure and to call for payment of the sums due. By 16 December 1991, the Bank had done all that which it had agreed to do by way of advancing funds to enable the Wharf Road project to be completed. There was no express or implied contractual term between the parties which precluded the Bank from exercising at that point of time its right to cancel the facilities at its pleasure. The purpose for which the funds had been lent had been achieved. Nor can I see any matter of fact which would have given rise to an equitable estoppel precluding the Bank from so acting. By 16 December 1991, more than three years had passed since the facilities had been granted and drawings had been made upon FDL 1 and FDL 2. During that time members of the Phontos' group had shown an unwillingness to cooperate with the Bank by reducing the indebtedness to the best of their ability. One example was the failure of Fulanga to sell the two Cremorne townhouses, the sale of which had been a specific condition of the 1988 terms sheet, of the 1989 Mason conditions and of the 1990 letter. Another was that moneys which could have been applied to the reduction of the facilities had been used for other purposes. I am of the view that the Bank was, in December 1991, entitled to call up FDL 1 on adequate notice.
The reduction arrangements with respect to FDL 2 did not express a date for repayment but required progressive reduction and ultimate clearance from the sale of townhouses at Cremorne, from the profits which PEP then expected from contracts it had with the Housing Commission and from the profits expected from the Wharf Road development. Fulanga did not sell the townhouses at Cremorne. There were no profits from the Housing Commission contracts for they were cancelled. A sum of $3.95m was received by PEP from the Housing Commission in settlement of a claim which it made against the Housing Commission and $3m was applied to the reduction of various of the Phontos' group accounts including FDL 1 and FDL 2. There were no profits from the Wharf Road development; but the proceeds from the unit sales were applied in reduction of the debt. In December 1991 the Bank was entitled to call up FDL 2.
In my opinion, the moneys due to the Bank became due and payable on the expiration of fourteen days from 16 December 1991. The notices of 16 December 1991 were adequate to terminate the relationship of banker and customer and to render the outstanding advances due and payable. In any event, by 5 November 1992, the date when the Bank filed its cross-claim, all possible periods of reasonable time had long since expired and the Bank had made it clear both by the notices served on 16 December 1991 and by the later notices served under s 57(2)(b) of the Real Property Act that it was seeking recovery of the funds. The submission put on behalf of the cross-respondents that, at the time of the filing of the cross-claim the time for the payment of the facilities had not yet arrived, seems to me to be without foundation.
The cross-respondents allege that each of the demands and notices served in December 1991 and in January and June 1992 was waived by the Bank when, on 28 May 1992, the Bank paid $3800 from PEP's overdraft in respect of an invoice respecting work on the Wharf Road development and when, on 17 August 1992, it advanced to Parras a further sum of $4,858 for payment to Auction Centre Pty Limited for carpet which had been installed in one of the units. However, these payments were made in accordance with earlier arrangements. I do not regard them as waiving the Bank's entitlements. They constituted a tidying up of outgoings which the Bank had agreed to meet. Their payment did not indicate in any way that the Bank was not requiring payment of the sums due.
It was submitted that the demands of 16 December 1991 were not validly given for they, like the subsequent s 57(2)(b) notices, were delivered to Phontos & Associates Solicitors. It was submitted that Phontos & Associates were the solicitors acting for the cross-respondents and were not shown to have had authority to receive demands on behalf of the cross-respondents. There is no suggestion, however, that the documents delivered to Phontos & Associates did not come to the notice of the cross-respondents or that Phontos & Associates indicated that they did not have authority to receive them. In fact, Phontos & Associates acted generally for the cross-respondents. Letters were written to Michael Phontos as representative for the cross-respondents and he wrote to the Bank on behalf of the cross-respondents. The documents which required execution were passed through Phontos & Associates. I conclude that Phontos & Associates had authority to receive the demands of 16 December 1991 on behalf of the cross-respondents and that, even if the contrary were the case, the demands came to the notice of the relevant cross-respondents.
MICHAEL PHONTOS AND SPOTEK PTY LTD
Michael Phontos and Spotek Pty Ltd ("Spotek"), which was Michael Phontos' company, had overdrafts with the Bank. On the establishment of each of these overdrafts, the standard form of application, the S22 form, was executed. The terms of that form, including the condition that the Bank may from time to time at its pleasure cancel or vary the limit of the accommodation granted, were part of the terms of the arrangement.
Michael Phontos and Spotek received letters of advice approving of the overdrafts each of which provided for "annual review of the overdraft". It was the submission of counsel for the cross-respondents that this term precluded the Bank from acting at its pleasure to cancel or vary the limit of the overdraft and that a change could be made only at an annual review. I do not read the contractual documents in that way. The provision as to annual review did no more than to indicate that, at least annually, the overdraft would be formally reviewed by the Bank. It was an additional provision, not a limitation to other provisions. It did not preclude the Bank from acting at other times to terminate or reduce the overdraft as it saw fit.
A fourteen day notice calling for the payment of sums due was served on Michael Phontos on 31 October 1991. I am satisfied that the notice was adequate and made the overdrafts due and payable on the expiration of the fourteen day period. The demand of 31 October 1991 was expressed to be a demand under a security, a registered mortgage which Michael Phontos had given to the Bank, but it was a sufficient demand for payment of the moneys outstanding under the overdrafts: Turnbull v National Mutual World Bank Ltd (1992) 26 NSWLR 361.
A notice of demand was given to Spotek on 16 January 1992. I am satisfied that this notice was adequate and that the overdraft became due and payable on the expiration of the fourteen days.
On 27 June 1990, Michael Phontos had been granted a Bills Discount Facility of $50,000. In due course, a bill matured and was not met. The Bank at first transferred the indebtedness to an overdraft account and later, when the Bill Facility was not reinstated, to a Bills Matured account. In my reasons for judgment of 24 October 1997, I rejected a challenge to this course of action. The sum due ultimately formed part of the moneys claimed by the Bank in the 14 day notice given to Michael Phontos on 31 October 1991.
It has been submitted on behalf of Michael Phontos that the original terms of the Bills Disount Facility continued to apply notwithstanding that a bill matured on 28 September 1990 and was not rolled over or thereafter reinstated. It was submitted that the amount outstanding became an excess to the ordinary overdraft of Michael Phontos but was payable as to interest only for the first twelve months and as to principal in the amount of $5,000 for every six months on and from December 1991. I reject this submission. In my opinion, the Bills Discount Facility was a facility of a different character from that of the overdraft facility which had been granted to Michael Phontos. Once the bill matured on 28 September 1990 and was not rolled over or reinstated, the sums payable under the bill were due and payable by Michael Phontos and were properly so treated by being debited to a Bills Matured account.
It was submitted that the notice of 31 October 1991 was ineffective because it was merely faxed to Phontos & Associates Solicitors, which was the firm established by Michael Phontos and of which he was the principal. It was not, however, suggested that Michael Phontos did not receive the notice. Argument proceeded on the footing that the document was faxed. However, the copy of the notice of 31 October 1991 which is in evidence at Vol 7 p 348 of the agreed bundle has on it the signature of Mr BJ Gardiner, the Manager of the Commonwealth Bank at Gladesville and a date received stamp of 1 November 1991, which suggests that the notice was actually received by Phontos & Associates on that date. In my opinion, there is nothing in the point. Michael Phontos received the notice. In fact, many of the communications which passed between the Bank and the Phontos group during 1991 were faxed to and from the office of Phontos & Associates.
It was said on behalf of Michael Phontos that his guarantee was not enforceable as the Bank had failed to comply with clause 3 of the Mason conditions. I rejected this allegation in my reasons of 24 October 1997 and I need not discuss the matter again.
It was also submitted that there was a waiver of the amounts due under the overdrafts and the Bills Matured account because, during 1991, Michael Phontos from time to time either paid or offered to pay off part of the outstanding sums and some amounts were received and accepted by the Bank. It was also submitted that the demand of 31 October 1991 was waived by a payment by Michael Phontos of $5,000 on 27 December 1991. I see nothing in the acceptance by the Bank of moneys in partial discharge of the outstanding indebtedness which amounted either to a waiver of the Bank's contractual rights or to a waiver of the demand for payment it made on 31 October 1991. Nor do I see any matter by way of waiver arising out of a payment made to LJ Hooker on 3 December 1991 and an offsetting credit made on 19 December 1991. The fact that there is an agreed dealing on an overdraft after it has been called up does not of itself demonstrate a waiver of an earlier demand for payment. The demand for payment having terminated the overdraft facility, there could be no further transaction thereon without consent.
PEP
PEP had an overdraft with the Bank. By reason of the signing of the S22 form, it was a condition of the overdraft that the Bank may, from time to time at its pleasure, cancel or vary the limit of the accommodation granted. In my opinion, the notice given to PEP on 16 December 1991 was adequate notice which made the overdraft due and payable on the expiration of the 14 day period. For the reasons I have already mentioned, I am of the view that the Bank was not restricted in its contractual arrangements to reviewing, cancelling or varying the limit of the accommodation granted only at the time of a formal annual review of the overdraft.
On 5 December 1991, the Bank advanced a further $25,000 to enable the first mortgagee on the home owned by Peter and Elli Phontos to be repaid. This sum was debited to PEP 2 which was the overdraft which was then operated by PEP. It was submitted on behalf of the cross-respondents that this sum of $25,000 should have been debited to FDL 2. A purpose of FDL 2 specified in the terms sheet was to "refinance existing facilities with ... a private mortgage." However, the total amount of FDL 2 had been used to pay out the ANZ. PEP was the building company which had been established to take over the business which had been conducted by Peter and Elli Phontos. They were the shareholders and Peter Phontos was the principal director of the company. I assume that the $25,000 had been borrowed to assist PEP in its business activities and had been used for that purpose. I assume that Peter Phontos drew a cheque or obtained a bank cheque on PEP's overdraft and that this was paid. I conclude that the $25,000 was debited to PEP's overdraft with its authorisation.
The principal point made in relation to this was, as I understand it, that the $25,000 was not payable before FDL 2 became payable. In view of my other findings, this point is irrelevant. However, I should specifically say that, in my opinion, if the $25,000 was debited to PEP's overdraft with the authority of PEP, as I conclude that it was, then payment of the sum was due when the overdraft was called up.
DOVIZO PTY LIMITED
Dovizo Pty Limited ("Dovizo") granted a mortgage on 2 May 1990 which supported advances and accommodation granted or to be granted to Parras, PEP, Phontos Investments, Ilanz and Fulanga. Dovizo was not asked to and did not execute a guarantee but I see no significance in this as the mortgage incorporated memorandum T340042 and this memorandum contained the conditions as to payment which I have already set out. It was alleged that Dovizo was under no liability to the Bank and that its mortgage was ineffective because of the lack of a guarantee. I see no substance in this point.
It was also submitted that the notice given to Dovizo on 16 December 1991 was ineffective both because the name of Dovizo was spelled "Doviso Pty Limited" and because the notice was in a form similar to that served on many of the other cross-respondents and referred to a guarantee dated 15 September 1988. That guarantee did not exist. In my opinion, the error in the name was of no significance and the reference to the guarantee, although it was an error, would not have mislead Dovizo as to what payment was called for. The notice made it clear that the sum was demanded under the mortgage of which particulars were given.
It was also alleged that the notice which was served on Dovizo under s 57(2)(b) of the Real Property Act on 30 January 1992 was ineffective because the name of the company was misspelt as "Doviso Pty Limited". However, as the mortgage and the secured property were specified, the notice was not ambiguous.
Dovizo, like the other mortgagors, had earlier been served with the notices of 16 December 1991. In any event, the notices of 16 December 1991 and of 30 January 1992 were a sufficient demand under the mortgage to validate the s 57(2) notice which was served on Dovizo on 18 June 1992.
INTEREST
The cross-respondents contend that the amounts charged for interest were not repayable until all the principal had been repaid. However, that was not the agreement between the parties. Under FDL 1, interest was to be capitalised, that is added to the capital and repayable with it. The terms sheet provided that there was to be "Capitalisation of interest during construction and marketing stages (say nine months), subject to the ceiling limit of $2,600,000 not being exceeded." When the Bank, by the notices of December 1991, called for the payment of moneys outstanding, it claimed and was entitled to claim payment of the total indebtedness.
The Mason conditions of 30 August 1989 contained requirement 8 that "interest to be met as charged each quarter commencing September 1989." This was an unrealistic condition at the time it was imposed. It was not met and it was not enforced by the Bank, although Mr Mason regarded the default as an example of the cross-respondents' failure to comply with the conditions. If the matter were significant, I would regard the Bank's later conduct as amounting to a waiver of or an abandonment of this condition. The Bank continued to advance moneys under FDL 1 and, subsequently, twice increased the amount of the facility without requiring payment of interest in accordance with the provision.
Under FDL 2, no provision for the payment as distinct from the charging of interest was expressed. In my reasons for judgment of 24 October 1997, I indicated that I considered that, in the absence of a demand, payment of interest when charged was not required. No such demand was made.
The cross-respondents have claimed that interest was incorrectly calculated. From 20 September 1988 to 1 July 1993, interest was charged quarterly. However, as from 1 July 1993, interest was charged monthly. The rate of interest charged from 1 November 1994 to date was the standard margin/small business loans per annum rate which was charged at monthly intervals. This rate itself took account of monthly charging. The cross-respondents allege that, in the absence of evidence from the Bank to show that the change from quarterly to monthly charging was appropriate, the Court should make an adjustment for the charging of interest at quarterly intervals. However, the interest charged was the standard rate for loans of the type made to Parras. As the Bank was entitled to vary its interest rates from time to time, I see no error in the change made.
It is alleged that interest was wrongly debited to the overdrafts of Michael Phontos and Spotek at "Troublesome Rates" over the whole loan and that this was done without notification. I see no reason why the Bank should not, in its discretion, have applied its Troublesome Rates to these overdrafts. The maintenance of the overdrafts involved the Bank in constant supervision. The Troublesome Rate was a rate of interest 2.75% in excess of the standard rate and was applied to the overdrafts of Michael Phontos and Spotek from 19 November 1991 to date.
Counsel for the cross-respondents relied upon the fact that the Bank's policy with respect to Troublesome Rates included the following:
"The Bank's policy at C/1 25/7 (d) [see Schedule of Attachments at p 88] states:
"Risky and Troublesome Advances
Failure on the part of a borrower to observe the terms and conditions under which accommodation has been granted separates the account from normal lending arrangements.
Managers may at their discretion apply the troublesome rate to the full balance of such accounts under their control, under written notice to the customer without indicating the reasons for the Bank's action."
(emphasis added)
It was said that the rate was imposed without any notice to Michael Phontos or to Spotek.
There does not appear to be have been any letter setting out the decision to apply the Troublesome Rates and the evidence does not disclose whether there was any oral communication with Michael Phontos about the matter. However, the bank statement with respect to Michael Phontos showed that as at 11 November 1991 the rate was 15% to $30,000 and 17.75% on the excess over that limit. The following bank statement showed, on 19 November 1991, that the rate of interest imposed was now 17.75%. Subsequent bank statements show changes in that rate. For example, the February 1992 statement showed that, as at 3 February 1992, the rate was now 16.75%. A later statement showed that, as at 30 June 1993, the rate was now 14.4%. I consider that the facts were that Michael Phontos and Spotek were kept advised of the rates of interest charged and that Michael Phontos, who was the principal director of Spotek, was aware that the rate charged was 2.75% above normal overdraft rates.
THE NOTICES UNDER S 57 OF THE REAL PROPERTY ACT
Section 57 of the Real Property Act 1900 (NSW) provides, inter alia:
"(2) A registered mortgagee, chargee or covenant chargee may, subject to this Act, exercise the powers conferred by section 58 if:-
(a) in the case of a mortgage or charge, default has been made in the observance of any covenant, agreement or condition expressed or implied in the mortgage or charge or in the payment, in accordance with the terms of the mortgage or charge, of the principal, interest, annuity, rent-charge or other money the payment of which is secured by the mortgage or charge or of any part of that principal, interest, annuity, rent-charge or other money;
...
(b) where
(i) the default relates to that payment; or
(ii) in the case of a mortgage, the default does not relate to that payment and notice or lapse of time has not been dispensed with under section 58A,
a written notice that complies with subsection (3) has been served on the mortgagor, charger or covenant charger in the manner authorised by section 170 of the Conveyancing Act, 1919;
...
(3) a notice referred to in subsection (2) complies with this subsection if:
...
(d) it notifies the mortgagor, charger or covenant charger that, unless the requirements of the notice are complied with within one month after service of the notice (or, where some other period exceeding one month is limited by the mortgagor, charge or judgment for remedying the default referred to in the notice, within that other period after service of the notice), it is proposed to exercise a power of sale in respect of the land mortgaged or charged.
....
(5) Without prejudice to any other manner in which it may be deprived of the force or effect, a covenant, agreement or condition whereby upon a default referred to in subsection (2)(a):
(a) the whole of the principal or other money of which the payment is secured by a mortgage or charge becomes payable; or
(b) a part of that principal or other money (not being a part to which that default relates) becomes payable,
has no force or effect until the powers conferred by section 58 become exercisable by reason of that default."
The power conferred by s 58, referred to in s 57(2), is a power to sell the mortgaged property.
In Websdale v S & JD Investments Pty Limited (1991) 24 NSWLR 573 at 578, Clarke JA, with whom Samuels & Priestley JJA agreed, said:
"The section (s 57) requires the mortgagee to bring to the attention of the mortgagor the particular default and to require him to make it good. It does not in terms require the mortgagee, in a case in which it is claimed that the mortgagor is in default in the payment of interest or principal, to specify the particular amount outstanding. What it requires is that the mortgagee identify the particular default or defaults."
The cross-respondents claim that the s 57 notices did not disclose the nature of the amount claimed to be due and owing, in the sense of distinguishing between principal, interest, other charges and debits or describe the covenant, agreement or condition in respect of which it was alleged that Parras was in default or identify the particular default or defaults.
However, it is not in dispute that the notices specified the indebtedness existing at the time of their service as it appeared to the Bank. As interest had been capitalised, it was not necessary that the Bank should go back through its books and calculate that which had originally been money advanced and that which had been interest charged or, indeed, to identify every item which had been added for service charges and the like. Nor do I think it was necessary for the Bank to identify the precise clause of the terms sheet under which the advances had been made. The mortgages were "all moneys" mortgages and relevantly, for the purposes of s 57 of the Real Property Act, it was the provision of the mortgage which applied.
I do not see any flaws in the terms of the s 57 notices. They appear to me to be in a standard and appropriate form. In the case of the moneys advanced to Parras, there were no such circumstances as might other cases have raised an ambiguity which would require clarification. Such a circumstance did arise in those cases where the mortgages covered moneys lent to more than one person. Thus, some notices served in June 1992 specified the moneys due by each principal debtor and the total claimed.
I do not read s 57 as bearing upon the issue as to when the sums became due by the principal debtor, Parras, to the Bank. There must be a default under the mortgage before a s 57 notice can be given. If the default is the payment of money, a s 57 notice may not be given before the sum claimed is due and payable. As Clarke JA pointed out in Websdale in his lengthy discussion at 578-9, a s 57 notice would not bring to the mortgagor's attention the existence of a particular default and give the mortgagor the opportunity of remedying that default if there was not a pre-existing default. Therefore, before a s 57 notice can be given, there must be moneys due and owing under the mortgage and default in the payment thereof. The notices served on 16 December 1991 and in January 1992 were a sufficient demand. In Turnbull v National Mutual World Bank Ltd (1992) 26 NSWLR 361 it was held that a notice served under s 57 of the Real Property Act may be effective as a demand for other purposes. In that case, it was held that a notice which was invalid for the purposes of 57(2)(b) was, nevertheless, effective as a demand for the purpose of an acceleration clause in a document other than the relevant mortgage. The s 57(2)(b) notices which were served on 18 June 1992 were, in my opinion, effective notices.
The covenant, agreement or condition referred to in s 57(5) is not any covenant, condition or agreement but one in which, upon a default, the whole of the principal of the money or a part of that principal or money becomes payable. The subsection applies to an acceleration clause. The moneys which became payable by reason of the notices served by the Bank on 16 December 1991 did not became payable under such a provision. They became payable by reason of the notice which terminated the banker/customer relationship and required payment of the amounts which had been advanced.
THE MORTGAGES AND GUARANTEES
1. Demands and Notices
It was submitted that the demands made and notices served upon the mortgagors were ineffective on the ground that they were not served in compliance with cl 35 of memorandum T340042. That clause read:
"35. Any notice to be given to or demand to be made upon the Debtor or Mortgagor hereunder by or on behalf of the Bank shall be deemed to be duly given or made if it is in writing and is signed by an authorised officer of the Bank and is left at or sent through the post in a prepaid envelope or wrapper addressed to the Debtor or Mortgagor as the case may be at the usual place of abode or business or registered office of the Debtor or Mortgagor last known as such to the person signing such notice or demand or is delivered personally to the Debtor or Mortgagor ... any such mode of service shall in all respects be valid and effectual notwithstanding the date of such service the Debtor and Mortgagor or either of them may be lunatic dead bankrupt insolvent or absent from the State of domicile or usual residence of the Debtor or Mortgagor as the case may be or may be in the course of liquidation or be wound up and notwithstanding any other matter or event and any such notice or demand if sent through the post as aforesaid shall be deemed to have been received by the Debtor or Mortgagor as the case may be at the time when the envelope or wrapper containing such notice or demand would in the ordinary course of post have been delivered."
Clause 19 of the guarantees was in comparably similar terms and the submission was put that the demands made on and the notices served on the guarantors were similarly ineffective.
However, these provisions of the mortgages and of the guarantees did not limit or purport to limit the means by which demands and notices may be communicated. They merely provided a means of service which, if followed, would establish sufficient communication of the demand or notice. In the present case, it was not submitted that the cross-respondents did not receive the demands and notices which were served upon them.
It was submitted that, as the demands of 16 December 1991 and the s 57(2)(b) notices served in 1992 were sent to Phontos & Associates, Solicitors, they were not served upon the cross-respondents. For the reasons I have earlier given, I reject that point.
The law requires a creditor to make demand upon a guarantor before enforcing a guarantee if the terms of the guarantee itself so provide. See the Modern Contract of Guarantee by O'Donovan and Phillips, pp.379-80. A provision that the guarantor pay on demand all moneys now or hereafter to become owing or payable is such a provision. See Bradford Old Bank v Sitcliffe (1918) 2 KB 833; Esso Petroleum Co Ltd v Alstonbridge Properties Ltd [1975] 1 WLR 1474. However, no particular form of notice is required. In my opinion, the notices served on 16 December 1991 were a sufficient demand for they indicated that, if the principal debtor did not pay, the guarantor should pay. In any event, the notices served under s 57 of the Real Property Act in January 1992 were a sufficient demand.
The cross-respondents allege that the Bank's demands of 16 December 1991 were not effective demands for the purpose of the mortgages and the guarantees. For example, cl A1 of memorandum No T340042 which was incorporated in each of the relevant mortgages read:
"The Mortgagor will at such time or times and in such manner as may at any time and from time to time be agreed in writing between the Mortgagor and the Bank and in the absence of any such agreement on demand pay to the Bank -
1. All moneys (including moneys advanced by way of loan for fixed term or provided by way of overdraft) now or hereafter to become owing or payable to the Bank by the Debtor and the Mortgagor or either of them either alone or on joint or partnership account or on any other account whether as principal or surety ..." (emphasis added)
There were similar provisions in the guarantees. It was submitted that there should have been a further demand on the guarantors and mortgagors after the demands of 16 December 1991 had made the indebtedness due and payable. However, as there was an underlying indebtedness by the principal debtors, it was permissable, in my opinion, for the notices demanding payment by the mortgagors and guarantors to be given at the same time as the notices to the principal debtors provided that the notices did not call for payment at a time prior to the moneys becoming due by the principal debtors. The notices served on the mortgagors and guarantors required that the recipients pay the sums specified at a time when they would be due and payable by the principal debtors. In Commonwealth Bank of Australia v Stow (Supreme Court of New South Wales, 21 February 1989, unreported), Brownie J came to a like conclusion although his Honour's reasoning was different.
Both the guarantees and the mortgages required payment on demand. It was put by counsel for the Bank that the service of the cross-claim upon the guarantors and mortgagors was a sufficient demand. But that is not so. When a guarantee or mortgage requires the making of a demand, that demand must be served before the cause of action arises.
2. The $6.4m Condition
Counsel for the cross-respondents raised an issue with respect to the note in the terms sheet of 31 August 1988 that the Bank's valuation of the properties to be taken as security was to achieve a combined "on completion" figure of at least $6.4m and that, in this respect, the opinion of the Bank's valuers would be final. Counsel for the cross-respondents submitted that, because the value of the securities did not reach this figure and, because the Bank's subsequent waiver of this condition materially increased their risk, the third party guarantors and mortgagors were released.
In my opinion, it is too late to raise this point. This case proceeded upon the footing that the cross-respondents set out in their statement of claim all their challenges to the validity of the relevant agreements, mortgages and guarantees. Amongst the allegations made were allegations based upon this particular clause it being alleged, inter alia, that the Bank breached that condition for, according to the cross-respondents, it did not value the properties on an "on completion" basis but rather on a "in one line" basis. It was also alleged that the Bank acted unconscionably by not informing the cross-respondents immediately that the figure of $6.4m had not been reached and by refusing to inform them prior to 5 December 1989 what the Bank's valuation was. It was further said that, by not bringing to the cross-respondents' attention at an early stage the fact that the applications did not reach the $6.4m figure, the Bank had acted so as to represent to the cross-respondents that the valuations had reached that figure. On these and other grounds, the cross-respondents by their amended application sought declarations that each of the subject mortgages and guarantees was void and unenforceable and a declaration that, inter alia, the mortgagors and guarantors were not indebted to the Bank at all.
In my reasons for judgment of 24 October 1997, I rejected these allegations and held that the condition as to $6.4m was one which had been inserted for the benefit of the Bank, that the Bank had waived it and that there had been no unconscionable or misleading conduct on the part of the Bank in relation to it. I specifically noted that no claim had been made that the guarantees and mortgagees were void by virtue of the Bank's waiver of the $6.4m condition. Presumably, it was because of this mention that the point has now been raised. As judgment has now been given on the cross-respondents' claim, I think it is too late to raise it.
In their defence to the amended cross-claim, the cross-respondents pleaded, inter alia, that the mortgages and deeds of guarantee were void and unenforceable but gave no particulars. They also pleaded, by way of equitable defence, the matters referred to in their amended statement of claim. This pleading did not raise to anyone's attention the point now sought to be raised and none of the witnesses was cross-examined on it. In my opinion, it is too late for the cross-respondents to raise this matter which, if it was to be raised, should have been raised at the trial when all relevant persons gave evidence and were available for cross-examination. This present proceeding on the cross-claim was not intended to be other than a hearing on points of law and like issues going to the quantum of the moneys if any due to the Bank and the availability of the relief which the Bank sought. It was not proposed to reagitate the question of the $6.4m condition, which played quite a considerable part in the earlier hearing. The matter is covered by the principle enunciated in Anshun Pty Ltd v Port of Melbourne Authority [No 2] (1981) 147 CLR 589, for to rule now that the guarantees and mortgages were unenforceable would be to give a judgment inconsistent with that given in December 1997, when the contrary was held.
In any event, I would not accept counsel's point. The principles of law with respect to the discharge of sureties were discussed in Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549. I need not repeat the lengthy discussion by Mason CJ, Wilson, Brennan & Dawson JJ of the relevant principles to be applied. At 561, their Honours concluded:
"If the surety is to be discharged for breach of a promissory term in the suretyship contract, the justification for the discharge must be that the creditor has failed to comply with a provision that, as a matter of interpretation, requires strict performance as a condition precedent to the surety`s obligation or at least requires substantial performance of the promise such that the surety would not have entered into the contract if it had not been assured that there would not be a breach such as the breach which in fact occurred. If on its true interpretation the term is not intended so to operate, it is not easy to understand why the surety should be discharged by its breach. "
In the present case, the value of the securities was a matter which the cross-respondents were as capable of judging as was the Bank. The cross-respondents were property developers. Peter & Elli Phontos were property developers of long standing. Harry & Mary Costas had joined with them. Michael Phontos, who was a solicitor, undertook property development during the time with which we are concerned. The five individuals were fully familiar with the securities, which were the Wharf Road property, the Cremorne units owned by Fulanga and the homes of Peter & Elli Phontos and of Harry & Mary Costas. The Phontos members had their own views as to the value of the properties. Various officers of the Bank had differing views about these matters including the likely value of the Wharf Road development. The cross-respondents knew their properties and wished to go ahead. It was not material to them that a bank valuation might value the Wharf Road property at a value less than they were prepared to put on it, so long as the finance was provided. As Michael Phontos said to Mr Marshall on 7 November 1988, according to his affidavit:
"Norm, are you telling me the Bank isn't going to proceed with the loan, because it's too late now to complain about valuations".
There are several aspects of the condition which suggest that it was inserted for the benefit of the Bank. First, the condition was expressed as a note, as if it were something of which the other parties should be aware but which primarily concerned the Bank. Secondly, the values to be assessed were not actual market values but bank values. Thirdly, the opinion of the Bank's valuers was conclusive. These points show that the condition was concerned not with actual values but with the Bank's satisfaction that it had sufficient security to support the loans. What was essential to the guarantors and the mortgagors was the loans should proceed, not that the Bank's valuers should agree with their own view of the values of the securities, including the value of the Wharf Road development when completed.
The guarantors and sureties did not elect to be discharged for breach of the provision with respect to Bank valuation, at least not because the properties had not come up to valuation. Many challenges to the guarantees and mortgages were brought forward but no election to discharge the obligations of the guarantors and sureties was ever made on the ground now relied upon until counsel's submissions were produced. The position is that, if the guarantors and sureties were entitled to elect to be discharged, which I think they were not, they nevertheless waived the breach and elected to proceed with the contract.
As early as November 1988, officers of the Bank had concluded that the security margin was too low and had decided to seek further security. Mr Norman Marshall of the Bank discussed the matter with Michael Phontos and explained that the Bank's valuations had not reached the anticipated value of $6.4m. He did not then state the figure arrived at by the Bank's valuers, taking the view that that was confidential to the Bank. After pointing out to Mr Marshall that no other security was available, Michael Phontos reluctantly agreed to give a registered second mortgage over property which he owned at Ashburn Place, Gladesville. Mr Phontos gave and the Bank accepted that second mortgage. It was for this reason that, in my reasons of 24 October 1997, I found that, once that had occurred, the Bank had waived its right, under the terms sheet, either to call for further security or to terminate the facility by reason of lack of security. If the guarantors and mortgagors then had a right to elect for discharge, they waived that right by seeking the release of further funds by the Bank.
Later, arising from the state of PEP's overdraft, the Bank required further security. On 5 July 1989, the Manager of the Gladesville Branch of the Bank wrote to Parras to say that:
"As discussed with Mr Michael Phontos on 19 June 1989 we require the following amendment to the Bank's original Term Sheet:-
`Proceeds of up to $3,000,000 if forthcoming in respect of the disputed claim with the Housing Commission (Ryde Project) being directed to reduction of Parras Holdings Pty Ltd's facilities with the Commonwealth Bank of Australia.'"
About the end of July 1989, the Manager informed Michael Phontos that, unless the members of the Phontos group executed this amendment to the terms sheet, the Bank would not advance any further funds for the construction of the Wharf Road development. On 2 August 1989, the $3m amendment was executed and delivered to the Bank. The provision was subsequently extended by clause 5 of the Mason conditions so as to encompass not only the debts of Parras but all other group borrowings. It was clear to the members of the Phontos group from these events and from the discussions which took place about that time that the Bank was dissatisfied with its security position. Other security was sought when, by clause 10 of the Mason conditions, the Bank required that Michael Phontos give an unlimited guarantee in favour of all of the group's loans. In the discussions which took place and in a letter which was written at about that time, Mr Phontos expressed his unwillingness to give that guarantee. However, ultimately, Michael Phontos agreed to give it. All the members of the Phontos family and all members of the Phontos group of companies acknowledged and accepted the Mason conditions.
Later, on 5 December 1989, the Manager of the Gladesville Branch called a meeting between himself, another officer of the Bank, Peter and Michael Phontos and Harry Costas. In the course of this conversation, the value which the Bank's valuers had put upon the Parras development was disclosed. Notwithstanding that, the cross-respondents proceeded with the transaction. The Phontos group sought some relaxation of the Mason conditions and this was agreed to. Subsequently, on more than one occasion, further advances were sought and two increases were agreed to. Throughout the period, the Bank was meticulous in keeping the guarantors and mortgagors advised of the limits of their liability and in obtaining their approval to the various changes agreed to.
In my opinion, the $6.4m condition was not a condition which required strict performance as a condition precedent for the sureties' or guarantors' obligations or a condition such that the sureties and guarantors would not have entered into the contract had they been told that the Bank may not enforce the condition. The condition was not inserted for their benefit but was one which the Bank was entitled to waive as it did. The guarantors and sureties, for their part, were aware at all times of the overall security position. They were aware of the demands which the Bank made for further security and they joined in compliance with those demands. I am of the view that the point has no substance.
It should be mentioned that the relevant guarantees contained the following provisions:
"10. ... this Guarantee shall be in addition to and independent of and shall not affect or be affected by ... any arrangement or transaction between the Bank and the Debtor ..."
12. The Bank may at any time and from time to time grant to the Debtor or to any other person any time or other indulgence or consideration ...”
There were analogous provisions in Memorandum T340042 which were incorporated into the mortgages.
I have not found it necessary to give consideration to the operation of these specific contractual provisions.
3. Provisions of the Mortgages and Guarantees
Counsel for the Bank raised an issue under the guarantees, each of which provided:
"HEREBY GUARANTEES to pay to the Bank on demand which may be made at any time and from time to time the moneys hereinafter mentioned or so much thereof as may be specified in each such demand that is to say:-
(a) all moneys (including moneys advanced by way of loan for fixed term or provided by way of overdraft) now or hereafter to become owing or payable to the Bank by the Debtor either alone or on joint or partnership account or on any other account whether as principal or surety; ..
...
And it is hereby agreed and declared as follows:
...
9. As a separate and independent stipulation the Guarantor agrees that all or any sums of money which may not be recoverable from the Guarantor on the footing of a guarantee whether by reason of any legal limitation disability or incapacity on or of the Debtor or any other Guarantor if there is more than one or any other fact or circumstance and whether known to the Bank or not shall nevertheless be recoverable from the Guarantor as sole or principal debtor in respect thereof and shall be paid by the Guarantor on demand together with interest at the rate or rates charged or chargeable by the Bank in respect of the moneys hereby secured immediately prior to the making of such demand from the date of demand until payment."
Counsel submitted, as I understood it, that, under paragraph (a), the guarantors agreed to pay to the Bank not only moneys which were "owing or payable" but also moneys for which the debtor was indebted but which were not then due and payable. Counsel submitted that, under clause 9 of the guarantees, although moneys could not be recovered by the Bank against a customer by reason that they were not then due and payable, which counsel said was "any other fact or circumstance", nevertheless, the guarantors gave an indemnity whereby they could be called upon to pay sums which were not due and payable by the principal debtor.
In my opinion, the provisions of the guarantees relied upon by counsel must be read in their context and having regard to the character of the obligation which a guarantor undertakes. It would be inconsistent with that and inappropriate for the document to be described as a guarantee if the guarantor were to undertake a principal liability to the Bank to pay an indebtedness which had not become due and payable by the principal debtor. The words "owing and payable" in para (a) are words which commonly appear in guarantees and they should be read in the light of the well understood obligations imposed by such documents on guarantors. Clause 9 was a special provision and it should be read narrowly. The clause was concerned with the special circumstance where there may be some incapacity on the part of the principal debtor. The words "any other fact or circumstance" should be read in the context, and not as converting the guarantee into an obligation of an entirely different character.
There were like provisions in the mortgages. I adopt comparable reasoning with respect to them.
POSSESSION
Counsel for the Bank submitted that the Bank was entitled to an order for possession even in the event that the s 57 notices were invalid as notices under s 57(2)(b) of the Real Property Act. Counsel referred to s 60 of the Real Property Act which authorises a mortgagee upon the default in payment of the principal sum or of any interest secured by the mortgage into possession of the mortgaged land by receiving the rents and profits thereof or to bring proceedings in the Supreme Court of New South Wales or the District Court of New South Wales for possession. Counsel submitted that the exercise of the power of sale under s 58 was expressly contingent upon the giving of a notice under s 57(2)(b).
I accept counsel's submission insofar as it depended upon the interpretation of the statute. I would read ss 57, 58 and 60 of the Real Property Act in accordance with the words used. However, the subject mortgages incorporated memorandum No T340042 and, in that memorandum, it is provided that the power of a sale and all other powers conferred on a mortgagee by the Real Property Act may be fully exercised by the Bank at any time after the requirements of the notice pursuant to s 57 of the Real Property Act have not been complied with. That appears in cl E2. Clause E3 provides that, upon the power of sale becoming exercisable, it is lawful for the Bank to enter upon and take possession of the mortgaged premises. I need not rule upon the point, but it seems to me that it would be unjust for the Bank to act inconsistently with its mortgage. It has agreed not to exercise its powers, including the power of taking possession unless and until a notice under s 57 of the Real Property Act has been served and its requirements have not been complied with.
However, as the s 57(2)(b) notices were valid, the power of sale had become exercisable.
The Bank seeks an order for possession of the mortgaged properties. I am satisfied that the Bank is entitled to that relief both in accordance with the terms of the mortgages and in accordance with the terms of s 60 of the Real Property Act.
Steps have been taken to ensure that notice has been given to all occupiers. I am satisfied from the steps which have been taken that adequate notice has been given. Insofar as there has been any minor failure to comply with the rules or any divergences from the rules, I would dispense with them. No occupier of the mortgaged premises has sought to oppose the making of the orders sought. I have been informed by counsel for the Bank that all occupiers, apart from persons who are parties in these proceedings, have been contacted, and that they have come to arrangements with the Bank with which they are satisfied.
The making of an order for possession has been opposed on the footing that s 60 of the Real Property Act confers power to make an order for possession on the Supreme Court of New South Wales, not on this Court. That was put as a formal submission, for, as the law stands, the cross-vesting legislation of New South Wales confers power upon this Court to exercise those powers. I consider, in any event, that sections 22, 23 and 32 of the Federal Court of Australia Act 1976 (Cth) confers power upon the Court to make the orders sought in the cross-claim. The proceedings were commenced by the cross-respondents in this Court, as the cross-respondents wished to rely upon the Trade Practices Act 1974 (Cth). The cross-respondents brought these proceedings with a view, inter alia, to forestalling the claims made now by the Bank in its cross-claim. It seems to me that, once the proceedings were commenced in this Court, the Court had jurisdiction to determine the whole matter which was in dispute between the parties.
ORDERS
Accordingly, I am satisfied that the Bank is entitled to judgment for the sums claimed and that the Bank is entitled to possession of the mortgaged premises. I shall make orders accordingly. The cross-respondents should pay the costs of the cross-claim.
I certify that this and the preceding thirty-nine
(39) pages are a true copy of the reasons for judgment of
the Honourable Justice Davies.
Associate:
Date: 12 June 1998
Counsel for the applicants/cross-respondents: N. Hutley SC
P.L. Dodson and J.M. Hennessy
Solicitors for the applicants/cross-respondents: Phontos & Associates
Counsel for the respondent: R.G. Forster SC with
N. Manousaridis
Solicitor for the respondent: L.E. Taylor
Commonwealth Bank of Australia
Legal Department
Dates of hearing: 17 December 1997,
30 & 31 March 1998
24 April 1998
Date of judgment: 12 June 1998
