Australian Securities Ltd v Borina Pty Ltd

1. [1]

   This is an application by the Defendant to file a cross-claim in proceedings that have been discontinued by the Plaintiff. The filing of the cross-claim was initially opposed, not because the proceedings have been discontinued, but on the basis that the causes of action pleaded are doomed to fail and, accordingly, it would be futile to file the cross-claim. The Plaintiff’s approach subsequently modified in the manner and circumstances I shall describe presently.

2. [2]

   The proceedings commenced on 19 October 2015 claiming possession of land at 513 Princes Highway, Blakehurst. The property concerned is a motel, the running of which is leased by the Defendant to a third party.

3. [3]

   A loan of $2,280,000 was first made to the Defendant on 14 November 2005. It appears, although the details are not available, that the loan was for a relatively short period of time but was subsequently rolled over a number of times so that the relevant repayment date (as pleaded in the statement of claim) was 15 December 2014. Thereafter, the Plaintiff claimed that the loan was due for repayment on that date but the Defendant asserted that the loan had again been rolled over for a two year period to 15 December 2016. I will return to the detail of that dispute presently.

4. [4]

   On 12 October 2015 the Plaintiff issued a notice under s 57(2)(b) of the Real Property Act 1900 (NSW) and then filed a statement of claim on 19 October 2015 claiming possession of the property.

5. [5]

   A defence, an amended statement of claim and a defence to the amended statement of claim were filed during 2016. The matter was otherwise prepared for trial and a trial date was fixed for 20 February 2017. As that date approached the Plaintiff drew the Defendant’s attention to the fact that, regardless of the dispute on the pleadings, the loan was undoubtedly due for repayment (even if it had been rolled over) on 15 December 2016. Settlement negotiations then commenced and on 22 December 2016 the Defendant paid the sum of $2,752,712.99 to the Plaintiff with $459,187.49 being expressly paid on a without prejudice basis so that a discharge of the mortgage could be obtained to enable the Defendant to refinance the loan with Baccus Investments Ltd.

6. [6]

   On 20 February 2017 leave was given to the Plaintiff to discontinue the proceedings and to file a Notice of Discontinuance on the basis that there was no order as to costs. Orders were made on that day by Harrison AsJ that had the effect of preserving the proceedings for the purpose of the Defendant filing a cross-claim. Directions were made for the service of a proposed cross-claim with a period of time being given to the Plaintiff to indicate whether consent would be given to the filing or not. The proposed cross-claim was served, the Plaintiff said it would not consent and as a result the Defendant filed a notice of motion on 25 May 2017 seeking leave to do so. In the meantime correspondence had been exchanged between the parties arguing for their respective positions in relation to the cross-claim.

Factual background

1. [7]

   To enable some understanding of the claims sought to be made by the Defendant and of the submissions of the parties it is necessary to set out relevant terms of the Facility Agreement and some of the correspondence leading up to, and including, an Acknowledgement executed pursuant to clause 8 of the Facility Agreement.

2. [8]

   The Facility Agreement relevantly provides:

3. [9]

   The word Security was defined in the definitions section of the Facility Agreement in a way which included the mortgage.

4. [10]

   On 23 October 2014 the Plaintiff forwarded a letter to Mr Samia of the Defendant which relevantly said this:

5. [11]

   On 27 October 2014 the Defendant wrote to the Plaintiff relevantly saying:

6. [12]

   On 28 October 2014 the Plaintiff sent an email to the Defendant saying that it was unable to offer a loan extension without the updated financials. That resulted in the Defendant forwarding them under cover of an email of 17 November 2014.

7. [13]

   On 12 February 2015 the Plaintiff sent an email to the Defendant saying that the credit committee requested further information which was set out in the email. That was responded to later on the same day.

8. [14]

   Subsequently on 24 March 2015 a further request for information was made by the Plaintiff of the Defendant and that commenced a series of emails backwards and forwards where the Plaintiff made various demands and the Defendant responded. This culminated in a letter from the Plaintiff to the Defendant dated 1 June 2015 where, having discussed what were described as conditions precedent to a rollover, the Plaintiff said that it was not prepared to roll over the loan, and the loan needed to be repaid with interest calculated and the higher rate from 15 December 2014 within 30 days. Throughout this period the Defendant’s statement of account with the Plaintiff shows that the Plaintiff in fact reduced the monthly payment from 15 January 2015 to the interest rate set out in the initial letter of 23 October 2014 and continued to charge only that rate until June 2015.

9. [15]

   The Defendant registered a dispute with the Financial Ombudsman Service in May 2015 and the dispute was not ultimately resolved. The Plaintiff thereafter commenced these proceedings.

10. [16]

    In the circumstances mentioned at [5] above, correspondence then ensued with the Plaintiff drawing attention to clause 8.3 of the Facility Agreement. On 16 December 2016 the Defendant provided its list of items in dispute that were ultimately incorporated into the Acknowledgement that was executed by the Defendant on 21 December 2016. Of significance is the fact that by 13 December 2016 the Defendant had negotiated a new loan with Baccus Investments Limited for $2.7m.

11. [17]

    The Acknowledgement was in these terms:

12. [18]

    Attached to that acknowledgement was an annexure which set out the details of various amounts that were required to be paid together with reasons for the dispute in relation to each of them. The various items were these:

The first proposed cross-claim

1. [19]

   Initially the proposed cross-claim claimed only damages by way of substantive relief. This changed in circumstances which I shall relate presently. The proposed cross-claim initially pleaded the written agreement of 14 November 2005 for the loan of $2,280,000 to be repaid by 15 November 2006. The loan was secured by a charge over the Defendant’s business and assets as well as a mortgage over the property.

2. [20]

   The cross-claim then pleaded that there were six separate occasions prior to 15 November each year when the Plaintiff agreed to roll over the loan for a further year.

3. [21]

   Paragraphs 20-50 pleaded, at somewhat unnecessary length, the correspondence that passed between the parties from 23 October 2014 with the view to the loan being rolled over for a further period until the s 57 notice was served. Thereafter the settlement effected on 22 December 2016 was pleaded including the payment of the “without prejudice” amount.

4. [22]

   Paragraphs 57-59 pleaded what were said to be express and implied terms of the finance facility agreement which were then breached in the manner pleaded in paragraphs 60-74. Paragraph 75C pleaded that by reason of those breaches the Defendant had suffered loss and damage.

5. [23]

   The loss and damage was particularised in paragraph 63 as follows:

6. [24]

   At the hearing of the motion on 30 June 2017 particular (b) was abandoned. No further particulars of loss and damage have been provided as paragraph (e) anticipated.

7. [25]

   An alternative claim was pleaded in paragraphs 76-79 as follows:

Procedural developments

1. [26]

   It is necessary to say something about the way the motion has developed. The matter was argued on 30 June 2017 to the point where Mr Docker of counsel for the Plaintiff had almost finished his submissions. By that time the hearing had exceeded the time estimated and the time available for the hearing.

2. [27]

   One of the principal arguments put forward by Mr Docker was that the authorities demonstrated that the only cause of action available to a cross-claimant in the position of the Defendant was that an account should be taken between the parties of what, if anything, was owing to the Defendant from the amount retained on settlement. Mr Neal of counsel for the Defendant accepted that, at the least, the proposed cross-claim would need to be amended to claim an account in the alternative to the claim for damages. Further, during the course of both counsel’s submissions it became clear, and it was accepted by Mr Neal, that other amendments needed to be made to the first proposed cross-claim.

3. [28]

   The proceedings were thereafter adjourned part heard to 27 July 2017.

4. [29]

   In response to an email that I directed my Associate send to the parties, Mr Neal provided to the solicitors for the Plaintiff and to my Associate a further proposed cross-claim in sufficient time before 27 July to enable consideration of it by those acting for the Plaintiff.

The second proposed cross-claim

1. [30]

   The second proposed cross-claim now sought, in addition to interest, costs and interest on costs (all of which had been sought previously) the following relief:

2. [31]

   The second proposed cross-claim omitted a number of the unnecessary paragraphs and then reformulated to some extent the damages claim that had been pleaded in the first proposed cross-claim.

3. [32]

   The significant paragraphs concerning the damages claim were paragraphs 48-52 which read as follows:

4. [33]

   Paragraph 53 then asserted that by reason of the breaches in paragraphs 49 and 52 above Borina had suffered loss and damage. The particulars were now confined to paragraphs (a), (c) and (e) (set out in [23] above). I note again that no further particulars of loss and damage were provided as particular (c) anticipated.

5. [34]

   The cross-claim then added two new paragraphs in reliance on s 21 of the Australian Consumer Law (being Schedule 2 to the Competition and Consumer Act 2010 (Cth)) (the ACL) as follows:

6. [35]

   The loss and damage was said to be the same as in relation to the breach of contract claim.

7. [36]

   There was then in paragraphs 57 to 60 a pleading which mirrored paragraphs 48 to 56 but seemed, in a way that was not easy to understand, to be based in the alternative on an agreement that the Defendant would provide certain material to the Plaintiff, and it again claimed both a breach of contract and breaches of s 21 of the ACL on the same basis.

8. [37]

   The loss of opportunity claim set out at [25] above was abandoned and instead a claim for money had and received was pleaded in this way:

Submissions

1. [38]

   The Defendant relied on the correspondence summarised above and submitted that the Plaintiff, in asserting that the loan had not been rolled over to 15 December 2016 and by requiring repayment, had breached clause 4.3 of the Facility Agreement. In the alternative, the Defendant submitted that the Plaintiff, in exercising its powers under clauses 4.3 and 6.5 as well as implied terms that it would act in good faith and would act fairly and reasonably, ought to have rolled the loan over to 2016. The Defendant submitted in the alternative that the Plaintiff had repudiated the agreement.

2. [39]

   The Plaintiff submitted that the authorities showed that all the Defendant was entitled to was to an account taken between mortgagee and mortgagor in relation to the amounts set out in the Acknowledgement totalling $459,187.49. The Plaintiff submitted that the authorities showed that claims for damages by a mortgagor against a mortgagee were not available.

3. [40]

   The Plaintiff submitted that there was no promise made by the mortgagee upon which the Defendant could sue alleging a breach of contract. That was because the only promise, essentially, was that the Defendant mortgagor would pay to the Plaintiff mortgagee the amounts due under the mortgage when they fell due for repayment.

4. [41]

   Initially, the Plaintiff opposed the filing of the cross-claim in its entirety because all that was sought was a claim for damages which the Plaintiff submitted was not available. Since the second proposed cross-claim the Plaintiff accepts that the Defendant is able to seek an account and may be able to make a claim for money had and received to the extent that the money paid under protest represented in whole or in part an overpayment. The Plaintiff submitted, however, that a damages claim at all, even if made in the alternative, should not be permitted to go forward because in law such a claim was not available.

5. [42]

   In the first proposed cross-claim the Defendant had not asserted that the contract had been repudiated by the Plaintiff by asserting that no rollover of the loan had occurred. A claim asserting repudiation was pleaded in the second proposed cross-claim. The Plaintiff submitted that such a claim should not be permitted because there was no assertion nor evidence that the repudiation was accepted with the result that no damages would flow from a finding that the Plaintiff had repudiated the contract.

6. [43]

   In relation to the claims now sought to be made relying on the ACL, the Plaintiff accepted that the claim of unconscionability was an arguable claim but asserted that no loss flowed from any such breach because it was not the Plaintiff’s conduct as pleaded that caused the Defendant to pay the disputed amount; rather, it was the operation of clauses 8.1 to 8.4 of the credit contract and the law that dealt with redemption of mortgages. In any event, there was no loss because the payment was made without prejudice to the right of the Defendant to recover the payment if it was entitled to do so. The Plaintiff also argued that allegations based on s 21 of the ACL go beyond what was included in the Acknowledgement executed at the time of the discharge.

7. [44]

   The Plaintiff submitted that the claim for the higher payments to Baccus is an interest claim on a loss meaning that it must flow from a loss. That claim is also within the account that will be taken and payable if the Plaintiff is successful in its claim for money had and received.

8. [45]

   In relation to the claim in reliance on the ACL the Defendant pointed to the range of relief and orders that could be made pursuant to s 243 of the ACL and submitted that it would be open to the Court to set aside cl 8.4 in the agreement and the Acknowledgment that was signed that purports to confine the Defendant to the matters contained in the Acknowledgment.

Consideration

1. [46]

   The only basis upon which Borina could be denied the right to plead a cause of action would be if the cause of action would be futile in that it would be doomed to fail. The question of whether the proposed pleadings are futile is to be dealt with by applying the same principles as are applied to an application for summary judgment or summary dismissal: Alamdo Holdings Pty Ltd v Australian Window Furnishings (NSW) Pty Ltd [2006] NSWSC 1073 at [11]. The principles are those set out in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at [129] and more recently in Agar v Hyde (2000) 201 CLR 552; [2000] HCA 41 at [57], subsequently affirmed in Spencer v The Commonwealth (2010) 241 CLR 118; [2010] HCA 28 at 24.

2. [47]

   In my opinion, the cases show that the only right the mortgagor has after redemption of the mortgage, whether by foreclosure or sale or simply by granting a discharge where a dispute remains, is that accounts should be taken between the mortgagor and the mortgagee. In those circumstances an action may lie for money had and received: Projects Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 97,341 at 45; Westpoint Finance Pty Ltd v Chocolate Factory Apartments Ltd [2002] NSWCA 287; (2002) 12 BPR 22,969 at [32]-[33], [54] and [58]; Thambiappah v Commonwealth Bank of Australia [2010] NSWSC 520 at [54]; Riva NSW Pty Ltd CAN 113 881 815 v Key Nominees Pty Ltd [2014] NSWSC 301 at [18]-[22].

3. [48]

   Consistent with those principles and particularly with what Hodgson J (as his Honour then was) said in Projects Research at p. 5, the arrangement entered into under the Facility Agreement required the identification of disputed matters in an Acknowledgment before the mortgagee would discharge the mortgage. The purpose of that was to ensure that sufficient funds were retained to enable the mortgagee to meet any claim for an account that might be made arising out of the disputed matters.

4. [49]

   In my opinion, no claim for breach of contract is available at law for the asserted failure to rollover the Facility or by reason of the fact that the Plaintiff charged the Defendant interest as if it was in default under the Facility Agreement. The remedy for the Defendant is by the taking of accounts. In any event, any loss will likely be confined to any amount that is found to be owing to the Defendant after the taking of accounts, with the possible exception of the claim for added interest payable to Baccus. That will be discussed later in the judgment.

5. [50]

   Nor are the problems for the Defendant in that regard overcome by asserting, as it now does, that the Plaintiff repudiated the Facility Agreement in not rolling over the loan. The Defendant does not plead that it accepted the repudiation, nor is there any evidence to show that the Defendant in fact accepted the repudiation. In those circumstances, a claim based upon repudiation should not be allowed to go forward.

6. [51]

   The Plaintiff appears to accept that the Defendant has the right under s 21 of the ACL to claim that the Plaintiff acted unconscionably in relation to the discharge of the mortgage. Common law and equitable doctrines confining a mortgagee’s rights cannot override rights given under statutes. The Plaintiff submits, however, that no loss is shown even if such unconscionability were established. That is because one of the rights acquired by the Defendant at the time of discharge was the right to have refunded to it any amount overpaid by reason of entry into the Acknowledgment.

7. [52]

   I do not accept, on an application to file a pleading containing an assertion of unconscionability contrary to s 21, that because the Defendant did not identify the issue of unconscionability when executing the Acknowledgment, it cannot be permitted to raise the issue now. A party seeking to make a claim based on a statutory right which is designed to protect a contracting party and, in the appropriate circumstances, provide relief for that party from the particular contract or transaction, cannot be required to execute the impugned document under some sort of protest or, here, by including that complaint in the Acknowledgement. Nor can the fact that the Defendant acquired the right at discharge to have refunded to it any amount overpaid by reason of entry into the Acknowledgment somehow circumscribe its right to make a claim in reliance on s 21 asserting unconscionability. Further, as the Defendant points out, the remedies provided for breach of s 21 are wider than compensation orders (see s 243 of the ACL).

8. [53]

   Nor am I in a position on an application such as the present to determine whether any loss that is found to flow to the Defendant, or which for present purposes can be assumed to flow to it, came from the entry into the Acknowledgment (as the Defendant asserts) or arose from the requirements of cl 8 of the Facility Agreement that gave rise to the Acknowledgment (as the Plaintiff asserts). The Plaintiff submitted that that is simply a matter of construction of the agreement but for present purposes that submission might be thought to take an unduly narrow view of the provisions of the ACL. I do not consider it is appropriate that I resolve that on the present application. The argument put forward by the Defendant does not seem to me to be regarded as hopeless or doomed to fail. If clause 8 were set aside, the loss might be held to flow from the requirement to sign the Acknowledgement.

9. [54]

   If all that the Defendant receives on establishing any unconscionability is compensation, there is a reasonable argument that such compensation would not exceed any amount which is required to be repaid to the Defendant on a taking of accounts except, possibly, the extra interest payable to Baccus.

10. [55]

    One of the particulars of loss identified by the Defendant is for costs incurred in having to borrow a higher principal sum from Baccus because the Defendant was obliged to repay the amount of $459,187.49 instead of the lower figure that it asserted was due. That additional interest payable to the Defendant was not specified in the Acknowledgment signed on behalf of the Defendant before the discharge of the mortgage. Clause 8.2 arguably suggests that it ought to have been specified. The costs were known because by that time the Defendant had entered into the loan agreement with Baccus.

11. [56]

    Clause 5 of the Acknowledgment, to which the Defendant agreed, said that the Defendant was not entitled to dispute any amount of the Payment Amount or raise any reason for dispute other than was set out in the Details of the dispute. In those circumstances, the Plaintiff has a right to assert that it did not retain sufficient funds by way of security to meet the cost of resolving all disputed matters between the parties. Had the Plaintiff known that this dispute may arise in the course of taking accounts, it would have been entitled to retain further funds: Project Research at p. 5; Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27 at [61]-[63]; Australia and New Zealand Banking Group Ltd v Mishra [2012] NSWSC 1333; (2012) 16 BPR 31,665 at [32]-[40].

12. [57]

    If, therefore, the Defendant wishes to pursue that head of damage in the taking of accounts or in a claim for money had and received, additional security needs to be provided. I do not, for the reasons already given, consider that the Defendant must provide security for the litigation of the unconscionability claim. Rights given by s 21 of the ACL must be regarded as superimposed on common law and equitable principles concerning redemption of mortgages.

13. [58]

    Evidence has been provided of the extra security which the Plaintiff calculates it would need if all of the claims made by the Defendant, including its contract claims and claims based on s 21 of the ACL, were now to be litigated. The extra amount of security is a little short of $100,000.

14. [59]

    The Defendant resists providing any further security on the basis that the Plaintiff has sufficient already, that the case it makes is a strong one, and that the Plaintiff’s order for security assumes the validity of the Acknowledgment when one of the claims made is that it be set aside because of unconscionability.

15. [60]

    In my opinion, a dispute concerning the further interest paid to Baccus is within a small compass because I am not permitting the contract claim to go forward. What is significant is that the Plaintiff in the affidavit of its solicitor, Mr Kaunitz sworn 3 August 2017, said that it calculated its contingent security costs retained on the basis of defences disclosed in the defence to the statement of claim as well as the areas of dispute identified in the Acknowledgment. The defences, as Mr Kaunitz acknowledges, included, in the event the Plaintiff established a breach of the Facility Agreement, reliance by the Defendant on waiver, estoppel, election and relief against forfeiture. It is clear that the defences of waiver, estoppel and election arise from the same factual sub-stratum as the contractual claim, namely, that by its actions the Plaintiff represented that it would rollover the loan at the end of 2014.

16. [61]

    Further, when I have held that the Defendant cannot be obliged to provide additional security for the statutory claim, in all of those circumstances, I consider that only a small allowance should be made by way of extra security in the sum of $10,000. If the Defendant is not prepared to provide that extra security it should not be permitted to pursue its claim for the extra Baccus interest. In those circumstances, the proceedings would be confined to the taking of an account, the claim for money had and received and the claims under s 21 of the ACL.

Costs

1. [62]

   The Defendant’s original application to file a cross-claim was misconceived. As I have held, it had no right to make a claim for breach of contract. During the course of the first day’s hearing the Defendant accepted that at least it needed in the alternative to seek an account. Ultimately the Plaintiff did not oppose the cross-claim going forward to the extent that it sought an account and the claim for money had and received.

2. [63]

   Further, the Plaintiff abandoned its loss of opportunity claim and subsequently sought to make a claim under s 21 of the ACL which I have held it cannot be prevented from doing. The Plaintiff resisted the claims under s 21 on the basis that no loss was shown, but was unsuccessful in doing so.

3. [64]

   My assessment of the time spent is that the majority of the time arguing the notice of motion was concerned with the Defendant’s desire to sue for breach of contract. It did that in circumstances where it had not made any such claim in the Acknowledgment that it signed. I have held that no such cause of action is available for the reasons put forward by the Plaintiff.

4. [65]

   In all the circumstances, I consider that the Defendant should pay 50% of the Plaintiff’s costs of the motion.

Conclusion

1. [66]

   I make the following orders:

   1. (1)

      Leave to the Defendant to file a cross-claim seeking an account, a claim for money had and received, and seeking relief for breaches of s 21 of the Australian Consumer Law.

   2. (2)

      On payment to the Plaintiff of the sum of $10,000, which is to be added to the Security Amount sum of $71,500 referred to in paragraph 3 of the Acknowledgement executed by the Defendant on 21 December 2016, leave to the Defendant to claim as a head of damage the matter specified in particular (b) to paragraph 53 of the second proposed cross-claim.

   3. (3)

      The Defendant is to pay 50% of the Plaintiff’s costs of the Notice of Motion filed 25 May 2017.