Sarai v N1 Loans Pty Ltd

1. [1]

   MITCHELMORE JA: I agree with Ball JA.

2. [2]

   BALL JA: The principal question raised by this appeal is whether interest payable under two short term loan agreements both of which were entered into on 26 September 2024 by the second appellant, Aldrich Pty Ltd (Aldrich), as borrower, and the first appellant, Mr Jovan Sarai, as guarantor of Aldrich’s obligations under the loan agreements, and both of which were on substantially the same terms, was payable in advance or in arrears.

3. [3]

   The lenders — the first, second and third respondents, N1 Loans Pty Ltd, N1 Venture Pty Ltd and N1SY Pty Ltd (together, the First Loan Lenders), in the case of the first loan of $10.5 million and the fourth respondent, N1 WH2 Pty Ltd (the Second Loan Lender), in the case of the second loan of $2,325,000 — claimed that interest was payable in advance and that Aldrich was in breach of both loan agreements by failing to pay interest on time. In accordance with rights granted by the loan agreements, they appointed a receiver to the assets of Aldrich and Mr Sarai.

4. [4]

   Mr Sarai’s obligations under the guarantees he gave in respect of the first loan agreement were secured by a registered mortgage over a property on Eastbourne Road, Darling Point, NSW (the Darling Point Property) and in respect of the second loan a registered mortgage over a property in Keppel Road, Ryde, NSW (the Ryde Property). The parties also on 26 September 2024 entered into a Deed of Cross-Collateralisation the effect of which was that a default under one loan agreement was a default under the other and the security given in respect of each loan was given in respect of the other.

5. [5]

   On 20 November 2024, the lenders commenced proceedings in the court below to obtain possession of the two properties. Aldrich and Mr Sarai filed a cross‑claim naming the lenders and Mr Sam Kaso, the receiver, as cross‑defendants. By that cross-claim, they sought relevantly a declaration that the appointment of the receiver was void ab initio because they were not in breach of the loan agreements and damages. Ultimately, they sought to quantify their damages on the basis that but for the wrongful appointment of the receiver, they would have been able to refinance the loans at a lower interest rate. They claimed the difference between the interest for which they are liable under the loans (and guarantees) and the interest for which they would have been liable if they had been able to refinance the loans, which was said to be $4,550,000 in the case of the first loan and $1,007,500 in the case of the second loan.

6. [6]

   The primary judge accepted the lenders’ construction of the loan agreements, with the consequence that the orders sought in the statement of claim were made and the cross-claim was dismissed. The primary judge also held that, even if he was wrong and that interest was payable in arrears, the claim for damages must fail. That was because his Honour was not satisfied that the appointment of the receiver prevented Mr Sarai and Aldrich from obtaining alternative financing.

7. [7]

   The appellants appeal against the orders of the primary judge on both the claim and cross-claim. For the reasons which follow, the appeal must be dismissed.

Background

1. [8]

   On 1 February 2022, Mr Sarai entered into a contract to buy the Darling Point Property for $14,000,000. He paid a deposit at that time of $700,000 and he and his family moved into the property and have remained there ever since. Between about 27 June 2022 and 10 September 2024, Mr Sarai paid further amounts totalling $1,400,000 as a deposit. Under the terms of the contract, settlement was due to occur 30 months after the date of the contract (that is, on 1 August 2024).

2. [9]

   Mr Sarai did not settle by that date. On 15 August 2024, the vendor served a notice to complete. On 12 September 2024, Mr Sarai and the vendor entered into a deed to extend the date of completion until 27 September 2024 with time of the essence. The two loan agreements were entered into to enable Aldrich to pay the balance of the purchase price for the property.

3. [10]

   As I have said, both loan agreements contain substantially the same terms. Both relevantly comprised a “Finance Offer Schedule” setting out the details relevant to each loan to which was attached a guarantee signed by Mr Sarai, and standard terms contained in a document entitled “Kingston & Partners Memorandum of Common Provisions Version 5 (LFMCPV5)” (the Common Provisions).

4. [11]

   Clause 3.5 of the Common Provisions provides:

5. [12]

   Clause 4 deals with interest. Relevantly, it contains the following clauses:

6. [13]

   Clause 14 deals with default. Relevantly, it is in the following terms:

7. [14]

   Clause 63 of the Common Provisions relevantly provides:

8. [15]

   Each Finance Offer Schedule sets out details of the lender, borrower, guarantor, facility limit and facility term (“3 Months from the date of first drawdown”). Each provides for a “Standard interest rate” of “36.00% per annum plus any increase in the Bank Bill Swap Rate (BBSW) from time to time after the first drawdown” and a “Discount interest rate” of “12.45% per annum plus any increase in the BBSW from time to time after the first drawdown”. Each also contains the following item:

9. [16]

   The Finance Offer Schedule for the first loan contained the following special conditions:

10. [17]

    The Finance Offer Schedule for the second loan contains similar provisions, except that the amount for retained interest in cl 2 is $24,121.88 and cl 7 gave the address of the Darling Point Property instead of referring to “the land”.

11. [18]

    The loans were advanced and the purchase of the Darling Point Property settled on 30 September 2024. On the same date, Mr Sarai granted a registered mortgage to the Second Loan Lender over the Ryde Property.

12. [19]

    On 4 November 2024, the lenders served default notices under their respective loan agreements and s 57(2)(b) of the Real Property Act 1900 (NSW) in respect of the failure to pay interest allegedly due on 1 November 2024. They also served notices of demand on Mr Sarai.

13. [20]

    On 20 November 2024, the lenders commenced the proceedings below and the following day appointed Mr Kaso as receiver and manager of the assets of Mr Sarai. Mr Kaso was appointed receiver and manager of the assets of Aldrich and as agent for the mortgagee in possession of the Ryde Property on 26 February 2025.

Conclusions of the primary judge

1. [21]

   In the Court below, the appellants submitted that the provisions relating to the payment of interest were void for uncertainty because the payment arrangements set out in each of the Finance Offer Schedules were contradictory. Each schedule stated both that interest was due “on the last day of the period” and was payable “Monthly in advance”. Relying principally on the decisions of Megarry J in Brown v Gould [1972] 1 Ch 53 and Barwick CJ in The Council of the Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd (998) 118 CLR 429; [1968] HCA 8 to the effect that a provision of a contract will not be void for uncertainty merely because it is ambiguous, the primary judge rejected that contention. He held that the question was one of the correct construction of the loan agreements. In his opinion, the correct construction was that interest was payable in advance. He summarised his reasons in these terms (at PJ[45]):

2. [22]

   Even assuming that, on the correct construction of the loan agreements, interest was payable in arrears, the primary judge rejected the appellants’ claim for damages. His Honour gave two reasons (at PJ[51]):

The grounds of appeal

1. [23]

   Ground 1 of the notice of appeal challenges both the primary judge’s conclusion that the provisions of the loan agreements relating to the payment of interest were not void for uncertainty and his conclusion that, on the correct construction of the agreements, they provided for the payment of interest in advance. In oral submissions, Mr Marshall SC, who appeared for the appellants, focussed principally on the second limb of this ground. He accepted that one difficulty with the contention that the provisions were void for uncertainty was identifying precisely what provisions were void and the consequences of that conclusion. However, his ultimate submission was that it was not necessary for this Court to reach a final conclusion on the issue. It was sufficient for his purposes that the agreements could not be construed as providing for interest in advance.

2. [24]

   Ground 2 is mechanical in nature. It simply asserts that if the primary judge was wrong in his construction of the loan agreements, then his Honour was wrong to conclude that the appointment of the receiver was not void ab initio.

3. [25]

   Grounds 3, 4 and 5 concern the primary judge’s conclusions in relation to damages. Ground 3 challenges the primary judge's rejection of certain evidence of what potential lenders are alleged to have said to a finance broker retained by Mr Sarai about their willingness to lend and the primary judge’s refusal to take “judicial notice” of the effect of the appointment of a receiver on Mr Sarai’s ability to obtain alternative finance. Ground 4 was not pressed. Ground 5 contends that the primary judge erred in not awarding damages. Plainly, these grounds only arise if the appellants succeed in relation to grounds 1 and 2.

Grounds 1 and 2

1. [26]

   The fact that a contract contains clauses which are inconsistent is not of itself a reason for concluding that the contract, or some part of it, is void for uncertainty. Rather, the task of the court is to identify the true (objective) intention of the parties construing the contract as a whole. As McPherson JA explained in McGowan v Commissioner of Stamp Duties [2002] 2 Qd R 499; [2001] QCA 236 at [22]:

2. [27]

   Only in those rare cases where it is impossible to determine the intention of the parties from the contract as a whole will a court conclude that the contract, or some part of it, is void for uncertainty. Normally, this principle is stated in a context where a particular clause of a contract is obscure: see, for example, Baloglow v Konstanidis (2001) 11 BPR 20,721; [2001] NSWCA 451 at [136] (Giles JA); Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184 at [55]-[56] (Leeming JA, with whom Ward and Emmett JJA agreed); The Council of the Upper Hunter County District v Australian Chilling and Freezing Co Limited (1968) 118 CLR 429 at 436-7; [1968] HCA 8 (Barwick CJ). However, the principle applies equally where the difficulty arises from inconsistent provisions.

3. [28]

   Plainly, the drafting of the loan agreements, and of the Finance Offer Schedules in particular, is unsatisfactory. Nonetheless, in my opinion this is a case where it is possible to discern the intention of the parties from the loan agreements as a whole.

4. [29]

   It is relevant to observe that the loan under both loan agreements was for a period of three months and that both loan agreements provided that interest would be paid monthly. That meant that there would be three interest payments in all. Clause 2 of the special conditions in each agreement – which under cl 63(z) of the Common Provisions overrode the Common Provisions to the extent of any inconsistency – provided, in effect, for the first instalment of interest to be paid in advance because it provided for the deduction of the amount of that payment from the “facility limit” and for it to be retained by the lenders.

5. [30]

   Mr Marshall took issue with the proposition of the previous paragraph. He submitted that cl 2 of the special conditions could equally be interpreted as stating that the first interest payment was to be deducted and presumably held in escrow to be paid towards interest when interest became due, which could be at the end of the payment period. In my opinion, that is reading too much into the clause. The natural reading of the clause is that it is saying that the lenders can deduct the amount of the first interest payment from the amount to be advanced and keep it for their own purposes, which would have the effect of discharging the obligation to pay interest for that month. There is nothing in the clause which suggests that the amount deducted was to be held in escrow until some later time.

6. [31]

   If interest was to be paid monthly and the first payment was to be made in advance, it is natural to infer that the intention of the parties was that future payments of interest would also be made in advance, particularly since there were only two of them. That conclusion is supported by other terms of the loan agreements. Clause 3.5 of the Common Provisions contemplates that where the Finance Offer Schedule states that the “payment type” is “interest only”, the parties might choose to specify in the schedule whether the payment of interest was to be in arrears or in advance. Clearly, under the heading “Payment arrangements” in the Finance Offer Schedules the parties, picking up the wording of cl 3.5, specified the “Payment type” as “Interest only”.

7. [32]

   The balance of the material under the heading “Payment Arrangements” must be understood as giving effect to the option contemplated by cl 3.5. The material under the headings “Payment period” and “Repayment” do not obviously relate to any other terms of the Common Provisions. Taken together, the material is obviously contradictory. However, the statement “Monthly in advance” is a clear statement that interest is to be paid monthly and is to be paid in advance. Similarly, the statement “Monthly repayments are to be made on the anniversary date of the first drawdown every month” indicates that interest payments are to be made “on the anniversary date of the first drawdown”, which can only mean the same date each month as the date of the first drawdown.

8. [33]

   The appellants take issue with the first of these points on the basis that the words “Monthly in advance” appear under the heading “Payment period”, which is inapposite to describe the date on which interest payments are to be made. Neither party ultimately sought to place much weight on the statement in cl 63 of the Common Provisions that “Headings are for convenience only and do not affect interpretation”. There may be a question whether that statement can apply to headings in the Finance Offer Schedules which identify the matters with which the clauses in those documents are concerned. But whatever the position, and whatever the meaning of the heading, it cannot alter the clear effect of the words “in advance”.

9. [34]

   The appellants also take issue with the second of the points made above because the relevant sentence only deals with “repayments” and interest is not “repaid”. However, the only payments that are made monthly under an interest only loan are interest payments. “Repayments” in this context must, therefore, be understood as including payments.

10. [35]

    Of course, what has been said is contradicted by the sentence “Your interest charges for a payment period are due on the last day of the period” under the heading “Payment type”. But taking the loan agreements as a whole – and, in particular the parties’ clear agreement that the first interest payment was to be paid (and by the terms of the loan agreements, was paid) in advance – what the parties must have intended was that interest would be paid in advance. Consequently, that sentence must be rejected as representing the parties’ intentions.

Conclusion

1. [36]

   Having regard to the conclusions I have reached on grounds 1 and 2, it is unnecessary to deal with the remaining grounds of appeal. The appeal should be dismissed with costs.

2. [37]

   FREE JA: I agree with Ball JA.