CHALHOUB v COMMONWEALTH BANK OF AUSTRALIA SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL DISTRICT COURT HANDLEY, POWELL and STEIN JJA 22 August 1997 , 1 October 1997 [1997] NSWCA 64 Contract of loan — appeal against finding of breach by debtor/appellant — interpretation of amended repayment plan — no defence to claim for repayment of loan The appellant had various loans by way of overdraft and housing loans from the respondent. The appellant defaulted on repayments and made an alternative arrangement for repayment which the trial judge found was not complied with. On appeal: The appellant claimed that the trial judge wrongly interpreted the alternative repayment arrangement and, by way of cross claim, that payment by the respondent of the final payment under the housing loan into the overdraft account caused him financial detriment. There was also an error in the trial judge's calculation of interest on the judgment debt. Held: Apart from the calculation of interest on the judgment debt, no error by the trial judge was demonstrated. Handley JA I agree with Stein JA. Powell JA I agree with Stein JA. Stein JA The appellant, John Joseph Chalhoub, appeals against a judgment of Judge Craigie delivered in the District Court on 27 March 1995 in favour of the respondent, the Commonwealth Bank of Australia, in the sum of $96,304.70 plus interest calculated at $33,182.85. INTRODUCTION The background facts to the litigation are as follows: ¢ In February 1987 the appellant, who is a solicitor, opened a credit account with the respondent bank. In September of that year, the bank granted him an overdraft facility on the account. By June 1989 the bank had increased the overdraft limit to $80,000. This limit was later increased to $100,000. ¢ In May 1988, the appellant and his wife purchased vacant land at Wamberal. The bank approved a loan for $44,000 to assist in the purchase. ¢ In November 1988, the bank approved a Personal Credit Line in the sum of $65,000 to enable the appellant to buy vacant land at Niagara Park in January 1989. The purchase was a speculative one. The loan was to be cleared in full from the sale of the property. * In February 1989, the bank approved a housing loan for $180,000 to help the appellant construct a house on the Wamberal land. By 25 October 1989 the undrawn down balance of the housing loan was $23,572.13. 2 UNREPORTED JUDGMENTS THE APPELLANT'S DETERIORATING FINANCIAL POSITION By letter dated 27 November 1989, the bank wrote to the appellant and his wife advising that the final drawdown on the housing loan ($23,572.13) had been made and that 'these funds have been credited today to the overdraft account'. An internal bank memorandum of the same date (following the transfer of the moneys from the housing loan to the overdraft account) summarised the appellant's then overall situation with the bank. He was in debit of $100,221 on the overdraft account. The housing loan had been fully advanced ($180,000) and, including interest, the debt was $193,263. In addition, the appellant owed $65,000 on the Niagara Park land, plus quarterly interest. The memorandum stated that Mr Chalhoub had indicated that there was a 'blow-out' on the Wamberal house construction costs, by as much as $70,000 and they would require a further $50,000 to complete the building. The memorandum continued: We have informed Mr Chalhoub that no further funds will be advanced on overdraft after final housing loan funding today of $23572 was credited to cheque account to cover excesses utilised on house construction. The balance of the memorandum suggests that the bank was becoming most concerned. It noted that Mr Chalhoub was to contact it by early December 1989 with a proposal for debt reduction. However, the debt to the bank increased over the ensuing months with Mr Chalhoub unable to make any real reduction. On 20 April 1990 the bank formally demanded repayment of the overdraft, then standing at $110,660.59, and threatened recovery action. Action was, however, withheld pending the outcome of an auction of the Wamberal property, due in June 1990. It eventuated that the house was not sold at auction. Thereafter, Mr Chalhoub made proposals to the bank to clear or reduce his indebtedness. The bank agreed to postpone legal action until 15 August 1990 on certain conditions. THE REPAYMENT PLAN OF AUGUST 1990 On 14 August 1990, the bank wrote to the appellant confirming that it agreed to the sale of Wamberal for $270.000. The letter concluded: Further we confirm our mutual agreement for full repayment of residual debt over seven years as under. $1,600 per month commencing one month from 1/8/90 for two years. Amortisation of balance of debt as from 1/8/92. These terms were confirmed in an internal bank memorandum of 15 August 1990. According to the bank, the arrangement was that the appellant would pay the residual debt in full over 7 years, starting with payments of $1,600 per month for the first two years. The first payment was to be made on 1 September 1990 and thereafter on the first day of each subsequent month for 2 years. The appellant does not agree that this was the mutual arrangement and I will return to his version later in these reasons for judgment. Meanwhile, the sale of the Wamberal house netted $242,146.05, which was disbursed by the bank to pay out the housing loan and interest ($207,339.10); to pay the balance owed on the Personal Credit Line for Niagara Park ($28,943.84) after the land had been sold at a loss; and the balance of $5,863.11 was deposited to the overdraft account. Mr Chalhoub made payments of $1,600 on 28 September 1990 and on 20 November 1990. He paid $3,200 on 20 December 1990. On the bank's understanding of the arrangement, this meant that the 1 September payment was URJ CHALHOUB v COMMONWEALTH BANK OF AUSTRALIA (Stein JA) 3 4 weeks late, the 1 October payment was missed and the 1 November payment was 20 days late. Further, the | December payment was missed. Thereafter, no payments were made in January or February 1991 and 51.600 was paid on 1 March 1991. The latter payment was referable to that due on | January 1990. Thus, by 1 March 1991 the appellant was 2 months behind, having missed payments on | February and | March 1991. All this would be academic (and of no significance) were it not for a submission made by the appellant that, notwithstanding subsequent events, the 14 August 1990 arrangement continued in place and that he was not in breach. The respondent wrote to the appellant on 27 March 1991, maintaining that he had not kept to the repayment arrangement. The bank indicated that it was not prepared to allow the 'present unsatisfactory situation to continue'. Unless suitable arrangements for repayment of the appellant's indebtedness could be arranged forthwith, legal proceedings would be brought. THE NEW REPAYMENT PROGRAMME Ultimately, and after some prevarication by the appellant, a meeting took place on 26 April 1991. His Honour found that Mr Chalhoub requested to be permitted to recommence payments of $1,600 per month as from 10 July 1991, with a review on 10 January 1992. The meeting resulted in a new arrangement for repayment. Consequently, the bank wrote to the appellant on 30 May 1991. The first and the third paragraphs of the letter read as follows: We refer to your recent discussions with the writer and confirm that reduction arrangements of $1,600 per month will commence on 10 July 1991. These arrangements will be reviewed again on 10 January 1992 with a view to increasing repayments at that time. We mention that should this proposed reduction programme breakdown for whatever reason the Bank will have no hesitation in pursuing for clearance of our debt, if necessary into bankruptcy. Mr Chalhoub may not have been happy with the repayment plan, but had no real alternative if he wanted to remain 'afloat'. Thus the new arrangement (embodied in the letter) was that the appellant pay $1,600 per month commencing on 10 July 1991. According to counsel for the bank, the arrangement meant that $1,600 was to be paid on 10 July, 10 August, 10 September, 10 October, 10 November, 10 December 1991 and 10 January 1992, when it would be reviewed. DEFAULT IN REPAYMENT PLAN No payment was made by the appellant on or before 10 July 1991. No payment was made on or before 10 August 1991. On 20 August 1991 the appellant called at the bank, and according to Mr Dirou, the Branch Manager, said that he still wished to pay $1,600 and a further $1,600 in 2 weeks. This appears to be the first time the appellant may have suggested that the bank's letter of 30 May 1991 did not represent what he agreed to at the meeting of 26 April 1991, although this is by no means clear. The bank informed the appellant that it required the full amount due and would be issuing a formal letter of demand. On 22 August 1991 Mr Chalhoub wrote to the bank and claimed that he had only agreed 'to use my best endeavours' to service the interest payments for 2 years. He stated that the bank 'will appreciate that since 1989 I have been insolvent'. This was undoubtedly correct. On Mr Chalhoub's calculations, set out in the letter, he was $3,393.31 in arrears in interest and enclosed two cheques 4 UNREPORTED JUDGMENTS totalling that sum, dated 26 August 1991, one being a trust account cheque for $1,607.00. The bank refused to accept the cheques, resuming them to the appellant. It demanded full repayment of the debt. In my view, it was entitled to refuse the tender. A formal demand was made by the bank's solicitor that same day (26 August 1991) for the sum of $91,133.48. A Statement of Claim was issued in the District Court on 18 October 1991. The appellant filed a defence, and later a cross-claim. THE APPELLANT'S DEFENCE It is not an easy task to understand exactly what Mr Chalhoub's defences are to the respondent's claim. Judge Craigie seemed to be labouring under a similar difficulty. Mr Chalhoub appeared to be relying on the continued existence of the agreement made between the parties on 14 August 1990, although his understanding of it differed from the bank's. According to the appellant, the agreement had not been breached. Second, he claimed that the bank was not authorised to transfer $23,572 from the housing loan account to his overdraft account in November 1989. Third, he claimed that the agreement of August 1990 was no more than that he would use his best endeavours to pay $1,600 per month with respect to interest or pay whatever the actual interest turned out to be. Alternatively, he argued that the arrangement only required him to make a payment during the month. Therefore, if he paid on the last day of each or any month there would be no breach. Judge Craigie concluded that the bank's letter of 14 August 1990, represented the agreement reached between the parties and he rejected Mr Chalhoub's version and interpretation of it. In rejecting the appellant's version, his Honour said that he found Mr Chalhoub's evidence unsatisfactory and 'at times I felt a great deal of unease if I were to rely upon that evidence'. Accordingly, his Honour found that the appellant was 'almost perpetually in arrears of those payments' under the 14 August 1990 arrangement such that the bank was entitled to sue if it desired. Craigie DCJ found that the agreement had been breached by the appellant's failure to make several payments. To my mind the evidence is compelling that this is so. I reject Mr Chalhoub's submission to the contrary. In my opinion, the arrangement (which was for the appellant's benefit since the bank was entitled to demand full repayment of the debt) was as set forth in the bank's letter of 14 August 1990. This arrangement had plainly been breached by the appellant. If the agreement required payment to be made on the first day of each month, no payment between | September 1990 and 1 March 1991 was made on time. One of Mr Chalhoub's versions of the agreement was that he was not required to pay $1,600 per month, but rather whatever happened to be the actual monthly interest charges. This is a spurious argument. It is common ground that the figure of $1,600 per month was a rough ready reckoner of the interest applicable in August 1990. It is also correct that the actual interest turned out to be less, but this matters not. What matters is what was agreed. In any event, even on the appellant's version it is apparent that he was still in breach, particularly in the months immediately following August 1990. It is obvious that by March 1991 the bank was becoming increasingly impatient and, in all likelihood, frustrated with Mr Chalhoub. It noted that he had not kept to the August 1990 understanding and threatened proceedings unless a repayment plan could be arranged. This lead to the meeting in late April 1991 and the bank's letter of 30 May 1991 set out earlier. URJ CHALHOUB v COMMONWEALTH BANK OF AUSTRALIA (Stein JA) 5 Rather than the earlier arrangement being reinstated or remaining afoot, a new arrangement was made which was embodied in the bank's letter to Mr Chalhoub of 30 May 1991. This represented a further indulgence by the bank of Mr Chalhoub's indebtedness and to his inability to keep to repayment programmes. I reject Mr Chalhoub's attempt to deny that the agreement was other than appears in paral and para3 of that letter. As an aside, however, it may be recorded that even if the August 1990 arrangement was skill afoot, and construing it in favour of Mr Chalhoub in every respect, he would still be in default. Turning to the new arrangement of 30 May 1991, it quite clearly required payment of $1,600 on 10 July 1991 and $1,600 on the tenth day of each succeeding month until 10 January 1992, when a review would take place. As his Honour recorded, no payment was made on 10 July 1991 nor by 10 August 1991. The arrangement was plainly breached. I find it difficult to understand how the appellant can submit to the contrary. To the extent that he argues that the August 1990 agreement was still afoot and his tender of 26 August 1991 was improperly refused, I have already rejected his claim. CLAIM OF WRONGFUL TRANSFER FROM HOUSING LOAN TO OVERDRAFT Turning to the transfer by the respondent of the last drawdown on the housing loan of $23,572.13 to the overdraft account, his Honour found that it was a valid drawdown on account of expenditure incurred by the appellant on the house construction. It represented moneys originally incurred on the overdraft account. On this issue, it seems that the evidence of the appellant (and his accountant Mr Call) were, as his Honour said, not preferred. His Honour found that the appellant authorised the transfer to reduce his overdraft to approximately the limit of $100,000. During the hearing of the appeal, it became apparent that, at least as to $15,628, the appellant did not challenge the transfer of the final drawdown balance of the housing loan ($23,572) to his account. Amounts totaling $ 15,628.95 had been paid out of his overdraft account for home construction purposes. (see Ex 17) If this is correct. it leaves only marginally less than $8,000 not made available on the housing loan. At a later point of time during the hearing of the appeal, Mr Chalhoub conceded that a further $2,850 was paid out of the overdraft account towards the house construction. This left littke more than $5,000 unaccounted for. Unfortunately for Mr Chalhoub, he was unable to supply missing cheque butts for a critical 5 week period. I cannot believe that the sum of less than $5,100 could have possibly made any relevant difference to the completion date of construction of the Wamberal house, as alleged by the appellant. It is, in my estimation, no more than wishful speculation on the part of Mr Chalhoub, and devoid of reality. In any event Mr Dore, (Manager, Loans, with the bank) gave evidence that the appellant agreed to the transfer. Given that his Honour preferred Mr Dore's evidence (to that of the appellant) it is difficult to comprehend how the appellant's complaint has any legitimacy, nor that his Honour's finding is open to challenge. CLAIM OF WRONGFUL INITIATION OF HOUSING LOAN PAYMENTS Mr Chalhoub further claims that he was harmed by the wrongful initiation of payments by the bank on the housing loan. This is part of the cross-claim. He maintains that the damage was caused by the transfer of the $23,572.13 from the housing loan to the overdraft account. According to the appellant, the transfer 6 UNREPORTED JUDGMENTS brought on the housing loan payments in December 1989 rather than after February 1990. This meant that he had to pay $8,310 (in 3 instalments) between December 1989 and February 1990 and earlier than he otherwise would have been required. Mr Chalhoub maintains that he could have utilised these moneys for earlier completion of the house and thereby was damaged. I think that this argument is without foundation. As I have said, Judge Craigie was justified in finding that the transfer was authorised. No other rational conclusion was op n on the credible evidence. I reject the appellant's claim that the bank wrongfully initiated payments under the housing loan. CLAIM OF WRONGFUL INITIATION OF NIAGARA PARK PAYMENTS The appellant's next claim is that the bank wrongfully compelled him, contrary to the agreement, to make payments in respect of the Niagara Park property. He says that if he had not been required to make these payments, the funds could have been expended on the Wamberal house construction. As to this transaction and the Personal Credit Line established for the purchase of the land, his Honour said 'not a great deal has been discussed in these reasons for judgment and about which no real problem or issue arises between the parties'. Mr Chalhoub agrees that he had never raised the issue before the appeal. In these circumstances one might be pardoned for asking why he should be permitted to now raise it. Nonetheless, the amount involved appears to be $3,960. The loan facility required the principal to be repaid upon sale of the land. However, the borrower was still under an obligation to pay interest. In any event, the land was sold in January 1990 at a loss $16,000 and, as at 2 January 1990, the debt was $26,251.53. The bank could have called for payment of that amount, but chose not to do so. I cannot see any merit in the appellant's claim on this basis. INTEREST One matter is at least free from contest. His Honour mistakenly included interest on the judgment debt at the standard rate. This was despite his finding that the lower reference rate was applicable (AB730). On behalf of the respondent, Mr Forster QC accepts the point, submitting that it was no more than a slip which the court could vary without setting aside the judgment. The true figure should be $94,026.77, in accordance with Ex 28. The adjustment to the judgment to substitute the agreed correct figure has no cost consequences in the scheme of the appeal. CONCLUSION When the mass of facts is worked through, it is glaringly obvious that the appellant borrowed significant funds from the respondent. He borrowed $65,000 for a purely speculative purchase of vacant land at Niagara Park, no doubt expecting to make a quick profit. It had to be sold at a significant loss. He borrowed $180,000 on a housing loan to help with construction of a house at Wamberal. The construction costs blew out by $70,000 and he was unable to complete and sell it at a time that he had expected, nor obtain the price he anticipated. While these problems were occurring his overdraft escalated and, although the limit was $100,000, on occasions the debit balance exceeded $120,000. To borrow his own words in the letter to the bank of 22 August 1991, the appellant had been insolvent since 1989. In the face of defaults in his obligations by Mr Chalhoub, and increasing residual debt, the bank was more than accommodating to the appellant. It was clearly anxious to be paid but was prepared to allow Mr Chalhoub to enter into debt repayment programmes which URJ CHALHOUB v COMMONWEALTH BANK OF AUSTRALIA (Stein JA) 7 could keep him financially afloat. Unfortunately, Mr Chalhoub was never able to keep to these arrangements and was repeatedly in default. In the end, the bank exhausted its patience with the appellant and demanded payment of the whole of the residual debt. In my opinion, it was entitled to do so. It has not been demonstrated that there was any relevant error by Judge Craigie. I would propose the following orders: 1. Judgment for the respondent entered by Judge Craigie in the District Court be varied by substituting the sum of $94,026.77 (together with interest) for the sum of $96,304.70 (together with interest). 2. Appeal otherwise dismissed with costs. 1. Judgment for the respondent entered by Judge Craigie in the District Court be varied by substituting the sum of $94,026.77 (together with interest) for the sum of $96,304.70 (together with interest). 2. Appeal otherwise dismissed with costs. Appellant appeared in person Solicitor for the Appellant: Chalhoub and Associates Counsel for the Respondent: Mr R G Forster SC Solicitor for the Respondent: Abbott Tout