COMANOS vy CITIBANK LTD SUPREME COURT OF NEW SOUTH WALES — COURT OF APPEAL MASON P, MEAGHER and HANDLEY JJA 10 September 1997 Mason P. The appellants were sued by the respondent ('Citibank') as the guarantors of the obligations of a family company, George Comanos & Associates Pty Ltd pursuant to a Leasing Agreement ('the Lease'). The Lease (which related to a Porsche 944S Coupe motor car) was for a term of 48 months. On my reading of the documents, the monthly rental was $2,386.62, and 20 of the 48 instalments were received before the car was returned to a dealer nominated by Citibank. Nevertheless, the trial and appeal were conducted on the basis that the monthly rental was $2,386.32, with 24 instalments being paid. Given that the Court has to grapple with larger discrepancies and confusions, I am content to proceed on the basis of 24 instalments of $2,386.32 being outstanding. The Lease stipulated an agreed residual value of $62,550. At trial the appellants were represented by one of their number, Mr George Comanos. Several issues were litigated that are no longer pressed. These included claims that no moneys were owing to Citibank (as distinct from a related company Citicorp Australia Ltd); that the appellants had been released from their obligations at the time when the car was surrendered; and that Citibank had sold the vehicle at an undervalue at a sale which had been unreasonably delayed. On each of these matters the learned trial judge (Cramer Roberts ADCJ) found in favour of Citibank. These points are no longer in dispute. One point that is pressed on appeal, but which can be disposed of summarily, is the submission that the Guarantee signed by the appellants does not relate to the company's obligations under the Lease itself. It was contended that the Guarantee covered any agreement following the Lease, but not the Lease itself. There is no merit in this point. The Guarantee recites the request by the guarantors to Citibank that it 'enter into a transaction with [the company] of the kind described [in the Schedule to the Guarantee].' That Schedule refers to the Lease. Clause 1.A of the Guarantee embodies a joint and several guarantee by the appellants to pay all moneys which the company 'may be or hereafter become liable to pay... pursuant to any agreement which results from your entering into the transaction or arising from the breach thereof...' It is clear that this embraces moneys becoming due under the Lease itself. The bulk of the time taken in arguing the appeal related to the calculation of the rebate for acceleration of the Lessee's obligations to pay rental instalments and referable to the agreed residual value. Clause 10.1 of the Lease provides: In the event of any repudiation by the Lessee as provided in Clause 10.0 hereof then following such repudiation the Lessor and Lessee hereby agree that there shall at the option of the Lessor become forthwith due and payable by the Lessee to the Lessor and the Lessor may recover from the Lessee as liquidated damages (its loss of profit on the transaction evidenced hereby) and without any demand or notice the unpaid balance of the rent for the whole of the term of this Agreement (less a rebate in respect of the rent instalments not then accrued due to be ascertained by applying the rate specified in the Schedule or if there be no such rate specified then at the rate of 12% per annum to each rent instalment over the period by which the date for payment thereof is brought 2 UNREPORTED JUDGMENTS forward by virtue of this sub-clause) together with an amount equal to the stamp duty (if any) on the net rent so payable PROVIDED HOWEVER that no moneys shall be payable by the Lessee under this sub-clause hereof when the Lessor has received the full amount of the measure of its loss under Clause 8.1 hereof. The Schedule stipulated that the rate for purposes of cl 10.1 is '14.5'. At issue was the proper calculation of (a) the 'rebate in respect of the rent instalments not then accrued due'; and (b) a corresponding rebate referable to the residual value figure which also had to be 'brought forward'. The obvious purpose of rebating future rental charges is to reduce them to present value. If Citibank were entitled, upon default, to immediate payment of the gross value of unpaid rental instalments then there would be a penalty given that, had the Lease remained on foot, those instalments would have been paid over the remaining months of the Lease. In the present case there were 24 instalments outstanding at the time when the vehicle was surrendered to Citibank. For similar reasons, it was common ground that the residual figure required discounting to allow for its acceleration. The precise contractual basis for discounting the residual figure is unclear, but both parties accepted implicitly that cl 10.1 was also applicable to that sum. It is clear, and it was common ground at the appeal, that '14.5' in the Schedule should be read as '14.5% per annum'. Cf the reference to 'the rate of 12% per annum' in cl 10.1 as the rate appropriate if no rate is specified in the Schedule. It is also clear, and this too became common ground at the appeal, that in the case of the rent instalment first due after the date of default, the rebate would be calculated by reference to 'the period by which the date for payment thereof [was] brought forward by virtue of' cl 10.1. This meant that, for the first rent instalment that was due one month after the date of default and that was accordingly 'brought forward' by one month by virtue of cl 10.1 the interest factor relevant to calculation of the rebate would be 1/12th of the stipulated annual interest rate of 14.5%. These two points of (ultimately) common agreement should have effectively disposed of the balance of the appeal by consent. Regrettably, the dispute remained clouded by two false issues. At trial, Citibank called as a witness its senior loans processing manager Mr Hedi. A document was tendered which became Ex C. It is an "Account Summary' that calculated Citibank's claim as at 4 May 1993 in the sum of $78,129.03. That sum, and the calculations leading to it, were ultimately accepted by the trial judge, who awarded a verdict of $102,339.31 being $78,129.03 plus $24,210.28 interest calculated to date of judgment in accordance with the Rules. The Account Summary was as follows: [Account Summary] Leaving aside the arguments about the resale of the vehicle which have now fallen away, the contest between the parties concerning cl 10.1 relates to the item of $18,258.37, described as 'Rebate of interest as per cl 10.1 — (Attachment 4)'. At one stage in the appeal, the appellants were contending that (as a matter of mathematics) the figure of $96,343.30 should be substituted for $18,258.37 with the consequence that no amount was owing as at 4 May 1993. Ultimately it became common ground that (on certain assumptions) the greater figure of $23,482.47 could be substituted for $18,258.37. If that alteration and consequential adjustments were made, the judgment sum would be amended to $94,725.33. In my view this is the proper disposition of the appeal, for reasons which follow. Attachment 4 should be set out: URJ COMANOS v CITIBANK LTD (Mason P) 3 [I have corrected one typographical error in Attachment 4, by showing '-n' in the net present value of an annuity formula as to the power of '-n'. This is not only correct as a matter of mathematical theory, but it is also consistent with the formula used for calculating the net present value of the single payment. It is also the formula that must have been used to come up with the result produced in the calculations appearing below in Attachment 4. To apply the formula as typed in the Appeal Book would produce a patently absurd negative value.] In evidence, Mr Hedi asserted that the (algebraic) formula in Attachment 4 reflected the (verbal) formula in cl 10.1. He explained that the first set of calculations (described as 'Net Present Value of an Annuity') discounted the rentals of $2,386.32 to present value at a rate of 14.5%. He described an annuity as 'just a series of payments' (Transcript p 25). The second part of the calculation applied a net present value to the residual value of $62,550. Since there was just the one deferred payment in relation to residual value, the (algebraic) formula was different. The Account Summary including Attachment 4 was tendered as Ex C. Thereupon Mr Hedi was stood down to enable Mr Comanos to check the calculations and prepare his cross-examination of this witness. The following day Mr Comanos cross-examined Mr Hedi. He first got Mr Hedi to agree that Attachment 4 calculated a present value of $18,258.37 as the combined present value of the 'annuity' ($15,818.92) and of the residual value ($2,439.45). This is indeed what Attachment 4 purports to do. Unfortunately, the two calculations are misdescribed in Attachment 4. The figures in fact represent the discount required to be deducted from the sum of the gross value of the 24 accelerated unpaid rental instalments ($57,271.68) and the lease residual ($62,550), a gross total of $119,821.68. Deducting the discount or rebate would produce the 'present value' of the accelerated rent instalments and the accelerated residual figure. This first point of confusion persisted until well into the oral submissions on appeal. Attachment 4, adjusted by dividing the 'r' factor by 12 in each case, should have produced a total of $23,482.47 made up as to $7,813.69 in lieu of $15,818.92 and $15,668.78 in lieu of $2,439.45. This confusion was compounded by a second error. Mr Hedi confirmed (Tr pp 51-2) that the contractual 'rate' of 14.5% was applied to the algebraic formula on the basis of 14.5% per annum. This of course is what cl 10.1 clearly infers, because it stipulates a 'fall back' rate of '12% per annum' (emphasis added) when no rate is specified in the Schedule. Mr Comanos then put it to the witness that it was necessary to divide the figure of '14.50%' in attachment 4 ('r' in the algebraic formula) by 12, because monthly not annual payments (what lawyers would call true annuities) were involved. Unfortunately, Mr Hedi disagreed. (It is now accepted by the respondent that he was in error on this point, and that the 'r' factor should be 14.5 divided by 12, or 0.012083.) In the light of further cross-examination, and reference to a Hewlett Packard calculator, Mr Comanos proposed an alternative version of Attachment 4 in which the factor 'r' in each of the two calculations was divided by 12 in order to bring it to a monthly interest rate. Mr Comanos produced an alternative version of it that showed the 'PV' for the rental payments as $49,457.99 and the 'PV' for the residual payment as $46,885.30. These sums (rounded up) totalled $96,343.30. Armed with this calculation, Mr Comanos sought to substitute $96,343.30 for $18,258.37 in the Account Summary. If that was in truth the total of the 'rebate of interest', no moneys were owing. This was Mr Comanos" case at trial and 4 UNREPORTED JUDGMENTS effectively the argument advanced on appeal. On the appeal the argument was supported by demonstrating the obvious absurdity of calculating $2,439.45 as the 'present value' of a (24 months) deferred payment of $62,550 for the residual figure. It was suggested that one would have to invest $2,439.45 at a rate of 14.5% per month, compounded, to get anywhere near $62,550 in 24 months. The point is clear, whether or not the mathematics support it. The problem is that Attachment 4 misled the appellants, because it described $2,439.45 as the PV ('present value') of the deferred payment of $62,550 whereas it should have been described the sum as the discounted value of the deferred capital sum. Unfortunately Mr Comanos" amended Attachment 4 had corrected one error but created another. Mr Comanos had been correct in demonstrating that the original Attachment 4 was wrong in the 'r' factor in the two formulaic calculations should not have been 14.5, but should have been that sum divided by 12, ie 0.12083. But where he erred was in the suggestion that the sum of $96,343.30 should be substituted for $18,258.37 as the falsely named 'PV' in Citibank's Attachment 4. Mr Comanos used a Hewlett Packard calculator and the formulae in Attachment 4, duly corrected by substituting the appropriate 'r' factor. This produced sums which when deducted from $119.821.68 (the total of the gross, undiscounted rental payments plus residual value) yielded $96,343.30. This was a true present value, because it deducted from the gross $19,821.68 sums which reflected the saving to Citibank of early payment of the monthly rentals and the residual value figure. Mr Comanos sought to have this sum of $96,343.30 inserted in lieu of the $18,258.37 appearing in Attachment 4 and the Account Summary. This created additional confusion at trial and on appeal for which, it seems to me, both parties share responsibility. Citibank are partly responsible because, in the original Attachment 4 it showed as 'PV' sums which individually and in total were in truth discounts or rebates. (The description of the Account Summary of the total as a 'rebate of interest' is also misleading, although an improvement over 'PV' in that it at least recognises that one is dealing with a rebate sum.) But Mr Comanos was also at fault in failing to disclose that his calculations totalling $96,343.30 were a true present value. On this basis it was quite inappropriate to suggest that the figure should be substituted in the Account Summary for the rebate figure of $18,258.37. In the Court of Appeal, counsel for the respondent accepted that 14.5% is a rate per annum. But to demonstrate the error involved in the appellant's approach, he provided the court with a calculation of the rental rebate, month by month, in order to check the accuracy of the algebraic formula in Attachment 4 and the calculations it contains. Thus, the first monthly instalment discounted $2,386.32 by one twelfth of 14.5%, the second monthly instalment discounted that sum by two twelfth's of 14.5%, and so forth. The residual payment of $62,550 was discounted by 25 twelfths of $14.5% on a similar basis. This produced a total of $27,545.70 for the combined discounts. Deducting this sum from the gross of $119,821.68 would produce $92,275.98 for the total amount of the present value of all of the accelerated payments. Substituting $27,545.70 for $18,258.37 in the Account Summary, making consequential amendments, and adding interest at Court rates to 24 May 1996 (the date of judgment) would produce a total of $87,453.33. This demonstrated that the appellant's contention that nothing was owing is clearly wrong. The fact that it does not corroborate the full sum in the Account Summary is explicable by the fact that the arithmetical approach differs from the algebraic one in that it does not involve any compounding of interest. URJ COMANOS v CITIBANK LTD (Mason P) 5 These figures were checked by an alternative calculation which used the algebraic formulae shown in 'Attachment 4' and reproduced on p 6 above. The calculation was handed to the court by counsel for the appellants during argument. It accepts the algebraic formulae but makes the correction of dividing the interest rate of 14.5% by one twelfth in relation to the rental instalments to allow for the fact that rental was due monthly, not annually. This algebraic method of calculation produced a total rebate of $23,482.47. (The difference between the sum derived from the arithmetic calculation produced by the respondent and that derived from the algebraic calculation produced by the appellants lies in the fact that the algebraic formula allows for monthly compounding.) If this sum is substituted for $18,258.37 in the Account Summary, and if consequential adjustments are made (including interest recalculation) one arrives at a sum of $94,725.33 due as at 24 May 1996 (the date of judgment). (The parties agree on the calculations.) I propose substituting this figure for the verdict below. The appellants concede that their penalty argument fails if their calculations tendered in the appeal are accepted. However, the appellants raise two further (and consequential) arguments supporting a lower verdict. First, it was somewhat faintly argued that the respondent should be impaled upon the case presented at trial by Mr Comanos. I do not agree. That case involved a mathematical sleight of hand which I do not suggest was deliberate, but which involved comparing apples with oranges. The confusion sprang in part from Citibank's misdescription of a calculated discount or rebate as a present value. Citibank's responsibility for that confusion must be reflected in the order for costs which I propose. However, our primary duty is to give effect to the true construction of cl 10.1. This is not a case where the appellants could have conducted their case differently had the confusion (if indeed it existed in Mr Comanos" eyes) had been lifted at trial. Secondly, it was suggested in written submissions given (by leave) to the Court after judgment stood reserved that the appellants should have the judgment sum calculated by reference to the arithmetical calculations offered by counsel for the respondent. I would reject this. Those calculations were offered as a means of demonstrating the fallacy in the approach pressed at trial by Mr Comanos and initially adopted by his counsel in the appeal. The algebraic formula was accepted by both parties below, and shown on the evidence to be an acceptable method of calculating a rebate for a series of accelerated payments. True the formula was misapplied when Citibank did not divide 14.5% by 12, but the formula was otherwise acceptable to the parties. The difference between the arithmetical approach offered by the respondent arguendo and the algebraic formula — and the outcomes produced — lies in the fact that the formula contains a compounding factor. Since this represents modern commercial practice I do not see why it should be rejected, at least in a matter where the validity of the formula was not challenged at trial. Compounding produces a higher discount in favour of the defaulting borrower and, in my view, more accurately reflects the realities of what the lender would do with 'its' money if repaid earlier. The trial judge accepted Mr Hedi's evidence that Attachment 4 was correctly calculated, and rejected Mr Comanos" evidence and submissions to the effect that a rebate in excess of $96,000 was appropriate. It will be apparent from what I have already written that I disagree with each conclusion. 6 UNREPORTED JUDGMENTS As to costs, I consider that Citibank should receive two-thirds of its costs at trial, having regard to its substantial success in the action, and its partial contribution to the confusion that emerged. The appeal has been but partly successful, and should have been avoided were it not for a combination of matters for which the parties share responsibility. There should be no order as to the costs of the appeal. I therefore propose the following orders: 1. Appeal allowed in part. 2. Set aside the verdict for the plaintiff of $102,339.31 and substitute a verdict of $94,725.33, to take effect from 24 May 1996. 3. In lieu of the order for costs at trial, order the defendants to pay two-thirds of the plaintiffs costs. 4. No order as to costs of the appeal. Handley JA. I agree with Mason P. Meagher JA. I agree with Mason P. 1. Appeal allowed in part. 2. Set aside the verdict for the plaintiff of $102,339.31 and substitute a verdict of $94,725.33, to take effect from 24 May 1996. 3. In lieu of the order for costs at trial, order the defendants to pay two-thirds of the plaintiffs costs. 4. No order as to costs of the appeal.