McDONALD vy PERRONE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL SHELLER and BEAZLEY JJA, and SHEPPARD AJA 3 September 1997, 30 September 1997 [1997] NSWCA 217 CONTRACT OF LOAN — Finding by trial Judge that appellant borrowed money from respondent — Loan not repaid — Loan denied by appellant — Contract for loan not in writing — Subsequent letters by appellant acknowledging loan — Appeal against findings of fact — No question of principle. CONTRACT OF LOAN — Respondent claimed to have lent money to appellant pursuant to contract of loan negotiated with applicant through respondent's solicitor. No contract of loan was prepared nor was there any document given to the appellant recording the terms of the loan. The appellant denied borrowing any money from the respondent. In evidence were a number of letters written by the appellant consistent with her having borrowed money from someone whose identity was then unknown to her. The trial Judge rejected evidence given by the appellant in an attempt to explain the letters by attributing them to other transactions in which she was involved. The appeal involved questions of fact only. The Court concluded that the trial Judge's finding should not be interfered with. In the course of its judgment, it made comments concerning the solicitor's failure properly to document the transaction. Sheller JA I agree with Sheppard AJA. Beazley JA I agree with Sheppard AJA. Sheppard AJA This is an appeal from a judgment of the District Court (Nash DCJ) in which his Honour found a verdict and judgment for the plaintiff (the respondent to this appeal) of $41,511. His Honour ordered the defendant (the appellant here) to pay the plaintiff's costs including indemnity costs from 21 August 1995. The action in which the respondent sued the appellant was an action to recover the sum of $20.000 together with interest in respect of an alleged loan of money. The judgment was made up of $20.000 principal and $21.511 for accrued interacts. His Honour found that the date on which the loan was made was 12 May 1988. The date of his judgment was 20 September 1996. The appellant's defence to the proceedings was that she did not borrow any money from the respondent. She denied the loan. The appeal is on questions of fact only. For its success it depends upon our overturning findings of fact made by his Honour many of which were made as a consequence of his observation of the only two witnesses called in the case, a Mr Scarfone, who is a solicitor and who gave the only evidence called in the respondent's case, and the appellant herself. The respondent was not called as a witness. Mr Scarfone was at one time the solicitor for the appellant. The challenge to his Honour's decision is made in the context of a case involving a conflict of oral evidence. The appellant is thus faced with the difficulty of overturning findings of fact made in those circumstances. We are bound by the decision of the majority of the High Court in Devries v Australian National Railways Commission (1993) 177 CLR 472. There Brennan Gaudron and McHugh JJ said (at 479): 2 UNREPORTED JUDGMENTS "More than once in recent years, this Court has pointed out that a finding of fact by a trial judge. based on the credibility of a witness, is not to be set aside because an appellate court thinks that the probabilities of the case are against - even strongly against - that finding of fact. (see Brunskill v Sovereign Marine & General Insurance Co Ltd (1985) 59 ALJR 842; 62 ALR 53; Jones v Hyde (1989), 63 ALJR 349; 85 ALR 23; Abalos v Australian Postal Commission (1990), 171 CLR 167.) If the trial judge's finding depends to any substantial degree on the credibility of the witness, the finding must stand unless it can be shown that the trial judge 'has failed to use or has palpably misused his advantage' SS Hontestroom v SS Sagaporack [1927] AC 37 at p47) or has acted on evidence which was 'inconsistent' with facts incontrovertibly established by the evidence' or which was 'glaringly improbable' Brunskill (supra)." The principal thrust of the appellant's submissions was that it had been demonstrated that the trial judge had acted on evidence which was "glaringly improbable". The evidence is in short compass. The account of it which I give comes substantially from his Honour's reasons for judgment. In 1988 the appellant was living with a man named Popovic. They intended to marry. They entered into negotiations to purchase a block of land at Earlwood from a Mr and Mrs Jacob. The block of land was part of a subdivision which had been "prepared" prior to May 1988 and was awaiting necessary approvals. His Honour remarked on the fact that any profit made on the sale by the Jacobs would probably attract capital gains tax and, depending upon the nature of their activities, income tax. However it may be noted that the Jacobs would not be taxed twice. If liability for tax arose they would either be liable for capital gains tax or for income tax but not for both. His Honour said that the lower the price paid for the land the less the stamp duty and legal costs payable in respect of the transaction by a purchaser would be. He also thought that there might be a question of less estate agent's commission being payable by the vendors. His Honour said that the contract for the purchase of the land was originally prepared for a sale price of $64.000. The appellant had paid the agent $1 000 as a holding deposit. The deposit provided for in the contract was 10 per cent and on the face of the contract the balance of the deposit would have amounted to $5.400 payable on the exchange of contracts. Before the exchange the Jacobs said that they would not sell for $64,000 but, if the appellant and Mr Popovic wanted to buy the land, the price was to be $69,000 to which they both agreed. The contract was amended accordingly. The appellant had been a client of Mr Scarfone for some time prior to 1988. She instructed him to act on the purchase. According to Mr Scarfone, the appellant advised him that the real price for the land was to be $89,000 but that the contract would only indicate $69,000. She asked him if he could arrange for a loan of $20,000. His Honour said that he inferred, upon the assumption that the evidence was correct, that the $20,000 was to be handed over in cash to the agent on the exchange of contracts. His Honour said that, if this were correct, the Jacobs, Mr Popovic, the appellant, the estate agent and Mr Scarfone must have known of the arrangement. He said that it could only have been entered into for the purpose of avoiding proper payments for tax and duties and, perhaps, legal costs. His Honour said that, not surprisingly, the Jacobs, the agent and Mr Popovic had not given evidence in the case. Although his Honour referred to the fact that the respondent did not give evidence, he did not otherwise comment on her absence from the witness box. URJ McDONALD v PERRONE (Sheppard AJA) 3 Mr Scarfone said that he arranged for the respondent to advance $20,000. He made calculations which were set out in a file note which was tendered. It is undated. It refers to Mr Popovic and to the appellant. It refers to land being lot 30 in Bluemantle Road, Mt McDonald at Wyangala Dam. There is a figure of $20.000 shown on the note and also in a circle the figure, $266.67. There are some references to title including the deposited plan number of the land at Wyangala Dam. Another document which it is convenient at this point to mention is a copy of a letter purportedly written by Mr Scarfone to Ms Perrone, the respondent. The letter is dated 3 May 1988 and refers to a mortgage from "McDonald" in respect of the land mentioned in the file note. The letter confirms receipt "from you today of the sum of the advance in this matter of $20,000 secured by the mortgagor's half-share of the above property". Mention is made of an interest rate of 16 per cent payable monthly by instalments of $266.67. Mr Scarfone said that he discussed the figures with the appellant saying that he had been able to organise an interest only loan for two years. Interest was to be at 18 per cent per annum but, if she paid the interest on time, it would be 16 per cent per annum. On that basis the monthly interest, at 16 per cent per annum, was $266.67, Mr Scarfone said that the sum of $20,000 was paid to him by the respondent and that, on the exchange of contracts, he paid to the agent $20,000 in cash and also the balance of the deposit provided for in the contract, It is to be observed that apart from the file note and the letter to the respondent's solicitors referred to, there is nothing in writing recording the loan of $20.000, No receipt was given, no memorandum of the agreement for the loan apparently exists and there is no other record of it. Mr Scarfone's books of account are not in evidence. Whether they disclosed anything is not revealed. Prior to the payment of the balance of the deposit provided for in the contract and the sum of $20,000, a form of mortgage had been signed by the appellant at Mr Scarfone's request and, so he said, in his presence. His Honour said that it was apparently for the purpose of having it completed "to cover the loan of $20,000". The form of mortgage is in evidence. It is a standard form of mortgage under the Real Property Act 1900. It has some figuring on the first page which does not seem to be relevant. Otherwise the only handwriting on it consists of the signatures of the appellant which appear on the first and second pages of the document. No part of it is filled in. In particular there is no reference to the title of the property which is the subject of the mortgage, no names of the parties to the mortgage and no reference to the principal sum which the mortgage is intended to secure. No other parts of the mortgage have been filled in. Thus there was no completion of those provisions which provided for the date when the principal was to be repaid, when interest was to be paid or the rate at which it was to be paid. In the course of his evidence Mr Scarfone said that his dealing in the matter was the subject of a complaint to the Law Society and that he was presently the subject of a review by the Law Society in relation to the transaction. He also said that the mortgage was blank because, so far as he recollected, he had not had time to prepare the mortgage document. He had asked the appellant to sign it saying that it would only take a few minutes to have it typed up. She said she was in a hurry and could not wait. He said he would fill it in later. He has never done so. The appellant was said to have on half interest in the property at Wyangala Dam. The half interest was then worth approximately $20,000. 4 UNREPORTED JUDGMENTS I observe at this point that it seems, on the face of things, to have been highly irregular for a solicitor to have allowed a client, no matter that she may have been in a hurry, to sign a mortgage in blank with no reference in it to the property which is the subject of the mortgage, the parties to the mortgage or the amount which the mortgage was to secure. It would be a grave understatement to say that a practice of this kind would be likely to lead to problems. It is not surprising that the matter is the subject of an investigation by the Law Society. These matters were discussed with counsel for the respondent. His only response was to draw our attention to the evidence which Mr Scarfone gave about the matter and to which I have referred. His Honour noted that, assuming the sum of $20,000 was lent at interest at the rate of 16 per cent per annum and that interest was payable monthly, the monthly payments would be $266.67. His Honour found that very shortly after the $20.000 had been handed over to the estate agent, money began to be paid by the appellant to Mr Scarfone. The first payment of $266.67 was made on 31 May 1988. There were further payments made on 1| July 1988, 2 August 1988 and 2 September 1988. His Honour said that other sums had been paid but he did not refer to the detail of these. He said that the appellant fell into arrears with the payments "for whatever purpose they were made" and began writing letters to Mr Scarfone. The first of these was written on 5 June 1990. The letter was in handwriting which was printed. The letter said:- "Please find enclosed three months paiment (sic) for the loan, which brings it up to date. Thank you for waiting. Would it be possible to extend this loan for a few months longer until I work things out. It was due for full payment in May." It may be observed that May 1990 would have been two years from May 1988 when the respondent through Mr Scarfone said that the loan was made. The appellant's letter was thus consistent with his evidence in this respect. On 12 July 1990 the appellant wrote a further letter to Mr Scarfone, this time in handwriting which was cursive. It dealt with three distinct matters. Relevantly it said: "Re: Loan. I'm sorry I'm late with the paiment (sic) of $266.67. I will send that to you as soon as possible. In a further letter dated 26 September 1990 the appellant said: "Re: Loan: I'm aware that I owe you three payments of $266.67. I'm sending you one paiment and I owe you two now. I will send you every two weeks one paiment until I'm up to date. I hope that it's okay with your client? Please apologise on my behalf. I didn't intend to fall behind. I can assure him (sic) one thing, he (sic) will get his money." It is to be observed that the letter is written upon the basis that the lender is male and not female as must be the case if the respondent was the lender. His Honour did not comment on this. It strongly suggests, however, that the appellant did not then know the identity of the person who was alleged to have lent her money. His Honour said that there were further letters but did not refer to the detail of them. I note that written on 23 November 1990 which, in relation to the loan, acknowledged that the appellant owed three payments of $266.67 totalling $800.01. She enclosed $400. She said that the following week she would forward the other half to bring the amount up to date. She added, "'thank you for waiting for such a long time". The letter also contained details of payments which the appellant said she had made to the Bank after which she said: URJ McDONALD v PERRONE (Sheppard AJA) 5 "T'm going write a letter to the Bank, as I can't take time off from work at the moment to see someone at the Bank as I need every cent that I can earn at the moment. Thank you again for everything." His Honour said that Mr Scarfone's evidence, if accepted, demonstrated that he was asked by the appellant to arrange a loan of $20.000 to her in order to pay the money due to the Jacobs in addition to the sum payable pursuant to the contract. His Honour then said: "In this day and age, the transaction can be described as most unusual. There was a time, 40 to 50 years ago, where such transactions were not unusual. These were in the days of land sales control, both in respect of city, suburban and country land and, in respect of many country properties. That form of control continued for a great number of years, perhaps still does. If the Jacobs or the agent were asked about it, if it be true that $20.000 was paid under the lap, I would not expect any of them to admit it. There was a minor incentive to Popovic and the defendant to agree to such an arrangement perhaps even greater if they were very anxious to buy the property and that was the only way the Jacobs were prepared to sell it. If the Jacobs became liable to income tax or capital gains tax, then there was every incentive to them to endeavour to insist on such an arrangement with a purchaser." His Honour referred to the appellant's evidence. He said that she claimed that at the relevant time she was in some financial difficulties because of loans she had from both the State Bank and the Commonwealth Bank. The moneys owing to the Commonwealth Bank were owing as a consequence of a personal loan and had nothing to do with the moneys lent for the acquisition of the land. She agreed that the purchase price for the land was originally $64 000 and was increased to $69 000. His Honour said that the appellant also said that she had discussed her "situation" relating to the State Bank and the Commonwealth Bank with Mr Scarfone and had asked him to make arrangements with those banks for payment by him, on her behalf, of the moneys which she owed with moneys provided by her. The sums involved were $130 per month which was due in respect of the personal loan by the Commonwealth Bank and "if the State Bank was agreeable" $100 per month off her indebtedness to that bank. She said that the balance, ie the difference between the amounts to be paid to the banks and the payments of $266.67, namely $36.67 represented Mr Scarfone's costs of doing this for her. She said that he agreed to this and that so far as she was aware payments of the money that she paid to Mr Scarfone thereafter were paid to the banks in the amounts to which she deposed. Reference to her evidence about this discloses that she first said that $130 per month was to go to the Commonwealth Bank, $100 per month to the State Bank and approximately $20 to Mr Scarfone for his costs. She said that that was what brought it up to $266. But the total of these amounts is not $266; it is $230. Later she said that the difference of $36.67 between the amount of the payments which she made and the $130 was Mr Scarfone's fee for "doing that" for her. His Honour said that the problem with her evidence in this regard was that it was clear that, at the relevant time, the appellant was up to date with her payments in respect of the personal loan made by the Commonwealth Bank. He added that it could be expected that, if she had had difficulty with that Bank in the repayment of this loan, it might not have agreed to the advance of $60,000 to assist her to buy the land. The appellant was behind with her payments to the 6 UNREPORTED JUDGMENTS State Bank. Mr Scarfone wrote to the bank to ask it to agree to $100 per month and sent $100 to it which was provided by the appellant The State Bank agreed to this course. As his Honour said, the principal support for Mr Scarfone's version of what occurred is to found in the payments of $266.67 made by the appellant and the terms of her letters to which reference has been made. As noticed, the sum of $266.67 is precisely the amount which would be required to meet monthly payments of interest on a loan of $20,000 at 16 per cent per annum. His Honour also drew attention to the use of phrases in the letters, "loan" and "your client". It could not be suggested that either of the banks was a client of Mr Scarfone. Finally his Honour remarked - and this has been earlier mentioned - on the fact that the loan became overdue shortly after two years from the time that Mr Scarfone said that it was made. Added to these matters was the fact that the sum of $130 per month payable to the Commonwealth Bank in respect of the personal loan was being paid, not by Mr Scarfone on the appellant's behalf, but directly by the appellant herself. His Honour said that he had no doubt that the signatures on the letters and the mortgage and on a statutory declaration which was tendered in evidence but to which I do not find it necessary to refer, were those of the appellant. It does not appear that she really denied that this was the case. Her explanation for the payments and what she said in the letters lay in her assertion that the "loan" to which she was referring has amounts which she had borrowed from both the Commonwealth Bank and the State Bank. Towards the end of his judgment his Honour said: "Whilst it is very disappointing to know that Scarfone a solicitor, involved himself in paying what can only be regarded as black money and permitted the defendant at his request to sign the mortgage document in blank, not to have anything in writing at all from the defendant about the loan and its terms, however brief that needed to be and to involve himself in paying the black money to an agent without some form of acknowledgment, if for no other reason than to protect himself against an allegation that it had not been paid. Nevertheless, having scrutinised him carefully in the witness box and taking into account that such documentary material as there is supports his evidence and, also bearing in mind that the parts of his evidence about the matters to which I have just referred could be regarded as contrary to his own professional interests, I find that Scarfone is a witness of truth. His Honour said that be rejected the appellant's explanation relating to the loan and how it came about and also her explanation of the letters written by her to Mr Scarfone which, so his Honour said clearly referred to the loan sued upon and not to anything relating to the appellant's transactions with the banks. His Honour said that the oral evidence and the objective documentary evidence apart from the contract for the purchase of the land supported the appellant's case. He found that Mr Scarfone on behalf of the appellant did lend to the respondent the sum of $20.000. The loan was effected by handing this sum to the agent of the Jacobs. On this basis he found a verdict for the respondent for the sum of $20.000 together with interest. As earlier mentioned, counsel for the appellant sought to found his case upon what he submitted to be the glaring improbability of the evidence which his Honour accepted. In fairness to the appellant's submissions, it must be said that the transaction has some strange features about it. His Honour has remarked on these but they may be summarised as follows: URJ McDONALD v PERRONE (Sheppard AJA) 7 (1) The respondent's case depends on the acceptance of Mr Scarfone's evidence that the real purchase price of the Earlwood land was $89 000 and not $69 000 as stated in the contract. The reason why the $20 000 should be hidden in the way that it was is far from clear. His Honour's conclusion that it must have been due to a desire on the Jacobs' part to avoid capital gains tax coupled with the appellant's willingness to go along with the idea because it would save her stamp duty may be correct but I am not satisfied that this is necessarily the explanation. His Honour makes reference to the amounts to be charged by the solicitors and the estate agent but they would be aware of what was going on and would have been unlikely to charge less than their entitlements under the applicable scales of costs or commission. (2) To be added into the equation is the fact that, so far as the evidence discloses, Mr Scarfone, a solicitor of this Court, made no record of the transaction other than the file note and the letter to the respondent to which I have referred. Neither of these was communicated to the respondent. These apart, there is no document. It is true that there is the mortgage but it is blank except for the signatures and, for that reason, has its own problems. (3) The acceptance of the respondent's case means that Mr Scarfone was in breach of his duty to his client in that he did not protect her by a proper documentation of what went on. Furthermore, if the respondent's case is accepted, it means that the $20,000 was paid over, not on completion of the transaction, but at the time contracts were exchanged. This in itself is most unusual and quite irregular. (4) As mentioned, his Honour explained the absence from the witness box of the Jacobs, Mr Popovic and the estate agent, but he did not comment upon the failure of the respondent to give evidence. It is true that the respondent would not have been able to give direct evidence of the transaction; she needed to rely on Mr Scarfone's evidence for that, but it is odd that the plaintiff in an action of this kind should not have been called merely to confirm the fact that she had lent the money and that it had not been paid. It is also true that there is no suggestion in the appellant's case that there had been am' payment of the principal. That was not her case. She denied the loan. In any event it would have been for the appellant to make good a plea of payment if it had been relied upon. But there is a question, not mentioned by his Honour, as to why it was that the respondent did not give at least formal evidence in relation to the matter or why, instead of that happening, there was no explanation given for her absence from the witness box. This is particularly so in the light of the fact that the appellant was obviously under the impression that the person alleged to be the lender of the money was male and not female. It seems clear that she did not know the identity of the person who had lent her the money. She referred to the lender as Mr Scarfone's "client" in her letters. If the matter had been raised it would have presumably been said that Mr Scarfone was acting as agent for an undisclosed principal. But in those circumstances it seems that it would have been wise for the respondent to be called to confirm the fact that she had authorised Mr Scarfone to lend money on her behalf. All these factors require consideration together. If there were no more, there may have been some force in the appellant's submission that his Honour s findings were "glaringly improbable". The question thus posed is academic and I express no view upon it. In passing, however I would say that even if that had been the case, one would have had to take into account Mr Scarfone's file note and his letter to the respondent. One would also have had to bear in mind the 8 UNREPORTED JUDGMENTS statement in Devries that a finding of fact by a trial fudge based on the credibility of a witness is not to be set aside because an appellate Court thinks that the probabilities of the case are against - even strongly against - that finding of fact. That part of the dictum earlier quoted needs to be considered in cases where one is asked to conclude that evidence is "glaringly improbable". In fairness to his Honour. it should be said that it seems likely that if there had not been the evidence of the appellant's letters, it is doubtful whether his Honour would have reached the conclusion which he did. It is obvious from what he said that he reached his ultimate conclusion because, and only because, of the appellant's own letters. I have read these and re-read them and I cannot assign any significance to them except that they are completely consistent with, and lend support to, the respondent's case. The appellant's explanation about the payments of $266.67 per month and the references to that sum in her letters could not be accepted. Her suggestion that the sum of $36.67 per month represented Mr Scarfone's costs of acting in relation to the moneys owing to the banks is itself something which lacks probability. That was his Honour's view. Like his Honour the letters and the evidence about the payments of $266.67 compel me to the view that the respondent's case is one which is supported by the respondent's own documents and for that reason is one that his Honour was well entitled to accept. In my opinion there is no basis for disturbing his decision. No error is disclosed. I would dismiss the appeal with costs. I have earlier referred to evidence given by Mr Scarfone that there is an investigation of this and perhaps other matters by the Law Society which is being undertaken. It may be that the Law Society is well aware of the circumstances of this case but, in case it is not, I consider that a copy of this judgment and of the transcript of the proceedings before us should be forwarded to the Law Society with an indication that if it wishes to inspect either the Court of Appeal file or the District Court file in the matter any necessary leave for this purpose will be given. Before concluding, I should mention that I have considered whether or not there is evidence of illegality on the face of the proceedings. No submission based on illegality was made by either party. The only basis for it would be a conclusion that the transaction was entered into in the way that his Honour found it was in order to enable the Jacobs to escape income tax or capital gains tax liability and to enable the appellant to pay less stamp duty. But I have earlier said that I am not satisfied that this was necessarily the reason why the transaction was structured in the way that has been described. In the circumstances, there is no warrant for the Court to interfere: cf Nelson v Nelson (1995) 184 CLR 538. In the result I would order that the appeal be dismissed with costs. 1. The appeal be dismissed. 2. The appellant pay the respondent's costs of the appeal. Counsel for the Appellant: M A Bradford Solicitor for the Appellant: Alexander Mack & Co Counsel for the Respondent: M Evans Solicitor for the Respondent: Muggletons