New South Wales Supreme Court CITATION : NAB Ltd v Magill & Anor [2000] NSWSC 598 CURRENT JURISDICTION: Common Law FILE NUMBER(S) : SC 11011/96 HEARING DATE(S) : 11, 12 & 14 October 1999 JUDGMENT DATE : 11 July 2000 National Australia Bank Limited (Plaintiff) PARTIES : Colin Harold Magill (First Defendant) Deirdre Evelyn Magill (Second Defendant) JUDGMENT OF : Master Harrison Mr J W Stevenson (Plaintiff) COUNSEL : Mr R W White SC with Mr M J Scheib (Defendants) Mallesons Stephen Jaques (Plaintiff) SOLICITORS : Leary & Company (Defendants) CATCHWORDS : Possession, estoppel - acceleration, the rights of combination of accounts, frustration Australian Rural Bank Act 1977 (NSW) Real Property Act LEGISLATION CITED : Bankruptcy Act 1914 Primary Industry Bank Act Commerical Banking Company of Aysney Limited Merger Acts 1982 Giliberto v Kenny (1983) 48 ALR 620 Mallison v Scottish Australian Investment Co Ltd (1920) 28 CLR 66 Wilson v Hart (1817) 7 Taunt 295; 129 ER 188 Codelfa Constructions Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 Prenn v Simmonds [1971] 1 WLR 1381 Jones v Dunkel (1959) 10 CLR 298The Commonwealth v Verwayen (1990) 170 CLR 394 BP Refinery (Western Port) pty Limited v Shire of Hastings (1977) 180 CLR 266 The Moorcock (1889) 14 PD 64 Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australiasia) (1954) 90 CLR 235Foran v Wright (1989) 168 CLR 385 Mahoney v Lindsay (1981) 55 ALJR 118 Peter Turnbull & Co v National Mutual Royal Bank Limited (1953-54) 90 CLR 235 Natwest Markets Australia Limited v Mannix (1995) 7 BPR [97587] Garnett v Kewan (1872) LR EX 10 CASES CITED : Inglis v Commonwealth Trading Bank of Australia [1973] 47 ALJR 234 National Westminister Bank v Halesowen Presswork & Assemblies Ltd [1972] AC 785, Capital & Counties Bank Ltd v Gordon [1903] AA 240 Sutcliffe & Sons Ltd v Exp. Royal Bank Ont. CA [1933] 562 Ross v Royal Bank of Canada 52 DLR 581 British & Northern European Bank Ltd v Salzstein [1927] 2 KB 92 Regina v Capewell (1995) 2 QdR 64 Buckingham & Co v London and Midland Bank (1895) 12 TLR 70 Greenhalgh (WP) & Sons v Union Bank of Manchester [1924] 2 KB 153 Garnett c McKewan (1872) LR 8 National Bank of Greece v Pinios Shipping Co [1990] 1 Ac 637 derham "Set-Off" 2nd ed (1996) at 486 Banking Law In Australia by Tyree 3rd Ed Butterworths at 88 Limitation Act Hapgood (1996) "Paget's Law of Banking" 11th Ed at 104 DECISION : See para 145 68 THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION MASTER HARRISON TUESDAY, 11 JULY 2000 11011/96 - NATIONAL AUSTRALIA BANK LIMITED v COLIN HAROLD MAGILL & ANOR JUDGMENT (Possession, estoppel - acceleration; the right of combination of accounts; frustration) 1 MASTER: The plaintiff seeks possession of the defendants property and a monetary sum. The defendants oppose such orders being made and seek an order that the plaintiff deliver to the defendants an executed discharge of the first mortgage and an order that accounts be taken. The first defendant is Colin Harold Magill and the second defendant is the first defendant's wife Deirdre Evelyn Magill. The plaintiff relied on an affidavit of William James Cope sworn 4 December 1998 and the defendants relied on their affidavits sworn 12 May 1998 and 21 April 1999 and an affidavit of A G Keitibian sworn 21 April 1999. Mr Cope and the defendants were cross examined. 2 The defendants had two loan accounts with the plaintiff which I will refer to in more detail later in this judgment. One of the loans was referred to as the "PIBA loan account" (Primary Industry Bank Account) and the other was referred to as the "FDA loan account" (Farm Development Advance loan account). The central issue to be decided is whether the plaintiff had authority to debit the FDA account on 5 June 1987 in the sum of $119,906.55. The plaintiff has to establish firstly, that both the debt on the FDA account and the debt for the PIBA loan were owed by the defendants to it; secondly, that the defendants were in default under both loans; thirdly, both loans were payable on demand and fourthly that clause 12 of the FDA agreement dated 5 July 1985 authorised the increase of the FDA debt by debiting the FDA account with the amount due in respect of the PIBA loan. 3 The defendants also submitted that in the event there is a finding that they borrowed the said sum from the Commercial Banking Corporation of Sydney Limited (CBC) by reason of the representations and conduct of CBC, the plaintiff is firstly, estopped from denying that the contract of loan for the advance of $90,000 was made between the defendants and PIBA; and secondly, that the defendants borrowed the said sum from PIBA and PIBA administered the account. A The identity of the lender 4 The identity of the lender is in dispute. The plaintiff submitted the lender was CBC. The defendants asserted that the lender was PIBA and that they understood that the role of CBC was to act as an agent for PIBA. 5 The plaintiff submitted that in order to ascertain the parties to a contract, the court may look at all the circumstances in existence at the time that the contract was made and referred to Giliberto v Kenny (1983) 48 ALR 620 and Mallison v Scottish Australian Investment Co Ltd (1920) 28 CLR 66 at 75. The defendants submitted that Mallison dealt with a different issue and was not relevant. 6 In order to ascertain to whom the debt for the PIBA loan was owed, the defendants submitted that it is to be decided primarily by reference to the documents constituting the contract, although parol evidence is admissible to establish the relationship of the parties. (Wilson v Hart (1817) 7 Taunt 295 at 304; 129 ER 118 at 122. According to the defendants, it is the objective evidence known to both parties which is relevant for this purpose and where there are ambiguities to be resolved in the contract, recourse may be had to the objective background facts known to both parties. (Codelfa Constructions Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337 at 352.4). The defendants submitted that the agreements between PIBA and CBC and the CBC Operating Instructions should not be considered as relevant. 7 In Codelfa, the identities of the parties were not in dispute. At 532 Mason J stated: "The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed." 8 In Giliberto the court had to determine the identity of the vendors to a contract for sale of land. Gibbs CJ (with whom Wilson, Brennan, Deane and Dawson JJ agreed) stated at 623.30 that it has long been established that in construing a contract, general evidence of surrounding circumstances is admissible to identify the persons or things referred to. However such evidence does not justify a departure from the ordinary meaning of the words where no ambiguity exists. His Honour referred to the discussion of principle in Prenn v Simmonds [1971] 1 WLR 1381 at 1383-4. In Prenn Lord Wilberforce stated: "The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. there is no need to appeal here to any modern, anti-literal, tendencies, for Lord Blackburn's well-known judgment in River Wear Commissioners v Adamson 918770 2 App.Cas. 743, 763 provides ample warrant for a liberal approach. We must, as he said, inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. Moreover, at any rate since 1859 ( Macdonald v Longbottom , 1 E. & E. 977) it has been clear enough that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term." 9 In Giliberto, Gibbs CJ specifically referred to considerations that are taken into account when the court is obliged to identify the person to a contract and referred to evidence of the mutually known facts being admissible. 10 It is common ground between the parties that the agreement between the parties is out in letters dated 20 November 1978 (Ex A, tab 11) and a variation of that agreement is set out in the letter of 13 September 1982 (Ex A, tab 30). It is necessary to examine the contents of these letters to ascertain whether the identity of the lender is ambiguous. If the identity of the lender is ambiguous or susceptible to more than one meaning, I will take into account the objective mutually known facts, namely the letter of 17 November 1978, conversations between Mr Munro, Manager of the Moree branch of the bank and Mr Magill, the loan application form and the drawdown of cheques as shown in the defendants' account statements. The initial memorandum relating to the drawdown agreement between PIBA and CBC and CBC's operating instructions were not mutually known facts as the defendants were not aware of the contents of these documents and they will not be taken into account. A(i) The written agreement between the parties 11 The whole of the letter dated 20 November 1978 is reproduced below. " PIBA LOAN APPROVAL LETTER The Commercial Banking Company of Sydney Limited MOREE NSW . 20TH. November 1978 Mr. & Mrs. C H Magill, Boonery Road, MOREE NSW . Dear Mr. & Mrs. Magill, PRIMARY INDUSTRY BANK OF AUSTRALIA LIMITED We are pleased to inform you that application for a refinance loan of $90,000 from the Primary Industry Bank of Australia Limited has been approved. The loan is for a term of 25.5 years and is subject to the conditions set out hereunder. (1) The loan is to be repaid by equal half-yearly instalments of principal and interest combined payable on 30th June and 31st December each year. The half-yearly instalments is $4,929.91 and the rate of interest 10% per annum. The first repayment is due on 31 December 1979. Interest is payable 30/6/79, $4,500. (2) Loans may be prepaid in whole or in part at any time upon giving three months written notice. In the absence of the required notice the Primary Industry Bank of Australia Limited reserves the right to charge three months premium interest. It will therefore be necessary for you to notify us well in advance should you wish to exercise this option, so that the necessary formalities may be completed. It is preferable that any partial prepayments be in multiples of $1,000 with a minimum of $5,000. Any early repayments will be permanent reductions in the loan. (3) The rate of interest will be at rates determined by the Primary Industry Bank of Australia Limited from time to time. In the event of an interest change, it is preferred that the original loan instalments be maintained and the term adjusted. Interest will be payable from the date the loan is drawn until the commencement of the period covered by the first repayment. The interest will be calculated on a daily basis for any broken period and on a half-yearly basis for a full half-yearly period. (4) In the event of adverse circumstances which seriously affect income during the currency of the loan, a rearrangement of the agreed repayment programme may be submitted to this Bank for consideration by the Primary Industry Bank of Australia Limited. Pending a decision being made the existing repayments must be met on the due date. (5) The loan funds must be utilised for the purpose sanctioned. As evidence that you fully understand the foregoing conditions, we wish you to sign the duplicate of this letter where provided and return it to us at your earliest convenience. Yours faithfully …. " 12 A signature at the end of the letter appears but neither the name of the employee nor their position is identified. 13 The agreement as set out in the letter of 20 November 1978 was on CBC letterhead. However above the words "The Commercial Banking Company of Sydney" appeared the words "PIBA loan approval letter" in smaller print. At the outset of the letter, reference is made to a "refinance loan". The letter stated that a refinance loan from PIBA (not CBC) had been approved. The conditions of the loan were that PIBA (not CBC) reserved the right to charge premium interest if three months notice was not given for the early repayment although notice had to be given to CBC to complete the necessary formalities(Para 2) and interest rates were determined by PIBA (not CBC) (para 3). Although, in the event of adverse circumstances, a rearrangement program was submitted to it (CBC), it was for consideration by PIBA (para 4). The conditions set out in paragraphs 3 and 4 relating to interest rates and adverse circumstances suggest that CBC had involvement in the loan. The conditions referred to in paragraphs 1 and 5 of the letter do not assist in determining the identity of the lender. 14 The whole of the second letter (dated 13 September 1982) which forms part of the agreement is reproduced below. " The Commercial Banking Company of Sydney Limited Established 1834 MOREE , N.S.W. 13TH September 1982 Mr. & Mrs. C.H. Magill, 'Arapiles', CROOBLE. N.S.W. 2419 Dear Mr. & Mrs. Magill, RE: PIBA REFINANCE LOAN # 05200001 IN THE NAME OF M. & D. Magil. (sic) You will be aware that this Bank and the National Bank have merged, and will be commencing operations as National Commercial Banking Corporation of Australia Limited in the near future. To meet PIBA's and the merged banks' accounting requirements it is now necessary to vary the due dates of the instalments on your PIBA Refinanced Loan from 30th June and 31st December to 31st March and 30th September each year. To enable this to be effected, the half-yearly instalment of principal and interest due on your loan as at 31st December 1982 will be deferred to 31st March 1983, and an interim payment of interest only of approximately $ 3,287.40 will be charged and paid to PIBA on 30th September, 1982. Unless there are any changes to the interest rates presently charged on your loan, the current half-yearly instalment amount will remain undisturbed. The ultimate date for final repayment of your loan will now be extended by 3 months. Should you have any queries on these proposals, please do not hesitate to contact me. Yours faithfully, Signature Manager" 15 It is not disputed that on 1 October 1981 the National Bank of Australia Limited bought all the shares in the Commercial Banking Company of Sydney Limited. It is common ground that by the operation of the Commercial Banking Company of Sydney Limited Merger Acts 1982 the plaintiff the National Australia Bank Limited, became the successor entitled to the rights, liabilities and privileges of the CBC including the rights, liabilities and privileges. 16 This second letter reiterates that the loan is a "PIBA refinanced loan". It stated that an interim payment of interest would be charged and paid to PIBA. This would suggest that in order to co-ordinate the banking records of National Bank and PIBA, the dates that interest payments were due had to be varied. The letter suggests that it is the National Bank who charged the interest and then paid it to PIBA. 17 It must be remembered that the agreements appear on CBC letterhead. In the wording of these documents, the loan was expressed to be a PIBA loan, it was PIBA who determined the interest rates, charged premium interest and determined any rearrangement program. In 1982 it was the National Bank who charged interest and paid it to PIBA. Overall these provisions are more consistent with the loan being from PIBA to the defendants with CBC acting as agent for PIBA. CBC's role was acting as agent in the monitoring of the account and forwarding documents from the plaintiffs to PIBA for PIBA's consideration. However I accept that the identity of the lender is ambiguous as is the term "refinance loan". Therefore recourse should be made to the surrounding circumstances that were known to the parties. 18 The term "refinance loan" which appears in both letters is susceptible to more than one meaning and its interpretation may assist in determining the identity of the lender. The words "refinance loan" could mean that the source of the funds was PIBA by the following method. There was a loan made by PIBA to CBC and those funds were on-lent by CBC to the defendants. Alternatively the term "refinance loan" could mean that the purpose of the loan was to payout an existing loan. "Refinance loan" could also mean that the farmers entered into a loan with CBC which was refinanced by PIBA. In fact, the defendants' PIBA loan together with an overdraft facility were used for two purposes, firstly to pay out an existing overdraft facility and fully drawn loan account that the defendants had with the ANZ bank, and secondly to complete the purchase of "the Gums". Hence, in this sense some of the funds can be said to have been used for refinancing. 19 If the identity of the lender is to be determined solely from the two agreements, the more consistent interpretation is the former one, namely that the loan agreement was made between PIBA and the defendants with CBC acting as an agent. However, in order to resolve the ambiguity of the identity of the lender and the meaning of the word "refinance" it is necessary to have regard to the surrounding circumstances known to both parties. As previously stated those circumstances are to be found in Mr Magill's evidence of conversations with Mr Munro, the loan application form, the authority signed on 1 November 1978, the letter of 17 November 1978 and the drawdown of cheques as shown in the defendants' bank statements. At this stage, I will not take into account the internal memorandum of the plaintiff relating to the drawdown agreement between PIBA and CBC and CBC's operating instructions as these were not known to the defendants. The application form 20 It is common ground that there is no approved application form by the defendants for the PIBA loan. However, there is a form headed "Commercial Banking Company of Sydney Limited (General Form)" which is dated 27 October 1978 (tab 5). Under the heading "type of loan" it states "Proposed PIBA advance" of $90,000. The form also refers to two other facilities namely the proposed overdraft of $20,000 and the FDA loan of $40,000. (These are also referred to in the letter of 17 November 1978). Details are then given of the assets and liabilities and financial forecast of the defendants' income derived from the properties. As the application for the three facilities appear on the CBC general form, this document suggests that the lender was CBC not PIBA. Authority of 1 November 1978 21 On 1 November 1978 Mr Magill signed an authority addressed to the CBC bank (Ex A tab 6). The letter is headed "PRIMARY INDUSTRY BANK OF AUSTRALIA LIMITED APPLICATION FOR REFINANCE". Mr Magill authorised CBC to provide PIBA with information in relation to accounts held at CBC. Paragraph 5 of that letter stated: "5. Any other information required by the Primary Industry Bank of Australia Limited which that Bank deems necessary to support an application for refinance or request for the variation of the terms of any existing Primary Industry Bank of Australia Limited refinance loan." 22 The last paragraph stated that: "This authority was a continuing authority and was to remain in full force and effect until all loans which have been refinanced by the Primary Industry Bank of Australia Limited are repaid in full." 23 Paragraph 5 does not assist in identifying the lender. It once again makes reference to being a "PIBA refinance loan". The last paragraph of the letter refers to the authority being in force until the loans which have been refinanced by PIBA are repaid in full. This authority was signed after the application form had been completed but before the PIBA loan had been approved. This document does not assist in determining whether PIBA loaned the money to CBA or directly loaned the money to the defendants to pay out or refinance their existing loans. Letter of 17 November 1978 24 On 17 November 1978, the CBC bank by letter (tab 10) advised the defendants that the bank (CBC) (my emphasis added) had approved three facilities, namely an overdraft limit of $20,000, a farm development loan of $40,000 and a PIBA refinance loan of $90,000. This letter stipulated that the PIBA refinance loan was for $90,000 for a term of 25.5 years and the amount of instalment was to be $4,929.91 payable 30 June and 31 December each year. The first repayment was 31 December 1979 with first interest payment of $4,500 due 30 June 1979. The letter also advised that the bank (my emphasis added) would take as security first mortgages over "Arapiles" and "the Gums". The letter then gives details of the timing of the drawdown of the FDA loan account which is not relevant to issues in dispute. This letter states that it is the bank that had approved the PIBA facility. In my view this letter makes it clear that it was the CBC bank which made the PIBA loan and the FDA loan and an overdraft account available to the defendants. This letter indicates that the bank was the lender not PIBA. It was clear that CBC made two of those facilities available and PIBA made the third facility available. Had there been two separate lenders, the letter would have referred to "Banks" or sought to distinguish the entities making the loans. The drawdown 25 The plaintiff submitted that there was a drawdown of $90,000 from PIBA to CBC and then a drawdown of $90,000 by CBC to the borrowers/defendants. The defendants' current account with the plaintiff styled "Colin Harold Magill and Deirdre Evelyn Magill" bank statement shows that on 15 January 1979 it was credited with the sum of $90,000. The particulars given of that transaction was "PIBA loan". The defendants would have been unaware that there may have been two drawdowns. All that both parties were aware of was that $90,000 represented the PIBA loan which was credited to the defendant current account. Mr Magill's evidence of his understanding of the loan transaction 26 In 1975 the defendants entered into a contract to pay rental on "the Gums" at the rate of $8,400 per annum and to ultimately purchase the property. The purchase was due to be completed on 15 January 1979. 27 Mrs Magill, the second defendant, is married to the first defendant. She derived her knowledge of the PIBA loan from what her husband told her. It was Mr Magill who had direct dealings with the bank. In 1978 Mr Magill became dissatisfied with his then current bank, the ANZ at Inverell. Some months prior to November 1978 Mr Magill went to see Mr John Munro who was the manager of the CBC, Moree branch. It was Mr Munro's suggestion that the defendants conduct their farming partnership account with CBC where they would have access to loans available through the new Primary Industry Bank of Australia Limited. 28 Mr Munro carried out an inspection of the properties "Arapiles" and "the Gums". Mr Magill was impressed that Mr Munro made this effort. At that inspection Mr Munro said to Mr Magill that the CBC was very short of funds for new borrowers but now as the CBC was an agent for PIBA they would be able to take on a lot more rural clients and help the bank tremendously in their lending in the rural community. Thus there was a relationship between PIBA and the CBC bank. Mr Munro also said that the review board of PIBA had two farmer representatives to consider loans and loan deferments. According to Mr Munro, PIBA's loans had a basic rate of interest and would pay one point something percent on top of that for the CBC's commission for which the CBC had to guarantee the loan to PIBA and the repayments of the loan. (para 5 - aff Mr Magill 18 February 1998). 29 Mr Magill understood that he and his wife were the borrowers of $90,000 which PIBA had lent to them in part to refinance "the Gums" (t 21.20). Mr Magill, during cross examination, stated that it was not obvious to him that the term "refinance" was a reference to some agreement between CBC and PIBA. Mr Magill was advised by Mr Munro that if the loan was split between PIBA and CBC the interest rate would be kept down because neither loan would be over $100,000. If the loan was over $100,000 it would have attracted a higher interest rate of 2%. 30 In relation to characteristics of the loan, Mr Magill gave evidence that he understood that the source of funds was the PIBA Bank. It was a long term loan, where the basic interest rate and the margin or commission were determined by PIBA and he could pay out the loan on three months notice. Mr Magill understood that the interest rate was 10% per annum unless or until PIBA determined that the interest rate be changed. If the interest rate changed he would still make the same half yearly payment but if the interest rate increased, any increase in the amount due would be added to the term of the loan instead of effecting the half yearly payments. Likewise, if the interest rate fell the period of the loan would be reduced. He also understood that he could apply to have the loan conditions rearranged if they were unable to meet the repayments due to seasonal adversity (t 24.20-55). Mr Magill's understanding of the loan agreement is not inconsistent with the terms of the agreement set out in the letter of 20 November 1978. He took comfort from the fact that the review of PIBA had farmer representation on it so that the plight of the farmer could be given sympathetic consideration. 31 On 14 December 1978 an article appeared in the "The Land" newspaper. It stated that the Primary Industry Bank of Australia had made 144 loans totalling $10 million in its first four weeks of operation. It continued that the loans were for new projects and that the bank had sufficient funds for the immediate future. There was a reported comment by the President of the New South Wales Livestock and Grain Producers Association, Mr Milton Taylor to the effect that he was extremely disappointed that the primary producers could not directly approach the bank for loans, and did not have access to the Primary Industry Bank. He said that country bank managers had refused to refer loans applications to PIBA. Mr Magill said he read some of that article. This article appeared in the newspaper two weeks after CBC wrote to the defendants setting out the conditions of the PIBA loan. The reading of this article was not the sole reason Mr Magill gained the impression that the loan made to him came directly from PIBA (t 24.5). 32 On 16 January 1979 Mr Magill executed a mortgage on "Arapiles" (the first mortgage) in favour of CBC for all of his interest in the whole of the land comprised in Certificate of Title Volume 7835 Folio 182 and known as "Arapiles" Moree in the State of New South Wales (the first mortgaged property) to secure all moneys due, payable or owing by the first defendant to CBC on any account whatsoever. By mortgage dated 16 January 1979 the defendants executed a mortgage of "The Gums" (the second mortgage) to CBC all of their interest in the whole of the land comprised in Certificates of Title Volume 2002 Folio 16 and Volume 8440 Folio 16 and known as the "the Gums", Moree in the State of New South Wales (the second mortgaged property) to secure all moneys due payable or owing by the defendants to CBC on any account whatsoever. 33 Both mortgages state that the mortgagee was the Commercial Banking Co of Sydney Ltd not the Primary Industry Bank of Australia. When Mr Magill attended the bank to sign the mortgage documents he stated that he was surprised to see that mortgagee was only to CBC. Mr Magill said to Mr Munro "Why is our mortgage only to the CBC? Does this only cover the CBC loan? What about the PIBA loan?" Mr Munro said that it (the mortgage) also covered the PIBA loan because as guarantors for the loan "we are then able to cover it with one mortgage". 34 According to Mr Magill, Mr Munro also said that during the term of the PIBA loan "you can have up to four years where that if you have any difficulties making repayments as a result of seasonal problems, then you can apply to PIBA to have the repayments deferred" (para 10 - aff Mr Magill 18 February 1998). Mr Munro informed Mr Magill that PIBA could not be contacted and that it had no offices (t 10.55). 35 Mr Munro the bank manager who was the other party to the conversations prior to and upon entering into the loan transactions, swore an affidavit which was tendered in evidence and later withdrawn and not relied upon. Mr Munro could have been expected to give the true complexion of the conversations he had with Mr Magill. Mr Munro was not called as a witness by the plaintiff. There was no sufficient explanation given to the court for his absence. Hence an inference should be drawn that his evidence would not have assisted the plaintiff. (Jones v Dunkel (1959) 10 CLR 298). I accept Mr Magill's versions of his conversations with Mr Munro. However, I do not accept some portions of Mr Magill's evidence and those portions are specifically referred to later in this judgment. 36 As previously stated, from Mr Magill's conversations with Mr Munro, Mr Magill understood that CBC was short of funds, CBC was an agent for PIBA, CBC would guarantee the loan to PIBA but that the mortgagee was CBC. Mr Magill also understood that the loan to PIBA had to be under $100,000 to avoid a higher interest rate, that the PIBA loan had a basic rate of interest upon which a 1. something % on top of that for CBC's commission, interest was payable half yearly, it was a long term loan, PIBA determined interest rate charges and if the interest rate increased the amount of repayment would not increase but the period of the loan would increase, and in periods of seasonal adversity the loan conditions could be rearranged. 37 Overall, the contemporaneous written application form and the letter of 17 November 1978 makes it clear that CBC was the lender in relation to three facilities. This accords with the mortgagee on the mortgage documents being CBC not PIBA. It would be unusual for CBC to guarantee payment of a loan to PIBA for which CBC derived no benefit other than a margin of 1-2% on the interest rate. Where there is an inconsistency in Mr Magill's evidence in relation to why the mortgagee was named as CBC, I do not accept his evidence as his explanation is improbable. It is my view that Mr Magill knew that there was a relationship between CBC and PIBA. Although he did not know the details of that relationship his motivation for entering into the transaction was that it was "the best deal I could get". There is nothing in the documents and evidence which make it improbable that CBC was the lender. I am satisfied on the balance of probabilities that on a proper construction of the documents the true lender was CBC. 38 If I am wrong and relevant documents, the contents of which were not known by the defendants should have been taken into account, I have done so below. The internal memoranda of the bank relating to the drawdown 39 On 7 December 1978 CBC Moree forwarded an internal memorandum to CBC head office (tab 13). It stated that the settlement of the purchase of "the Gums" was to take place on 15 January 1979 and that "We will be required to draw the PIBA loan of $90,000 on that date". That memorandum stated CBC was required to drawdown this loan from PIBA on 14 December 1978. On 18 December 1978 CBC head office replied to CBC Moree (Ex A Tab 15). Mr Cope who is currently the area manager of the Orange region of the National Australia Bank gave evidence that he had not seen a document to suggest that the bank did drawdown funds from PIBA to refinance a loan to the defendants on 14 December 1978 (t 67.10). History of Primary Industry Bank of Australia Limited (PIBA) 40 The Australian Rural Bank Act 1977 (NSW) which was assented to on 10 January 1977, established the Australian Rural Bank for the purpose of assisting in the financing of primary production. 41 Section 7 of the Australian Rural Bank Act provided that the Treasurer on behalf of the Commonwealth could make grants or loans to PIBA on "such terms and conditions as he determines", and that such "terms and conditions": "…may include arrangements for the provision of finance by [PIBA] to banks and lenders to enable those banks and lenders to make loans of a kind referred to in clause 1 in the Schedule on terms more favourable to the borrowers than would otherwise be practicable, and such terms and conditions may fix, or otherwise make provision with respect to, rates of interest to be payable in respect of such loans." 42 Thus this Act intended that PIBA would provide finance to banks and lenders to enable the lenders to make loans on favourable terms to borrowers. This is reflected in the Schedule below. Clause 1 in the Schedule read: "REQUIREMENTS APPLICABLE TO MEMORANDUM AND ARTICLES OF ASSOCIATION OF RURAL BANK 1. (1) The principal object of [PIBA] is to be the carrying on of banking business in Australia and, in particular, the provision of finance to banks and lenders. (2) The provision of finance to banks and lenders is to be for the purpose of enabling those banks and lenders to make loans with a view to increasing the availability of loan funds for purposes relating to primary production, being purposes that are commercially sound, to persons who are, or have a reasonable prospect of, successfully carrying on the business of primary production… 3. The directors of the [PIBA] are to include: … (c) 2 persons designated by the Treasurer to represent the interest of primary producers." 43 By virtue of the Primary Industry Bank Amendment Act 1978 (NSW) the Australian Rural Bank became known as the Primary Industry Bank of Australia Limited (PIBA). The agreement between PIBA and CBC 44 On 8 November 1978 the Primary Industry Bank and the Commercial Banking Company of Sydney Limited entered into a shareholders' prime lender agreement (tab 7). This agreement came into existence after the defendants had completed their application form but before the loan approval letter was written. That agreement recited that: "WHEREAS the Prime Lender [that is CBC] may from time to time advance moneys to or provide accommodation for primary producers and PIBA may at its discretion provide the Prime Lender with refinance for such transactions or any of them." 45 The relevant parts of that agreement are as follows. "1. Definitions and Interpretation 1.01 In this Agreement including Schedule 1: (a) "Advance" means a borrowing made from PIBA by the Prime Lender under clause 4 or the principal amount thereof for the time being outstanding; … 4. Refinancing Applications 4.01 The Prime Lender may from time to time submit an application for loan refinancing to PIBA in such form and containing such information as PIBA may in its discretion require. 4.02 PIBA, if satisfied with such application, may approve it in which case PIBA will make an Advance or Advances to the Prime Lender in accordance with Schedule 1 and the Approved Application." 5. Subordinated Loans … 5.03 The Prime Lender hereby agrees with PIBA that while it is indebted to PIBA (either actually or contingently); (a) it will not demand or accept repayment or any Subordinate Loan otherwise than in accordance with Clause 5.02; (b) it will not grant or suffer to exist any mortgage pledge lien or any other encumbrance over its right title and interest in Subordinated Loans made by it to PIBA; (c) if it receives any moneys in contravention of the provisions of this Agreement it will refund those moneys to PIBA in full; (d) should any right of set-off accrue to the Prime Lender in relation to debits and credits as between PIBA and the Prime Lender prior to repayment of all moneys owing by the Prime Lender to PIBA, then it will not exercise any such right of set-off; and (e) it will not assign or transfer to any person or otherwise dispose of all or any of its right title and interest in any Subordinated Loans made by it to PIBA." 46 Schedule 1 to the agreement sets out the terms and conditions relating to each advance. Paragraph (1) of the schedule defines "advance" as a borrowing made from PIBA by the prime lender or the principal amount thereof for the time being outstanding; and "end borrower" as a person to whom the prime lender has lent or proposes to lend moneys in relation to the refinancing of which the advance is to be made. Paragraph 2 of the schedule states: "2. Agreement Upon and subject to the terms and conditions of this Schedule and conditionally upon the Prime Lender certifying in such form as PIBA may require that the End Borrower has authorised the Prime Lender to disclose to PIBA such information concerning the affairs of the End Borrower relating in any way to the loan to be refinanced by PIBA, as PIBA may from time to time require, PIBA agrees to lend and the Prime Lender agrees to borrow the Advance stipulated in each Approved Application made by the Prime Lender in the amount on the dates and otherwise on the terms and conditions set out in the Approved Application." 47 and paragraph 5 states: "5 Prepayment 5.01 The Prime Lender may prepay the whole of the Advance on giving not less than three months' prior written notice to PIBA or, upon payment of interest up to the date three months after the notice is given, on shorter notice. 5.02 The Prime Lender will, within 7 Business Days of receiving prepayment of all or any part of its loan to the End Borrower, prepay to PIBA all, or the corresponding part, as the case may be, of the relevant Advance, 48 and paragraph 6 states: "6. Interest 6.01 The Prime Lender undertakes to pay to PIBA on the days specified in the Approved Application interest computed in the manner and at the rate or rates provided in the Approved Application, or at such other rate as may from time to time be notified by PIBA to the Prime Lender during the term of the Advance. 6.02 The Prime Lender agrees with PIBA that the interest payable by the End Borrower shall be calculated in the manner and at the rate or rates provided in the Approved Application or at such other rate as the Prime Lender and the End Borrower may agree upon, PROVIDED THAT THE RATE OF INTEREST PAYABLE BY THE End Borrower to the rate of interest payable by the End Borrower to the Prime Lender shall not at any time exceed by more than such margin as may from time to time be agreed between PIBA and the Prime Lender the rate at which interest is payable by the Prime Lender to PIBA on the Advance. 6.03 PIBA's determination and/or certificate as to each amount and/or each rate of interest payable under this clause shall, in the absence of manifest error, be conclusive evidence of each such amount and/or rate." CBC Operating Instructions 49 The CBC Operating Instruction No 87993 dated 12 October 1978, contains instructions relevant to the commencement of business operations by PIBA. Under the heading "Method of Operation" it is stated: "PIBA will operate as a refinance institution" and "Loan will be made only to approved lenders (prime lenders) who, in turn, will on-lend to primary producers (end borrowers)". Under the heading "Term of Loans" it is stated: "PIBA's main function is to facilitate loans to primary producers for a longer term than would otherwise be available." Under the heading "Loan Security" it is stated: "PIBA will not be exposed to the risk of lending and will therefore not require any form of security. It is the responsibility of each prime lender to obtain security for refinanced loans". 50 Operating Instruction No 8997 of 12 October 1978 (at B7) stated that: (a) PIBA would operate as a refinance institution; (b) loans would only be made to approved prime lenders (namely, CBC) who would, in turn, on-lend funds to primary producers (end borrowers); (c) prime lenders would be responsible for assessing loan applications; (d) applications were to be submitted to the relevant CBC Chief/Divisional Manager using "the Bank's General Form Application"; (e) CBC's Loans and Funds Development, Head Office would lodge such applications with PIBA; (f) CBC would accept all risk involved in the lending and would be obliged to make repayments of principle and interest in respect of its borrowings from PIBA, regardless of the end borrower's performance; (g) PIBA would not be exposed to any risk of lending and it would therefore not take security. 51 Operation Instruction No 9004 of 27 October 1978 (at B4) stated: (a) repeated that applications for loans were to be submitted on CBC's "General Form Application"; (b) stated that settlements between CBC and PIBA would occur each month, and that the date for settlements between CBC Head Office and PIBA for 1978 would be on 14 December 1978; (c) said that branch applications must stipulate the appropriate drawdown date for settlement between CBC and end borrowers. 52 Operating Instruction No 9029 of 14 December 1978 (at B14) stated that: (a) in circumstances where settlement with an end borrower was effected after the date on which CBC drew down from PIBA, CBC would charge a "holding fee" of 1.5% per annum on a daily basis; (b) on due dates, CBC Head Office would draw directly on the branch through "Branch Transits". 53 On 11 January 1995 the Business Accounts Manager wrote to the defendants and stated that PIBA at that time was responsible for all such information. It was the bank's understanding that PIBA issued loan schedules rather than statements and that the defendants could contact PIBA directly regarding their request. This letter written many years after PIBA ceased loan activities, is incorrect and I attached little weight to it. 54 The plaintiff submitted that when the agreement between PIBA and CBC's operating instructions are taken into account, the defendants' submission that PIBA lent the money directly to them involves the court accepting the proposition that PIBA made the loan contrary to its statutory mandate and that both PIBA and CBC acted contrary to and inconsistent with their agreement of 8 November 1978. 55 According to defendants, the shareholders primary agreement supports the view that the loan provided in accordance with the letter of 20 November 1978 was not entered into as envisaged by the shareholders prime lending agreement. The factors that the defendants submitted supported that conclusion are that firstly, under the contract with them interest was to be determined by PIBA. Under the shareholders prime lender agreement the interest was to be calculated at the rates provided in the approved application or at such other rate as the prime lender and the end borrower might agree upon (cl 6.02 Schedule 1). According to the defendants, the second factor is that under schedule 1, if the loan were prepaid without three months notice having been given, the prime lender was required to pay interest up to the date three months after the notice of prepayment was given (cl 5.01), whereas under the contract of 20 November 1978, if three months notice of prepayment was not given PIBA reserved the right to charge the defendants three months premium interest; and thirdly, the contract contained in the letter of 20 November 1978 provided for PIBA to consider rearrangement of payments in the event of adverse circumstances which seriously affected income. In relation to the interest rate, clause 6 of the shareholders prime lender agreement provides the calculation of interest as agreed between the prime lender and borrower but it cannot exceed a stipulated margin as agreed between PIBA and the prime lender. 56 In relation to the second point, under the contract the defendants received a benefit. They may not have been relieved of the obligation to pay interest if they gave less than three months notice. These inconsistencies are minor and do not mean that the agreement was one which was made independently of the shareholders agreement. The shareholders agreement provides for advances to be made by PIBA to the prime lender such as CBC, and for the prime lender to loan the moneys to an end borrower. CBC may charge interest a certain percentage above a margin rate agreed by PIBA and the prime lender. This accords with the conditions of the loan agreement set out in the letter of 20 November 1978. It is my view that these additional documents make it clear that the lender was CBC. 57 The defendants contend that the general application form (referred to earlier in this judgment) is not an application form made in respect of the defendants' loan by CBC to PIBA. The general application form was used on 27 October 1978 because it was five weeks prior to the detailed requirements being known. They were specified in operating instruction of 14 December 1978 (tab 14). The application form was prepared before the shareholders prime lending agreement came into being; secondly, according to the defendants the application form does not conform with the operating instruction in that firstly, the B/S/B number is not included; secondly the words "PIBA refinance loan" is not typed in. To the contrary, what is typed in is "Proposed PIBA Advance"; thirdly, the defendant contended that the PIBA end borrower form is not included; fourthly, the postcode on page 1 after the applicants' address is not included; fifthly, the postcode of the property being purchased is not included; sixthly, the drawdown date for the PIBA loan is not stated; and seventhly, the required date for first repayment of principal and interest is not stated (except by reference to the month of January 1980). The deficiencies identified in the first and third to fifth points of the submissions are trivial matters and ones that staff completing the form may have overlooked. 58 It is my view that the shareholders primary agreement stipulated that PIBA would make advances to prime lenders such as CBC and those moneys would be loaned to an end borrower. This is consistent with the operating instructions of 12 and 27 October 1978. Thus PIBA was to make loans to CBC and CBC would loan those funds to an end borrower such as the Magills. On a proper construction of all the documents and the evidence, I am satisfied on the balance of probabilities that the identity of the lender was CBC not PIBA. 59 Overall, it is my view that from the two documents which form the agreements between the parties, the identity of the lender is ambiguous, so recourse is to be had to the surrounding circumstances. When these circumstances are evaluated together with the two letters, it is more probable that the identity of the lender was CBC. Further, if other documents there were not known by the defendants are taken into account, the identity of the lender is beyond doubt CBC. B Is the Bank estopped from denying that the lender was PIBA ? 60 The representation the defendants allege they relied upon is set out in paragraph 4 of the defence. It states: "By [the letter of 20 November 1978 at B11] CBC represented to the defendants that the loan to the defendants which had been approved was a loan from PIBA at an interest rate of 10% per annum or such other rate of interest as might from time to time be determined by PIBA." 61 According to the defendants, the cumulative effect of the bank's representation and conduct is that it is estopped from denying that firstly, the contract for the PIBA loan was made between PIBA and the Magills; and secondly PIBA and that the Magills borrowed an advance of $90,000 from PIBA. According to the defendants those assumptions were entirely reasonable and understandable. The plaintiff submitted that in all the circumstances, it was not reasonable for the defendants to suppose that their lender was PIBA, rather than the bank and that in any event, revelation of the "true position" to them would have made no difference to their decision to borrow from the bank. 62 Alternatively, the plaintiff submitted that if the court found it had induced the defendants to assume that the lender under the PIBA loan was PIBA, and not CBC, then a re-calculation of the bank debt in accordance with the reconstruction spreadsheet, referred to in the affidavit of Mr Cope of 4 December 1998, would be sufficient to satisfy the "minimum equity" required. According to the plaintiff to deny it an entitlement to make any recovery from the defendants in respect of the moneys advanced to them would be to "insist upon a disproportionate making good of the relevant assumption" and lead to a "wholly inequitable and unjust" result. Firstly, did the Magills rely on this statement ? 63 As previously stated, from Mr Magill's conversation with Mr Munro, Mr Magill understood that CBC was short of funds, CBC was an agent for PIBA, CBC would guarantee the loan to PIBA. Mr Magill also understood that the loan to PIBA had to be under $100,000 to avoid a higher interest rate, that the PIBA loan had a basic rate of interest upon which a 1. something % on top of that for CBC's commission, interest was payable half yearly, it was a long term loan, PIBA determined interest rate charges and if the interest rate increased the amount of repayment would not increase but the period of the loan would increase. In periods of seasonal adversity, the loan conditions could be rearranged. Mr Magill gave evidence that in subsequent correspondence the bank had reviewed the accounts (including the PIBA loan account). He agreed that although the bank had approved their continuation this did not alter his belief that they had borrowed funds from PIBA (t 52.25-53.35). When giving evidence, at times, it seemed that Mr Magill was going to adhere to this line, even when faced with of the documentation. His stance was not credible. 64 In paragraph 15 of Mr Magill's affidavit he stated that had he known the loan was with CBC he would have remained with the ANZ bank. Mr Magill agreed that at the time he was considering changing banks the PIBA loan was the best deal he could get (t 21.25-t 22.30). He also said that it would have made a lot of difference to him had he been told that the mechanics of the loan was that the loan was from PIBA to CBC to him. The transcript (22.20) reads from CBC to PIBA but it was understood that the loan was from PIBA to CBC. Mr Magill's explanation for it making a lot of difference was that "we get back to this one hundred thousand thing again. I would see it as some sort of circumnavigation of this one hundred thousand" (t 22.28). This statement, I think, is a reference to his being told by Mr Munro that if the one loan was over $100,000 it would attract a higher interest rate of 2%. 65 The interest rate was initially 10% which lasted for only one period of repayment. After the first payment the interest rate increased and the amount of the payment due increased, rather than the period of the loan being extended. It is my view it did not matter to Mr Magill whether the lender was CBC or PIBA when he decided to enter into the transaction although I agreed that he took comfort in the rearrangement provisions and that there were farmers on the review panel. I do not accept that he would have remained with the ANZ Bank. It is my view the overriding factor which influenced Mr Magill's decision to take up the loan was that it had the characteristics previously outlined but overriding all of those characteristics was that it was the best deal he could get. 66 I find that on the balance of probabilities, when Mr Magill initially had conversations with Mr Munro he understood that the lender of the sum of $90,000 was PIBA. However, as previously stated, by the time he came to sign the mortgage document where the mortgagee was named as "CBC" he knew that the loan was from CBC. His explanation for continuing to hold the belief that the loan was from PIBA when the mortgagee was CBC was that Mr Munro made the mortgage also cover the PIBA loan because CBC was a guarantor of the loan. This explanation is implausible. It is also difficult to accept that Mr Magill could have continued to hold this belief when he signed the loan documentation and after receipt of subsequent correspondence from the bank, referred to below. There is no correspondence in evidence where Mr Magill asserted that his understanding was that the lender was PIBA not CBC. 67 For the foregoing reasons, the Magills did not rely on the representation that the loan to the defendant which had been approved was the loan from PIBA at an interest rate of 10% per annum or such other rate of interest as might from time to time be determined by PIBA. 68 If I am wrong, I find that the identity of the lender was not a decisive factor in the defendants entering into the PIBA loan. As previously stated, the overriding consideration for entering into the loan transaction was that it was the best deal he could get at the time. The loan he entered into whether it was CBC or PIBA has the characteristics which he thought were attractive. The identity of the lender was incidental. 69 There is relevant correspondence between the plaintiff and defendants in relation to the PIBA loan. On 7 February 1983 (Ex A tab 34) the plaintiff wrote to the defendants stating that (the bank) wished to confirm that PIBA had agreed to the deferment of repayments. Mr Crane, the manager informed the defendants that he had been instructed by the Sydney office to review their account in full no later than 28 February 1983. Mr Magill understood that the review would be of all facilities including the PIBA facility and would be carried out by the plaintiff (t 25). Correspondence after 20 November 1978 70 On 14 March 1981 the bank wrote to the defendants and referred to a recent discussion regarding the accommodation needed to carry on pending possible sale of assets and until receipt of wheat proceeds. It stated "We are pleased to advise that the Bank has agreed certain arrangements which included the FDA and PIBA account. Mr Magill read "the Bank" to mean PIBA or CBC even though the word "Bank" is singular. 71 On 14 March 1983 the bank wrote to Mr and Mrs Magill and informed them that the bank had agreed to certain rearrangements including an increase in the overdraft limit. The letter mentioned the PIBA loan account and review of other accounts which would take place on 31 July 1983. (tab 39). On 15 September 1983, by letter, the plaintiff advised that it had approved an increase of the overdraft limit but the defendants had to take steps to reduce it, as well as substantially reducing the FDA debt. (tab 40). On 1 October 1983 Mr Magill completed, in his handwriting, a drought relief form and named the lender of the PIBA loan as the National Australia Bank and named the type of loan as a PIBA loan. He signed a statutory declaration declaring that the above statement was true. (tab 41). In 1983 as a result of the 1982 drought Mr Magill asked the then manager of the bank Mr Grahame Crane about deferring repayments for that year. According to Mr Magill Mr Crane said that it would be necessary for him to obtain permission from PIBA. Sometime later Mr Crane advised Mr Magill that PIBA had agreed to the deferment. 72 On 9 May 1984 the bank wrote to Mr and Mrs Magill and referred to discussions during the annual review. The bank approved the continuation of the fully drawn advance of $181,000, the Farm Development loan of $24,000 and the PIBA refinance loan in the sum of $99,539. Mr Magill gave evidence that he understood that it was the National Australia bank who was approving the continuation of the PIBA loan. However, later in re-examination he stated that the National bank was acting as agent by relaying the message. (t 51.5). In the letter of 9 May 1984 the bank also advised: "…a substantial reduction is to be provided after harvest to your fully drawn advance account and also that reductions on your farm development loan and PIBA refinance loan are to be met as detailed in the enclosed budget." 73 The bank also advised that as two instalments were already in arrears on the PIBA refinance loan they were not prepared to allow further arrears to develop. This reference to "they" in the second sentence of the first paragraph is unclear. "Our administration have requested that we advise you that there is no doubt that unless you can substantially reduce your liabilities this year from income, land will have to be sold and that you are to be left in no doubt on this point." (tab 51) 74 The above correspondence shows that it was the bank that approved the continuation of the PIBA loan. Mr Magill admitted in cross examination that it was the National Bank who authorised the continuation of the PIBA loan. In re-examination he sought to revert to the notion that the National bank was merely acting as agent. It is my view that Mr Magill has since 1978 known that the true lender was CBC. If I am wrong in finding that Mr Magill knew that the lender was CBC at the time of signing the mortgages, I find that between 1983 to mid 1985 Mr Magill knew that the lender of the PIBA moneys was the National bank. Also in the light of the correspondence forwarded to Mr Magill, referred to above, after 1983 it was unreasonable for him to continue to hold the belief that the lender of the $90,000 was PIBA. 75 On 4 June 1985, Mr Longmuir wrote to Mr and Mrs Magill noting that they currently conducted a PIBA refinance loan and due to the lifting of the Reserve bank restrictions "they" were now able to take over this loan with the same interest rate and half yearly repayments to apply. An authority was enclosed. (tab 57). This proposal occurred at a time when the defendants were still in financial difficulties as the bank was dishonouring Mr Magill's cheques. Mr Magill said that he could not see any benefit in this proposal. 76 According to Mr Magill the next time he visited the bank, Mr Longmuir said to him "Are you willing to transfer the PIBA loan to the bank?" and Mr Magill replied "No. I can't see any benefit to us by doing that". (Aff para 18). Mr Longmuir could have been expected to give the true complexion of the conversations and explained the meaning of the letter he wrote. Mr Longmuir was not called as a witness by the plaintiff and there was no sufficient explanation given to the court for his absence. His affidavit was withdrawn. Hence an inference should be drawn that his evidence would not assist the plaintiff's case. 77 The explanation for this letter is most likely that the National Bank had to pay PIBA the principal sum of $90,000 to retire its debt. But the Magills position in relation to payment of the interest and the principal to the National Bank would remain unaltered. However, it appears that nothing was done by the plaintiff to pay out its debt to PIBA as it is still referred to in correspondence from the bank until 1987. 78 In 1987, the plaintiff wrote to the defendants (although they did not see this letter until 1994) advising them that it had decided to enforce the securities and had been forced to apply to PIBA for the payout of their loan which would then be absorbed into the FDA account. Like Mr Munro and Mr Longmuir, Mr Anderson's evidence was withdrawn. Once again there was not sufficient explanation for him not being available to give evidence. I make an inference that his evidence would not assist the Bank's case. The 1987 correspondence means that the bank had to pay the principal sum of $90,000 to PIBA. 79 On 21 April 1986, the bank wrote to the defendants advising them that the current position at this bank was that they had a FDA account in the sum of $250,000 and the PIBA loan in the sum of $97,149. In 1986 the defendants' financial position continued to deteriorate so the bank advised that these advances were to be regarded as the maximum assistance the bank would provide. It was expected that the working account would be maintained on a credit basis. There was no longer an overdraft facility. (tab 70). A further indication of the defendants' financial difficulty was that between 1983 and 1987 the defendants had not paid the council rates on "Arapiles". The council commenced legal proceedings against the defendants to recover the rates. In 1988 the council submitted "Arapiles" to public auction. Ultimately the defendants paid the outstanding rates of about $18,000. (t 49). 80 The question of whether departure from the assumption would be unconscionable must be resolved not by reference to some preconceived formula framed to serve as a universal yardstick but by reference to all the circumstances of the case, including the reasonableness of the conduct of the other party in acting upon the assumption if departure from the assumption and the nature and extent of the detriment which he or she would sustain by acting upon the assumption if the departure from the assumed state of affairs were permitted - per Deane J in The Commonwealth v Verwayen ( 1990 ) 170 CLR 394 at 445. Did the Magills act to their detriment ? 81 The defendants submitted that they acted to their detriment because they sold "the Gums" so that they would no longer be a debtor of the National Australia Bank and they made preparations to grow cotton on "Arapiles". Mr Magill's evidence is that after the harvest of 1986/87 he could not deliver a lot of wheat because of lack of storage facilities of the Grain Handling Authorities. He could see that they were in shortfall of finance and things were not going to be better no matter what they did. They took the opportunity to take a quick sale of "the Gums" for $330,000. Mr Magill believed this would clear them of all debts with the National Australia Bank and allow them to keep their loan with PIBA, which had a repayment schedule well within their scope of approximately $4,900 each six months. Even though Mr and Mrs Magill had wanted $400,00 for the "the Gums" when Anburn Pty Limited offered $330,000 plus a share farming contract Mr Magill thought that they had a fairly good deal. They had got rid of the hassles with the National Australia Bank and it allowed them to continue farming on country they were familiar with. It left them in the position that their only substantial debt was the loan to PIBA. Accordingly, it was for these reasons they accepted the offer of $330,000 for the "the Gums" even though it was $70,000 less than what they had wanted. (Aff paras 16 & 17). 82 However, in 1987 at the time the decision was taken to sell "the Gums" the PIBA loan repayments were almost double the sum of $4,900. It was only the first payment that was for the sum of $4,900. By 1987 the half yearly payment had risen to $9,000. When Mr Magill was asked how the repayment schedule could be well within their scope of $4,900 each six months Mr Magills replied "he was hoping". (t 55). The reality was that this time the payments were of $9,000 per six months and interest on the PIBA loan was probably around 18% (t 42). On any view, the Magills were not in a financial position to meet the repayments even if they were $4,900. It is my view that Mr Magill's belief that the sale of "the Gums" meant he could clear his debts with the National Bank has been reconstructed. The Magills were in a dire financial position with their borrowings. 83 According to the defendants they also acted to their detriment by preparing to grow cotton on the 800 acres of remaining property, "Arapiles". Cotton had previously been grown on "Arapiles" in the mid 1980's. On 29 June 1987 the defendants decided to proceed with this development with their two sons Scott and Dugal. They purchased a four year old International Specialist Rowcrop tractor for the sum of $10,000 to carry out the cotton sowing. However by 1986, the Magills' working account had to be maintained on a credit basis, the Commonwealth bank was threatening to repossess a Deutz header and a Chamberlain disk plough. These pieces of equipment were given back to the Commonwealth bank. Also in 1986, Esanda repossessed a Versatile tractor because the defendants defaulted in making repayments. They had council rate payments outstanding on "Arapiles" since 1983. In August 1987, Mr Magill states that he realised that he was unable to continue his cotton growing venture as he did not have a safe and effective finance with the bank. Mr Magill attributes the action of the bank as causing his income to be seriously curtailed, not being able to provide for his and his wife's retirement and not being able to provide their sons with expertise and experience in farming. In 1994 there was correspondence to the bank by the defendants stating that they were not in a financial position to continue to grow cotton on their property. They could not afford equipment or to purchase fertiliser and insecticides 84 It is my view that the defendants did not act to their detriment in selling "the Gums" in 1987. The growing of cotton was not a viable proposition even if the FDA loan had been discharged. Even in Mr Magill's own evidence selling "the Gums" would not put him in a position to grow cotton as he would have needed to borrow funds to carry out the share farming. This plan was also not feasible as at this time the defendants' farm machinery was being repossessed and council rates remained outstanding on "Arapiles". 85 The defendants submitted that the Bank ought to be denied any recovery under the PIBA loan, that is NAB should be estopped from denying PIBA was the lender and from owing a debt as the lender. The plaintiffs submitted that this remedy would be unjust and would give the Magills a windfall. There has to be proportionality between the remedy and the detriment. A central element of the doctrine is that there must be proportionality between the remedy and the detriment which is its purpose to avoid. It is wholly inequitable and unjust to insist on a disproportionate making good of the relevant assumption - per Mason J in Verwayen at 413. 86 It is my view that if I am wrong and the lender was PIBA, to deny the bank an entitlement to make any recovery from the Magills in respect of the $90,000 advanced to them would insist on a disproportionate making good of the relevant assumption and lead to a wholly inequitable and unjust result. This is because the defendants have the benefit of the loan moneys and the bank has been obliged to pay the money due on the loan to PIBA. The conditions of the loan in all other respects were all the defendants required. At the time Mr Magill admitted that it was the best deal available. As previously stated, the defendants had the benefit of the loan. The Magills paid out existing liabilities to the ANZ Bank and financed the purchase of "the Gums". If the Magills acted on the assumption outlined earlier, the departure from that assumption is not unconscionable. Further, to permit the defendants to pay any money outstanding on the debt, would in my view be a windfall to the defendants. To allow the defendants not to pay the principal sum of $90,000 and interest would insist on a disproportionate making good of the assumption. 87 In summary on the estoppel point, it is my view that the defendants knew that the lender was CBC, so no estoppel arises. However, if I am wrong in this, no estoppel arises because the defendants did not rely on the statement that the lender was PIBA to induce them to enter the loan transaction. If I am wrong and if they did rely on this statement they did not act to their detriment. The defendants should pay the amount due under the conditions of the PIBA loan as calculated in the affidavit of Mr Cope dated 4 December 1998 provided there has been a default in payment of the PIBA loan. C Default The PIBA loan 88 It is accepted by the defendants that they did not pay the instalment under the PIBA loan which was due on 31 March 1987. However the defendants submitted that there was no default in respect of this payment. 89 The notice of demand forwarded to the defendants dated 6 March 1987 predates the date upon which the payment fell due, namely 31 March 1987. It demanded payment of firstly $16,504.66 due on the current account, secondly $266,686.53 due on the FDA account, and thirdly $114,704.91 due on PIBA loan account (tab 85). The plaintiff accepted that there was no default in relation to the PIBA loan account as at 6 March 1987 and consequently it was not entitled to make a demand for the payment of the PIBA loan on that date. 90 The plaintiff submitted that the bank was not precluded or prevented from relying upon the defendants' failure to pay the March 1987 PIBA instalment as an event of default. According to the plaintiff, once a default occurred the PIBA loan became repayable on demand. The plaintiff also submitted that it was authorised to combine the amount due under the PIBA loan with the FDA account pursuant to paragraph 12 of the FDA loan conditions (this will be covered under a separate heading later in this judgment). 91 In March 1987 the maximum limit on the FDA account was $250,000 but the amount owing in February 1987 was $257,820.20. In March 1987 the bank sent a variation request to PIBA to arrange a deferment of the March instalment of $8,000. The bank resolved to pay out the PIBA loan on 6 June 1987 (tab 84). This request was in respect of the repayment by the bank to PIBA. It is acknowledged that the defendants had no knowledge of the bank requesting a deferral from PIBA. The Magills were due to pay $9,815.70 (see PIBA account). There is no record in the bank statements of this amount being paid by the Magills. 92 On 10 March 1987 the bank advised the defendants that due to their inability to provide for interest on their borrowings the bank has been forced to apply to PIBA for payout of their loan which will be absorbed into the FDA account. Mr Magill says that he did not receive their letter. At no time does Mr Magill say either in his affidavit or in evidence that he approached the bank for deferral of the interest payment due on 31 March 1987 nor does he say that he paid this instalment. There is no application made by the Magills to the bank to defer the March 1987 payment. They made no arrangements to pay the March payment and such a payment was not made. I find that the defendants did not make the interest payment due on 31 March 1987 in relation to the PIBA loan. The defendants were in default of the PIBA loan due on 31 March 1987. 93 There was no express term of the PIBA loan that upon default the whole of the principal sum should become immediately due and payable. The defendants submitted that there was nothing inefficacious about a lender having a right to sue for each unpaid instalment as it fell due. The only express condition in the agreement of 20 November 1978 relating to default in repayment was that an application for rearrangement of the loan repayment in the event of seasonal adversity and that unless such rearrangement was agreed to "repayments must be met on the due date". 94 The plaintiff submitted that it was an implied term of the PIBA loan that upon default the whole of the PIBA loan became due and owing. According to the plaintiff this implied term is firstly so obvious that it goes without saying; secondly it is not inconsistent with any express term of the PIBA loan; thirdly is capable of clear expression and fourthly is necessary as a matter of business efficacy. The defendants submitted that there is no implied term that upon default the whole of the principal sum should become immediately due and payable. According to the defendants, it is customary to insert a clause in a contract of a loan that upon certain events occurring the lender may call up a loan and it is not inconsistent that where a term of a loan is for 25 years where conditions are specified that it should be subject to an unwritten term that if a default was made the payment of any instalment the whole of the loan should be immediately due and payable. 95 Both parties referred to Codelfa and BP Refinery (Western Port) Pty Limited v Shire of Hastings (1977) 180 CLR 266. The defendants submitted that a term that upon default the whole of the loan falls due and owing should not be implied. The plaintiff submitted that there is no inconsistency between an implied term that in the event of default the whole loan becomes repayable and the fact that the PIBA loan would be repayable over 25.5 years. 96 The defendants submitted that in the event of a default, the plaintiff could only recover the amount due on the outstanding instalment. To justify the implication of a term in a contract which the parties have not thought fit to express, five conditions, which may overlap must be satisfied. In order to justify the implication of a term in a contract which the parties have not thought fit to express, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying", (4) it must be capable of clear expression; (5) it must not contradict any express terms of the contract - per Lord Simon of Glaisdale, Viscount Dilhorne and Lord Keith of Kinkel. In The Moorcock (1889) 14 PD 64 at 689 Bowen LJ said: "I believe if one were to take all the cases, and they are many, of implied warranties or covenants in law, it will be found that in all of them the law is raising an implication from the presumed intention of the parties with the object of giving to the transaction such efficacy as both parties must have intended that at all events it should have. In business transactions such as this, what the law desires to effect but the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men …" 97 Paragraph 4 of the agreement contained in the letter of 20/11/78, makes an express provision for "rearrangement" of the facilities in the event of seasonal adversity and unless such rearrangement was agreed to the repayments must be met on the due date. 98 To give the contract business efficacy, if there is a default in the loan repayment, the whole of the loan should become due and payable. Otherwise the plaintiff could only sue for an instalment payment and if that payment and the next one is paid the plaintiffs would have to continue to sue for the first missed payment and then sue for the second missed payment and so on. Although the loan is of long duration, having an acceleration clause is reasonable and equitable, capable of clear expression and does not contradict any express term of the contract. It is my view that at the time that the parties entered into the transaction, where they had turned their minds to what happens upon default, if no rearrangement was granted, it would have been most likely that the parties would have anticipated that it would operate like other bank loans i.e. upon default the principal and interest becomes due and payable. The acceleration term is obvious. 99 The parties would not have intended that the agreement remain on foot for 25 years if no half yearly payments were made. It is my view that an implied term of the agreement is that in the event of a default in a repayment, the whole of the loan (principal and interest) became due and owing as this is necessary to give business efficacy to the transaction and must have been intended by the parties. 100 According to the defendants there was no justification for the bank to demand payment of the full debt and they were dispensed from performing a term of the contract where the other party intimates, expressly or impliedly, that it is useless to perform it. According to the defendants, the bank's unretracted demand was a refusal to perform the contract on its part and a waiver of the term requiring payment of the March instalment. The defendants referred to Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) (1954) 90 CLR 235 at 247; Foran v Wight (1989) 168 CLR 385 at 420, 442.6, 451.2, 458.3; Mahoney v Lindsay (1981) 55 ALJR 118 at 119. In Peter Turnbull & Co v National Mutual Royal Bank Limited (1953-54) 90 CLR 235 at 246, Dixon CJ said: "but a plaintiff may be dispensed from performing a condition by the defendant expressly or impliedly intimating that it is useless for him to perform it and requesting him not to do so. If the plaintiff acts upon the intimation it is just as effectual as actual prevention." 101 Even though the bank issued a notice of demand prematurely, it did not expressly intimate that it would be useless for the defendant to make payment of the March instalment due on the PIBA loan. Nor is there any evidence to suggest that the plaintiff acted upon the intimation. I infer that the reason that the Magills did not make the March payment was because they did not have the funds to do so. The defendants did not attempt to rectify this as no payments were made into the PIBA accounts between 31/3/87 and up until 5/6/87 when the proceeds from the sale of "The Gums" was used to retire the PIBA loan. There was no waiver by the plaintiff in relation to the March 1987 payment under the PIBA loan. Nor did the plaintiff waive the unpaid balance due under the PIBA account and subsequently notice demands have been served and not complied with by the defendants. 102 The defendants further submitted that s 57(5) of the Real Property Act is relevant to the suggested implication of the term. It is common ground that if a covenant for acceleration is contained in the mortgage document, such a covenant is of no effect unless the power of sale is exercisable. The plaintiff submitted that s 57(b) RPA has no bearing on the matter as the provision only applies to accelerated provisions found in registered instruments. It referred to in Turnbull and Natwest Markets Australia Limited v Mannix (1995) 7 BPR [97587]. In Turnbull, Priestley JA (with whom Meagher and Sheller JJA agreed) stated at 370: "…it was argued for the appellants that the concluding words of s57(5) not only deprived the acceleration clause in the registered mortgage of 'force or effect' until a valid notice under the section had been served, but also deprived any acceleration clause in any document, whether the registered mortgage or some other such document as the guarantee, whereby upon default by the mortgagor the whole of the principal secured by the registered mortgage became payable, of any force or effect until a valid notice had been served. This was said to be the result construing s57(5) completely literally. It seems to me however, that when s57 is read as a whole, the 'covenant, agreement or condition' referred to in s57(5) is a provision in the registered security document referred to in the opening words of s57(2)." 103 From the above, it is my view that the service of a notice of demand does not deprive the plaintiff of the benefit of the acceleration clause in the agreement dated 20 November 1978. The agreement is not a registered security document. However, there has been no effective notice of demand issued in relation to the PIBA account. If the plaintiff had the right to combine accounts, a notice of demand did not need to issue in relation to the PIBA account and subsequently notice demands have been served and not complied with by the defendants. The FDA agreement 104 Both the mortgage over "Arapiles" and "the Gums" (Ex B Tabs 16 and 17) contained a covenant by the defendants to "…duly and punctually pay all rates…payable…in respect of the mortgaged premises…". The defendants failed to pay rates in respect of the "Arapiles" property for a number of years between 1983 and 1988. The plaintiff submitted that the defendants failed to pay the FDA interest instalments which fell due on 30 September 1986, 31 December 1986 and 31 March 1987. The defendants accepted that they were in default of the FDA agreement by their reason of their failure to pay rates. It is this default which the plaintiff submitted gave it the right to combine the accounts. It was a term of the FDA loan that in default of an interest payment, the continued FDA would become repayable on demand. 105 The plaintiff issued further notices of demand in relation to the FDA account on 19 January 1995, 3 February 1995 and 4 September 1995. D The right of combination 106 The plaintiff submitted that the debits made to the FDA had nothing to do with any payment by NAB of its debt to PIBA. Nor did the debits "discharge" the defendants' PIBA debit to NAB. Rather the entries caused all of the defendants' obligations to NAB to be "combined" into the FDA account so that the amount due by the defendants to NAB on the "one account" between them could be ascertained. That account represented the resultant debit balance in the FDA upon which NAB sues in these proceedings. The plaintiff submitted that upon proper construction clause 12 of the 5 July 1985 loan agreement conferred on the bank the right of combination. 107 The defendants submitted that it is not possible to combine a debt upon which interest is payable at a rate determined by PIBA with a debt whose interest is payable at a rate prescribed from time to time by NAB. According to the defendants, it is not possible to combine one debt which is owed on terms including those in conditions 2 and 4 of the PIBA loan conditions with an FDA debt which does not contained those terms. 108 The plaintiff submitted that its right of combination does not depend on there being an account in credit. The defendant referred to Derham "Set-Off" 2nd ed (1996) at 486, in which the author describes the combination of bank accounts as follows: "When a customer has more than one account with a bank, one of which is in credit and another in debit, it is said that the bank may combine, or consolidate, the accounts and proceed on the basis that only one debt for the balance is owing." 109 At page 488, the learned author stated: "…unless a particular account is separated out by agreement (express or implied) or it is separate as a matter of law, the debt owing by either party to the other at any particular time can only be ascertained by looking at the balance of all the accounts together. In other words, it is not so much a right to combine accounts, as a recognition that the balance of all accounts represents the debt. Expressed more concisely, combination is a matter of account rather than of set off. On this basis a specific act of combination should not be required. While there is an accounting exercise, that in itself does not bring about a single debt, but rather it is undertaken in order to ascertain what the debt is. The principle has its justification in the notion that, no matter how many accounts belonging to a particular customer a bank may entered in its books, there is still only one banker/customer relationship." 110 In Banking Law in Australia, Tyree 3rd Ed Butterworths at 88: "…when the accounts are of a sufficiently different nature they cannot be combined. The most common example is when one account is a current account and the second is a loan account which has been opened with a view toward longer term finance." 111 The circumstances referred to by Tyree appear to be directed to the general position where there are no contractual terms governing when the accounts can be combined. 112 On 5 July 1985, the defendants entered into a fully drawn advance. It was for the amount of $250,000. Interest was charged a the variable rate, then at 18.25%. Interest payments were due each March, June, September and December. There was no time period stipulated for the loan, just that it was due for review on 28 February 1986. 113 Paragraph 12 of the FDA agreement states: "The Bank has authority at any time after demand has been served under paragraph 11 hereof to combine the loan account with all or any of the other accounts standing in your name, whether existing at the date hereof or to be subsequently opened with the bank to treat the loan account and all or any of the other accounts as one account and to appropriate any credit standing in any other account in your name towards payment of the indebtedness outstanding on the loan account together with all other interest, fees and charges then accrued and unpaid without notice to you." 114 On 10 March 1987 the bank wrote to the defendants. The third paragraph of that letter was in these terms: "Due to your inability to provide for interest on your borrowings the Bank has also been forced to apply to the Primary Industries Bank for payout of your loan which will be absorbed into your Fully Drawn Advance account." 115 On 14 May 1987 the bank issued a notice of demand in respect of moneys due and payable under the current account, the FDA account and the P.J.B.A. (sic) account (tab 89). 116 On 11 June 1987 the defendants signed a "letter of Instruction - Surrendering Deeds" which directed the proceeds from the sale of "the Gums" to be allocated to the FDA account namely 01174-9325 (tab 95). On 5 June 1987, the bank processed two entries, one debit and one credit namely a debit entry of $119,906.55 denoted "MISCELLANEOUS DEBIT" to the FDA account; and a credit entry of $116,044.47 denoted "MISCELLANEOUS CREDIT" on 5 June 1987 to the PIBA account. (See page 15 of the statement for the FDA account and page 7 for the PIBA account - tabs 126 and 127). After these entries, the FDA account was $390,036.85 in debit. 117 The next two June entries are deposits of $259,403.78 and cash of $26,230 being the proceeds of the sale of the "the Gums". On 1 July 1987 the overdraft account was debited to the FDA. If the three accounts had not been combined the FDA account would have been standing in credit. On 1 July 1987 the FDA was in debit in the sum of $121,611.61. On the same date the Moree branch of the bank sent an internal memo to Regional Operations stating: "We confirm the above PIBA Loan was paid out today to the debit of the FDA Account." After the credit entry to the PIBA account had been made, a nil balance was produced. While the proceeds were initially paid into the FDA account as directed, the bank transferred the funds from the FDA account to pay out the PIBA debt". The defendants did not authorise this transfer. The Bank combined the three accounts to ascertain the amount of the debt owing in relation to the customer/banker relationship. 118 Clause 12 of the FDA agreement authorised the plaintiff to combine the loan account with the PIBA account (and the overdraft account). The accounts were in the names of both defendants. It was not a requirement of clause 12 that one account has to be in credit and another in debit. If there was a credit in one account clause 12 authorised that credit being appropriated towards payment of indebitness outstanding on the loan account. The PIBA loan account was in debit. The bank made a credit entry to the PIBA account that allowed the bank to close the PIBA account. Pursuant to clause 12 the bank was authorised, after service of the notice of demand of 14 May 1987, to combine the loan account with the PIBA account. The defendants had been given prior warning that the bank had to pay out the Primary Industry Bank and that the PIBA loan would be absorbed into the FDA account. 119 If I am wrong in the interpretation of Clause 12 of the agreement, the parties referred to Garnett v Kewan (1872) LR EX 10, Inglis v Commonwealth Trading Bank of Australia [1973] 47 ALJR 234 at 235 and the appeal of National Westminister Bank v Halesowen Presswork &Assemblies Ltd [1972] AC 785, Capital & Counties Bank Ltd v Gordon [1903] AA 240, Sutcliffe & Sons Ltd v Exp. Royal Bank Ont. CA [1933] 562, Ross v Royal Bank of Canada 52 DLR 581, British & Northern European Bank Ltd v Salzstein [1927] 2 KB 92, Regina v Capewell (1995) 2 QdR 64, Buckingham & Co v London and Midland Bank (1895) 12 TLR 70 and Greenhalgh (WP) & Sons v Union Bank of Manchester [1924] 2 KB 153. 120 According to the defendant, the PIBA loan was a long term contract which contained five specific conditions which governed its operation and none of them provided the bank with a right of combination. According to the defendants the terms of each loan were quite different and the combining of accounts provided the bank with several advantages including the ability to charge a higher interest rate and other charges. 121 In Greenhalgh it was held that a banker who has agreed with a customer to open two accounts in his names and who holds bills which the customer has specifically appropriated to one account, is not entitled, without the customer's consent, to transfer the proceeds of such bills to the other account. Buckingham was a jury trial and the issue was whether the bank gave reasonable notice to a customer before it closed his account. These cases do not offer guidance as to the circumstances that entitle a bank to combine accounts. 122 The Canadian decisions of Sutcliffe, Ross and Re T C Marine Ltd (1973) 34 DLR (3d) 489 discuss the right of combination of accounts which accords with the proposition by Tyree. In all of these cases there was no contract between the parties which contained a term that stipulated when accounts could be combined. The facts in Salzstein are very different from the facts in the Canadian cases and the present case. R v Capewell is a decision of the Queensland Court of Appeal and concerns an offence under s 408C of the Criminal Code, namely whether a person dishonestly applies to his own use the property belonging to another. In Capewell Ms Capewell and her 13 year old daughter, Fleur each had accounts in the same bank. The bank through a clerical error credited the daughter's account with $44,000. The mother presented to the bank a transfer of $3,500 from her daughter's account to her own. She was convicted of an offence under s 408c(1) and appealed. This case is a criminal one and is not relevant to the case before me. 123 In Sutcliffe it was stated at 560: "Put shortly, my view is that the fact that there were two accounts kept by the Bank is utterly immaterial. There was in law but one account to be ascertained by bringing all items into consideration…There never was in any true sense of payment on November 23 or any transaction. It was a mere bookkeeping entry. The transfer of the credit balance in the current account to their liability ledger was nothing more nor less than a transfer of a debit balance from the liability ledger to the current account. Neither was a payment. The money had been deposited and was the Bank's own money from the moment it received it." 124 It is not necessary to adopt the Canadian law that the money deposited was the banks own money from the moment it received it. In the case before me the bank paid the money, as directed by the defendants, into the FDA account. It was the transactions after that one which combined the accounts. However, the credit entry in the PIBA account does not have the effect of discharging the PIBA debt. Nor does a credit entry to the current account (which was used as an overdraft facility) have the effect of discharging the debt in the current account. These two accounts were combined into another account, namely the FDA account. 125 In Halesowen Presswork it was held (per Lord Cross of Chelsea at 809) that: "If a banker permits his customer to have two accounts, on - sometimes called a "loan account" - which records the indebtedness of the customer to the bank in respect of advances made to him and the other a current account which the customer keeps in credit and uses for the purpose of his trade or business or ordinary expenditure, then, unless the bank makes it clear to the customer that it is retaining the right at any moment to apply the credit balance on the current account in reduction of the debt on the loan account, it will be an implied term of the arrangement that the bank will not, so long as it lasts, consolidate the two accounts. As Scrutton L.J. pointed out in Bradford Old Bank Ltd v Sutcliffe [1918] 2 K.B. 833, 847, unless such a term is implied no customer could feel any security in drawing a cheque on his current account if he had a loan account greater than the credit balance on his current account…" 126 In Halesowen Press it was common ground that there was such implied term. The House of Lords held that the bank was entitled to combine the two accounts. It was an issue in Halesowen Press whether the parties could contract out of a statute, namely s 31 Bankruptcy Act 1914. There is no implied term in the case before me rather there was an express term in the FDA agreement. However, the bank put the defendants on notice that they were going to combine the accounts so if there was such an implied term that the bank would not consolidate accounts once the letter of 10 March 1987 was received by the defendants, the implied term did not last. It no longer existed. This case does not assist the defendants. 127 In Inglis there was no written agreement relating to the right to combine accounts. In Inglis Mason J discussed the banker's rights to combine accounts. His Honour held that as the bank had earlier demanded payment of moneys owing in the two accounts, it did not commit a breach of contract when it consolidated those two accounts. 128 While it might be proper to give notice to the customer when the bank is combining the customer's accounts, there is no obligation for the banker to do so, arising either from the express contract or the course of dealing between the parties - see Garnett v McKewan (1872) LR 8 Ex 10, Kelly CB at p age 13. 129 Even assuming that clause 12 did not apply in the case before me, the bank gave the defendants notice that the PIBA loan would be paid out and that debt would be absorbed into the FDA account. Under the next heading the issue whether the PIBA and FDA loans were similar is discussed. They are similar. According to the High Court authority Inglis, the bank did not commit a breach of contract when it combined the accounts. In the circumstances of the case before me the bank was entitled to combine the accounts absent clause 12 of the agreement. Further estoppel 130 The defendants submitted that the Bank is estopped from asserting that the PIBA loan continued and from denying that the defendants were discharged from further performance under the PIBA loan after 5 June 1987 (see paras 48 to 50 of the amended defence). As previously stated on 5 June 1987, the bank was entitled to combine the accounts so that there was one debt. In any event there is no evidence of reliance, or the defendants acting to their detriment. The defendants had the benefit of these moneys and to release them from the obligation to repay the debt would, in my view be a disproportionate making good of the assumption (if in fact that assumption could be established). This submission fails. 131 Further, the defendants raised a further ground of estoppel namely that there were two implied terms of the contract namely that the bank would perform its obligations and exercise its rights under the contract in good faith and the plaintiff would do all such things as were necessary to enable the defendants to have the benefit of the PIBA loan. There is no evidence that the bank did not act in good faith. The FDA account was running at about the same interest rate as the PIBA loan. The FDA account was for an undefined term. It operated on nearly the same basis as the PIBA loan. In lieu of making application for rearrangement in circumstances of seasonal adversity to the PIBA board, requests for deferral were to be submitted to the regional office of the bank for consideration (tab 100). To this end, it is noted that even on the defendants' own evidence, Mr Munro stated that these rearrangements could only be made for four years, ie., up to 1982. 132 In an internal bank memo dated 27 June 1991 (tab 105B) the bank stated that as from 30 June 1991 the existing PIBA loan will be funded by the bank and will be in keeping with the policy laid down in June 1987. The loans are to be converted to instalment loans which will function in exactly the same manner (bank's emphasis added) as the former PIBA loan. It also appears that when the bank took over the existing PIBA loan, it was to remain established as an Account Type 15 loan. New loans were not to be treated as Account Type 15 loans. It appears it was anticipated that the loan was still to run for 25 years (tab 102). This submission fails. 133 The defendants plead a further estoppel, namely that if the PIBA loan was made by PIBA to them or the plaintiff is estopped from denying it was made, the defendants' debt to PIBA was discharged by payment made by the plaintiff to PIBA. My findings are that the PIBA loan was made by CBC. 134 Alternatively the defendants submitted that if the PIBA loan was made by CBC to the defendants and the plaintiff is not estopped from denying that the loan was made by PIBA, by the making of the credit to the PIBA account of the sum of $116,044.47 on 5 June 1987 thereby closing that account with a nil final balance, the plaintiff discharged the defendants from further performance under the PIBA loan and the debt owed under the PIBA loan was extinguished. I have previously stated that a book entry does not mean that the debt is extinguished. The Magills did not rely on this assumption and did not act to their detriment. On 30 July 1987 (after these entries had been made) the bank wrote to them and stated that the bank had approved a fully drawn advance facility in the sum of $143,596 with an interest rate of 18.25% payable quarterly, September, December, January and March. Review dates were 30 September 1987 and 31 December 1987. It requested the defendants to complete the loan documentation as soon as possible. However the defendants did not sign this agreement. Frustration 135 On 30 June 1987, ownership of PIBA passed to the Rural and Industry Bank of Western Australia. On 8 November 1987, the Primary Industry Bank Act was repealed. The defendants submitted that due to the sale of shares by PIBA and the purchase of those shares by participating banks, further performance of the loan was frustrated. 136 In order to show that the loan contract was frustrated the defendants must establish that the contract became "fundamentally different" from that originally contemplated by Mason J in Codelfa and that the changes took place after 30 July 1987: "…so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulation in the new circumstances." (per Lord Simon of Glaisdale in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 700 (cited with approval of Aickin H in Codelfa at 378). 137 For the reasons given under the heading "Further estoppel" when the bank took over the loan, it operated on a similar basis to the PIBA loan. I do not consider it to be "fundamentally different". The true situation why the accounts fell into arrears was that the defendants did not have the funds to make the payments due under the loan. Statute of Limitations 138 The defendants submitted that s 43(1) of the Limitation Act precludes the recovery of interest accruing before 1 March 1990 being six years before the commencement of proceedings. Section 43(1) provides: "Action for interest (1) An action on a cause of action to recover interest secured by a mortgage is not maintainable by a mortgagee under the mortgage if brought after the expiration of: (a) a limitation period of six years running from the only or later of such of the following dates as are applicable: (i) the date on which the cause of action first accrues to the plaintiff or to a person through whom he claims; and (ii) where a mortgagee under a prior mortgage is, on the date mentioned in subparagraph (i), in possession of all or any of the property comprised in the mortgage securing the interest, and after that date discontinues his possession - the date of discontinuance; or (b) the limitation period fixed by or under this Act for an action between the same parties on a cause of action to recover the principal money bearing the interest, whichever limitation period first expires." 139 It has not been raised by the defendants that the cause of action to recover the principal money bearing the interest is statute barred. Hence a cause of action to recover interest secured by the mortgage is not statute barred. This submission fails. Calculation of PIBA debt 140 There is an implied right to capitalise interest despite the fact that the PIBA account is not a current account - see Hapgood (1996) "Paget's Law of Banking" 11th Edition at 104 and National Bank of Greece v Pinios Shipping Co [1990] 1 AC 637. 141 The defendants' noted that Mr Cope had used the "Q" rate and thereafter the "B + 2%" rate in his recalculations. These rates result in a balance which is far less than that which will be calculated using the rate last "determined" by PIBA on 5 June 1997 (17.75% - Ex C). This is because interest rates have fallen since then. Mr Cope's interest rate calculations reflect that fall in rate. If the loan was to be calculated at 17.75% from 1987 to date, a far higher figure would result. I will use the calculations which make the debt due and owing a lesser figure, ie., Mr Cope's calculations on the "Q" rate. Alternative claim 142 Alternatively, the plaintiff submitted if it was found that the defendants were firstly, not, as at 5 June 1987, in default under the FDA, the PIBA loan or the current account referred to in paragraph 5 of the defence; secondly, the plaintiff was not entitled to exercise any right of combination as alleged in paragraph 21; and thirdly, the plaintiff was not entitled on 5 June 1987 to debit the FDA loan with the 1987 PIBA balance, the deposit of the proceeds to the FDA did not have the effect of causing repayment of the PIBA loan and such deposits had the effect of causing repayment of the FDA loan at all time thereafter the PIBA loan remained unpaid and the plaintiff by its letter of 30 July 1987 agreed to permit the PIBA loan to continue. By making demands or alternatively by commencing these proceedings, the plaintiff submitted that it demanded repayment of the PIBA loan and the defendants are indebted to the plaintiff in respect of the PIBA loan in the sum of $226,391.98 being the 1987 PIBA balance plus interest. As the plaintiff has succeeded in its claim that the defendants were as at 5 June 1987 in default under the FDA and PIBA loans and it was entitled to exercise its right of combination, it is not necessary to consider the alternative claim. 143 As the defendant has been unsuccessful in its defence and cross claim, the cross claim should be dismissed. The defendants are liable to pay the amounts outstanding on the loans. According to Mr Cope, the amount outstanding as at the 30 September 1998 was $204,279.44. amount outstanding at "Q" rate as at the 30 September, 1999 was $226,391.98 (Ex C). The amount that is due between the 30 September 1999 and 30 June 2000 has to be calculated by the plaintiff in affidavit form so that it can be added to the sum of $226391.91. The plaintiff is entitled to possession of the property "Arapiles". The plaintiff is entitled to enforce the judgment by issuing a writ of possession but I will hear submissions as to an appropriate date upon which the writ should issue. 144 Costs are discretionary. Costs should follow the event. The defendants are to pay the plaintiff's costs. 145 The orders I make are: (1) It is adjudged that the plaintiff is entitled to possession of the property described as the whole of the land comprised in Certificate of Title Volume 7835 Folio 182 and known as "Arapiles" Moree in the State of New Wales. (2) The amended cross claim is dismissed. (3) The plaintiff is to file a further affidavit to calculate the amount owing from 30 September 1999 to 11 July 2000 so that judgment for a sum of money can be entered. (4) The matter is stood over for argument as to the date on which the writ of possession should issue. (5) The defendants are to pay the plaintiff's costs. ************ Last Modified: 09/26/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.