Chocolate Factory Apartments Pty Ltd v Westpoint Finance Pty Ltd [2002] NSWSC 444

New South Wales Supreme Court

CITATION : Chocolate Factory Apartments Pty Ltd v Westpoint Finance Pty Ltd [2002] NSWSC 444 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2583/02 HEARING DATE(S) : 16 & 17 May 2002 JUDGMENT DATE : 17 May 2002

PARTIES : Chocolate Factory Apartments Pty Limited (P) Westpoint Finance Pty Limited (D) JUDGMENT OF : Hamilton J

COUNSEL : V R Gray (P) D E Grieve QC (D) SOLICITORS : Frank G Kalyk (P) Robinson Beale Horton McMinn (D) CATCHWORDS : ESTOPPEL [27] - Estoppel by deed - In general - Whether acknowledgment of receipt of advance operates as estoppel where advance not made. Byers v Dorotea Pty Ltd (1986) 69 ALR 715 Cousens v Grayridge Pty Ltd [2000] VSCA 96 Discount & Finance Ltd v Gehrig's NSW Wines Ltd (1940) 40 SR(NSW) 598 Greer v Kettle [1938] AC 156 Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533 CASES CITED : Mackay v Brice (1979) 53 ALJR 603 Peterson v Moloney (1951) 84 CLR 91 Burchell v Thompson [1920] 2 KB 80 Fisher and Lightwood's Law of Mortgage (Aust ed by Tyler, Young and Croft, 1995) [1-71] Meagher, Gummow and Lehane, Equity Doctrines and Remedies (3rd ed, 1996) [335] Spencer Bower and Turner on Estoppel by Representation (3rd ed, 1977) [164] DECISION : Interlocutory relief granted.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

HAMILTON J

FRIDAY, 17 MAY 2002

2583/02 CHOCOLATE FACTORY APARTMENTS PTY LIMITED v WESTPOINT FINANCE PTY LIMITED JUDGMENT 1 HIS HONOUR: These proceedings for interlocutory relief arise out of contractual arrangements concerning the financing and building of a development in Stanmore of 87 residential units. The building has been substantially completed, and of the units, about 20 remain to be sold. Last week and this week there have been the completions of sales of various units and, on those completions, sums totalling about $2 million have been or are to be received. 2 The owner of the land and developer is the plaintiff. The present defendant is Westpoint Finance Pty Limited. It is one of a group of companies ("the Westpoint Group") which also include Westpoint Corporation Pty Limited ("Westpoint Corporation"), Westpoint Management Pty Limited ("Westpoint Management") and Westpoint Constructions Pty Limited ("Westpoint Constructions"). The Westpoint Group was employed by the plaintiff in various activities in the development of the project. Thus, Westpoint Management was to oversee the obtaining of finance and the construction and sale of the units and Westpoint Constructions was to build the units. While construction was proceeding, the defendant also became involved and a third registered mortgage over the land was granted by the plaintiff to the defendant. The two prior mortgages to which it was originally subject have since been discharged, so that it is the only remaining registered mortgage over the land. 3 It appears from the material before me that the defendant became involved in the matter in November 2001. There is a resolution of the directors of the plaintiff of 16 November 2001 to the effect that a mortgage should be given to the defendant to fund upgrades to certain apartments and "to provide the builder [Westpoint Construction] with security for the additional 10 per cent retention that was being withheld by the Bank of Western Australia Limited in accordance with its Finance Approval". The resolution set out figures which specified the amount in respect of building contract retention as $1,712,900 and in respect of upgrades as a total of some $630,000, being a grand total of about $2,344,000. The loan for the upgrades was to carry interest at 15.5 per cent per annum, but the loan in respect of retention moneys was not to bear interest. The arrangement was put into effect by the execution on 19 November 2001 of two documents. One of those documents was the mortgage that subsequently became the third registered mortgage ("the mortgage"), the execution of which was required by the other document, which was a loan agreement ("the loan agreement"). 4 By the mortgage the plaintiff acknowledged "receipt of the principal sum referred to in the loan agreement ... and any further variations thereof". The loan agreement provided in clause 3 that the lender should: "… upon request by the Borrower, provide the Advance to the Borrower by way of cash advance on the Drawdown Date ... The Advance will be provided to the Borrower by way of cheque drawn by the Lender payable to the Borrower or as the Borrower directs in writing." 5 The evidence shows that, whatever the acknowledgment of receipt contained in the mortgage means and whatever its effect, no advance had in fact been made at the time of the execution of the loan agreement and the mortgage on 19 November 2001. The evidence also shows that there were no cheques drawn or delivered by way of provision of the advance and no direction in writing by the borrower for the drawing of cheques in favour of any person other than the borrower, nor is there evidence of any written or other direction by the plaintiff for moneys to be advanced or paid to any person other than itself. 6 Mr Grieve, of Queen's Counsel for the defendant, relies, as showing the moneys advanced under the loan agreement and secured by the mortgage, on journal entries made within the accounts of companies in the Westpoint Group. The journal entries are largely dated as at (and none is earlier than) 31 December 2001, although from the evidence it appears that they were created in February 2002 as a result of an internal direction given within the Westpoint Group. The plaintiff's case is that in those circumstances it is not established that there are any moneys payable under the mortgage and it is, therefore, as against the defendant, entitled to take and use as its own the proceeds received on the sale of the various units. The defendant's case is that moneys are owing under the mortgage and that, although the defendant, whether it is obliged to by the terms of the mortgage or not, is quite prepared to give progressive partial discharges of the mortgage to permit completion of the sales of the units, it is not prepared to do so unless it receives the net proceeds of sale, at least until the amounts of the advances it says were made are met. 7 The moneys that have so far been paid during the last fortnight have been paid into Court in accordance with the short term interlocutory relief which I have granted at the plaintiff's instance, but on the application before me the plaintiff bears the onus of establishing that those moneys ought remain in Court and that further moneys, as received in return for partial discharges of the mortgage, ought be paid into Court to abide the further order of the Court. 8 In addition to this dispute between the plaintiff and the present defendant as to whether or not moneys were advanced and are secured by the mortgage, there is also a dispute between the plaintiff and Westpoint Constructions as to what moneys are owing between those companies under the construction contract. However, the transaction on which this application turns is a transaction between the plaintiff and the defendant only. 9 I should add that Mr Grieve, in addition to relying upon the journal entries referred to as establishing that advances have been made, has relied upon an estoppel that he says arises from the acknowledgment of receipt contained in the mortgage that prevents the plaintiff from arguing on this application that the advance stipulated in the loan agreement, namely, $2,345,000, was advanced by the defendant to the plaintiff and is secured by the mortgage. Furthermore, Mr Grieve has argued in some detail that, although the evidence is in an elementary state on the questions of the countervailing claims under the construction agreement, even upon the plaintiff's claim as formulated, the balance under that contract must be in a substantial sum in favour of Westpoint Constructions. 10 Evidence has been led which does indicate that, if sums of money running into a seven figure total were paid to the defendant and dissipated, it may be difficult for the plaintiff to recover the sums paid in due course from the defendant, if it were found not entitled to them. In that company the shareholders' equity is negative. Mr Grieve has tendered an undertaking by Westpoint Corporation to the effect that, if an order were made for the repayment of any moneys received by the defendant, Westpoint Corporation "would provide the defendant with such financial assistance as may be necessary to ensure that [it] is able to comply with such an order". The evidence available concerning the financial affairs of Westpoint Corporation indicates that it has shareholders' funds of between $5 and 6 million, but a director of that corporation in cross examination has conceded to Mr Gray, of counsel for the plaintiff, that there are not shown on the accounts contingent liabilities by way of guarantee arising out of development projects which, at their worst, total several million dollars. 11 Turning to the arguments, in my view, Mr Grieve's submission as to an estoppel is not correct for a number of reasons. One is that the very terms of the acknowledgment containing a reference to future advances create difficulties in construing this acknowledgment as representing that the whole of the moneys had been advanced. Further difficulties are created if the terms of the mortgage are read, as I think they must be, together with the terms of the contemporaneous loan agreement. In other words, the mortgage cannot be construed as making the acknowledgment sought to be relied on, or the acknowledgment is ambiguous and cannot found an estoppel: Discount & Finance Ltd v Gehrig's NSW Wines Ltd (1940) 40 SR(NSW) 598 per Jordan CJ at 603. However, whatever the interpretation of the acknowledgment, this is a court of equity and it is clear that in equity the question of what advances have in fact been made may be examined despite an acknowledgment of receipt: see the often quoted passage from the speech of Lord Maugham in Greer v Kettle [1938] AC 156 at 171; see also Meagher, Gummow and Lehane, Equity Doctrines and Remedies (3rd ed, 1996) [335]; Fisher and Lightwood's Law of Mortgage (Aust ed by Tyler, Young and Croft, 1995) [1-71]; Spencer Bower and Turner on Estoppel by Representation (3rd ed, 1977) [164]; Burchell v Thompson [1920] 2 KB 80 per Lush J at 86; Peterson v Moloney (1951) 84 CLR 91 per Dixon, Fullagar and Kitto JJ at 100; Mackay v Brice (1979) 53 ALJR 603 per Gibbs J at 605; Byers v Dorotea Pty Ltd (1986) 69 ALR 715 per Pincus J at 723; Cousens v Grayridge Pty Ltd [2000] VSCA 96 per Batt JA at [58]. 12 The question then becomes whether the plaintiff has an arguable case that no moneys were owing under the mortgage on the basis that it is not established on the evidence that any moneys had been advanced under the mortgage and bearing in mind the mechanical provisions of clause 3. In my view, there is an arguable case to this effect. It is arguable that the necessity for a written direction by the plaintiff was specified not only to permit the nomination of an alternative payee of the advance, but also to protect the plaintiff, so that liability for advances under the loan agreement can be imposed on it only in respect of moneys it actually receives or in respect of which it has given a written direction. There is on the evidence no request or assent by the plaintiff in respect of the payment of any advance to the defendant or any other person. No doubt in appropriate cases journal entries can effect a payment but there is a serious question as to whether in this case they do effect payments to the plaintiff or payments which are advances under the mortgage. In my view it is certainly arguable that the resolution of 16 November 2001 forms no part of the contract between the plaintiff and the defendant and cannot be relied on without more as justifying the defendant in paying moneys to Westpoint Constructions on the plaintiff's account. 13 It seems to me, considering the balance of convenience, that the plaintiff has established that it may have difficulty in recovering considerable sums of money from the defendant if paid to that company. Mr Grieve has proffered the undertaking by Westpoint Corporation that I have already mentioned to mitigate the effect of the financial state shown in the defendant's accounts. However, some doubt has been cast upon the ultimate financial strength of Westpoint Corporation itself. Furthermore, the undertaking in the form in which it has been proffered is, it seems to me, uncertain in its terms and may well prove difficult of enforcement, if enforcement were necessary. 14 The balancing exercise required in cases of applications for interlocutory relief is as set out by McLelland J in Kolback Securities Limited v Epoch Mining NL (1987) 8 NSWLR 533 at 535 - 536. In the end, the view that I have come to is that the correct result of the balancing exercise is that there should be interlocutory relief to maintain the status quo, namely, that the moneys concerned are not in the hands of either the plaintiff or the defendant. The effect of the relief will be to hold available any moneys received on the sale of lots for payment in due course to whomever may prove to be entitled to them. I should say that the evidence does not show any immediate financial difficulty which would be caused to the defendant or, indeed, if it be relevant, the Westpoint Group generally, by this course of action being followed. 15 One matter was clarified late in the hearing of the application. I indicated that for relief to be granted I should require to be convinced that the plaintiff was taking appropriate steps to resolve speedily the disputes that existed not only between itself and the defendant but between itself and Westpoint Constructions. Mr Gray has this morning brought in a statement of claim against both the present defendant and Westpoint Constructions, which would need to be added as a defendant to the proceedings for claims relating to it to be determined. He invites me to add the second defendant, to order that the proceedings continue on pleadings and to make a direction for the filing of that statement of claim within a day or two (to allow final consideration to be given to its form). He has also asked that the matter be placed before an Expedition Judge in the near future to permit an application for expedition to be brought. Although I shall not make it a specific condition of the interlocutory relief I grant that the proceedings be pursued diligently, it is upon the understanding that they will be that I shall grant the interlocutory relief. Any lapse in that diligent prosecution would, in my view, be an occasion for the defendant to move for the variation or discharge of that relief. 16 Short minutes should be brought in to encompass the decision that I have come to.