New South Wales Supreme Court CITATION : Jones v Mecu Limited [2006] NSWSC 51 HEARING DATE(S) : 8 February 2006 JUDGMENT DATE : 8 February 2006 JURISDICTION : Equity JUDGMENT OF : Campbell J EX TEMPORE JUDGMENT DATE : 02/08/2006 DECISION : Proceedings dismissed CATCHWORDS : CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – parol evidence rule – authority of agent – principally turns on facts – EVIDENCE – effect of failure of a party to give evidence on a topic which he could have given evidence – effect of failure to call a relevant witness Branir Pty Ltd & Others v Owston Nominees (No.2) Pty Ltd and Another (2001) 117 FCR 424 Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 CASES CITED : Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2005) 218 CLR 471 Jones v Dunkel (1959) 101 CLR 298 State Rail Authority of NSW v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 Richard Mark Jones - First Plaintiff PARTIES : Essicorp Pty Ltd - Second Plaintiff Mecu Limited - Defendant FILE NUMBER(S) : SC 6288/05 COUNSEL : G Niven - Plaintiffs M R Aldridge SC - Defendant SOLICITORS : DTA Lawyers - Plaintiffs Gadens - Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY JUDGE LIST CAMPBELL J WEDNESDAY 8 FEBRUARY 2006 6288/05 RICHARD MARK JONES & ANOR v MECU LIMITED JUDGMENT – Ex Tempore (revised 13 February 2006) 1 HIS HONOUR: The plaintiffs are joint venturers engaged in a construction project at 48 Evans Street, Rozelle. They are the registered proprietors of the land on which that construction project is proceeding. Mr Jones, the first-named plaintiff, is also acting as the builder in connection with the Project. 2 There was a mortgage on the property in July 2005. In July 2005 the plaintiffs were investigating borrowing further money to enable them to proceed with the construction project (which at that stage had not commenced, though the plaintiffs owned the land). They approached Mortgage Force Australia (NSW) Pty Ltd, a mortgage broker, about refinancing the existing mortgage. There, they dealt with a Ms Jo Perricelli. 3 Mr Martin Warner on behalf of the plaintiffs made contact at a very early stage with Ms Perricelli. Mr Warner is the moving force behind the second plaintiff. As early as 7 July 2005, Ms Perricelli was e-mailing Mr Warner, mentioning the prospect of borrowing money from Member Education Credit Union (which either is, or is intimately connected with, the defendant). 4 It appears that an application was made on 15 July 2005 by the plaintiffs to borrow the sum of $1.48 million. That application was considered by the defendant. Mr Stephen Collis is the Regional Manager for the defendant, who was responsible for processing this application. In early August of 2005 he caused a valuation of the property, as it would be when the building project was completed, to be made. That seeking of the valuation followed on from Mr Collis informing Ms Perricelli, on 29 July 2005, that the $1.48 million loan had been approved, subject to some conditions. One of those conditions was "Borrowers to account for all loan costs & stage valuation costs". 5 The valuation which Mr Collis requested came to hand on 12 August 2005. It assessed the value of the property with the completed buildings on it at $1.75 million. Mr Collis states that it is the defendant's practice to lend up to a maximum of 80% of the valuation. It is not suggested that that practice is something which was of itself known to the plaintiffs. It resulted, however, in the defendant deciding that the most it would lend to the plaintiffs was the sum of $1.4 million (which is 80% of $1.75 million). 6 Ms Perricelli and Mr Collis negotiated further concerning the loan. In particular, on or about 19 August 2005 Mr Collis spoke to Ms Perricelli, and the following conversation ensued: COLLIS: "You know that because of the valuation the 80% rule will have to apply to the progress payments?" PERICELLI: "Yeah that's fine." 7 There was a hiatus, the cause of which is not explained on the evidence, after that. The plaintiffs began the construction task, expending money in connection with it starting on 8 August 2005. 8 The defendant sent a letter of offer to the plaintiffs, which came to be executed on behalf of the defendant on 24 October 2005. The letter of offer was one which made provision for acceptance on behalf of the borrower by the borrower signing. The precise date when the borrower signed does not appear from the evidence, but it must have been on or before 24 October 2005. 9 The letter of offer said that the defendant offered the plaintiffs "... the Amount of Credit specified in the Schedule on the terms set out in this Offer and Loan Contract ...". The amount of credit stipulated was $1.4 million. Under the heading "Valuation Fees" the letter of offer said: "If your loan is for the construction of a property, a fee is payable to the valuer for each progress inspection. This fee is currently between $65.00 and $100.00 (not including GST) depending on the State or Territory the property is concerned in." 10 Under the heading "Disbursement Date Disclaimer" it said: "You acknowledge that we have made no representation or warranty as to the date or dates upon which the Amount of Credit will be advanced to you. You expressly acknowledge that to the extent permitted by law we are not liable to you for any loss or damage caused to you or any other person arising in connection with the amount of credit not being advanced on the date or dates required by you." 11 The letter of offer had annexed to it a printed form setting out terms of the loan contract. Those terms included: "2.2 You must arrange to draw the Amount of Credit within 30 days of the date of this loan contract or later as we both agree. If you do not do so, we may terminate this loan contract. 3.1 Subject to Clause 2 and this loan contract, we agree to lend you up to the Amount of Credit." 12 The first page of the letter of offer contained a power for the lender to vary many of the amounts which became payable in connection with the loan, such as the interest rate, the fees, and the amount of repayments. The terms of the loan contract spelt out the manner in which those various powers to vary the contract would be exercised. Mr Niven, for the plaintiff, correctly points out that, while there is a power to vary many of the commercially important integers of the loan agreement, there is no express power reserved to vary the manner in which the Amount of Credit may be drawn down. 13 On 28 October the solicitors for the defendant wrote to Mr Jones, enclosing various documents which were to be executed and returned. The letter stated that the loan amount was $1.4 million, from which would be deducted amounts for application fee, stamp duty, the lender's solicitor's fees, and registration fees, each in stated amounts. It continued: "The balance loan amount will be available to you and we will pay it as directed by you or your solicitor. Settlement (completion of your loan) is organised through us. We require directions on how to pay the balance loan amount prior to 12.00 noon, two business days prior to settlement." 14 On 12 August 2005 Mr Jones, wearing his hat as the builder of the project, wrote a letter to himself and the second plaintiff. It said: "Please find below the payment schedule for the building project on your development. As a Department of Fair Trading contract will be signed between yourself and Richard Jones Constructions, it should be noted by yourselves and the financial institution that upon receipt of an invoice for these amounts that you have 5 working days to issue a cheque as per the contract. Failure to do so will result in a breach of this contract." 15 It then went on to set out a list of five progress payments, numbered 1 to 5. In relation to each of the progress payments, it set out a list of work connected with the construction project. A reasonable commercial interpretation of that letter is that, in relation to any particular progress payment, that progress payment would be payable when the work stated in the list as corresponding to that particular progress payment, had been done. The letter stated the amount of each of the five progress payments. The total amount of those progress payments was $780,000. The amount that was owing to the previous financier was $720,000. Thus, if the loan had been made for $1.48 million as originally applied for, the making of those progress payments, and payment out of the prior financier, would absorb all of the $1.48 million which had been applied for, together with an additional $20,000. This particular letter had its genesis in an e-mail which Mr Jones had sent to Ms Perricelli, for her to pass on to the defendant. 16 It appears, from the account of the loan maintained by the defendant, that settlement occurred on 11 November 2005. Before that time, a request for progress payment had been made by Mortgage Force on or about 7 November 2005. That request, made by a Ms Williams to Mr Collis, said: "Please find following the Progress Payment request for the first two progress payments. Richard advises that the progress payments 1 & 2 are covered in the schedule originally provided dd 12-8-05. They advise that they have funded the building works to date and work will have to stop on Wednesday of next week if the progress payments have not been made. They are desperate to get these underway. Would you please arrange for the valuer to attend the worksite and confirm that the building works described have been completed?" 17 The request by Ms Williams was accompanied by a letter from Mr Jones, addressed to Mr Collis, saying: "Please arrange for an inspector/valuer to assess the completed works on the above-mentioned project. We are presently starting the laying of bricks to the first floor which is Part 1 of the third progress payment. Therefore, we require payment of $290,000, being payments numbers 1 and 2." 18 It was also accompanied by another copy of the letter of Mr Jones of 12 August 2005, to which I have already referred. That letter identified the first progress payment as being for $120,000, and the second progress payment as being for $170,000. 19 As requested, the defendant arranged for a valuation of the property to occur. That valuation was received by the defendant on about 10 November 2005. It recommended progress payment of $290,000, after certifying that the value of the work satisfactorily carried out was $290,000. 20 The defendant did not advance the whole of that $290,000, however. Instead, it advanced an amount of approximately $272,000. This was calculated as being the additional amount which needed to be advanced to bring the total advances made to 80% of the land value ($950,000) plus the 80% of value of improvements which had been erected to date ($290,000). 21 This did not satisfy the plaintiffs. On 21 November 2005 DTA Lawyers, acting for the plaintiffs, wrote to the solicitors for the defendant, stating as follows: "Dear Sirs, re: JONES & ESSICORP - MORTGAGE TO MECU LIMITED 48 EVANS STREET, ROZELLE We act for Mr Jones & Essicorp Pty Ltd. We are instructed as follows:- 1. Our clients entered into a loan agreement with your client for your client to provide them with funding of $1,400,000.00. 2. By your letter of 28 October 2005, you advised our clients as follows:- "The loan amount is $1,400,000.00 From that amount, the following will be deducted:- Application fee $595.00 Stamp duty for mortgage $5,541.00 Gadens $220.00 Registration fees $154.50 The balance loan amount will be available to you and we will pay it as directed by you or your solicitor." 3. Clause 2.2 of the Loan Contract recites as follows:- "You must arrange to draw the Amount of Credit within 30 days of the date of this loan contract...." 4. Settlement of the mortgage advance has taken place. 5. On settlement, the funds owing to the existing mortgagee were paid and the fees referred to in paragraph 2 above were paid. 6. Two further amounts have been paid to our client. 7. Not withstanding the matters referred to in paragraphs 2 and 3 above, our clients have not yet received the full amount of the loan balance. In accordance with the terms of the agreement between your client and our clients, your client is now authorized and directed to draw the balance of the remaining loan amount in favour of our clients. The amount should be credited to the account of our clients with AMP Bank. We are instructed that your clients have the relevant bank account details. Please confirm the deposit of the funds within the next forty eight hours. Yours faithfully, DTA LAWYERS" 22 There were other requests made on behalf of the defendants for payment of the outstanding balance of the progress claims. However, the defendant has continued to assert that its only obligation is to pay 80% of the value of the land plus the work completed to date. 23 On 4 December Mr Warner wrote to Ms Williams, requesting a full breakdown of the transaction at settlement of the loan, stated that the requirement of 100% payment for instalments 1 and 2 must be paid immediately, and said that they required the third instalment within five business days. On 6 December Ms Williams wrote to Mr Collis, enclosing a progress payment request for the third progress claim. She said: "Again, this payment is per the schedule originally provided dd 12/8/05. Would you please arrange for the valuer to attend the work site and confirm that the building works described have been completed?" 24 The letter enclosed the letter from Mr Jones to Mr Collis, which, amongst other things, said: "Please arrange for an inspector/valuer to assess the completed works on the above-mentioned project. We have finished the first floor framing and are completing the first floor walls. Rendering is being undertaken to the basement, bathroom, laundry and pit room and the tiler commences work next week to complete this area. Landscaping is completed with the planting of trees and shrubs to the rear fence and to the side fence of one of the proposed sub-divided properties. Please note that it is a requirement that your valuer makes an appointment to enter the building site and conducts an assessment of the works visually and professionally. Under the terms of the Department of Fair Building Home Building contract, five days after an invoice is issued by Richard Jones Construction, ESSICORP Pty Ltd and Richard Jones comply with payment or the contract is in breach." 25 It asserted that there had been a settlement of a dispute about whether they were entitled to the whole of the progress claim, and threatened that if progress payments were not forthcoming the plaintiffs would proceed with legal action. 26 Mr Jones, in evidence, explained the writing of this letter by saying that it was written on legal advice, to the effect that, even though it was the contention of the plaintiffs that they were entitled to receive the whole of the loan immediately, they should at least receive the progress payments. I observe that there was no assertion in the present proceedings, in the relief sought, that there had been a binding agreement to settle the dispute arrived at, in the manner asserted in Mr Jones's letter. The defendant replied to Ms Williams on 7 December, saying that it had not agreed to change the funding conditions of the loan "from those previously advised to Jo Perricelli". 27 The third progress claim was made, for $120,000. In fact, the defendant paid the whole of that progress claim, even though it took the total amount of it to lendings above 80% of the land value plus 80% of what the valuer said was the value of the works to that date. Mr Collis said the defendant did that for commercial reasons, believing that its security would be better protected if the building work were to advance rather than not. 28 There have been other progress claims made, but it is not necessary to go into the detail of them now. The present state of affairs is that not all of the work which is referred to in Mr Jones's letter of 12 August 2005 as being the work relating to the fourth progress claim has yet been done. Some, but not all, of the work listed in relation to the fifth progress payment has, however, been done. The amount by which the payments made by the defendant fall short of the total of the first, second and third progress claims is of the order of $67,000. 29 The plaintiff alleges that, on the correct construction of the loan agreement, it was entitled to the Amount of Credit immediately upon settlement or at any event within 30 days. 30 The High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2005) 218 CLR 471 has said, in a joint judgment of Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ as follows: "The respondents each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. Yet fundamental to the respondents' case that the operative agreements between the parties were wholly oral, and reached earlier than the execution of the written agreements, was the proposition that the written agreements subsequently executed not only may be ignored, they must be. That is not so. Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified. The respondents attempted neither. There are reasons why the law adopts this position. First, it accords with the "general test of objectivity [that] is of pervasive influence in the law of contract". The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions. Secondly, in the nature of things, oral agreements will sometimes be disputable. Resolving such disputation is commonly difficult, time-consuming, expensive and problematic. Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case. Different questions may arise where the execution of the written agreement is contested; but that is not the case here. In a time of growing international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements (and frequently communicating in different languages and from the standpoint of different cultures) this is not a time to ignore the rules of the common law upholding obligations undertaken in written agreements. It is a time to maintain those rules. They are not unbending. They allow for exceptions. But the exceptions must be proved according to established categories. The obligations of written agreements between parties cannot simply be ignored or brushed aside." 31 Mr Aldridge SC, for the defendant, accepts that there is nothing in the letter of offer itself, or the mortgage document, which contains an express term limiting the payment of the Amount of Credit to payment by progress payments of 80% of the value of the property from time to time. However, he submits that the contract in question is one which is partly written and partly oral. The parol evidence rule is a rule which states that oral evidence cannot be given to add to or contradict the terms of an agreement which is wholly in writing. However, as McHugh JA pointed out in State Rail Authority of NSW v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170 at 191, before the parol evidence rule becomes applicable, the court must first decide that there is an agreement and that the terms of the agreement are wholly contained in writing. See also Branir Pty Ltd & Others v Owston Nominees (No.2) Pty Ltd and Another (2001) 117 FCR 424 at 506. In the present case, the loan approval was subject to a condition that the borrower pay the "stage valuation costs". The letter of 12 August, the substance of which was communicated to the defendant, contemplated that there would be progress payments. The loan documentation itself contemplates that there will be progress inspections, when the loan is for the construction of a property. The conduct of the plaintiffs in applying for the first and second progress payments is consistent with there having been an agreement that payment would be made by progress payments of some sort. That application by the plaintiffs was made before the defendant had expressly stated, in response to a progress payment application, that it would make progress payments only of 80% of the total value of the security from time to time. 32 If the plaintiffs' preferred construction of the contract were correct, so that the whole of the amount of credit could be drawn down instantly, a situation which was commercially unusual, and where there was the potential for the defendant to be undersecured, would arise, if at the time of that draw down the construction work had not all been carried out. I say that there is a potential for that to happen, because it was a term of the loan that a guarantee be provided by Mr Warner, as well as a mortgage over the site where the building work was taking place, and the value of that guarantee is not disclosed in evidence. There is nothing in a term whereby the payment would be made by progress payments which in any way contradicts the express terms of the loan agreement. I am satisfied that it was a term of the loan agreement that the loan would be advanced by progress payments. 33 Mr Aldridge SC contends that the conversation between Ms Perricelli and Mr Collis of 19 August 2005 was made in circumstances where Ms Perricelli was the agent of the plaintiffs for the purpose of making the arrangement of which Mr Collis there gives evidence. While one would not assume, from the mere position of someone as a mortgage broker, that that person had authority to enter contractual arrangements on behalf of their clients, in the present case there is evidence that Ms Perricelli was in communication not only with Mr Jones, but also with Mr Warner. Mr Jones gave evidence that he did not authorise his broker "to negotiate any amendment to the finance facility on behalf of himself or on behalf of Essicorp Pty Ltd". That evidence says nothing about whether, before the finance facility was actually entered into, there was authority for Ms Perricelli to have the conversation which she had on 19 August 2005. It being a topic on which Mr Jones had the power to give evidence, and chose not to give evidence, the principle related to Jones v Dunkel (1959) 101 CLR 298 applies, recognised by the Court of Appeal in Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-9. Further, there has been no evidence at all from Mr Warner, who seems to have been every bit as active as Mr Jones in negotiation of the finance facility. The rule in Jones v Dunkel applies to his failure to give evidence. The evidence of Mr Collis concerning his conversation with Ms Perricelli was in no way tested, even though Mr Collis was called for cross-examination. According to that evidence she agreed straight away to the proposal which Mr Collis put to her. It would be strange if she were to agree immediately to such a proposal without authority to do so. In the particular circumstances of this case, I find that she had authority to have the conversation she had with Mr Collis. Under those circumstances, the agreement between the parties is that not only will there be payment of the Amount of Credit by progress payments, but that those progress payments will be made in accordance with the 80% rule. 34 In those circumstances, the defendant is not in breach of its contract. The plaintiffs' application is dismissed. 35 I order the plaintiffs to pay the defendant's costs of the proceedings. ********** 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.