Dong v Monkiro [2005] NSWSC 749

A loan deed was entered into whereby the plaintiff agreed to lend the defendant $1.1 million for the purpose of a townhouse development. The issue arose of whether it was open for the loan agreement to operate retrospectively (in respect of payments already made) and whether interest payable on those amounts was a penalty.

There was an issue about the amount of the repayments made, and whether these payments were repayments or profit share. The determination of those issues also affected the amount of interest payable on the loan.

The Court was asked to take into account pre-contractual negotiations in deciding when the loan agreement was formed. Justice Hall found  that the parties’ rights were governed by the loan deed they entered into, including terms for the retrospective operation of the loan agreement, saying

The law has adopted a practical approach to the operation of commercial contracts having regard to earlier dealings between contracting parties. The law does not assume that acceptance of an offer cannot have retrospective effect so as to make the contract apply to things done earlier in anticipation of the contract.  In Trollope & Colls Limited v. Atomic Power Constructions Limited (1962) 3 All ER 1035, Megaw, J. stated:-

“… there is no principle of English law which provides that a contract cannot in any circumstances have retrospective effect, or that, if it purports to have, in fact, retrospective effect, it is in law a nullity.  If, indeed, there were such a principle, there would be many Mercantile contracts which would, no doubt, to the consternation of the parties, be nullities.  Frequently in large transactions a written contract is expressed to have retrospective effect …:  and this in cases where the negotiations on some of the terms have continued up till almost, if not quite, the date of the signature of the contract.  The parties had meanwhile been conducting their transactions with one another, it may be for many months, on the assumption that a contract will ultimately be agreed on lines known to both the parties, though with the final form of various constituent terms of the proposed contract still under discussion.  The parties have assumed that when the contract is made – when all the terms have been agreed in their final form – the contract will apply retrospectively to the preceding transactions.  Often, as I say, the ultimate contract expressly so provides.  I can see no reason why, if the parties so intend and agree, such a stipulation should be denied legal effect.”

Similarly, in City of Box Hill v. E.W. Tauschke Pty. Limited (1974) VR 39, it was contended that tender documents for the reconstruction of a road for a Council which were accepted by letter, called upon the tenderer to sign contract documents within four days.  It was not in fact signed until some time later by which date works had been performed and certain progress payments had been made.

In that case, it was unsuccessfully contended that the contract was purely prospective in operation and in no way related to works which had already been done.  However, ultimately, the decision in that case essentially turned upon the principle in Masters v. Cameron (1954) 91 CLR 353 and is therefore not strictly relevant to the point here.  As a question of construction I am of the opinion that the Deed of 10 February 2002, had a retrospective operation whereby the first defendant assumed obligations in respect of earlier advances and any other advances falling within the operative terms of the Deed.

The only subject of agreement was the townhouse development and all amounts paid were referable to that project. The loan deed expressly brought into account prior loans or payments or advances. The borrower had control of the terms of the loan agreement. It was open for the parties to agree upon the retrospective operation of the loan deed.   

Justice Hall set out the principles of estoppel by deed

(a) General proposition

Estoppel by deed is a rule of evidence founded on the principle that a solemn and unambiguous statement or engagement in a deed must be taken as binding between parties and their privies and therefore as not admitting any contradictory proof.  This is a rule of common law, though it may be noted that an exception arises where the deed is fraudulent or illegal:  Greer v. Kettle (1938) AC 156, 171 per Lord Maugham.  The position in equity is, and was always different in this respect.  Where there are proper grounds for rectifying a deed, eg., because it is based upon a common mistake of fact, then to the extent of the rectification there can plainly be no estoppel based on the original form of the instrument:  Greer v. Kettle (ante).

The decision in Bowman v. Taylor (1834) 2 Ad & El 278 has been explained on the basis that the deed was entered into on the footing that the recital, whether true or not, must be taken during the continuance of a licence as true.

(b) Specific propositions concerning estoppel by deed

• It is clear that a recital may operate as an estoppel but that it must relate to specific facts which are certain, clear and unambiguous.

• There is support for the proposition that estoppel by deed may be considered as a form of estoppel by convention.  In that case, it may be said that an estoppel will only arise by convention where it can be shown that the alleged assumption has in fact been adopted by the parties as the conventional basis of their relationship:  Con-Stan Industries of Australia Pty. Limited v. Norwich Winterthur Insurance (Australia) Limited (1985-86) 160 CLR 226, 244.

• Estoppel by deed is not confined to statements in recitals but applies also, and indeed originally applied only to statements in operative provisions:  Coke on Littleton (1832 ed., vol. 2, 352(b)) and Greer v. Kettle (supra).

• If a party is to be estopped, the court must construe the deed as containing agreement by the party to admit the relevant proposition.

The provisions of the loan deed operated as an estoppel. The lender and the borrower retrospectively agreed, following the making of the payments, that earlier advances were to constitute and/or relate to the subject-matter of the Deed itself. .  

The borrower argued there was an implied term that the amount of the loan was a profit share in the event the development went ahead. That argument failed the business efficacy test set out in BP Refinery (Westernport) Pty. Limited v. Hastings Shire Council (1977) 52 ALJR 20 at 26;  Codelfa (supra). Justice Hall did not accept either that the doctrine of good faith could be relied upon to argue the breach of an implied term that the loan was a profit share since it was not capricious or arbitrary to claim in accordance with a clause for repayment of the loan.

It was not unconscionable to claim the amount loaned since the loan agreement on its proper construction provided for that amount to be repaid, rather than be distributed as a profit share.

The loan agreement provided that a higher rate of interest was payable on any unpaid amounts. The Court having decided that the loan agreement operated retrospectively, the higher rates of interest on the lender’s pre-agreement loans which remained outstanding were not a penalty.

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