Iacullo v Behrens [2006] NSWSC 121

In this case the borrowers executed a loan agreement and a mortgage in the sum of $50,000. The lenders alleged the mortgage was for the purpose of discharging pre-existing liabilities. This was denied by the borrowers. The borrowers contended that this sum was not advanced and that no valuable consideration was given by the lender to the borrowers pursuant to the loan agreement.

The lenders argued that:

  1. The Mortgage secured an advance that discharged existing liabilities to an amount of $50,000
  2. To the extent the Loan Agreement was silent on the purpose of the loan (what was meant by the term “advance”) it is a latent ambiguity as to which the Court can consider extrinsic evidence to determine the true intention of the parties.
  3. The extrinsic evidence supports the lender’s construction of the word “advance”.

The loan agreement contained one recital, namely:

“The Borrower has requested the Lender to make a loan available to him (sic) upon the terms and conditions set out in this document.”

Clause 1 provided:

“The Lender agrees to advance to the Borrower subject to the terms and conditions of this document the sum of $50,000.”

The Agreement contained an entire agreement clause. The borrowers submitted that as the Loan Agreement was wholly in writing, contained an entire agreement clause and was not ambiguous, resort could not be had to extrinsic evidence. Smart AJ held that the loan agreement contemplated the lender advancing $50,000 to the the borrowers that is, furnishing that money to them. The furnishing need not necessarily have been by way of loan. However, a loan was in contemplation in the present case. Under the loan agreement (and the mortgage) this arrangement did not purport to be a loan to cover past indebtedness including moneys previously advanced and debts previously incurred, for example, for rent. The context of the agreement made that clear.

His Honour did not regard the language of the loan agreement as ambiguous or susceptible of more than one meaning. He regard it as reasonably clear and would therefore not rely on the surrounding circumstances in construing the loan agreement. This is not a case for the admission of extrinsic evidence because of inherent ambiguity in the sense used by Mahoney JA in Burns Philp Hardware. If I am wrong in that conclusion my review of the evidence leads me to the conclusion that in the present case “advance” was used in its normal meaning of furnishing money to the Behrens, albeit by way of loan. The extrinsic evidence, which I have accepted, leads to the conclusion that this was not a loan to cover past indebtedness.

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