Illawong Village v State Bank of NSW [2004] NSWSC 18

In this case, the borrower approached the bank to obtain finance for the construction and operation of a shopping centre.  A three year loan was given to the borrower under which the borrower agreed to mortgage its interest in the land on which the shopping centre was built.

However, it was discovered shortly thereafter that the borrower had not yet acquired title to some of the land on which the shopping centre was built. Consequently, it was agreed that the borrower grant a mortgage over the parcels of land that it currently owned (“the 1988 mortgage”) and upon the acquisition of the remaining parcels, the borrower was to execute a mortgage over the remaining parcels of land – an obligation which was fulfilled in 1990 (“the 1990 mortgage”).

When the loan became due and payable at the end of the three year term, the two parties agreed to refinance the loan. However, the issue arose as to the correct interest rate that was to be charged during the period of the three year loan expiring and its subsequent refinancing. The period was referred to in the judgment as the “limbo period”. The borrower claimed that the interest was overcharged by the bank during this period.

The 1988 Mortgage

The 1988 mortgage was an ‘all monies’ mortgage which secured all past and future indebtedness of the borrower to the bank. One of its clauses provided that:

The Mortgagor [borrower] will pay to the Bank interest on the moneys hereby secured at the rate or rates agreed upon from time to time and in default of such agreement as decided by the Bank from time to time.

It was accepted by the parties that once the term of three year loan had expired, the rate of interest charged under the loan no longer applied to the debt that was still owing. Hence, in compliance with the above clause, where there is no agreement over the interest rate to be charged, the bank could decide what interest rate applied to the debt.

The main contention of the borrower was that this clause in the 1988 mortgage was varied by the execution of the 1990 mortgage.

The 1990 Mortgage

The mortgage granted by the borrower in 1990 over the remaining parcels of land which it had subsequently acquired provided that it secured the interests that were being charged by the bank at:

the rate or rates from time to time agreed upon between the Mortgagor [the borrower] … and the Mortgagee [the bank] and failing such agreement the rate determined from time to time by the Mortgagee as being applicable to like accounts.

The borrower contended that the bank the interest rate to be applied on the debt during the limbo period should have been an interest rate that it was applying to like accounts.

Did the 1990 mortgage vary the 1988 mortgage?

Citing the case of Tallerman & Company Pty Limited v Nathan’s Merchandise (Victoria) Pty Limited (1957) 98 CLR 93, Campbell J noted at paragraph 42 that:

The parties to an agreement may vary some of its terms by a subsequent agreement.  They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement.”

The provision concerning rate of interest contained in 1990 Mortgage will, thus, be operative if an intention to vary the provisions as to interest contained in the 1988 Mortgage, can be seen. 

In holding that the bank was entitled to charge the interest rate in accordance with 1988 Mortgage, Campbell J found that at the time the loan was granted, the intention of the parties was for security to be given to all the parcels of land on which the shopping centre was built. The agreement was that the borrower would execute a mortgage over the remaining parcels of property when it was subsequently acquired. This the borrower did through the execution of the 1990 Mortgage. Hence, the 1990 Mortgage was given in fulfillment of that obligation.
In these circumstances, Campbell J held that there was no intention of the parties as disclosed by the 1990 Mortgage to vary the provisions as to interest which are contained in the 1988 Mortgage.


The borrower further argued that the bank was estopped from overcharging on the basis of estoppel. They contended that the bank made a representation to them that it would “deal with” the issue of overcharging. The borrower contends that this meant the bank would consider and deal with the issue of overcharging in accordance with the contractual rights of the borrower.

Campbell J found that the borrower cannot show that it had suffered any detriment because his contractual rights (or obligations), as held by his Honour, was to pay the interest charged pursuant to the clause in the 1988 Mortgage.

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