Contract: Amendment or replacement?
Parties to a contract enter into a further contract by which they vary the original contract terms. Is the effect of the second contract to bring the first contract to an end and to replace it with the second, or to leave the first contract standing, subject to alteration?
Balanced Securities Limited v Dumayne Property Group Pty Ltd  VSCA 61
Whether the effect of a second contract is to bring an end to the first contract and replace it with the second, or to leave it to subsist subject to alteration, is not capable of a universal answer. It all depends on the objective intention of the parties. Yet, the answer may have serious financial consequences.
Balanced Securities Limited (‘Lender’) offered to lend $7,500,000 to Dumayne Property Group Pty Ltd (‘Borrower’) under a Facility Agreement dated 24 October 2011 (‘the first Facility Agreement’), which provided for a loan term of 18 months, commencing on the ‘Interest Commencement Date’ – relevantly, 7 days after the despatch of “mortgage documents” to the Borrower. Interest under the loan was capitalised and was to be repaid on the “Repayment Date” – relevantly “the date of expiry of the Accommodation Period” (namely, 18 months). The expression “mortgage documents” was not defined.
The Lender despatched some mortgage documents to the Borrower on 12 January 2012 and commenced charging interest on 19 January 2012.
A few months later the Borrower requested the Lender to alter the terms of the loan – in particular, by reducing the Accommodation Period from 18 months to 15 months and consequentially by reducing the capitalised interest amount from $1,200,000 to $900,000. The Lender agreed, and sent a second Facility Agreement (and associated documentation) on 20 March 2012, which was duly executed on 28 March 2012.
Each Facility Agreement provided that if repayment was not made by the Repayment Date, additional interest charges and ‘rollover’ fees were payable. Clause 7.5 of each Facility Agreement provided that upon execution, the Agreement created a mortgage in favour of the Lender over the Mortgaged Property. Moreover, each Facility Agreement contained an ‘entire agreement’ clause.
The Borrower repaid the loan (and capitalised interest) on 27 June 2013. The Lender contended that the repayment was late and that rollover fees and additional interest were payable. So as to procure the release of the security granted in favour of the Lender, the Borrower paid an additional $521,509 under protest.
The Borrower commenced proceedings against the Lender seeking recovery of the amount paid by it under protest.
The Lender argued that the relevant ‘despatch’ of mortgage documents was on 12 January 2012, the ‘Interest Commencement Date’ was 19 January 2012, that the ‘Repayment Date’ was 19 April 2013. It contended that while the second Facility Agreement amended the first Facility Agreement in various respects, the “Interest Commencement Date” under the first Facility Agreement had not been amended, and remained operative. Therefore, the loan was not repaid in time.
In contrast, the Borrower contended that repayment was due 15 months from despatch of the second Facility Agreement (and associated documents), which superseded the first Facility Agreement. Consequently, the Repayment Date was 27 June 2013 and as a result the loan was repaid within time, and no additional fees or interest were payable.
In order to resolve the Repayment Date issue, the trial judge set down as a preliminary question whether the second Facility Agreement amended or supplanted the first Facility Agreement.
Judge Kennedy (as her Honour then was) determined (in favour of the Borrower), first, that the second Facility Agreement supplanted the first Facility Agreement, and, secondly, that the ‘mortgage documents’ had not been ‘despatched’ within the meaning of the second Facility Agreement until that agreement itself had been sent by the Lender to the Borrower. Accordingly, the relevant ‘despatch’ was on 20 March 2012, the ‘Interest Commencement Date’ was 27 March 2012, the ‘Repayment Date’ was 15 months later on 27 June 2013, and consequently the loan was repaid in time.
Following the determination of the preliminary question, the Borrower applied for, and obtained, summary judgment of $521,509, as well as interest pursuant to s 58 of the Supreme Court Act 1986 (Vic).
The Lender appealed.
Court of Appeal
The Court of Appeal agreed with the trial judge. After a review of the leading authorities , the Court set out the following general principles (at ):
- (a) an agreement may be brought to an end either expressly or by implication;
- (b) the issue is to be resolved by ascertaining the manifest intention of the parties;
- (c) the manifest intention of the parties is to be ascertained objectively by the construction of the subsequent agreement, having regard to the relevant context of that agreement where it is permissible to do so in accordance with the ordinary principles of contractual construction;
- (d) a potentially critical factor militating in favour of a conclusion that the manifest intention of the parties, objectively ascertained, was to bring the earlier agreement to an end and replace it, is where the terms of the two relevant agreements deal with the same subject matter in different and inconsistent ways.
Applying those principles, the Court concluded that:
- 1. there was only ever one facility (i.e. a $7.5 million loan);
- 2. the second Facility Agreement regulated the facility in a different and inconsistent way from the first. For example, the ‘Repayment Date’ and the capitalised interest provisions were different;
- 3. the second Facility Agreement had clearly been drafted to constitute the entire agreement and govern the parties’ rights and obligations in relation to the facility;
- 4. the second Facility Agreement had ‘wholly replaced’ the first Facility Agreement.
Next, the Court held that the second Facility Agreement was a mortgage document, and that there was no relevant “despatch” until all mortgage documents were despatched to the Borrower. It followed that upon entry into the second Facility Agreement, the Lender was not entitled to enforce any rights it had under the first Facility Agreement.
The parties could have made explicit provision in the second Facility Agreement as to the intended inter-relationship between it and the earlier Facility Agreement (for example, by providing in the later contract that the earlier contract was at an end; alternatively, was entirely at an end save in respect of certain aspects). But, as so often happens, they did not. Therefore, the Court was left to discern their objective intention, effectively imputing an intention to them.
 In particular, Schreuders v Grandiflora Nominees Pty Ltd  VSCA 93, Hillam v Iacullo (2005) 90 NSWLR 422, Concut Pty Ltd v Worrell (2000) 176 ALR 693 and Commissioner of Taxation (Cth) v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 201 CLR 520.