When innocent errors lead to a Supreme Court trial

How would you feel as a manager or director of a lender if you read these comments in a court judgment:

Before the loan agreement was entered into, [the borrower] provided a form of authority to [the lender]’s mortgage manager to enable monthly interest payments to be deducted by direct debit. However, the hand-writing on the form was unclear as to whether the last numeral of the BSB number for the account to be debited was a six or a zero. The correct BSB number for the account ended with a zero. Unfortunately, [the lender] read it as “06 2006”.

 That relatively innocent combination of errors has generated contractual chaos. The problem was not identified until over six months after the commencement of the facility. In the meantime, each time [the borrower] was notified that the debit had been “dishonoured”, it made its payment by cheque, but [the lender] treated those as late payments and began to charge additional interest. [The borrower] disputed [the lender]’s entitlement to do so and continued to pay interest at the lower rate.

But that was the fact scenario behind Perpetual Trustee Company Limited v Agusta Pty Limited [2009] NSWSC 1075. I'm sure both sides are still wondering how the dispute got so far.

Apart from the fact that the amount involved was relatively large (it was a $2m facility and the security property is a commercial property owned by a company) the case is otherwise unremarkable.  There was a legal argument about renewal of the loan facility but I suspect the parties had locked themselves into intransigent positions about who was responsible for the mistake.

The result? The judge said:

Accordingly, it remains necessary to resolve the dispute between the parties as to whether there was default in respect of any of the interest payments due between November 2006 and May 2007. I am not satisfied that there was…

I am not satisfied that Agusta [the borrower] was at fault in any real sense for the problem that occurred with the direct debit. The authority form provided to Challenger [the lender] was simply unclear. The last numeral of the BSB number looks a bit like a zero and a bit like a six. The person who entered the information into Challenger’s system read it one way, but it could equally have been read the other, and it would have been a simple matter to check. There is no question of attributing blame, but the simple fact is that the process failed due to error on the part of Challenger.

In those circumstances, the implication of a term that Challenger would not treat interest as being due until after Agusta had been put on notice of the failure to debit the account is, in my view, reasonable and equitable. It is necessary to give business efficacy to the contract, because the mutual object of having payments made and received promptly could not be achieved unless Agusta was made aware of the problem. In my view, such an implied term is so obvious that it goes without saying. It is capable of clear expression and supplements the express terms of the contract rather than contradicting them.

The judge ordered that Challenger recalculate its debt and give the borrower an opportunity to pay the correct amount before taking possession of the security.

Are there any lessons from this? Whilst I have no knowledge of the facts other than those set out in the judgment, it confirms the old adage that there are 2 sides to every story. The discrepancy should have come out long before the case went to trial. No order has been made yet in respect of costs.

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