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David Securities Ltd V. Commonwealth Bank Of Australia Notes

BCL Law Notes > Restitution of Unjust Enrichment BCL Notes

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DAVID SECURITIES LTD V. COMMONWEALTH BANK

OF

AUSTRALIA

FACTS David Securities Pty. Limited ("David Securities") and A. and T. Rahme and Sons Pty. Limited ("A. and T. Rahme") were family companies controlled at all material times by Antoine and Therese Rahme. The companies carried on business as builders and property developers. At various times, Mr Rahme and the two companies had obtained finance from the Dee Why branch of the Bank... with a view to obtaining finance for a property development negotiations were started with the bank... the manager of the bank referred the claimants to Mr Morgan, a member of a firm of accountants, who thereafter advised the Rahmes during the course of negotiations. Two documents were executed by the parties: a loan agreement between David Securities and the Bank; an application by David Securities to the Bank for a revolving bills facility with foreign currency option. The controversial provision (cl. 8) in the loan agreement was intended to ensure that the bank did not suffer the consequence of withholding tax that would have to be normally paid by the bank...
the operation of the withholding tax provisions necessarily means that a non-resident lender receives less than the full amount of interest provided for in a loan agreement. Being aware of this problem and intent upon remedying it, the Bank included in its standard form foreign currency loan agreement a grossing-up provision which was intended to ensure that the Bank received its full contractual entitlement. The relevant clause (cl. 8) read: "All interest payments hereunder shall be paid by the borrower to the Bank without deduction of any tax or duty or other imposts of any kind whatsoever. Should the Borrower at any time be compelled by law to deduct any such taxes, duties or imposts from any payment to be made by the Borrower the Borrower will pay such additional amounts as may be necessary in order that the net amount received shall equal the full amount the Bank would have received." As a consequence of the operation of this clause, the appellants paid out the amount of contractual interest (10 per cent of which was paid to the Commissioner) plus an additional amount under cl.8(b) representing a further 11.1 per cent of what the Singapore branch of the Bank was due to receive after the Commissioner's share had been deducted. However, clause 8 of the loan agreement was void under s. 261 of the Trade Practices Act is Australia which read: "(1) A covenant or stipulation in a mortgage, which has or purports to have the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage ... shall be absolutely void."

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