Interim finance for a construction project; how to resolve inconsistencies when the money is paid before a loan agreement is signed

It is a truism that construction projects are “always a day late and a dollar short”.  Tensions frequently arise between builders or developers carrying out the work and those providing the finance, particularly when additional short-term funding is required to complete a project.

The NSW Court of Appeal has given judgment in a case where a loan agreement stated the incorrect lender and referred to a future payment, when in fact funds had already been advanced.[1]  The court was required to untangle the knot, and in the process established a new precedent for the Australian common law concerning the doctrine of “past consideration”.  The court applied a judgment of the High Court of Singapore.

Background 

Mr Rose was a property developer and Mr Manassen was an investor.  They had worked together on a number of development projects over the years.

The case arose due to outside factors (including Covid-19 lockdowns) which severely impacted the profitability of the project.  Short term finance was provided, but the parties disagreed as to the nature of this loan.

Structure of the investment

On 15 December 2016, Mr Rose and Mr Manassen (through their respective corporate entities) entered into an agreement to establish the funding structure for the Wavelength Project at Cronulla NSW.  It included the following:

• Formation of a company as a special purpose vehicle (SPV) which would be the trustee for the Iridium Development Trust (“Iridium”);
• Mr Manassen would fund the acquisition of the land, while Iridium would take a loan from a third-party lender for construction costs.
• Mr Rose and Mr Manassen would each hold 50% of the shares in the company and 50% of the ordinary units in the Iridium Trust.
• Mr Manassen’s investments were preference equity in that his units would be paid first.
• In addition, he would receive 30% per annum return on his preference units.
• Therefore, on completion of the project Mr Manassen would have a priority return on his initial investment plus 30% per annum, compounding up to the date for distribution of profits. The remaining profits would be distributed among the ordinary unit holders on a 50/50 basis.

Project delays due to Covid-19 and obtaining construction finance – significant impact

The Wavelength Project was subject to two delays: (a) lengthy negotiations with third party lenders for construction costs, and (b) various COVID-19 related public health orders which applied from March 2020 to October 2021.

Despite Iridium acquiring the land in mid-2017 and obtaining development consent in February 2018, the funding terms with a third-party lender were only finalised in November 2019.  The construction phase of the Wavelength Project neared completion in November 2021, and Mr Manassen and Mr Rose held discussions to reassess their financial position and potential returns from the project.

On 26 November 2021, Mr Manassen asserted in an email that Mr Rose was unlikely to obtain a profit from the Wavelength Project following the payment of Mr Manassen’s preference shares due to a low internal rate of return.   Mr Manassen suggested that he could buy out Mr Rose’s interest in the Project for $150,000, to be split with the external consultant; or he would consider a proposal that he provide a loan to the Project.

Mr Rose was not happy about this.  He blamed Mr Manassen at least in part for some of the delays.  He was not prepared to walk away with what would in effect be a significant loss from the Project.  He discussed the possible terms of a loan from Mr Manassen, including by emails on 13 December 2021.

On 24 January 2022, Manassen Holdings Pty Ltd transferred $1.3 Million to Mr Rose.

On 2 February 2022, Mr Rose signed a Loan Agreement with another of Mr Manassen’s companies, Manno Kingsway Pty Ltd.  Terms included that the loan amount was $1.3 million at an interest rate of 3.85% per annum, with termination 12 months later.  Clause 2 stated that the “Lender will lend the Loan Amount to the Borrower” subject to three conditions, including completion of the Lender’s due diligence, provision of executed copies of the Security and Guarantee, and provision of executed copies of “Release Deeds”.

Thus, while the amount stated in the Loan Agreement was the same as that already paid to Mr Rose, the Lender was a different entity to that which had paid the amount, and the Agreement expressly referred to a loan advance which was to take place in future, and only after conditions had been met.

It appears that Mr Rose may have regarded the advance of $1.3 Million as additional project funding to tide the Project over until sale of sufficient properties was achieved, whereas Mr Manassen regarded the advance as simply a fixed short-term loan, and this was reflected in the terms of the Loan Agreement.

The Manassen parties commence court proceedings

Mr Rose made monthly interest payments on the amount of $1.3 Million.  At the end of 12 months, Mr Manassen demanded repayment of the full amount.  When this was not forthcoming, his company commenced proceedings in the Supreme Court of NSW claiming the amount as a debt.

Mr Rose defended the proceedings.  It does not appear that he denied that the advance of $1.3 million would have to be repaid (eventually), but rather it appears that he regarded it as additional investment funds into the project, so that repayment of the loan would occur from profits at a later stage.

The Court of Appeal decision

Mr Manassen was successful at trial before a single judge, and Mr Rose then appealed to the Court of Appeal, which also found in Mr Manassen’s favour, but for different reasons:

• Although Mr Manassen had attempted to rely on emails between himself and Mr Rose on 13 December 2021 discussing a prospective loan to Mr Rose, the Court of Appeal found that there were so many uncertainties and inconsistencies in these emails that they could not be said to show an intention to create a contract.[2]
• Mr Rose argued that the advance of $1.3 million could not legally form a basis for the Loan Agreement, on the basis often expressed as: “past consideration is insufficient to form a legally enforceable agreement”. He did have a point.  After all, the advance had been made over a week before the Loan Agreement was signed, and the Loan Agreement itself explicitly referred to funds being advanced in future, and by a different entity.
• Nevertheless, the Court of Appeal found that despite the various inconsistencies and the elapse of time, the advance of the funds and the execution of the loan agreement should be regarded “as part and parcel of a single transaction” [para 52] The court referred to a number of authorities, including the judgment of Andrew Phang JA in the High Court of Singapore in Gay Choon Ing v Loh Sze Ti Terence Peter:[3]

“[T]he courts look to the substance rather than the form. Hence, what looks at first blush like past consideration will still pass legal muster if there is, in effect, a single (contemporaneous) transaction (the common understanding of the parties being that consideration would indeed be furnished at the time the promisor made his or her promise to the promisee). This was established as far back as the 1615 English decision of Lampleigh v Braithwait [1615] EWHC J17; (1615) Hob 105; 80 ER 255 and, whilst often referred to as an exception to the principle, is not really an exception for (as just stated) its application results in what is, in substance, a single transaction to begin with…”

One of the strongest factors for the Court of Appeal was that there was no other agreement to which the payment of $1.3 Million could be related, whereas the Loan Agreement did so.  In reaching its conclusion, the court took into account all the dealings and communications between the two men and their companies.  This was not a situation where there were several agreements for which the payment might form a basis, nor was there any clear statement or action by the Lender indicating that it regarded the loan as being on a different basis from that stated in the Loan Agreement.

Conclusion

By treating the advance of the $1.3 Million on 24 January 2022, and the execution of the Loan Agreement 9 days later as part of a single transaction, the Court of Appeal was able to gloss over several inconsistencies between the documents and the facts.  Arguably, this meant that the court could look at the commercial realities of the transaction, rather than be distracted by some details which may be regarded as peripheral.

This decision means that the law in Australia and the law in Singapore are consistent on this important issue as to when a prior payment may form the basis for a later written contract.

[1] Rose v Manno Kingsway Pty Ltd as trustee for the Manno Kingsway Unit Trust [2025] NSWCA 23; Judgment date 27 February 2025 per Bell CJ, Mitchelmore and Adamson JJA.

[2] Judgment para 42, citing Masters v Cameron; ABC v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 548-9

[3] [2009] 2 SLR(R) 332 at [93], in turn cited in Ma Hongjin v SCP Holdings Pte Ltd [2019] SGHC 277 at [78].  The NSW Court of Appeal also referred to the Privy Council decision in Pao On v Lau You Long [1979] UKPC 17; [1980] AC 614 and a number of lower court decisions in Australia.