BFC Finance Ltd v Higton Enterprises Pty Ltd

[1995] HCATrans 40

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Brisbane  No B5 of 1995

B e t w e e n -

BFC FINANCE LIMITED

Applicant

and

HIGTON ENTERPRISES PTY LTD and JOHN SIDNEY ERNEST HIGTON, JUNE ISABELLA HIGTON, CHRISTOPHER JOHN HIGTON and MALCOLM PETER HIGTON

Respondents

Application for special leave to appeal

BRENNAN J
DEANE J
GAUDRON J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 10 MARCH 1995, AT 10.12 AM

Copyright in the High Court of Australia

MR P.A. KEANE, QC, Solicitor-General for the State of Queensland:   May it please the Court, in this application I appear with MR R.G. BAIN, QC, for the applicant.  (instructed by Clayton Utz).

MR S.S.W. COUPER, QC:  If it please the Court, I appear for the respondents.  (instructed by Gadens Ridgeway)

BRENNAN J:   Yes, Mr Solicitor.

MR KEANE:   As your Honours appreciate from the summary of argument, this case was concerned with the extent to which the respondents’ indebtedness to the applicant should be reduced by set‑off or counter‑claim to reflect the loss suffered by the respondents as a result of the applicant’s breach of duty in relation to the exercise of its power of sale of mortgaged land.  The relevant breach was the breach by the applicant of its duty as mortgagee to ensure that the property was sold at proper value.

The contract made in the exercise of that power was an improvident one made in breach of duty.  The questions which we wish to agitate relate to the fact that the improvident contract was not completed and indeed expired in August 1989, some 20 months before the property was actually sold in April 1991.  The questions which we wish to agitate concern the extent to which a mortgagee is to be held responsible for a diminution in the value of property after a breach of duty in relation to sale and, in particular, whether the mortgagee is responsible for a diminution in the value of mortgaged property which occurs after an improvident contract has expired and before it is ultimately sold.

DEANE J:   Mr Solicitor, was the ultimate sale by your client?

MR KEANE:   Yes, it was, your Honour.

DEANE J:   I could not see anything in the book that said that; no doubt I missed it.

MR KEANE:   Your Honour, it was by our client and the $2.5 million that were generated by the sale were taken into account at that time.

DEANE J:   Well, if the ultimate sale was by your client why would you not look at the whole process culminating in the ultimate sale instead of simply looking, as it were, at the initial delay?

MR KEANE:   Your Honour, one looks at the initial delay because it points up the issue which is related to the circumstance that when the original contract came off, the property which might then have been sold was worth $3.9 million and when it was ultimately sold was worth $2.5 million.

DEANE J:   I follow that, but it seemed to me that the judgments below approach the matter on the basis that there had been an exercise of powers of sale which had failed, but the exercise had led to certain consequences.  Why do you not look at it as an overall process involving the exercise of powers of sale in a way that ultimately resulted in a sale for millions of dollars less than should have been obtained in a proper exercise?

MR KEANE:   Because, your Honour, the improvident contract ceased in August 1989.  It no longer bound the land.  The land was available to the mortgagee.  The question we say then becomes whether the extent to which the security diminishes further in value should be at the risk of the mortgagee or at the mortgagor’s risk.  In relation to the way in which the matter was dealt with by Justices Pincus and McPherson, they held, I think in the way which your Honour may be putting to me, that there was an opportunity to get a price high enough to discharge the mortgage entirely and that that opportunity was lost forever in the scheme of the accounts between the parties.  But, with respect, that approach ignores the fact that the opportunity was not lost forever but revived on the expiration of the contract.  It also ignores the fact that the opportunity had a cost, that is the value of the property, which the mortgagee retained as at August 1989 and which it was able to sell.

His Honour Mr Justice Fitzgerald avoided those difficulties, which we submit are difficulties in the reasoning of the majority of the Full Court, by at page 80 adopting a process of reasoning in the alternative.  Firstly, his Honour recognised a continuing duty to sell which arose by reason of the original breach of duty and the fact of the falling market and secondly, and in any event, by finding ‑ and your Honours will see this at the bottom of page 80 going over to 81 ‑ that the applicant would have prevented the respondents from selling after the improvident contract had ceased to have any effect on the mortgagor’s ability to deal with his own assets.  We submit that there is no such duty as that recognised by the learned President and we submit that the finding as to prevention was simply not open, having regard to the way the case was run.  There had never been any suggestion to that effect alive in the case and we note that in response to our complaints to that effect in our summary of argument, that contention is not gainsaid in our learned friend’s summary.

As to the view that the mortgagee was duty‑bound to act to procure a sale after the improvident contract had ceased to have its effect, we submit that the recognition of such a duty is one which is outside authority.  There is no other authority which supports the existence of such a duty and it is contrary to the established view that a mortgagee has no duty to sell.  In so far as it is contended that the duty may have arisen by virtue of the moratorium agreement to which the learned President referred at the middle of page 80, his Honour did not take that moratorium agreement to an expressed conclusion as the source of a duty.  We would make the point that the moratorium agreement itself simply contains no duty to sell but regulates an order of sale in the event that the mortgagee did seek to sell.

Can we say further, your Honours, in relation to the proposition at page 3 of our learned friend’s summary of argument, the contentions there advanced being to the effect that the case is simply concerned with mitigation of damage by the respondents, we say, with respect, that the issue is not one of mitigation but the extent of the loss for which the mortgagee is responsible, having regard to the breach being the entry into a contract which did expire.

In our submission, the result of the judgment of the Court of Appeal is to treat the mortgagee as if it were obliged to hold the mortgagor and its sureties harmless against market fluctuations which occur after the land is no longer tied up as a result of any breach of the duty relating to sale.  This is a departure from the position under which a mortgagee is not obliged to effect a sale at all and that in accordance with established authority it is the mortgagor and the mortgagor’s securities who bear the risk of depreciation if the security is not sold.

DEANE J:   But why does not one simply say the mortgagee exercised its power of sale and sold for $3.9 million in circumstances where, but for its misconduct in entering into an improvident contract, it would have sold for $5.75 million?

MR KEANE:   Well, your Honour, that, with respect, is what we submit is the proper analysis, but I think your Honour may have mistaken the figure of 3.9 million for 2.5 million.

DEANE J:   Well, yes.

MR KEANE:   Your Honour, in relation to that, we say that that is not the appropriate approach because that proposition is really to the effect that the improvident sale itself prevented a realisation after August 1989, and that is simply, with respect, not correct as a matter of fact.

DEANE J:   Well, you would say it should be 3.9?

MR KEANE:   Your Honour, at August 1989 the finding was that the property had a value of about $3.9 million.  The breach was that in November 1988 the mortgagee had not achieved, as if it had properly exercised its duties in terms of its powers of sale, a price of $5.7‑odd million.  Now we accept, with respect, that that involved loss, but that loss is quantified by, in our respectful submission, the difference between the price that might have been obtained and the price that was obtained, but it is not quantified by ignoring the fact that the improvident contract ceased to bind the land at a time when 3.9 could have been obtained for it.

BRENNAN J:   Is that quite correct?  This was a claim against guarantors, was it not?

MR KEANE:   Yes, your Honour.

BRENNAN J:   If it had been sold at the time at which the improvident contract was entered into, the guarantors would have been without liability.

MR KEANE:   That is so.  That is the finding, yes.

BRENNAN J:   And it was an improvident contract.

MR KEANE:   Quite right, your Honour.

BRENNAN J:   Then why is it that the guarantors are now liable?

MR KEANE:   Because, your Honour, the opportunity said to be lost forever was not lost forever.  It revived and could have been used by the mortgagor, the mortgagee being under no duty to use it and it having a cost at the time when it might have been realised, namely, the value of the land.

BRENNAN J:   I understand that, but if the claim was against the guarantors and the claim is based on section 85 of the Property Act, why is it that the guarantors do not simply say, “Your duty so far as we are concerned was to sell by a proper contract at the time at which you purported to sell.  If you had done so, we would have been held harmless.  Now you want money from us and you want it from us because of a breach of your duty.”  Does it matter that you want now more money than would have been recoverable from them if there had been no breach of duty in August 1989?

MR KEANE:   Your Honour, we submit that it does because, if one puts it on the basis of a duty to the guarantors, the duty to them can have been no higher than it was to the mortgagor and in relation to the mortgagor the duty and the consequences of breach of that duty so as to identify the damage caused by that breach of duty are measured by reference to the loss of the opportunity to sell, which opportunity was not lost forever but which revived.  In answer to your Honour’s question, the guarantors cannot be better off than the mortgagor and so far as the mortgagor was concerned it is incorrect to say that an opportunity to be released entirely disappeared forever because, with respect, that is not in fact what happened.

BRENNAN J:   But is it a question of an opportunity to be released forever being lost or is it a question of an exercise of a power of sale which did not result in the discharge of the mortgage?

MR KEANE:   Your Honour, the question is what was the loss caused by the breach, which loss might then be set off, and the loss caused by the breach, in our respectful submission, can be identified as having its end point at a time when the breach no longer affected the mortgagor or the sureties.  It is, in our respectful submission, important to appreciate that one is concerned to set off against the ultimate mortgage debt the loss caused by the breach and that involves, with respect, identifying the harm that was done and identifying the point at which that harm ceased.

BRENNAN J:   What are the findings of fact relating to the existence of an opportunity in the respondents to sell as from August 1989?

MR KEANE:   They are in the judgment of the learned primary judge.  If your Honours would go to page 38 of the record, commencing at line 15 and at page 39, commencing at line 45:

After 31 August 1989 the plaintiffs could have sold the property at a reduced price and paid out the debt, but only by using their own assets to meet the shortfall.....On the other hand, once the contract with Jenhut had collapsed ‑

that is the improvident contract, your Honours ‑

the first defendant was under no duty to find another purchaser.  It was again entitled to remain inactive.  Therefore it cannot be said that the plaintiffs should be fully discharged as a result of the first defendant’s default.  That result would imply a duty upon the first defendant to effect a further sale after the Jenhut contract had collapsed.

Now, that is the finding which your Honour asked us about.  It also contains a statement of the principle by Mr Justice Dowsett which we submit is correct.

GAUDRON J:   But, does that not fail to take account of the fact that it is the guarantor’s loss we are concerned with, not the ultimate effect to the mortgagee?

MR KEANE:   No, with respect, because at the risk of repetition, insofar as a duty is owed to the sureties, it is a duty which derives from their position as sureties of the mortgagor and their position, with respect, may certainly not be different or better than ‑ certainly not better than ‑ the mortgagor.  And, your Honours, we should, perhaps mention that the case we refer to in our outline which states what we say is the conventional position, China & South Sea Bank Ltd v I Tan Soon Gin, the decision of the Privy Council, is a case where sureties were concerned and their Lordships said at 545:

The surety contracts to pay if the debtor does not pay and the surety is bound by his contract.  If the surety, perhaps less indolent or less well protected than the creditor is worried that the mortgaged securities may decline in value then the surety may request the creditor to sell and if the creditor remains idle then the surety may bustle about, pay off the debt, take over the benefit of the securities and sell them.

But, the position remains, as their Lordships say, that the creditor is not obliged to do anything and if he does nothing, and the security becomes valueless and the sureties suffer, then, with respect, that is the way that the risks are allocated under the established principles.

GAUDRON J:   But, the case here is that he did something, or it did something ‑ ‑ ‑

MR KEANE:   Oh, quite, your Honour.

GAUDRON J:    ‑ ‑ ‑ which, if it had been done properly, would have resulted in a discharge of liability and that, surely, is the loss, that there was not a discharge of liability at that point of time.

MR KEANE:   Well, no, your Honour, because there would have been a discharge of liability but the mortgagor and the sureties are left with the property which ‑ in other words, they would have their cake and they would have eaten it too.  One cannot determine the extent to which they have

suffered loss by the breach without identifying, with respect, that they suffered a loss of opportunity but one at no cost to them.  One identifies the cost by taking in the value of the property, the $3.9 million.

They could not have simply got $5.7 million worth of release without the loss of $3.9 million worth of property.

DEANE J:   But you do not distinguish between the difference in the nature of the damage.  The damage sustained by the mortgagor is that the property has fallen so much in value and it is then in his control whether he sells or not.  The damage sustained by the guarantor is that a sale which would have left him without liability has not taken place due to your conduct’s misconduct.  It has then left him powerless and in a position where his loss cannot be calculated until either your client or the guaranteed, the mortgagor, takes action and ultimately crystallises the amount of the loss.

MR KEANE:   Your Honour, with respect, we take issue with that because it is, with respect, incorrect to say that the sureties’ loss is one which arises because they were prevented from exercising their rights as surety to secure a sale by the mortgagor.  The mortgagor was, until it went into liquidation, controlled by the sureties.  That apart, the sureties had their rights in relation to the exercise of rights under the securities and the point that your Honour puts to us that our side prevented the exercise of those rights in respect of sale, or would have prevented them, is a proposition on which his Honour the learned President founds the alternative basis for his decision, but it is a proposition which was never put in the case.

We submit that it is not an available basis on which to decide the case against us.  It is an error which crept into the case in the Court of Appeal and really, in our respectful submission, is a reason for granting special leave so it can be corrected.  Your Honours, those are our submissions unless your Honours have something further to take up with us.

BRENNAN J:   Thank you, Mr Solicitor.  Yes, Mr Couper.

MR COUPER:   Your Honours, the way in which our learned friend puts the question in issue in his submissions is the issue is the extent of loss for which the mortgagee is responsible.  That is so.  The questions which my learned friends say arise in relation to that issue, in my submission, do not arise having regard to the reasons of the court below.  The proper analysis, in my submission, is this:  the learned trial judge found that but for the improvident sale, the liability of the guarantors would have been discharged.  Their loss is therefore equivalent to the monetary extent of that liability.

The question then becomes:  what is the effect of the absence of a sale for $3.9 million after the improvident contract was terminated?  My learned friends say the effect is that, because the property was then available to be sold by somebody, the loss ceases.  They try and characterise it as if that fact meant that there was no further loss.

BRENNAN J:   I think the argument put against you is that what was lost when the improvident contract was entered into was the receipt of a proper purchase price which would have then been applied to discharge the mortgage, but that was, in a sense, to be counterbalanced by the fact that the mortgage property remained in the hands of the mortgagor.

MR COUPER:   Your Honour, there are, with respect, two answers to that approach, each of which was taken by members of the court below:  the first is that what is actually being said is that because the guarantors could and should have sold the property for $3.9 million, or caused it to be sold, therefore their loss should be taken to have ceased; it did not in fact cease, but it should be taken to have ceased.  That is, in my submission, then to correctly characterise the issue as one of mitigation.  What is being said, although it is being put in different terms, is in fact that the guarantors were obliged to take steps to realise the property, their failure to take those steps means that their loss should be regarded as having ceased.  It is and was correctly characterised by the court below as a mitigation question; it was an issue which was neither pleaded nor relied upon by the applicant at the trial or in the court below.

The second response is to say that his Honour the President below was correct in saying that in fact the respondents as guarantors had no real opportunity to realise the property.  They were guarantors, the mortgagor went into liquidation in January 1989, before the improvident contract ceased.  His Honour at page 78 of the appeal book sets out those reasons and then continues at page 79 at about point 11 and finds:

there is no basis for an inference that the respondent would, at that time, have released its mortgage over the property to enable completion of a sale which would still leave it with a substantial indebtedness secured only by the “Guarantee and Indemnity” -

It said that there was no evidence directly on the point at the trial.  That is so.  However the evidence at the trial was that the valuation of $3.9 million was a valuation obtained by the mortgagee, the applicant, and obviously that the mortgagee did not sell for that price at that time.  It is not a difficult step to take to say that a reasonable inference to be drawn from that is that the mortgagee would not have accepted an offer at that price if procured by the guarantors.  But the principal point, in my submission, is that this is, properly analysed, a case of mitigation of loss alleged which was not pleaded by the applicants.

To put it in terms of causation, my learned friends say that the fact of the property being available for sale means that the loss has ceased.  The fact that it was not sold by the mortgagee cannot mean the loss has ceased, therefore one focuses on the fact that it was not sold by the mortgagor.  Once one is in that territory one is very much in the realm of mitigation.  The difference between this case and the China & South Sea Bank Ltd v I Tan Sloon Gin type case is that in this case there was in fact a breach by the mortgagee which caused the loss.  We are not dealing with the duty of a mortgagee in a vacuum, we are not dealing with the rights of guarantors to take steps; we are dealing with a reasonably straight-forward, in my submission, case of breach of duty causing a loss and the question:  should that loss be deemed to have ceased because of failure by the parties who suffer the loss to take steps?

BRENNAN J:   The other way of looking at it is, caused what loss?  What was the loss that it caused?

MR COUPER:   Your Honour, the loss that it caused was the loss of discharge of the mortgage and discharge of the guarantees.  There was a positive finding made by the trial judge that but for the improvident contracts the property would have been sold at a price which would have discharged all liability.  The monetary calculation of that loss is the sum which was at trial claimed to be owed by the guarantors to the mortgagee.  What is being said by the applicant is that that monetary sum should be reduced because it could have been limited by an earlier sale at a higher price.  One would ask the question, who should have sold?  The response given is that the respondent should have sold, and one is back, with respect, in the mitigation area rather than any other aspect of causation.

Whether one treats the loss as being the loss of discharge of liability or a loss equivalent to the monetary sum now claimed, the question remains the same, in my respectful submission.  Your Honours, as to the point taken by the applicant that the finding of the President was one which of itself warrants the grant of special leave, there are, in my submission, two points, the first being that it is raising a question of a finding of fact only; the second is that independently of that finding his Honour and the other members of the Court of Appeal found correctly on a separate basis that the respondents were entitled to succeed.  Those are the respondents’ submissions, if the Court pleases.

BRENNAN J:   Yes, thank you.  Mr Solicitor?

MR KEANE:   Your Honours, if we may make one brief point in reply and that is in relation to the suggestion that it is really a case about mitigation and we say we certainly agree that it was never suggested on our side that the respondents were obliged to sell.  We do not submit that now.  We do not say that they were obliged to sell.  Our contention is simply that if being in a position to sell or to procure a sale of sureties they do not exercise that power, then if the property subsequently diminishes in value it is at their risk, not the mortgagee’s.

BRENNAN J:   What is the distinction between that and mitigation of loss?

MR KEANE:   It is that one is concerned to identify the extent to which the mortgagor or the sureties were damnified by the breach and there comes a point at which one can say that they are no longer damnified by the breach because its consequences have ceased.  They have not been deprived of the opportunity of selling the asset for what it is worth.  They were deprived of the opportunity of selling the asset at a particular price.  They had the opportunity to sell it at a different price and it is the difference between those two prices which is the extent to which they were damnified.  It is a question of causation, in our respectful submission, and that that is the orthodox view as reflected in the majority judgment in cases such as MAN v Burns and the findings were as appears from page 35 that the respondents knew that the land was available again.  We can refer your Honours to page 35 of the record commencing just at about line 35.

BRENNAN J:   Thank you, Mr Solicitor.  The Court will adjourn briefly to consider what course it should take in this matter.

AT 10.45 AM SHORT ADJOURNMENT

UPON RESUMING AT 10.53 AM:

BRENNAN J:   The analysis of the issues in this case must ultimately depend on its particular facts, including the relationship in August 1989 between the mortgagee, the mortgagor and the guarantors, the mortgagor’s going into liquidation during the currency of the improvident contract and the making of the ultimate sale by the applicant.  In the circumstances as we apprehend them, we do not think that the case enjoys sufficient prospects of success to warrant the grant of special leave.  Accordingly, special leave is refused.

MR COUPER:   The respondents ask for costs, if the Court pleases.

BRENNAN J:   Do you have anything to say about that, Mr Solicitor?

MR KEANE:   No, your Honours.

BRENNAN J:   It will be refused with costs.

AT 10.54 AM THE MATTER WAS CONCLUDED