Broster v Brueckner

[2003] NSWCA 281

CITATION:	BROSTER v BRUECKNER [2003] NSWCA 281
HEARING DATE(S):	22/07/2003
JUDGMENT DATE:	3 October 2003
JUDGMENT OF:	Meagher JA at 1; Beazley JA at 2; Hodgson JA at 32
DECISION:	Appeal dismissed with costs
CATCHWORDS:	APPEAL - Appealable error by trial judge - CONTRACT 'off the plan' purchase contract - purchase price paid two years in advance of completion - charge created by payment of purchase price - limited covenant not to caveat EVIDENCE - expert evidence conveyancing practice - lodgment of caveat GUARANTEE liability of guarantor - failure of creditor to protect security
CASES CITED:	Wulff & Billing v Jay (1872) 7 LR (QB) 756 Youyang Pty. Ltd. v Minter Ellison (2003) 196 ALR 482 Malec v J.C. Hutton Pty. Limited (1990) 169 CLR 638 Capel v Butler (1825) 2 Sim&ST 457 Strange v Fooks (1863) 4 Giff 408, 66 ER 765
PARTIES :	Jonathan Broster (Appellant) Peter Brueckner (Respondent)
FILE NUMBER(S):	CA 40512/02
COUNSEL:	T.D. Castle (Appellant) R.W. Evans (Respondent)
SOLICITORS:	Morgan Lewis Alter (Appellant) McKells (Respondent)

LOWER COURTJURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	ED 3949/00
LOWER COURT JUDICIAL OFFICER :	Campbell J

CA 40512/2002
ED 3949/2000

MEAGHER JA
BEAZLEY JA
HODGSON JA

3 October 2003

BROSTER v. BRUECKNER

FACTS:

The appellant guaranteed the respondent’s purchase of two home units “off the plan”. A receiver was appointed to the vendor of the units and the land upon which the units were to be built was sold by the mortgagee. The respondent had failed to protect its security in the units by caveat.

The issue on the appeal was how to assess the damages for which the appellant was liable in circumstances where the respondent had failed to protect the security.

HELD:

1. There was no error in the trial judge’s assessment of damages.

2. Appeal dismissed with costs.

CA 40512/2002
ED 3949/2000

MEAGHER JA
BEAZLEY JA
HODGSON JA

3 October 2003

BROSTER v. BRUECKNER

Judgment

1 MEAGHER JA: I agree with Beazley JA.

2 BEAZLEY JA: The issue in this appeal is whether the trial judge erred in awarding damages to the respondent against the appellant, who guaranteed the obligations of a third party vendor in respect of the respondent’s purchase of two home units “off the plan”.

3 The facts as found by his Honour are not in dispute and I will state them as set out in his Honour’s judgment:

“1. In July 1997 the [respondent] entered into contracts to purchase two home units from The Satellite Group (Ultimo) Pty Limited (‘Satellite Ultimo’). The purchase was made “off the plan” … He paid the whole of the purchase price to Satellite Ultimo. At the time of entering those contracts, he obtained a guarantee of performance from each of the third, fourth and fifth defendants, who were the directors and secretary of Satellite Ultimo.
2. Satellite Ultimo subsequently mortgaged the land on which it was proposed to build the home units, to the second defendant (‘Westpac’). Before Westpac took its mortgage, it was informed that the [respondent] (and numerous other people) had entered into contracts to purchase identified home units in the building.
3. Satellite Ultimo encountered financial problems, and a receiver was appointed to it soon after the building was completed. Westpac has exercised a mortgagee’s power of sale in relation to the two units which Satellite Ultimo had contracted to sell to the [respondent].”

The appellant was the fifth defendant in the proceedings.

4 The respondent paid the total purchase price for the units at the time of contract and this amount was immediately released to the vendor. This was different from the other ‘off the plan’ sales where purchasers paid a 10% deposit. The advantage to the respondent in paying 100% of the purchase price was that he was able to negotiate a much lower purchase price for his two units. The respondent negotiated this arrangement after having obtained personal guarantees from the third to fourth defendants and the fifth defendant/appellant. The respondent understood that the Strata Plan might not be registered for 2 to 2½ years after the date of his contracts. The respondent also understood that the purchase moneys could be used by the vendor “for whatever purpose”. He believed that the actual purpose was for the marketing of the units. However, there was no contractual obligation to that effect.

5 The contracts were in identical terms and were in the usual 1996 edition of the Standard Form Contract of the Law Society and the Real Estate Institute of New South Wales. Clause 2.8 of the contract provided:

“If any of the deposit or of the balance of the price is paid before completion to the vendor or as the vendor directs, it is a charge on the land in favour of the purchaser until termination by the vendor or completion”.

6 The contract also contained a number of special conditions including Special Condition 5, which is centrally relevant to the appeal. It provided:

“It is an essential condition of this contract that the Purchaser shall not lodge any caveat over any part of the title to the land comprising the Site which shall, or may have the effect, of preventing or delaying the registration of the consolidated plan of subdivision, the stratum plan of subdivision, the strata plans of subdivision, the cancellation, release or registration of any 88B instrument or easement or any right or restriction referred to in or contemplated by this Contract, or which might otherwise prevent the registration of any mortgage, discharge of mortgage, or variation of mortgage to which the vendor is a party and which mortgage is, or was associated with, the funding of the acquisition of the site, or the construction on the site of the Building by or on behalf of the Vendor”.

7 Clause 4.2 provided for a right of rescission to either party should the strata plan and other relevant documents not be registered by 28 February 2000.

8 There was expert evidence in the case that:

“… it is the usual practice of … a solicitor to cause a caveat under the Real Property Act 1900 to be lodged to protect the purchaser’s interest under a contract for sale when there is a delayed settlement, release of the deposit, or a perceived unusual risk. He also says it is the usual practice of such a solicitor to lodge a caveat where a purchaser is acquiring a property, “off the plan” , and for such a caveat to be lodged immediately after exchange of contracts.”

9 His Honour found:

“… that a prudent purchaser in the position of [the respondent] would have lodged a caveat.”

10 His Honour next dealt with the consequences of this finding in relation to Special Condition 5. He said:

“105. Counsel for [the respondent] also submits that I should not find that [the respondent] had engaged in any neglect or default in failing to lodge a caveat because [the respondent] was, in all these matters, advised by his then solicitor, Mr. Pappas.”

11 That then led to a consideration of what Westpac would have done had a caveat been lodged.

12 Evidence was given on behalf of Westpac that -

“… if there had been a caveat of any description on the property at the time of Westpac making its advance. … if [the respondent] had lodged a caveat, Westpac would have required it to be removed before any money was advanced, but in consequence of the lodgement of a caveat Westpac would have had clear actual notice of [the respondent’s] rights.”

13 As the respondent did not lodge a caveat his Honour found, and this is not challenged on the appeal, that Westpac was not bound by any personal equity that required it to recognise the respondent’s interest in the two units. Accordingly, Westpac held title free of the respondent’s interest.

14 His Honour also held that the respondent was entitled to a judgment against Satellite Ultimo for $579,000 plus interest. This finding is not challenged.

15 The case against the third to fourth defendants and the fifth defendant/appellant (the guarantor), related to their guarantee of Satellite Ultimo’s obligations. His Honour held that Satellite Ultimo’s liability fell within the scope of the guarantee except to the extent that the guarantors had defences available to them. The defence relied upon was that the respondent had failed to protect his interest in the land that he had by virtue of the provisions of clause 2.8 of the contract. (The third defendant had other defences which are not the subject of the appeal.)

16 His Honour approached the determination of this issue by considering what Westpac would have done had the respondent lodged a caveat. There was no dispute about the correctness of his Honour’s approach. The issue on the appeal is whether his Honour’s was correct in finding that the damages to which the respondent was entitled was the amount of damages his Honour awarded against Satellite Ultimo ($579,000), less the contract price of the two units ($275,000), being $304,000.

17 His Honour held that had the respondent lodged a caveat one of three possible consequences would have followed:

“(a) [the respondent] would have his contracts recognised by both Westpac and other mortgagees, so that those contracts could be completed, eventually, according to their terms, or
(b) a renegotiation would occur, involving [the respondent], Satellite Ultimo, and all mortgagees, under which [the respondent] could receive the units, but on payment of a higher price, or
(c) the contracts were brought to an end, on the basis where [the respondent] received back some, or perhaps all, of his money.”

18 His Honour was not able to determine which of the three was the more likely outcome.

19 His Honour held therefore:

“130 … While a creditor who has the benefit of a guarantee is free, if he chooses, to sue the guarantor rather than to sue the principal debtor, if the creditor takes that choice the guarantor will be given a remedy by equity, or subrogation to the rights which the creditor had against the principal debtor. What is driving equity here is that, while the creditor is free to choose which of the means of recovering his debt he will adopt, his choice ought not determine where the loss ultimately lies, as between the guarantor and the principal debtor. It is for this reason that the surety is entitled, upon payment of the guaranteed debt, to be subrogated to any securities which the creditor had for that payment.
131. If the creditor has, through neglect, caused a security to be lost or impaired, the value of the guarantor’s right of subrogation is correspondingly diminished. … There then arises an equity between the creditor and the guarantor – because, as a result of the creditor’s neglect, in losing or impairing a security, equity’s ability to ensure that the arbitrary choice of the creditor about whom to sue does not decide where the loss ultimately falls has been diminished, equity decides that the ability of the creditor to enforce the guarantee must be correspondingly diminished. … the area of equity’s concern, is fully satisfied if a remedy is provided which reduces the guarantor’s liability by the value of the security which has been lost. … equity gives a remedy which will fulfil the purpose for which the equitable duty was held to exist in the first place.”

20 His Honour held that, applying these principles to the case before him, the appellant (and other guarantors) were entitled to have their liability under the guarantee reduced by $275,000.

21 The appellant contends, however, that no loss flowed from any of the three possible scenarios found by his Honour.

22 The appellant submitted that as on each of the three possibilities the respondent’s position would have been fully protected, there would have been no need to make a claim under the guarantee. The appellant contended that, in that circumstance, “equity should not permit a creditor such as the respondent to make any claim on the guarantee which only arises because of his own breach of duty”. The appellant also submitted and this was the thrust of the appellant’s oral argument that the respondent suffered no loss on any of the three scenarios so that the claim against the guarantors should have been dismissed. The appellant explained its position in relation to each scenario as follows:

“(a) Under the first outcome, the respondent’s title would have been recognised and given clear on the issue of the certificates of title without him having to do anything further.
(b) Under the second outcome, the respondent would also have obtained clear title on the issue of the certificates of title, although the existing contracts would have been amended so that he was required to pay the full price for his units.
(c) Under the third outcome, the respondent would have been refunded his money and the existing contracts rescinded. There is no reason to assume that the respondent would have been out of pocket on this outcome, because at the time the hypothetical renegotiation occurred, Satellite was not insolvent and would have had every reason to quickly dispose of any claim made against it so as not to imperil completion of the project.”

23 There appears to be no doubt that there would be no loss to the respondent under (a). I do not see however how there would be no loss under (b) or (c).

24 In respect of the second scenario, the appellant submitted that there would have been no loss because the respondent would have successfully renegotiated the contract. On that hypothesis not only would the guarantee extend to the renegotiated contract, but the respondent would not have lost the benefit of his contract.

25 This submission fails to recognise that the scenario postulated by his Honour does not involve a renegotiation of the guarantee and misunderstands the point of his Honour’s finding. Indeed, had the contract in fact been renegotiated, the guarantee would have been discharged. What his Honour was concerned with was determining what were the likely outcomes had the respondent lodged a caveat to protect the security. The outcome postulated in (b) involved the respondent paying an amount greater than the original purchase price. To that extent, he would have incurred a loss.

26 In relation to the outcome postulated in (c) the respondent would have lost any shortfall in the amount repaid as well as the profit he might have made had the contracts not been brought to an end.

27 It seems, with respect to the appellant’s argument, that what he is really contending in relation to (b) and (c) is that the respondent would not have lost the benefit of his bargain i.e. he would not have lost the contracts for the purchase of the two units. However, that entirely misconceives the nature of the exercise that his Honour was undertaking. His Honour was seeking to determine the dollar value of the appellant’s entitlement under its defence. Accordingly, I would reject this part of the appellant’s argument.

28 There was some discussion in the course of argument as to whether the caveat would have protected more than the purchase price, as found by his Honour. However, his Honour’s finding was not directly challenged and in my opinion is the correct construction of clause 2.8 of the contract.

29 The appellant submitted alternatively that had the respondent not breached his equitable duty by failing to caveat, not only would the security have been unimpaired for the benefit of the appellant guarantor, but the guarantees would not have been called upon. It was submitted, that therefore, as a matter of “common sense causation” the appellant’s loss, in having to pay under the guarantee, was caused by the respondent’s breach of equitable duty in failing to caveat. In my opinion, this is the same argument that I have already discussed.

30 The appellant relied upon the decision of Wulff & Billing v Jay (1872) 7 LR (QB) 756 in support of this argument. In that case it was held that a surety has a remedy when a creditor fails to hand over the security. That is the equitable principle applied by his Honour. It is the principle which permits the remedy. It does not otherwise prevent the creditor who failed to protect the security from recovering the balance of the loss. That is made clear in the judgment of Cockburn CJ in the lengthy passage extracted in his Honour’s reasons at 128.

31 The appellant next put his argument in slightly different terms. He submitted that by considering principles of causation in equity the respondent should have been held responsible for all of the loss that flowed from the failure to caveat. He submitted that as was said in Youyang Pty. Ltd. v. Minter Ellison (2003) 196 ALR 482, the common law rules of causation apply to cases of equitable breaches. Youyang involved breach of duty by a trustee. As his Honour explained fulsomely in his judgment at 123 “the remedy which is appropriate for breach of one type of equitable duty is not necessarily the same as the remedy which is appropriate for a different type of equitable duty”. I agree with his Honour’s reasoning in this paragraph and those that follow in which he explains the nature of the duty and the principles which govern the remedies available upon breach. It follows, in my opinion, there is no error in his Honour’s judgment and I would dismiss the appeal with costs.

32 HODGSON JA: I agree with the orders proposed by Beazley JA, but I reach this conclusion by a different route from that taken by her Honour.

33 The primary judge did consider the question what Westpac would had done had the respondent lodged a caveat but, having specified three alternatives as together being more likely than not, was “not able to say which of the alternatives is the most likely one, nor that any of the alternatives is more likely than any other one”.

34 As I read the primary judge’s reasons, he went on to hold that the measure of the appellant’s loss (and thus of the amount which could be set off against the respondent’s claim) was the reduction of the value of the appellant’s right of subrogation in relation to security lost by the respondent, rather than all loss caused by the failure to lodge a caveat. The primary judge noted that the respondent had a charge, under cl.2.8 of its contract, for the purchase price he had paid ($275,000.00); and in effect treated the loss of that charge as the reduction of value of the appellant’s right of subrogation.

35 The appellant’s argument on appeal proceeded in two stages. First, it was submitted that the appellant was entitled to damages or a set-off in respect of his loss caused by the failure to lodge a caveat, determined by comparing what actually happened with what would have happened had the caveat been lodged. Second, it was submitted that, had the caveat been lodged, the respondent would have suffered no loss and there would have been no liability under the guarantee. As shown by Beazley JA’s judgment, there are difficulties in the second stage of that argument; although there could possibly be merit at that stage in an approach along the lines discussed in Malec v. J.C. Hutton Pty. Limited (1990) 169 CLR 638. In my opinion however, the appellant’s argument fails at the first stage. A creditor paid out in full by a guarantor has an obligation to give the guarantor the benefit of any security for the debt held by the creditor. If through negligence the creditor has lost the security which it otherwise could have made available to the guarantor, the guarantor can set off against this liability the value of the security so lost: see Capel v. Butler (1825) 2 Sim&ST 457, Strange v. Fooks (1863) 4 Giff 408, 66 ER 765, Wulff & Billing v. Jay (1872) LR 7 QB 756.

36 Although the negligence of the creditor (respondent) in this case was identified as failure to lodge a caveat, the appropriate enquiry was not as to all the consequences of failure to lodge a caveat but rather as to the value of the security of which the guarantor (appellant) would have had the benefit but for the negligence of the creditor. The primary judge determined this value at $275,000.00, and there is no effective challenge to that determination on this appeal.

37 It may have been possible for the appellant to advance a case at the trial that the security which should have been made available was not merely the charge for $275,000.00 under cl.2.8 of the contract, but the totality of the rights in respect of property which the respondent had by virtue of its contract; and that those rights extended to an implied equitable charge for interest on $275,000.00 plus such rights to the land as reflect the ability of the Court to order specific performance of the contract. It could perhaps then have been argued that the proper value of that security was reached, in accordance with Malec principles, by adding to the virtual certainty of recovering $275,000.00 from the land the value of the chance of recovering interest or even specific performance. However, that case was not advanced at the trial, and explicitly was not advanced on appeal; and so it need not be considered further.

38 For those reasons, I agree that the appeal should be dismissed with costs.

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Last Modified: 10/07/2003