Burness v Hill
[2019] VSCA 94
•1 May 2019
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2018 0043
| PAUL ANDREW BURNESS and MATTHEW JAMES JESS (in their capacity as trustees of the bankrupt estate of THOMAS JAMES LOVE) | Applicants |
| v | |
| ANTONY CHRISTOPHER HILL | Respondent |
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| JUDGES: | KAYE, McLEISH and HARGRAVE JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 19 March 2019 |
| DATE OF JUDGMENT: | 1 May 2019 |
| MEDIUM NEUTRAL CITATION: | [2019] VSCA 94 |
| JUDGMENT APPEALED FROM: | [2018] VSC 29 (Sifris J) |
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EQUITY – Marshalling – Whether there was a secured debt to second mortgagee which attracted operation of marshalling doctrine – Effect of settlement of earlier County Court proceeding on nature of debt – Principles of merger considered – Tomlinson v Ramsey Food Processing Pty Ltd (2015) 256 CLR 507 considered – Secured debt existed.
EQUITY – Marshalling – Whether non-binding arrangement between debtor and first mortgagee as to order of sale of secured properties avoided operation of marshalling doctrine – Where first mortgagee accommodated preference of debtor to sell commonly mortgaged property first – National Crime Agency v Szepietowski [2014] AC 338 applied – Binding agreement required to exclude operation of marshalling doctrine.
CONTRACT – Release – Construction – Whether marshalling claim released by terms of settlement from earlier proceeding relating to debt owed – Where both parties were unaware of marshalling right – Where issues of security of debt had not yet arisen – Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112 applied – Marshalling claim not released.
EQUITY – Anshun estoppel – Abuse of process – Whether unreasonable for applicant not to make marshalling claim in earlier County Court proceeding – Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 applied, UBS AG v Tyne (as trustee of the Argot Trust) (2018) 360 ALR 184 considered – Not unreasonable for applicant not to raise marshalling claim in earlier proceeding – No estoppel or abuse of process – Appeal dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr J Delany QC with Ms C van Proctor | Cornwall Stodart |
| For the Respondent | Mr D G Robertson QC with Mr D C Morgan | Earl & Associates |
KAYE JA
McLEISH JA
HARGRAVE JA:
This case concerns the equitable doctrine of marshalling of mortgages, which allows a second mortgagee whose debt has not been paid from the sale of the mortgaged property to access the proceeds of sale of another property mortgaged by the same debtor to the same first mortgagee, even though the second mortgagee has no security over the other property. Marshalling rights are primarily relevant where the debtor is insolvent; as marshalling gives the second mortgagee priority over unsecured creditors.
This case also concerns whether the second mortgagee lost any marshalling right by various defences raised on behalf of the unsecured creditors by the trustees of the bankrupt estate of the debtor, including a defence concerning the effect of a release given by the second mortgagee to the debtor.
Background facts
Between about June 2004 and January 2011, Thomas Love engaged the respondent, Antony Hill, as his solicitor. The retainer concerned substantial and notorious litigation brought by Love against the Roads Corporation as a result, in part, of the compulsory acquisition by the Roads Corporation of parts of three properties owned by Love in the suburb of Epping, Victoria (collectively the ‘Epping properties’).
The Epping properties comprised:
(1) 275 O’Herns Road, Epping;
(2) 315 O’Herns Road, Epping;[1] and
(3) 460 Cooper Street, Epping.
[1]This property was previously known as 410 Cooper Street, Epping.
The litigation conducted by Hill on Love’s behalf was lengthy, costly and complex. Although Love was land-rich, it appears that he needed to borrow in order to fund the litigation. Accordingly, Love borrowed about $12 million from the Commonwealth Bank of Australia (‘CBA’) and gave a first mortgage over each of the Epping properties to CBA to secure the loans.
By March 2009, the CBA loan facility had expired, and Love was in default under that facility. By the end of August 2009, an extension granted by CBA had expired. In these circumstances, Love granted a second mortgage to Hill over 275 O’Herns Road to secure the amounts he owed to Hill for unpaid legal fees and disbursements. The second mortgage describes that it was granted in consideration of an ‘advance or other valuable consideration’ of $3 million, but is expressed to be security for the payment of ‘the moneys hereby secured’. By reference to the Memorandum of Common Provisions incorporated into the second mortgage, ‘moneys hereby secured’ is defined to include the advance stated in the second mortgage ‘and each and all sums of money in which [Love] may now or hereafter be indebted or liable or contingently indebted or liable to [Hill] in any manner or on any account whatever…’.
On 24 November 2009, Love signed a variation of the second mortgage, which increased the amount of the recorded advance from $3 million to $4 million, as further legal fees and disbursements had been incurred but not paid by this time.
On 2 December 2010, the second mortgage (but not the variation) was registered on the title of 275 O’Herns Road. In mid-2011, Hill sought further security from Love but Love advised that he did not want to give further security to Hill.
On 22 December 2010, Hill sent an email to Love in which he stated to Love: ‘I further confirm your acceptance now to execute further mortgage documents to further secure the moneys owing to our office. I will arrange to have them delivered to you for execution’. This statement in Hill’s email refers to disputed discussions between Hill and Love. Acting on the basis of his version of the discussions, Hill lodged a caveat over 460 Cooper Street and 315 O’Herns Road on 21 January 2012 (‘the first caveat’). In the first caveat, Hill claimed an interest in 460 Cooper Street and 315 O’Herns Road: ‘Pursuant to a Charge dated 22 December 2011 between [Love] and [Hill]’.
As Love disputed that he agreed to provide further security for the legal fees owing to Hill, he arranged for another solicitor to serve a notice on Hill pursuant to s 89A of the Transfer of Land Act 1958. Accordingly, on 9 February 2012, that solicitor wrote to Hill, and informed him that steps were being taken pursuant to s 89A of the Transfer of Land Act to remove the first caveat over 460 Cooper Street and 315 O’Herns Road, and that Love reserved his rights to claim compensation for the wrongful lodging of the first caveat under s 118 of the Transfer of Land Act. The s 89A notice was dated 17 February 2012 and the caveat lapsed because Hill took no steps to enforce it within the 30-day period which, we infer, was specified in the notice.[2]
[2]Transfer of Land Act 1958 s 89A(4).
In the meantime, in about August 2011, CBA sold 275 O’Herns Road as mortgagee, for the sum of $10,370,000. The sale was settled on 9 February 2012. Hill’s second mortgage was removed from the title upon registration of the transfer. The net proceeds of sale were insufficient to repay the whole of Love’s debts to CBA.
In these circumstances, Hill wrote to Love on 21 February 2012 concerning the conduct of an appeal lodged by Love in respect of one of the compulsory acquisition proceedings, and concerning unpaid legal fees. In his 21 February 2012 letter, Hill:
(1) enclosed a further invoice to Love for legal fees and disbursements incurred on his behalf since 3 September 2011;
(2) noted Hill’s previously stated position that he required further security as a consequence of continuing to act for Love without payment of his outstanding debts for legal fees;
(3) noted that, notwithstanding Love’s failure to provide further security, Hill had continued to represent Love in good faith and prepare for a strike-out application against Love in an appeal by him, which was fixed for hearing in the Court of Appeal on 7 March 2012;
(4) noted Love’s previously stated position that he would not pay the outstanding legal fees of about $3.5 million, and intended to claim damages against Hill in excess of that amount;
(5) nevertheless stated that he would act for Love in the strike-out application against him on 7 March 2012, to avoid placing Love in a precarious situation;
(6) gave Love notice that he would cease acting for him on completion of the strike-out application; and
(7) advised Hill to instruct alternate solicitors.
We infer that Hill ceased representing Love after 7 March 2012, as he said he would do in his letter.
Next, on 30 March 2012, Hill commenced County Court proceedings against Love, seeking to recover unpaid legal costs and disbursements in the sum of approximately $4.15 million (including interest on unpaid fees and disbursements). We infer that Hill’s first caveat had lapsed before the proceeding was commenced.
The parties then exchanged pleadings, in which Love raised various defences to Hill’s claims for unpaid fees and disbursements, and counterclaimed against Hill for, among other things, negligence in acting for him in the various Roads Corporation proceedings. Love also claimed damages from Hill under s 118 of the Transfer of Land Act for wrongfully lodging the first caveat over 460 Cooper Street and 315 O’Herns Road. In his defence to the counterclaim, Hill admitted that he did not have a caveatable interest to support the first caveat, pleaded that the first caveat had lapsed following service of the s 89A notice, admitted Love had suffered loss and damage by reason of the lodgement of the first caveat, and pleaded that he would tender the amount of the damages claimed to Love. It was accepted on the hearing of this application for leave to appeal that Hill acted in accordance with that pleading and paid the damages claimed for wrongfully lodging the first caveat.
In this context, a mediation was held on 17 January 2013 in the County Court proceeding. Hill and Love agreed to settle the proceeding and executed handwritten terms of settlement on that day. In summary, the terms of settlement provided that Love would pay Hill the sum of $2.2 million, and would consent to judgment against him in the County Court proceeding for that amount, on condition that $2 million of the judgment debt be stayed until 31 October 2013 and the remaining $200,000 be stayed until 31 January 2014.
On 4 February 2013, the County Court entered a consent judgment against Love for $2.2 million in the terms provided for by the terms of settlement.
On 24 April 2014, CBA sold 315 O’Herns Road, with settlement being effected on 18 July 2014. Again, the net sale proceeds were insufficient to discharge Love’s debts to CBA.
On 27 May 2014, Hill lodged a second caveat over 460 Cooper Street, claiming an equitable interest as mortgagee. In the second caveat, he stated his grounds of claim as a right to be subrogated to CBA’s first mortgage. This was a clear reference to Hill’s claimed marshalling right.
In these circumstances, Hill commenced a proceeding in the Trial Division in June 2014 against Love, CBA, and Love’s wife, Helen Love. Relying on the doctrine of marshalling, Hill claimed that his second mortgage gave him the right to stand in the shoes of CBA as first mortgagee of 460 Cooper Street and be paid the amount secured by the second mortgage — namely, the amount of the judgment debt, interest on that judgment debt, and his costs of the County Court proceeding. Hill also sought a declaration validating his caveat over 460 Cooper Street.
It was necessary to join CBA because it was the first mortgagee of 460 Cooper Street. It was necessary to join Mrs Love because Hill knew that she asserted a proprietary interest in 460 Cooper Street.
CBA took possession of 460 Cooper Street on 30 July 2014.
Love was made bankrupt by a sequestration order made on 3 February 2016. The trustees then assumed the conduct of Love’s defence in the proceeding.
Love died on 1 April 2016.
CBA sold 460 Cooper Street on 24 November 2016, with settlement occurring on 21 February 2017. Following payment of all secured indebtedness due to CBA, there were surplus sale proceeds of $5,889,737.70 (‘surplus sale proceeds’). The surplus sale proceeds were paid into Court by CBA. Subsequently, directions were made for pleadings in the proceeding so that Hill and Mrs Love could state their claims to the surplus sale proceeds and the trustees could file defences.
The proceeding was tried in the Commercial Court by Sifris J for a period of five days in September 2017. The trial judge delivered a judgment in which he found in favour of Hill and made declarations and orders upholding his right to marshal. Mrs Love’s claim to an interest in 460 Cooper Street was dismissed.[3] In summary, the trial judge declared that Hill was entitled to be subrogated to CBA’s first mortgage over 460 Cooper Street to the extent of the value of 275 O’Herns Road, and thus had first right to the surplus sale proceeds. On this basis, the trial judge ordered that the sum of $3,330,589.04 be paid to Hill from the surplus sale proceeds held by the Court. The trial judge also ordered that Hill’s costs be paid from the surplus sale proceeds on an indemnity basis pursuant to the terms of the second mortgage.
[3]Hill v Love (2018) 53 VR 459 (‘Reasons’).
Trial judge’s reasons
In the pleadings and at trial, the trustees contended that Hill’s marshalling claim should fail for a number of reasons, including because:
(1) at the time 275 O’Herns Road was sold, Hill’s judgment debt did not exist and was thus not secured by the second mortgage. Hill’s claim for unpaid legal fees and disbursements was extinguished by the County Court judgment, and thus could not form the basis of the marshalling claim;
(2) there was an arrangement between CBA and Love as to the order of sale of the Epping properties, to the effect that 275 O’Herns Road would be sold first. Moreover, Hill was aware of the arrangement. Thus, the sale by CBA of 275 O’Herns Road before selling the other Epping properties over which it held first mortgage security was not arbitrary or capricious;
(3) Hill released his marshalling rights by the terms of settlement in the County Court proceeding; and
(4) Hill’s marshalling claim was estopped under Anshun principles.[4]
[4]Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 (‘Anshun’).
The trial judge found against the trustees on all issues. In summary, insofar as is relevant to the proposed grounds of appeal, the trial judge held that Hill was entitled to rely on the marshalling doctrine, and had not lost that right, because:
(1) there was a secured debt at the time 275 O’Herns Road was sold;[5]
[5]Reasons 471 [60]–[62].
(2) any arrangement between Love and CBA to sell 275 O’Herns Road first was not binding, and thus did not deprive Hill of his marshalling right;[6]
[6]Ibid 469 [51]–[52].
(3) Hill’s claim to enforce his marshalling right had not been released by the terms of settlement;[7] and
(4) Anshun estoppel did not apply because it was not unreasonable for Hill to not raise his marshalling claim in the County Court proceeding.[8]
The trial judge’s reasons will be considered in more detail when considering each of the grounds of appeal.
[7]Ibid 472–3 [67]–[68].
[8]Ibid 473 [69]–[70].
Grounds of appeal
The trustees’ amended application for leave to appeal relies on five proposed grounds. The fifth ground was not pressed in oral argument and we take it to have been abandoned. In any event, it sought to challenge an incidental finding, or comment, by the trial judge which did not form part of his reasoning. No error was demonstrated and leave to appeal should be refused in respect of it. The four grounds which were persisted with at the hearing of the application for leave to appeal — as amended by leave of the Court during the hearing — are as follows:
1. The learned trial judge erred in law at [67], [68] and [69]:
a.in finding that a release of ‘all claims, suits, demands and actions the parties now have, or but for these terms could in the future have, arising out of this proceeding and the allegations, acts, facts or matters the subject of this proceeding and the Retainer,’ which his Honour held ‘deals with all issues between the parties arising out of the litigation and work performed and fees and disbursements charged under the retainer,’ did not include a claim by the solicitor to marshal securities that was said to arise in consequence of a mortgage provided by the client to secure the fees the subject of that proceeding (the County Court proceeding) and charged under the retainer;
b.in finding that the subjective state of knowledge and intention of the solicitor:
(i)was determinative of, or relevant to, the proper construction of the settlement and release;
(ii)could not have been to release a right of which he was unaware, in circumstances where the release expressly provided for the release of ‘all claims, suits demands and actions that the parties now have, or but for these terms, could in the future have’;
c.in finding that it would be unconscionable to allow the Trustees to rely on the general words of the release.
2.The learned trial judge erred in law at [70] and [75] in finding that it was not unreasonable by reason of Anshun estoppel and/or abuse of process for the solicitor not to have raised his marshalling claim in the County Court proceeding (in which other security interests were raised) because the solicitor was unaware of the right and the right was ‘tangential and not directly relevant’.
3.The learned trial judge, having held that the solicitor’s marshalling claim relied on a $2.2 million County Court judgment debt obtained in April 2013 (at [3]), erred in law at [60]-[62] in finding that the debt on which the solicitor’s marshalling claim was founded:
a.was a debt for unpaid legal fees and disbursements, and not the County Court judgment debt of $2.2 million pleaded and referred to in paragraph F of the solicitor’s prayer for relief;
b.was unaffected by:
(i)the settlement and release of the solicitor’s claims for, and arising out of, the same legal fees and disbursements;
(ii)the orders made in the County Court proceeding;
(iii)the judgment debt in favour of the solicitor of which $2 million was payable by 31 October 2013 and $200,000 was payable by January 2014.
4.The learned trial judge erred at [51] and [52], and should have found that the doctrine of marshalling did not apply where, as the evidence established:
a. the order in which the other mortgagor (CBA) sold the client’s properties:
(i)was in accordance with and the subject of an arrangement between the CBA and client and known to the solicitor;
(ii)was not arbitrary or capricious;
(iii)was intended by and known to the solicitor and client at the time the client agreed to give the mortgage to the solicitor and in circumstances where the client refused to give security over any of his other properties to the solicitor.
b.the debt on which the solicitor founded his marshalling claim, being the County Court judgment debt pleaded in his statement of claim, arose after the sale of the specified property over which the solicitor held security, and could not found a subsequent claim to marshal securities.[9]
[9]Emphasis removed.
Taken in a logical sequence, the four proposed grounds of appeal raise the following issues for determination:
(1) Was the debt owed by Love to Hill a secured debt when 275 O’Herns Road was sold? (grounds 3 and 4(b))
(2) Does the non-binding arrangement between Love and CBA to sell 275 O’Herns Road first deprive Hill of his marshalling right? (ground 4(a))
(3) Did Hill release his right to marshal? (grounds 1 and 3(b))
(4) Did Hill act unreasonably by not making his marshalling claim in the County Court proceeding? (ground 2)
We will consider the proposed grounds of appeal in this order, by reference to the above questions.
Was the debt owed by Love to Hill a secured debt when 275 O’Herns Road was sold?
In order to understand the contentions made by the trustees, it is necessary to set out the relevant principles governing the application of the marshalling doctrine.
The Supreme Court of the United Kingdom recently summarised the marshalling doctrine in the following terms:
Marshalling [is] allowed to a creditor, in a case where (i) his debt is secured by a second mortgage over property (‘the common property’), (ii) the first mortgagee of the common property is also a creditor of the debtor, (iii) the first mortgagee also has security for his debt in the form of another property (‘the other property’) (iv) the first mortgagee has been repaid from the proceeds of sale of the common property, (v) the second mortgagee’s debt remains unpaid, and (vi) the proceeds of sale of the other property are not needed (at least in full) to repay the first mortgagee’s debt. In such a case, the second mortgagee can look to the other property to satisfy the debt owed to him.
Consider a case where the mortgagor owes £2m to the first mortgagee and £2m to the second mortgagee, the common property and the other property are each worth £3m, and the common property is sold, resulting in repayment in full of the first mortgagee and a reduction of £1m in the debt of the second mortgagee. The mortgagor still owes £1m to the second mortgagee, whether or not the second mortgagee can marshal. The only effect of the second mortgagee being able to marshal would be that it could directly enforce its outstanding £1m debt against the other property rather than falling back on the status of unsecured creditor. This emphasises the point that marshalling only really comes into its own where the mortgagor/debtor is insolvent: marshalling improves the position of the second mortgagee as against the unsecured creditors of the debtor, not as against the debtor herself.[10]
[10]National Crime Agency v Szepietowski [2014] AC 338, 349–50 [31]–[32] (Lord Neuberger) (‘Szepietowski’).
The trustees contend that the trial judge erred in finding that Hill’s marshalling claim was based on a debt for legal fees and disbursements, which was secured by the second mortgage.[11] They contend that the marshalling claim is based on the premise that the judgment debt was secured by the second mortgage, and thus: ‘As this was a debt which did not exist at the time 275 [O’Herns Road] was sold, it could not found a marshalling claim’. This contention involved the following steps.
[11]Reasons 471 [60].
First, the trustees contend that the effect of the County Court judgment was that Love’s debt to Hill for legal fees and disbursements ceased to have an independent existence, because the debt merged in the judgment which ‘created a “new charter” of rights which were the only rights that could thereafter found a claim’. In substance, the trustees contend that this means Love’s debt to Hill was extinguished by the judgment.
Second, the trustees contend that it follows there was no debt due by Love to Hill, secured by the second mortgage, at the time 275 O’Herns Road was sold by CBA — which they contend was the relevant time to assess the marshalling claim.
We do not accept these contentions. We begin by referring to the trial judge’s reasons, with which we agree. The trial judge reasoned as follows:
Debt arose after the sale of the first property
The final issue under this section concerns the submission that the debt only arose after the sale of the first property, that is 275 O’Herns Road, and as a consequence there was nothing to marshal.[12] I do not accept this submission. In my opinion the debt, comprising legal fees and disbursements, and fluctuating, from time-to-time, existed at the time of the Second Mortgage and continued and indeed continues. There was always and still is an amount owing to Hill. The debt and liability remained unaffected by any non-compliance with solicitors’ obligations of disclosure and the like, or by the later Judgment. The later Judgment does not mean there was nothing owing or no indebtedness prior to the Judgment and relevantly at the time of execution of the Second Mortgage or the sale of 275 O’Herns Road.
The authorities establish that judgment on a cause of action does not eliminate an initial obligation and replace it with another. Pursuant to the doctrine of res judicata, an initial obligation or cause of action (ie the debt) merges in the judgment and thereafter ceases to have an independent existence. As explained by French CJ, Bell, Gageler and Keane JJ in Tomlinson v Ramsey Food Processing Pty Ltd:[13]
The rendering of a final judgment in that way ‘quells’ the controversy between those persons. The rights and obligations in controversy, as between those persons, cease to have an independent existence: they ‘merge’ in that final judgment. That merger has long been treated in Australia as equating to ‘res judicata’ in the strict sense.[14]
As submitted by Hill, the fact that the initial obligation or cause of action ceases to have an independent existence does not mean that it did not exist at the relevant time so as to preclude the operation of marshalling.[15]
[12]The Trustees rely on the judgment of Lord Neuberger in Szepietowski [2014] AC 338, 354 [52].
[13](2015) 256 CLR 507.
[14]Ibid 516 [20].
[15]Reasons 471 [60]–[62] (emphasis in original) (citations in original).
First, the trial judge was right to reject the trustees’ contention that the County Court judgment had the effect of extinguishing Hill’s claim, and thus Love’s debt, for outstanding legal fees. The reliance by the trustees on the statement in the plurality judgment in Tomlinson v Ramsey Food Processing Pty Ltd,[16] is misplaced. Like the trial judge, we emphasise the words ‘ceased to have an independent existence’.[17] That does not mean that pre-existing rights are treated as void from the beginning, or never having existed. Merger means merger, not retrospective extinguishment, as if the pre-existing rights and liabilities never existed.
[16](2015) 256 CLR 507, 516 [20].
[17]Emphasis added.
Second, we do not accept that, in the case of an ‘all moneys’ second mortgage such as that held by Hill, the amount which can be marshalled depends on the amount that was owing at the time the first mortgagee sells the commonly mortgaged property, or on the legal character of the secured debt at that time. The trustees rely on Szepietowski to support their contention in this regard, in particular on the statement by Lord Neuberger that the remedy of marshalling is not available to a second mortgagee where the second mortgage ‘does not secure a debt due from the mortgagor’.[18] So much may be accepted. But it does not follow that the extent of the second mortgagee’s marshalling right is limited to the exact amount and legal character of the secured debt at the time the first mortgagee chooses to sell the commonly mortgaged property.
[18]Szepietowski [2014] AC 338, 353 [50].
Acceptance of the trustees’ contentions in this regard would lead to absurd results. This case provides a good example. The trustees’ contention would have the effect that a second mortgagee who obtains a judgment for the whole or part of the secured debt after the first mortgagee sells the commonly mortgaged property, loses the right to marshal. Thus, if instead of compromising his claim against Love, Hill had taken his claim in the County Court to trial and been completely successful, he would lose his marshalling rights. That is an absurd result, even if the second mortgagee had secured only the specific liability of Love to Hill for unpaid legal fees and disbursements — and was not an ‘all moneys’ mortgage. It is a result which has nothing to do with the underlying basis of the marshalling doctrine, which Lord Neuberger traced in Szepietowski[19] by reference to the broad statement by Joseph Story in his text, Commentaries on Equity Jurisprudence:
The reason is obvious... [By] compelling [the first creditor with the two securities] to take satisfaction out of one of the funds no injustice is done to him ... But it is the only way by which [the second creditor with one security] can receive payment. And natural justice requires, that one man should not be permitted from wantonness, caprice, or rashness, to do injury to another.[20]
[19]Ibid 350 [35].
[20](2nd ed, Stevens and Haynes, 1982) 416–17.
Lord Neuberger also referred to ‘good practical reasons’ for equity adopting the marshalling doctrine:
namely the unattractive and adventitious benefit which would otherwise be accorded to the first mortgagee. If marshalling was not available to the second mortgagee, the first mortgagee’s free right to choose the property against which he enforced could have substantial value. In effect, he could auction that right as between the second mortgagee (who would be prepared to pay him to enforce against the other property) and the unsecured creditors of the mortgagor (who, especially where the mortgagor was actually or potentially insolvent, would be prepared to pay him to enforce against the common property). Further, it appears to be somewhat arbitrary that, if he could not marshal, a second mortgagee who had sufficient resources and was prepared to take any associated risk, could redeem the first mortgage (on the basis of ‘redeem up foreclose down’ …), and then protect its position as second mortgagee by selling the other property to redeem the first mortgage, before selling the common property.[21]
[21]Szepietowski [2014] AC 338, 350–1 [36].
Other examples demonstrating the absurdity that would result if the trustees’ contentions in this regard were accepted come readily to mind. They include:
(1) A second mortgage secures a fluctuating line of credit to the mortgagor. At the time the first mortgagee chooses to sell the commonly mortgaged property, the line of credit stands at nil. The mortgagor later draws on the line of credit.
(2) A second mortgage secures a debt payable in the future, which is not due as a present debt at the time of the sale by the first mortgagee of the commonly mortgaged property.
(3) A second mortgage secures a contingent debt, such as a guarantee of the obligations of another, and the contingency occurs after the sale by the first mortgagee of the commonly mortgaged property.
(4) A second mortgage secures a debt which is only payable on demand, and no demand may have been made at the time the first mortgagee chooses to sell the commonly mortgaged property.
If the trustees’ contentions were accepted, in each of those instances, the equitable right of marshalling would not apply so as to entitle the second mortgagee to be subrogated to any other security held by the first mortgagee. Such a result would be clearly inconsistent with the fundamental rationale of the marshalling doctrine.
For those reasons, we conclude that Hill’s mortgage secured a debt when 275 O’Herns Road was sold. Proposed grounds 3 and 4(b) are not made out.
Does the non-binding arrangement to sell 275 O’Herns Road first deprive Hill of his marshalling right?
The trustees contend that Hill has no marshalling right because the decision by CBA to sell 275 O’Herns Road before selling the other Epping properties over which it held first mortgage security was in accordance with an arrangement between CBA and Love — and thus not arbitrary or capricious. The trial judge did not accept this contention, finding that there was no agreement or binding arrangement between CBA and Love as to the order of sale of the Epping properties.[22] In the trial judge’s view, the evidence:
rises no higher than an accommodation by the CBA (well after the execution of the [first] mortgage) as to the desire by Love to sell 275 O’Herns Road first. Importantly, none of the mortgages executed by Love in favour of the CBA contained any provision regarding the order of sale. There is no other document containing any binding promise to such effect. In fact (and law) the contrary appears to be the position. CBA was entitled to sell any of the properties, in any order, upon the mortgages becoming enforceable.[23]
[22]Reasons 469 [51].
[23]Ibid 469 [52].
We agree with the trial judge. We note first that the proposed grounds of appeal do not seek to challenge the trial judge’s finding that the evidence does not establish any agreement or binding arrangement between CBA and Love as to the order of sale of the various Epping properties. That finding is fatal to this contention made by the trustees.
The trustees contend that it is not necessary for them to establish that the arrangement between CBA and Hill as to the order of sale of the Epping properties was a binding one. It is enough if the form of the arrangement, and CBA’s decision to act in accordance with it, made CBA’s conduct neither arbitrary nor capricious. We reject that contention, for the following reasons.
First, the contention is contrary to authority. In Szepietowski, Lord Neuberger accepted that Australian authority supported the proposition that marshalling is not available to a second mortgagee where the first mortgagee is ‘contractually bound’ to look first to the commonly mortgaged property to satisfy the debt to the first mortgagee:
On the second strand of Mrs Szepietowski’s argument, there is Australian authority to support the proposition that marshalling is not available to a second mortgagee where the first mortgagee is contractually bound to look first to the other property to satisfy the debt due to him; see In re Holland (1928) 28 SR (NSW) 369 and Miles v Official Receiver in Bankruptcy (1963) 109 CLR 501. This seems to me to be correct, at least where the contract is with the mortgagor or with someone else with an interest in the other property, because the basis of the right to marshal is the arbitrariness of allowing the first mortgagee’s decision as to which asset to enforce against to affect the second mortgagee’s rights. It also seems to me that the Australian cases accord with the approach of the Court of Appeal in Webb v Smith (1885) 30 Ch D 192.[24]
[24]Szepietowski [2014] AC 338, 351 [38] (emphasis added).
The ‘second strand’ of the argument advanced by Mrs Szepietowski was based on the fact that the property sought to be marshalled by the second chargee was her home,[25] and there were two legislative barriers to the enforcement of any security interest over the home.[26] Lord Neuberger held there was ‘nothing in either of these points’,[27] but even if the legislation relied on made it ‘more difficult’[28] for the second chargee to enforce its security over Mrs Szepietowski’s home:
that would be wholly insufficient to prevent SOCA being able to marshal, if it was otherwise entitled to do so. Where the requirements of the right to marshal are otherwise present, it would require a contractually enforceable obligation, or something close thereto, on the first mortgagee to enforce against the common property in priority to the other property for the second mortgagee to lose his right to marshal. (The words ‘or something close thereto’ are added out of an abundance of caution, based on an acceptance that nobody can foresee every possibility: I find it very hard to think of an arrangement short of a binding estoppel which would do.)
It would be wrong, both in principle and in practice, if it were otherwise. The right to marshal is based on a simple principle, and there is no reason to dilute it in the way contended for on behalf of Mrs Szepietowski. After all, the right to marshal is not based on the proposition that the first mortgagee is under an obligation to sell the other property first: see para 34 above. Further, if Mrs Szepietowski’s contention were accepted, one can readily imagine all sorts of arguments as to whether one property is more difficult to sell than another, and whether the extent or nature of the difficulty is such as qualifies for the purposes of the contention.[29]
[25]Ibid 348 [23], 358 [73]–[75].
[26]Ibid 358 [73]–[75].
[27]Ibid 358 [75].
[28]Ibid.
[29]Ibid 358 [75]–[76] (emphasis added).
We agree with Lord Neuberger that the authorities require a contractually enforceable obligation between the mortgagor and the first mortgagee, or something close thereto. To his observation that a binding estoppel would do, we add that a statutory obligation requiring a first mortgagee to sell the commonly mortgaged property first — at least where that obligation is reflected in the first mortgage document — would suffice;[30] as would a contractually binding arrangement between first and second mortgagees.[31]
[30]Miles v Official Receiver in Bankruptcy (1963) 109 CLR 501, 510–11.
[31]Webb v Smith (1885) 30 Ch D 192.
The need for any such arrangement to be a binding one, is also stated in academic texts.[32]
[32]Paul A U Ali, Marshalling of Securities: Equity and the Priority-Ranking of Secured Debt (Oxford University Press, 1999) 130 [7.27] (‘if the senior creditor is bound’); J D Heydon, M J Leeming and P G Turner, Meagher, Gummow & Lehane’s Equity: Doctrines and Remedies (5th ed, LexisNexis Butterworths, 2015) [11-070] (‘the double claimant’s securities … bind the claimant to pursue one fund before the other’); Edward I Sykes and Sally Walker, The Law of Securities (5th ed, Lawbook, 1993) 183 (‘must not be bound to resort to the property’).
The trustees also sought to support their contention in this regard by reference to the general statement of Lord Neuberger that the marshalling doctrine may not be available in a particular case depending on the circumstances.[33] This statement, however, must be seen in context. Lord Neuberger added that, although it would be ‘wrong to rule out the possibility of an exceptional case’ where the general principles of marshalling would not be applied, he found it ‘hard to conceive of such a case’.[34] This leads us to the next reason for rejecting the trustees’ contentions in this regard.
[33]Szepietowski [2014] AC 338, 355 [58].
[34]Ibid.
Second, the trustees contend that the authorities support a conclusion that a marshalling claim may be defeated where the decision of the first mortgagee to sell the commonly mortgaged property first is not arbitrary or capricious. They contend that this is such a case, because of the non-binding arrangement between Hill and CBA. They rely upon the statement of Lord Neuberger in Szepietowski, emphasised above in paragraph [48], that ‘the basis of the right to marshal is the arbitrariness of allowing the first mortgagee’s decision as to which asset to enforce against to affect the second mortgagee’s rights’.[35]
[35]Ibid 351 [38].
We reject that contention. It elevates the policy reasons underlying the existence of the marshalling doctrine to essential elements to be established before the doctrine can be relied upon. There is no authority to support that contention, and we reject it. For the reasons given above, a contractually enforceable arrangement, binding estoppel, or legislative obligation, is required.
Proposed ground 4(a) is not made out.
Did Hill release his right to marshal?
The terms of settlement of the County Court proceeding were handwritten at the conclusion of a mediation, the document being dated 17 January 2013, and are in the following terms:
RECITALS
A.By writ and Statement of Claim filed in this proceeding the Plaintiff has made certain claims for outstanding legal fees owing to the Plaintiff by the Defendant in acting for the Defendant in various proceedings set out in the Statement of Claim (‘Retainer’).
B.The Defendant denies the claim and has filed an Amended Defence and Counterclaim.
C.The Plaintiff denies the Counterclaim.
D.The parties have agreed to resolve this proceeding as follows:
Operative Part
1)The Defendant agrees to pay to the Plaintiff the sum of $2,200,000 as follows:
a) the sum of $2,000,000 on or before 31 October 2013;
b) the sum of $200,000 on or before 31 January 2014.
2) The parties agree to orders being made in this proceeding as follows:
a)that there be judgment for the Plaintiff in the sum of $2,000,000;
b) paragraph (a) be stayed until 31 October 2013;
c)that there be further judgment for the Plaintiff in the sum of $200,000;
d) paragraph (c) be stayed until 31 January 2014;
e) no order as to costs.
3)In consideration of the parties entering into these terms of settlement, the parties hereby release each other from all claims, suits, demands and actions the parties now have; or but for these terms would in the future have, arising out of this proceeding and the allegations, acts, facts or matters the subject of this proceeding, and the Retainer.
4)The parties agree to keep the terms of this settlement confidential except as required by law or for the purpose of enforcing these terms.
5)The parties agree not to make any disparaging or derogatory remarks about each other to any third party.
6)The parties agree to take all necessary steps and sign all such documents as necessary to give effect to these terms including signing consent orders in accordance with paragraph 2 within 7 days.
It was common ground on the hearing of the application for leave to appeal that the evidence established that, at the time the terms of settlement were signed, neither Hill nor Love knew that Hill had a marshalling claim. In these circumstances, are the general words of the release contained in clause 3 of the terms of settlement wide enough to include a release of Hill’s marshalling claim? If so, should those words be read down to exclude the marshalling claim, having regard to the context in which the terms of settlement were agreed and executed?
The trustees’ grounds of appeal contend that the trial judge erred by:
(1) construing the words of the release as not wide enough to extend to include a release of Hill’s marshalling claim;
(2) taking account of Hill’s subjective intention in construing the words of the release; and
(3) finding that, even if the general words of the release were wide enough to release Hill’s marshalling claim, it would be unconscionable for the trustees to rely on the general words in the circumstances of the case.
The first contention concerns the proper interpretation of the release in the context of the terms of settlement when construed as a whole. Subject to special principles applying to contracts of release, which we discuss below, the general principles of contractual interpretation apply. We will initially approach the first contention solely on the basis of those general principles.
The principles were summarised by French CJ, Nettle and Gordon JJ in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd in the following terms:[36]
[36](2015) 256 CLR 104, 116–17 [46]–[51] (citations in original).
Applicable legal principles in these appeals
The rights and liabilities of parties under a provision of a contract are determined objectively,[37] by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.[38]
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean.[39] That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.[40]
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.[41]
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’.[42] It may be necessary in determining the proper construction where there is a constructional choice.
…
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.[43]
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’.[44] Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[45]
[37]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656 [35].
[38]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350 (citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6), 352. See also Sir Anthony Mason, ‘Opening Address’ (2009) 25 Journal of Contract Law 1, 3.
[39]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656 [35].
[40]Ibid 656–7 [35].
[41]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352. See also Sir Anthony Mason, ‘Opening Address’ (2009) 25 Journal of Contract Law 1, 3.
[42]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35], citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350, in turn citing Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6.
[43]Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352; Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, 995–6.
[44]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35], citing Re Golden Key Ltd [2009] EWCA Civ 636 [28].
[45]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 657 [35], citing Zhu v Treasurer (NSW) (2004) 218 CLR 530, 559 [82].
To this summary, we would add that the Court should have regard to all of the words used in the agreement ‘so as to render them all harmonious one with another’[46] and to ensure the ‘congruent operation of the various components as a whole.’[47]
[46]Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109.
[47]Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, 529 [16].
The trustees contend that the trial judge erred in his construction of the words of the release, by placing too much focus on the recitals as limiting the width of the general words of the release — in particular, by not giving the words ‘arising out of’ their broad natural meaning. Further, they contend that the trial judge did not take into account admissible evidence outside the text of the terms of settlement as to the existence of a dispute between Hill and Love as to whether Love should, or had agreed to, provide security over 315 O’Herns Road and 460 Cooper Street to secure Hill’s unpaid fees. In that regard, they point to the first caveat lodged by Hill over those properties which, although it had lapsed following service of the s 89A notice, was the subject of a counterclaim by Love against Hill for damages in the County Court.
Based on these contentions, the trustees submit that the commercial purpose of the terms of settlement, especially the release, was to put an end to ‘all conceivable further disputes’ between the parties ‘arising out of [the County Court] proceeding and the allegations, acts, facts or matters the subject of [that] proceeding, and the retainer’. As to the scope of the retainer, notwithstanding the definition of that term in Recital A, they contend that the evidence establishes that the retainer included Hill’s role in acting on Love’s behalf in his dealings with CBA to obtain funding for his legal fees.
We do not accept the trustees’ contentions in this regard. Our reasons follow.
First, while we accept that the words ‘arising out of’ are broad in their natural meaning, the extent of their breadth depends upon the context in which the words are used. For example, context may indicate that the words are the equivalent of the wider expression ‘connected with’, while in other contexts the words may have a narrower meaning.[48] Here, the relevant context is the words of the terms of settlement when construed as a whole, and admissible contextual evidence.
[48]Comandate Marine Corp v Pan Australia Shipping Pty Ltd (2006) 157 FCR 45, 87–93 [164]–[186] (in the context of a submission to arbitration, where the law requires a liberal approach to be taken to the words used); Rinehart v Welker (2012) 95 NSWLR 221, 248 [123], referring to Samick Lines Co Ltd v Owners of the ‘Antonis P Lemos’ [1985] AC 711, 727.
We start with the text of the heads of agreement, and note the following material aspects of them:
(1) The recitals define the context in which the release is given, by reference to the pleadings in the County Court proceeding and the agreement of the parties ‘to resolve [that] proceeding’, on the terms which follow.
(2) The recitals also define the ‘Retainer’ by reference to Hill’s actions ‘in acting for [Love] in various proceedings set out in [Hill’s] Statement of Claim’. This definition of the retainer is inconsistent with the trustees’ contention that the terms of settlement should be construed on the basis that the retainer extended to include Hill’s role in assisting Love in his dealings with CBA.
(3) Clause 3, which contains the release, has three parts:
(a) it expresses the consideration for entry into the terms of settlement — a matter of no present significance;
(b) it contains general words of release — ‘the parties hereby release each other from all claims, suits, demands and actions the parties now have; or but for these terms would in the future have [against each other] …’ (‘the general words’); and
(c) it limits those general words by the phrase — ‘arising out of this proceeding and the allegations, acts, facts or matters the subject of this proceeding, and the Retainer’ (‘the limiting words’).
Viewed in this context, reasonable persons in the position of Hill and Love would have understood the general words as being subject to the limiting words; and the limiting words as confining the general words to claims arising from the pleaded allegations and defences and/or the defined ‘Retainer’.
It is thus necessary to consider the pleadings in the County Court proceeding. As set out above:
(1) Hill made a simple claim in debt for unpaid legal fees and disbursements, and Love counterclaimed — alleging negligence by Hill in performing the retainer and seeking damages for wrongfully lodging the first caveat.
(2) The first caveat related to an allegation by Hill that on 22 December 2010 Love orally agreed to provide security over 460 Cooper Street and 315 O’Herns Road, and claimed an interest pursuant to a charge created on that day. We note that the first caveat had no connection with Hill’s marshalling claim (which was the subject of his second caveat lodged in May 2014).
(3) By his defence to the counterclaim, Hill: (a) admitted that he did not have a caveatable interest to support the first caveat; (b) pleaded that the first caveat had lapsed following service of the s 89A notice; (c) admitted that Love had suffered loss and damage by reason of the lodgement of the first caveat; and (d) pleaded that he would tender to Love the amount of the damages claimed.
(4) It was accepted on the hearing of this application for leave to appeal that Hill acted in accordance with that pleading and paid the damages claimed for wrongfully lodging the first caveat.
Thus, there was no issue joined on the pleadings about the basis for Hill’s claims in the first caveat. Recital C — which states that Hill ‘denies the counterclaim’ — is clearly incorrect to this extent.
Reading the terms of settlement as a whole, and assuming in the trustees’ favour that evidence as to Hill’s requests for further security and Love’s refusal to provide it are admissible for the purposes of construing the terms of the release, we are not persuaded that they would be understood by reasonable people in the position of Hill and Love as extending to Hill’s marshalling claim. This is because Hill’s marshalling claim was not in dispute on the pleadings, and there is no evidence that the retainer included any obligation by Love to give Hill security for unpaid fees or disbursements. The evidence discloses only that Hill’s requests for security came much later, after Love had exhausted his funding for the continuation of his various legal proceedings and had run up an extremely large debt to Hill for unpaid fees and disbursements. Further, the only allegation in the pleadings concerning security for Love’s debt related to the first caveat — which had no connection whatsoever with Hill’s marshalling right. Indeed, Hill’s marshalling right depends upon the fact that he had no security other than the second mortgage over 275 O’Herns Road.
We conclude that the trial judge was right to find that the release ‘does not go so far as to release any claim or right to marshal’.[49] The trustees’ first contention therefore fails. This conclusion is bolstered by the special principles applying to contracts of release set out in Grant v John Grant & Sons Pty Ltd,[50] to which we now turn.
[49]Reasons 473 [67].
[50](1954) 91 CLR 112 (‘Grant’).
Grant establishes two common law principles to be applied to the construction of contracts of release, and a third (equitable) principle. The first common law principle was stated in the following terms:
The principle … is that adopted by the common law long ago for the restriction of wide words in a release of obligations, [namely] that the general words of a release should be restrained by the particular occasion … Thus the general words of a release are to be restrained by the particular recital … As it is concisely expressed … : ‘If there be introductory matter, that will qualify the general words of the release’.[51]
[51]Ibid 123 (Dixon CJ, Fullagar, Kitto and Taylor JJ) (citations omitted).
The second common law principle stated in Grant provides that general words in a release should be restricted — or read down — by reference to the disputes existing between the parties at the time the release is given. In that respect, the High Court stated that the second principle:
is based upon a different conception [to the first common law principle] of the circumstances which should provide the means of restricting the generality of the release. It depends upon the simple allegation that there never at any material time was any dispute between the plaintiff and the defendant concerning the moneys claimed in or the subject matter of the suit. The difference between the two [principles] lies in the difference between controlling the general words by reference to the express recital and controlling them by reference to the disputes which existed between [the parties].
The principle which it is thus sought to apply was expressed by Lord Westbury in London & South Western Railway Co v Blackmore as follows: ‘The general words in a release are limited always to that thing or those things which were specially in the contemplation of the parties at the time when the release was given’. It was expressed by Taunton J in Upton v Upton in this way: ‘… the general words of a release may be limited by the particular matter out of which the release springs and the particular intent of the parties by whom the release is executed’.[52]
[52]Ibid 123–4 (citations omitted).
The third principle stated in Grant is an equitable one, which prevents unconscientious reliance upon the general words of a release by restricting the general words ‘to that thing or those things which were specially in the contemplation of the parties at the time when the release was given’;[53] and this principle ‘includes the proposition that in equity “a release shall not be construed as applying to something of which the party executing it was ignorant” [and] it matters not whether such ignorance was caused by a mistake of fact or of law’.[54]
[53]Ibid 126, quoting Sir Frederick Pollock, Principles of Contract (13th ed, Stevens and Sons, 1929) 412. We note that these words were also referred to by the High Court in considering the second common law principle in the previously cited passage.
[54]Ibid, quoting Sir Frederick Pollock, Principles of Contract (13th ed, Stevens and Sons, 1929) 412.
The court in Grant summarised the third (equitable) principle in the following terms:
From the authorities which have already been cited it will be seen that equity proceeded upon the principle that a releasee must not use the general words of a release as a means of escaping the fulfilment of obligations falling outside the true purpose of the transaction as ascertained from the nature of the instrument and the surrounding circumstances including the state of knowledge of the respective parties concerning the existence, character and extent of the liability in question and the actual intention of the releasor.[55]
[55]Ibid 129–30 (emphasis added).
The trial judge set the above passage out in his reasons.[56] The trial judge also referred to the decision of this Court in Doggett v Commonwealth Bank of Australia,[57] which explains that the principle in Grant is sometimes described more broadly than is justified:
It is not authority for the proposition that a release can only ever apply to matters then known to the parties. It is possible to enter into an arrangement which does settle ‘all conceivable further disputes’. The equitable principles articulated in Grant v John Grant restrain a party from unconscientious reliance on legal rights. Particular circumstances may reveal that it would be unconscientious to allow the general words of a release to be relied upon. Grant v John Grant was such a case. But there will be no room for the application of those equitable principles if it is clear that the parties intended the general words of a release to encompass all conceivable further disputes.[58]
[56]Reasons 472 [65].
[57](2015) 47 VR 302.
[58]Ibid 319 [63] (citations omitted); Reasons 472 [66].
The trial judge expressed his conclusion to reject the contention that Hill’s marshalling claims were released by the terms of settlement in the following terms:
I do not accept that the right to marshal has been released. I accept that claims and rights are capable of being released even in circumstances where the releasor is unaware of the claim or right. It is of course the wording of the release that is most important. Not surprisingly each party emphasised different aspects of the release. In my opinion an examination of the text and context suggests a narrower release than that contended by the Trustees or more precisely a release that does not go so far as to release any claim or right to marshal. The release is fairly wide but not wide enough. It deals with all the issues between the parties arising out of the litigation and the work performed and fees and disbursements charged under the retainer. However given the nature, extent and ambit of the dispute as set out in the pleadings, there is no warrant or basis to extend the release to include further and remoter issues such as the Second Mortgage, which had in fact been discharged in any event. It is unlikely that this would have been in contemplation notwithstanding that 460 Cooper Street had not yet been sold.
The true purpose of the release was to compromise the subject matter of the dispute as pleaded. The critical issues were legal fees and disbursements owing by Love to Hill[59] and in addition to attacking disclosure and other technical matters associated with the recovery of costs and disbursements, any negligence on the part of Hill.[60] These aspects were compromised. Clearly the state of knowledge and intention of Hill could not have been to release the right to marshal that he was in any event unaware of. In my opinion, it would be unconscionable to allow the Trustees to rely on the general words in these peculiar circumstances. The Second Mortgage did not arise in the proceeding and was not relevant to any issue.[61]
[59]The statement of claim pleads various retainers and disclosures and seeks payment of $3,575,111.77. It is in the nature of a debt collection matter.
[60]The defence essentially put Hill to the proof of his claim and raised various disclosure and notification matters. The counterclaim for negligence raises 17 particular matters relating to his skills and diligence in acting for Love. They all relate to the conduct of the various proceedings.
[61]Reasons 472–3 [67]–[68] (footnotes in original).
Without expressly saying so, it appears that the trial judge applied the two common law principles derived from Grant in the first paragraph of his conclusion, when concluding that the release did not extend to a release of Hill’s marshalling claim. In the second paragraph of his conclusion, the trial judge applied the third (equitable) principle derived from Grant. This is evident from his conclusion that: ‘Clearly the state of knowledge and intention of Hill could not have been to release the right to marshal that he was in any event unaware of’.[62]
[62]Ibid 473 [68].
The trustees’ second contention challenges that finding, on the basis that the trial judge erred in taking Hill’s subjective intention into account in construing the words of the release. The emphasised words in the summary of the equitable principle in Grant, which we have set out at paragraph [74] above, are directly inconsistent with the second contention; which must therefore fail. Specifically, the trial judge was justified in referring both to Hill’s subjective intention and the fact that Hill was ignorant of his marshalling claim at the time he entered into the terms of settlement.
We now turn to the trustees’ third contention, which seeks to challenge the trial judge’s reliance on the third (equitable) principle expressed in Grant, on the basis that the facts are inconsistent with it being unconscientious for them to rely on the general words in the release. In this regard, the trustees relied on the evidence that Hill had sought further security from Love, that Hill admitted that he wrongfully lodged the first caveat, and that Love had steadfastly refused to provide any further security.
We do not accept the trustees’ third contention. The first answer to it is that there was no need for Hill to rely on the equitable principle because, in light of the recitals, the general words attract the operation of the first and second common law principles to exclude Hill’s marshalling claim from the general words of the release. In other words, the common law interpretation of the release in Hill’s favour is enough for him to succeed on the scope of the release issue. We note in this regard that the High Court in Grant referred to the equitable principle applying ‘whatever construction is to be given by law’ to a deed of release.[63]
[63]Grant (1954) 91 CLR 112, 124.
The second answer to the trustees’ third contention is that the third (equitable) principle does not depend on proof of some unconscientious conduct by the releasee — here, Love. Rather, in a case such as the present, the equitable principle applies to restrict the general words to the things which were specifically in the contemplation of the parties when they signed the terms of settlement. The equitable principle applies here because both Hill and Love were ignorant of Hill’s marshalling claim at that time, and Hill could thus not have intended to release his unknown claim.[64] In those circumstances, and given the ambit of the dispute between the parties in the County Court proceedings, and of the retainer, it would be unconscientious for Love (or the trustees) to rely on the general words of the release as applying to Hill’s marshalling right.
[64]Ibid 126, 130.
For those reasons, proposed grounds 1 and 3(b) are not made out.
Did Hill act unreasonably by not making his marshalling claim in the County Court proceeding?
Proposed ground 2 contends that the trial judge erred in finding that it was not unreasonable for Hill to not raise his marshalling claim in the County Court proceeding. The trustees contend that Hill acted unreasonably in not raising his marshalling claim, and the trial judge should thus have found that his marshalling claim was barred by Anshun estoppel and/or abuse of process.
The trial judge expressed his reasons for rejecting the trustees’ Anshun defence in brief terms:
In my opinion, it was not unreasonable for Hill not to have brought his marshalling claim in the County Court proceeding. Indeed, at this time he was unaware of such right and the proceeding involved other more direct issues, the right to marshal being tangential and not directly relevant particularly in circumstances where the property the subject of the Second Mortgage had been sold.[65]
[65]Reasons 473 [70].
The legal principles to be applied were not in contest. In Anshun, the High Court (Gibbs CJ, Mason and Aickin JJ) explained that there will be no estoppel based on the failure to advance a claim which could have been litigated in earlier proceedings:
unless it appears that the matter relied upon as a defence in the second action was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it. Generally speaking, it would be unreasonable not to plead a defence if, having regard to the nature of the plaintiff’s claim, and its subject matter it would be expected that the defendant would raise the defence and thereby enable the relevant issues to be determined in the one proceeding.[66]
[66]Anshun (1981) 147 CLR 589, 602.
The plurality in Anshun continued by noting that:
there are a variety of circumstances … why a party may justifiable refrain from litigating an issue in one proceeding yet wish to litigate in other proceedings e.g. expense, importance of the particular issue, motives extraneous to the actual litigation, to mention but a few. …
[On the other hand, it] has generally been accepted that a party will be estopped from bringing an action which, if it succeeds, will result in a judgment which conflicts with an earlier judgment …
The likelihood that the omission to plead a defence will contribute to the existence of conflicting judgments is obviously an important factor to be taken into account in deciding whether the omission to plead can found an estoppel against the assertion of the same matter as a foundation for a cause of action in a second proceeding.[67]
[67]Ibid 603.
In Tomlinson,[68] the plurality explained the relationship between Anshun and related estoppels and abuse of process:[69]
Thus, the assertion of a right or obligation, or the raising of an issue of fact or law, in a subsequent proceeding can be simultaneously: (1) the subject of an estoppel which has resulted from a final judgment in an earlier proceeding; and (2) conduct which constitutes an abuse of process in the subsequent proceeding.
Abuse of process, which may be invoked in areas in which estoppels also apply, is inherently broader and more flexible than estoppel. Although insusceptible of a formulation which comprises closed categories,[70] abuse of process is capable of application in any circumstances in which the use of a court's procedures would be unjustifiably oppressive to a party or would bring the administration of justice into disrepute.[71] It can for that reason be available to relieve against injustice to a party or impairment to the system of administration of justice which might otherwise be occasioned in circumstances where a party to a subsequent proceeding is not bound by an estoppel.
Accordingly, it has been recognised that making a claim or raising an issue which was made or raised and determined in an earlier proceeding, or which ought reasonably to have been made or raised for determination in that earlier proceeding, can constitute an abuse of process even where the earlier proceeding might not have given rise to an estoppel.[72]
[68](2015) 256 CLR 507.
[69]Ibid 518–19 [24]–[26] (citations in original).
[70]Batistatos v Roads and Traffic Authority (NSW) (2006) 226 CLR 256, 262 [1], 265 [9].
[71]PNJ v The Queen (2009) 252 ALR 612, 613.
[72]Walton v Gardiner (1993) 177 CLR 378, 393, citing Reichel v Magrath (1889) 14 App Cas 665, 668; Coffey v Secretary, Department of Social Security (1999) 86 FCR 434, 443 [25].
In UBS AG v Tyne (as trustee of the Argot Trust),[73] the majority (Kiefel CJ, Bell, Gageler and Keane JJ) found an abuse of process in later proceedings between parties who were not the same as the parties in the earlier proceeding. The plaintiff in the later proceeding was a related party of the plaintiff in the earlier proceeding. In that respect the case is distinguishable from this case (as well as on other grounds). The trustees rely upon the statement in the majority judgment in UBS AG that the ‘timely, cost effective and efficient conduct of modern civil litigation takes into account wider public interests than those of the parties to the dispute’,[74] and these wider interests are reflected in the overarching purpose in s 37M of the Federal Court Act 1976 (Cth),[75] which the trustees note corresponds with the overarching purpose in the Civil Procedure Act 2010. To the same effect, the trustees rely upon the statement by Gageler J in UBS AG that the question of whether a claim sought to be brought in a later proceeding ‘should’ have been brought in the earlier proceedings cannot be determined solely by reference to interests of the parties to the action.[76] There is a public interest in the timely and efficient administration of civil justice.[77]
[73](2018) 360 ALR 184 (‘UBS AG’).
[74]Ibid 195 [38] (citations omitted).
[75]Ibid.
[76]Ibid 203 [70].
[77]Ibid.
The trial judge considered the unreasonableness question in the context of an alleged Anshun estoppel only. As we have noted, abuse of process was not relied upon at trial. The trustees acknowledge, however, that their reliance upon the doctrine of abuse of process is based solely on the Court’s determination of whether, in all the circumstances, it was unreasonable for Hill not to have brought his marshalling claim in the County Court proceeding. Thus, the addition of the abuse of process contention serves only to add, to the mix of factors to be considered in determining the unreasonableness question, whether wider public interests are engaged. We will proceed accordingly.
The trustees contend that it was unreasonable for Hill not to have brought his marshalling claim in the County Court proceeding because, in answer to Love’s counterclaim for damages arising from Hill having wrongfully lodged the first caveat, Hill ought to have considered whether he had a caveatable interest over 460 Cooper Street on some other basis. If he had done so, properly advised, he would have realised that he had a marshalling claim which he could have included in an amended statement of claim in the County Court proceeding. During the hearing of the application for leave to appeal, senior counsel for the trustees acknowledged that this was the sole basis on which it is contended that Hill acted unreasonably.
We do not accept the trustees’ unreasonableness contentions. Even if it be accepted that Hill knew, or reasonably ought to have known, that he had a marshalling claim, he would have been justified in refraining from litigating that claim in the County Court proceeding. Our reasons follow.
First, the marshalling claim was irrelevant to the debt claim, and did not provide any defence to the counterclaim. Moreover, the first caveat had lapsed before the counterclaim was served and it was no longer possible to amend it to rely on a different caveatable interest. On the other hand, introducing Hill’s marshalling claim would have brought an entirely new issue into the County Court proceeding, and would have had very serious consequences for all parties, as follows:
(1) it would have been necessary to join CBA as a party to the County Court proceeding;
(2) it may also have been necessary to join Mrs Love as a party, if she had then claimed an interest in the context of a marshalling claim having been made;
(3) the addition of the marshalling claim in the County Court proceeding would have substantially increased the complexity and expense of the County Court proceeding. In addition to the lengthy trial of the pleaded issues in the County Court proceeding, especially the counterclaim for negligence, up to five additional days would have been added to deal with the marshalling claim.[78]
[78]The trial of the marshalling claim before Sifris J occupied five hearing days.
Second, the addition of CBA as a party to the County Court proceeding (and perhaps Mrs Love also) would have made it more difficult to compromise that proceeding. As it stood on the pleadings, it was a debt recovery claim with a counterclaim, between two parties only.
Third, if the County Court proceeding had proceeded to trial and judgment, there was no risk that any judgment would conflict with a judgment on Hill’s marshalling claim. As pleaded, the County Court proceeding concerned only debt and counterclaim between two parties. It could only have resulted in a monetary judgment in favour of one party. Hill’s marshalling claim, on the other hand, concerns the security (if any) which he has for Love’s debts to him. It has nothing to do with the quantification of any such debt.
Fourth, at the time of the County Court proceeding, only 275 O’Herns Road had been sold. Although Love remained indebted to CBA, he continued to own 315 O’Herns Road and 460 Cooper Street. Those two properties were worth substantially more than Love’s remaining debt to CBA, as evidenced by the surplus sale proceeds which in fact eventuated after the sale of 460 Cooper Street. Thus, at the time, Hill had no reason to think that Love had insufficient assets to meet his debt claim. Put another way, even if Hill had known of his marshalling claim, there was no reason for him to think it was necessary to complicate the County Court proceeding by raising it. We note that Love was not made bankrupt until about four years later.
In response to this point, the trustees contend that Hill must have been conscious that there was a risk Love would become insolvent, as evidenced by his repeated requests that Love provide further security, the increase of the advance stated in the second mortgage from $3 million to $4 million under the variation, and Hill’s conduct in lodging the first caveat. In our view, this contention does not meet the point. The fact that a solicitor who has millions of dollars outstanding in unpaid legal fees and disbursements seeks further security for the debt can be seen as mere prudence in the circumstances of this case. The fact that Hill was seeking to improve his position, so as to enable his debt to be paid on a secured basis, is understandable in the context of a large unpaid debt from a land-rich client who, while apparently solvent, required funding to continue prosecuting his multiple legal proceedings.
For these reasons, proposed ground 2 has not been made out.
Conclusion
For the above reasons, none of the proposed grounds of appeal has been made out. We will grant leave to appeal on proposed ground 1, which was arguable, but dismiss that ground of appeal. We will refuse leave to appeal on proposed grounds 2, 3, 4 and 5, as those grounds were not reasonably arguable.
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