Commonwealth Bank of Australia v MLD Financial Services & Management Pty Ltd
[2015] NSWSC 1476
•12 October 2015
|
New South Wales |
Case Name: | Commonwealth Bank of Australia v MLD Financial Services & Management Pty Ltd |
Medium Neutral Citation: | [2015] NSWSC 1476 |
Hearing Date(s): | 11 September 2015 |
Date of Orders: | 12 October 2015 |
Decision Date: | 12 October 2015 |
Jurisdiction: | Common Law |
Before: | Davies J |
Decision: | 1. Judgment for the Plaintiff for possession of the whole of the land in folio identifier 3/555428 being the land situated at and known as 1390 Illaroo Road, Illaroo (also known as 1390 Illaroo Road, Camberwarra West and also known as 1390 Illaroo Road, Tapitallee) in the State of New South Wales. |
Catchwords: | REAL PROPERTY – mortgages – possession of land – summary judgment sought for possession – whether any defence to claim for possession – dispute regarding amount owing is no defence to claim – claim by mortgagor that mortgagee’s breaches of duty prevented payments due under loan agreement and mortgage – mortgagee’s acts post-dated entry into loan agreement and mortgage – whether such claim an equitable set-off – whether claim impeached mortgagee’s title –contractual provisions preventing the raising of a set-off until loan repaid in full – effect of such provisions – no set-off available – no defence to plaintiff’s claim |
Legislation Cited: | Uniform Civil Procedure Rules 2005 (NSW) |
Cases Cited: | Australian & New Zealand Banking Group v RQA Accountants Pty Ltd & ors [2013] NSWSC 165 |
Texts Cited: | Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th Edition 2015 Lexis Nexis) |
Category: | Procedural and other rulings |
Parties: | Commonwealth Bank of Australia (Plaintiff) |
Representation: | Counsel: |
File Number(s): | 2014/351000 |
JUDGMENT
On 28 November 2007 the Plaintiff and the First Defendant entered into a loan agreement under which the Plaintiff lent $570,050 to the First Defendant. The Second Defendant who was a director and shareholder of the First Defendant provided a guarantee for the loan at or about the same time. In addition, the First Defendant gave a mortgage over land at 1390 Illaroo Road, Illaroo.
There were defaults throughout the period of the loan. Ultimately, a s 57 notice was served on or about 13 August 2014. Proceedings were commenced on 28 November 2014 seeking possession of the land and claiming a monetary judgment.
A Defence was filed by the Second Defendant acting for herself and for the First Defendant on 22 December 2014. The Defence, as best as it could be understood, appeared to raise two matters. The first was that the amount said to be owing was disputed because there were said to be incorrectly debited fees, costs, charges and interest. Secondly, it was said that the Plaintiff by its negligence had directly and indirectly impaired the ability of the First Defendant to earn income to pay what was due under the loan agreement and mortgage. The meaning of this second matter will be made clear in the course of the judgment.
On 13 July 2015 the Plaintiff by Notice of Motion filed on that day sought summary judgment for possession of the land. The Motion came before me as part of case management of the proceedings on a number of occasions during which time the Defendants obtained adjournments because they were endeavouring to obtain legal assistance. Ultimately on 14 August 2015 Mr G M Colman of counsel appeared for the Defendants on a direct access brief.
On that occasion I sought to ascertain from Mr Colman what the Defendants’ defence was to the claim. He informed me that the Defendants would be alleging an equitable set-off, and sought an adjournment to enable the obtaining of proper instructions which would include the drafting of an amended defence and cross-claim. Accordingly, the matter was adjourned to 11 September 2015 for the hearing of the Plaintiff’s Motion for summary judgment. The Defendants were directed to provide before 11 September the form of the defence and cross-claim on which they would resist the summary judgment Motion and would ultimately seek to rely at a final hearing.
The Defence which was ultimately served admitted the entry into the loan agreement, the mortgage and the guarantee, admitted that there had been a failure to make repayments but denied that there was default because of the set-off alleged in the proposed Cross-Claim.
The proposed Cross-Claim pleaded that the Defendants went through a period of revenue deficit during 2012 and the loan payments to the Bank fell into arrears. The pleading further asserted that the First Defendant was about to enter into two contracts for the supply of the First Defendant’s services, being a management, accounting (project, systems and financial) and consulting services business, but that these two potential clients declined to proceed with the proposed arrangements. The pleading went on to say that the reason those companies declined to proceed to contract with the First Defendant was that letters forwarded by the Plaintiff to the Defendants came into their hands by reason of the negligence of the Plaintiff.
In short, it was asserted that the Plaintiff had forwarded correspondence intended for the Defendants to wrong addresses and that correspondence came into the hands of the two companies concerned. The nature of the correspondence involved assertions by the Bank of defaults by the First Defendant in breach of the terms of the home loan and mortgage. The two companies concerned asserted that they were not prepared to contract with the First Defendant for the provision of business and financial services if the First Defendant could not itself manage its own business and financial matters.
The principal sum was advanced on 7 December 2007. On 7 January 2008 the first instalment was paid and was dishonoured the following day. It was then paid again on 9 January 2008. A repayment made on 7 July 2008 was dishonoured as were payments made on 7 September and 7 December 2008. The statements thereafter show regular dishonours of payments up to and including 8 March 2012.
On 29 March 2012 the Plaintiff issued a s 57 Notice claiming arrears of $9,927.96. That appears to have led to the Defendants making an application to the Plaintiff for help in managing their debt as a letter from the Plaintiff to the Second Defendant of 12 June 2012 discloses. At some stage thereafter the Defendants made application to the Financial Ombudsman Service. Negotiations were entered into and the Bank offered a reduction on monthly repayments commencing 7 September 2012 to $1,500 with repayments at $5,000 per month to recommence on 7 November 2012. It is not clear what happened after that time but on 2 October 2012 the Bank made another offer that the repayments for December 2012, January and February 2013 be $4,500 per month.
In his affidavit read at the hearing of the Notice of Motion the Second Defendant’s husband, Rodney John Macaulay, who said he was responsible for the daily office administration of the day to day clerical affairs of the First Defendant, asserted that the company went through a period of revenue deficit during 2012 and loan payments fell into arrears. They concentrated their efforts to obtain new work and at the beginning of 2013 had negotiated service and management consulting agreements with two businesses being Select Cellars International Pty Ltd and PMO Global Consulting Pty Ltd.
Mr Macaulay thereafter gave evidence of what was pleaded in the proposed cross-claim including annexing correspondence from those two companies showing first their intention to enter into contracts with the First Defendant and thereafter declining to proceed because information had come to their attention about the First Defendant’s financial problems with the Plaintiff.
The agreement with Select Cellars was for a minimum fee of $1000 per day. The agreement with PMO Global Consulting Pty Ltd was for a fee of $1000 per day with an additional hourly rate of $175. The agreement with Select Cellars entitled Select to terminate the agreement at any time on four weeks’ notice. Similarly, the agreement with PMO Global Consulting permitted either party to terminate on one months’ notice after the expiry of the initial term which was defined as being two weeks from the commencement date.
The First Defendant submitted that at least since Tournier v National Provincial and Union Bank of England [1924] 1 KB 461 it has been accepted that a bank owes a duty of confidentiality to its customers, breach of which even if inadvertent, will sound in damages. The First Defendant submitted that in the present case the Bank had breached its duty of confidentiality by sending the correspondence to the wrong addresses, and as result the First Defendant suffered damage in that it became unable to meet its commitments under the Loan Agreement and mortgage.
Summary judgment
Summary judgment is sought only for possession of the land and concerns, therefore, only the First Defendant.
The Court of Appeal has recently summarised the principles relevant to applications for summary judgment in O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71. Macfarlan JA (with whom Beazley P agreed) said:
[3] The High Court decision in Spencer v The Commonwealth [2010] HCA 28; 241 CLR 118 was concerned with s 31A(2) of the Federal Court Act 1976 (Cth) but the following principles stated in it are of general application:
(a) On a summary judgment application, the real issue is whether there is an underlying cause of action or defence, not simply whether one is pleaded (at [23]).
(b) The critical question can be expressed as whether there is more than a "fanciful" prospect of success (at [25]) per French CJ and Gummow J) or whether the outcome is so certain that it would be an abuse of the process of the Court to allow the action to go forward (at [54] in the judgment of the plurality). Demonstration of the outcome of the litigation is required, not an assessment of the prospect of its success (ibid).
(c) Powers to summarily terminate proceedings must be exercised with exceptional caution (ibid at [55]; see also French CJ and Gummow J at [24]).
Ward JA (with whom Beazley P also agreed) said:
[66] The primary judge set out the principles on which the Bank's summary judgment application was to be determined at ([23]), noting that the relevant question was whether the proposed defence showed no triable issue or no prospects of success at all (it not being sufficient to say that the prospects of success might be slight), and citing in support of that statement of the test: Dey v Victorian Railways Commissioner (1949) 78 CLR 62; General Steel Industries Inc v Commissioner for Railways (New South Wales) (1964) 112 CLR 125; Webster v Lampard (1993) 177 CLR 598; Agar v Hyde (2000) 201 CLR 552; [2000] HCA 41; and Esanda Finance Corporation Limited v Peat Marwick Hungerford (1997) 188 CLR 241; [1997] HCA 8. It was recognised that the power summarily to dispose of a claim should be exercised with the utmost caution and only in very clear cases. On appeal, it was not suggested that there was any error in the articulation of the relevant principles by the primary judge.
[67] The principles applicable on a summary judgment application were more recently considered by the High Court in Spencer v Commonwealth of Australia [2010] HCA 28; (2010) 241 CLR 118. Hayne, Crennan, Kiefel and Bell JJ there described the test identified by Dixon J in Dey as being a test requiring "certain demonstration of the outcome of the litigation, not an assessment of the prospect of its success", emphasising that unless it could be shown that it was "so certain" that the question to be determined must be answered in favour of the party seeking summary judgment (such that it would be an abuse of process of the court to allow the case to go forward) it would not be competent for the court to accede to such an application ([54]). French CJ and Gummow J (at [25]) commented that there seemed little distinction between the approaches set out in Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87 at 99 and Batistatos v Roads and Traffic Authority (NSW) (2006) 226 CLR 256 at 275 (repeated in Agar v Hyde at 575-576) and the requirement of a "real" as distinct from "fanciful" prospect of success contemplated by s 31A of the Federal Court of Australia Act 1976 (Cth) as applicable in Spencer.
[68] The issue, therefore, in the present case is whether (having regard to the potential outcome of the litigation) there is an underlying defence that has a real (or more than a fanciful) prospect of success. If so, then summary judgment should not have been given in favour of the Bank. The existence of such a defence on the one hand, and the pleading of such a defence on the other, are distinct concepts as noted by Lindgren J in White Industries Australia Ltd v Federal Commissioner of Taxation (2007) 160 FCR 298 at 309 (cited in Spencer with apparent approval at [23]).
In the present case any proposed defence involving a dispute about the amount owing cannot provide a defence to the claim for possession. The only defence put forward to resist the claim for possession is what is said to be the equitable set-off that arises from the Plaintiff’s negligence that led to the inability of the First Defendant to make the payments under the home loan and mortgage. In terms of the principles relevant to summary judgment applications, the issue to be determined is whether there is an arguable case that an equitable set-off is established and is capable of providing a defence to the Plaintiff’s claim. It must be asked whether the set off has a real or more than a fanciful prospect of success.
The Plaintiff’s claim
The Plaintiff’s evidence establishes the Plaintiff’s right to possession subject only to any defence by the First Defendant. The First Defendant admits that payments were not made although it disputes that default has occurred.
Clause 9 of the loan agreement relevantly provides:
9.1 You are in default under the Contract if:
(a) You do not pay on time any amount payable under the Contract;
…
9.3 If you are in default and:
(a) You do not fix the default in the time allowed by the notice we give you under clause 9.2;
…
THEN
(d) We may decide, without further notice, that all money owing by you under the Contract is due and payable immediately;
(e) We may sue you for payment of the money you owe us;
(f) We exercise rights under the Security, including our right to sell the security property.
Clauses A21 and A22 in the mortgage deal with what can happen if the mortgagor is in default. They relevantly provide:
A21: When are you in default?
You are in default if:
(a) You do not pay on time any of the Amount Owing;
…
A22. What can happen then?
…
A22.2 If you are in default and we choose to enforce this mortgage, then, excepting the cases described in clause A22.3 and A22.4(c), we give you a notice before doing so. The notice must:
(a) Tell you what the default is; and
(b) Require you to fix the default (if it can be fixed) within the period stated in the notice. (If we give you notice under the Consumer Credit Law, you will have at least 30 days to fix the default); and
(c) Contain any other information the law requires us to give you.
…
A22.5 If we have given you a notice under clause A22.2 or A22.4 and you do not fix the default within the time allowed in the notice, or if you are in default and we are not required to give you a notice, we may:
(a) Decide, without further notice to you that the amount owing is due and payable immediately;
(b) Take Possession of the property;
…
On the proper construction of the Loan Agreement and the mortgage default has occurred by reason of the failure to pay what was due and owing.
The First Defendant argued that by reason of the Bank’s wrongdoing a default did not occur under the loan agreement and the mortgage. That submission cannot be accepted.
Under clause 9.1(a) of the loan agreement the borrower is in default if they did not pay on time any amount payable under the contract. Although the clause goes on to deal with the service of notices nothing in that clause suggests that default only arises either when a notice is served or if no legitimate reason can be offered for the failure to pay on time any amount payable.
The mortgage bears this out in clause 21 which contains a similar provision.
The loan agreement provided that the security for the loan was a registered mortgage over the property at 1390 Illaroo Road, Cambewarra West. There is no dispute that that is the alternative description of Illaroo.
Clause A4 of the mortgage relevantly provided:
Complying with this mortgage
A4.1 You must pay us every Amount owing for which you are liable at the time agreed by you, or if no time has been agreed, when we ask (which we may do on one or more occasions).
A4.2 You must ensure that you are not in default under this mortgage. You must also carry out in time all your obligations under every Secured Agreement.
The terms “Amount Owing” and “Secured Agreement” were defined as follows:
“Amount Owing” means … all money which one or more of you owe us, or will or may owe us in the future, under a Secured Agreement and this mortgage or either of them. …
“Secured Agreement” means:
An agreement between one or more of you and us (including a guarantee given by one or more of you) whenever made, under which you undertake to pay or repay us money, and which you acknowledge in writing to be an agreement to which this mortgage extends; …
Subject, therefore, to any defence, the Plaintiff is entitled to possession of the property.
The Defence
The Plaintiff submits that the Defence is simply a cross-claim which cannot defeat the Plaintiff’s right to possession because that right arises under the loan agreement and mortgage. The Plaintiff submits that if the matters raised by the First Defendant are arguable they are caught by the principle discussed in Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 at 165-167 and 169. The Plaintiff points to a number of other cases which it says clearly establish that a cross-claim or a set-off cannot amount to a defence to a claim for possession. The Plaintiff submits that the attempts to bring such a set-off or counter claim is contrary to cl 11.21 of the loan agreement.
It is necessary first to determine if the Defence and Cross-Claim sought to be relied upon by the First Defendant amounts to an equitable set-off. It is then necessary to see whether that set-off is capable of being raised when the contractual arrangements between the parties are considered.
In Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439 Giles J said at 465:
Equitable set-off is available where the defendant establishes an equitable ground for being protected from the plaintiff’s claim. That has been expressed in language to the effect that the defendant’s set-off goes to the root of or impeaches the title of the plaintiff’s claim, but also in language to the effect that the counter-claim is so directly connected with the claim that it would be unjust to allow the plaintiff to recover without taking into account the defendant’s counter-claim.
Bryson J, having set out that passage in GE Capital Australia v Davis [2002] NSWSC 1146 at [81], went on to say:
[82] Although counsel referred to a number of later authorities I do not understand them to make any further or better elucidation than that made by Giles J. There are many judicial formulations of the kind of claims which may be raised in this way, none of them exhaustively clear, and I will not attempt to reduce them to a single formulation or add to them. In a claim by a mortgagee against a mortgagor for the balance of the mortgage debt, the mortgagor would be entitled to raise a claim for equitable compensation for sacrifice of the mortgagor’s interest in exercise of a power of sale as an equitable set-off of compensation against the contractual debt. To do so would be no more than a short form of claiming that an account be taken of the amount due under the mortgage.
However, it must be remembered that in Davis Bryson J was considering the right of a guarantor to raise an equitable set-off when the guarantor was being sued for the amount guaranteed rather than for possession of the land.
In Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161 Walsh J said:
[13] A general rule has long been established, in relation to applications to restrain the exercise by a mortgagee of powers given by a mortgage and in particular the exercise of a power of sale, that such an injunction will not be granted unless the amount of the mortgage debt, if this be not in dispute, be paid or unless, if the amount be disputed, the amount claimed by the mortgagee be paid into court.
[14] The rule, as it affects the exercise by a mortgagee of the power of sale, is stated in the following terms in Halsbury's Laws of England, 3rd ed., vol. 27, p 301:
"The mortgagee will not be restrained from exercising his power of sale because the amount due is in dispute, or because the mortgagor has commenced a redemption action, or because the mortgagor objects to the manner in which the sale is being arranged. He will be restrained, however, if the mortgagor pays the amount claimed into court, that is, the amount which the mortgagee swears to be due to him, unless, on the terms of the mortgage, the claim is excessive."
Then there is a reference to a special case where the mortgagee was the mortgagor's solicitor. The plaintiffs contend, however, that such a rule can have no application in this case, in which the action brought by them is brought to establish a claim that upon balance there is no debt due by them to the defendant, but on the contrary, there is a balance due to them. They contend that that action is not one in which they seek to maintain rights in the capacity of mortgagors.
[15] In my opinion, the authorities which I have been able to examine establish that for the purposes of the application of the general rule to which I have referred, nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt. If the debt has not been actually paid, the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due.
[16] The benefit of having a security for a debt would be greatly diminished if the fact that a debtor has raised claims for damages against the mortgagee were allowed to prevent any enforcement of the security until after the litigation of those claims had been completed.
…
[23] In Morgan & Son Ltd. v. S. Martin Johnson & Co. Ltd. (1949) 1 KB 107, a passage was cited from the judgment of Lord Cottenham in Rawson v. Samuel (1841) Cr & Ph 161, at p 179 (41 ER 451, at p 458), and in which Lord Cottenham referred to some earlier cases which he described as being cases where - I quote his words - "the equity of the bill impeached the title to the legal demand".
[24] One of those early cases was Piggott v. Williams [1821] EngR 279; (1821) 6 Madd 95 (56 ER 1027). In that case a solicitor filed a bill for foreclosure of an estate pledged as a security for costs and there was a cross bill alleging that the costs demanded were occasioned by the negligence and want of skill of the solicitor, and that therefore nothing was due. A demurrer to the cross bill was overruled. The plaintiffs in the present case have sought to place some reliance upon Morgan & Son Ltd. v. S. Martin Johnson & Co. Ltd. (1949) 1 KB 107 , and upon the citation therein of the earlier authorities, to some of which I have referred. I have looked at the case of Rawson v. Samuel (1841) Cr & Ph 161 (41 ER 451) and I do not find in it any support for the argument of the plaintiffs in the present case, nor do I think that the decision in Piggott v. Williams [1821] EngR 279; (1821) 6 Madd 95 (56 ER 1027) assists them. That case was concerned with the question whether, against a plaintiff who had come to the court to enforce a security, the defendant could assert by a cross bill that nothing was due under the security, because the debt which it was intended to secure had never been incurred at all. That is not the situation in the present case.
As the learned authors of Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (5th Edition 2015 Lexis Nexis) make clear, for the claim to amount to an equitable set-off the claim must impeach the Plaintiff’s claim or, in the case of a mortgage, impeach the Plaintiff’s title to the mortgage. They say at [39-060(g)]:
One ingredient of set-off in equity is that the Defendant’s cross-claim must actually go to the root of, or be essentially bound up with, or “impeach”, the title of the Plaintiff. The requirement is fulfilled where the Plaintiff’s title to the legal demand would not have come about had the Plaintiff not breached some duty the Plaintiff owed to the Defendant. No requirement of impeachment exists at law, but in equity it is indispensable. It is not sufficient that there be countervailing claims, nor that those claims be mutual, nor even that they arise out of the same transaction. In order to make out an equitable set off, the Defendant must establish some equitable right to be protected from the Plaintiff’s claim.
See also Gummow J in James v Commonwealth Bank of Australia (1992) 37 FCR 445.
In Lord v Direct Acceptance Corporation Ltd (Receiver And Manager Appointed) (In Liq) (1993) 32 NSWLR 362 Sheller JA with whom Kirby P and Meagher JA agreed said at 367:
Equitable set-off:
Next the appellant argued that it had an equitable defence of set-off to the extent of the amount held on deposit. This argument necessarily proceeded on the assumption that the deposit had not been appropriated in satisfaction of the debt and remained a debt due to Me and Angus Pty Ltd that is to say a chose in action the property of Me and Angus Pty Ltd. For the defence to succeed the appellant needed to demonstrate some equitable ground for being protected by set-off against Direct Acceptance Corporation Ltd's demand to the extent of the deposit. The mere existence of a cross-demand would not be sufficient. The equity had to be such as impeached Direct Acceptance Corporation Ltd's title to demand payment. These propositions adopt the language of Lord Cottenham LC in Rawson v Samuel (1841) Cr & Ph 161 at 178-179; 41 ER 451 at 458, which was applied by the High Court in Hill v Ziymack (1908) 7 CLR 352 at 360-362: see also J & S Holdings Pty Ltd v NRMA Insurance Ltd (1982) 61 FLR 108; 41 ALR 539, a decision of the Full Federal Court (at 554). In subsequent cases the Lord Chancellor's language has been explained or diluted often in ways not entirely satisfactory: see the discussion by Gummow J in Re Just Juice Corporation Pty Ltd; James v Commonwealth Bank of Australia (1992) 109 ALR 334 at 349-352; sub nom James v Commonwealth Bank of Australia 37 FCR 445 at 459-462. The cases have been extensively examined by Woodward J in D Galambos and Son Pty Ltd v McIntyre (1974) 5 ACTR 10 and Giles J in AWA Ltd v Exicom Australia Pty Ltd (1990) 19 NSWLR 705 at 710-712. In Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] AC 1056 at 1102, Lord Brandon of Oakbrook said that the concept of impeaching the title to the legal demand was not one familiar today and referred to the expression used in Government of Newfoundland v Newfoundland Railway Co (1888) 13 App Cas 199 at 212-213 that a claim may be set-off if “flowing out of and inseparably connected with the dealings and transactions which also give rise to the claim”. The concept is better stated in Meagher, Gummow and Lehane, Equity, Doctrines and Remedies, 3rd ed (1992), par 3709(h) at 818, where the learned authors say that it is an indispensable requirement of equitable set-off that the set-off actually go to the root of, be essentially bound up with, “impeach” the title of the plaintiff. If available, the set-off would operate on judgment or perhaps earlier to diminish or extinguish Direct Acceptance Corporation Ltd's claim: see par 3709(g) at 818 and Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514 at 518.
In the present case, the wrongdoing on the Bank’s part is said to postdate significantly the entry into the loan agreement and the mortgage. It is not suggested that there was any wrongdoing at the time of the entry into the contractual arrangements. This is not a case where, for example, misrepresentation or misleading and deceptive conduct leading to the making of the agreement is alleged nor where there is unconscionablity or an unjust contract is made. Such matters, if established, can be said to impeach the Plaintiff’s title to the land because of the way that title was obtained.
The present complaint is independent of the entry into the contractual arrangements. It arises from subsequent conduct of the Bank which is said to have impeded the ability of the mortgagor to observe the terms of the contractual arrangements. In that way it cannot be said to impeach the title of the Plaintiff to the mortgage on which the Plaintiff now seeks possession of the land. Again, the complaint about the Plaintiff is not directly connected with the claim, that is, the right to obtain possession as a result of the default under the mortgage.
The need to impeach the title to establish an equitable set-off is made most clear in cases where mortgagees are seeking possession only of the property. In Westpac Banking Corporation v Corry [2011] NSWSC 1014 the defendants attempted to resist summary judgment for possession by asserting that they relied on the bank manager’s advice not to sell some properties at a price which would have substantially reduced their indebtedness to the bank. They contended that reduction of the level of indebtedness at that stage would enable them to continue meeting other loan repayments and would have put them in a better position to refinance and protect the property of which possession was now sought by the bank.
Johnson J said:
[33] I have expressed in relatively brief terms the basis upon which the Defendants assert that there is an arguable defence to the Plaintiff's claim for possession of land. A fundamental problem with the Defendants' argument is that they seek to attack or impugn the mortgage entered into and registered in 2003 by reliance upon representations said to have been made in and after 2006. The Defendants do not contend that the alleged representations were made in circumstances surrounding the entry into the mortgage. In my view, this is a fundamental problem for the Defendants on the present application.
[34] To the extent that the Defendants seek to rely upon a form of set-off by way of defence or cross-claim, I note that a cross-claim or set-off is not a defence to a claim for possession of land: Inglis v Commonwealth Trading Bank of Australia [1972] HCA 74; 126 CLR 161 at 165-167, 169; Horrobin v Australia and New Zealand Banking Group Limited (1996) 40 NSWLR 89 at 99-100.
In National Australia Bank Ltd v C & O Voukidis Pty Ltd [2014] NSWSC 384 Campbell J came to a similar conclusion where the defence said to amount to a set-off asserted:
(a) That the Bank wrongfully and unconscionably caused the surplus funds for the sale of the other Burwood property to be paid into the controlled money account rather than applying them to the reduction of the second portfolio facility;
(b) In December 2012 "wrongfully and unconscionably caused' the term deposit to be paid in reduction of the Bills Facility, rather than in reduction of the debts secured by the mortgage on the Burwood property.
Campbell J said:
[27] Nothing brought forward in the Amended Defence, or by way of argument, vitiates the Bank's title under its mortgage. To the extent to which the various matters raised by the first defendant might be arguable, and it is not obvious to me that they are, they are caught by the principle discussed in Inglis. That is to say, these matters do not undermine the Bank's title as mortgagee to possession, but rather arise by way of counterclaim or setoff and as such cannot defeat the claim for possession.
[28] The first defendant's averments may after a hearing on the merits give rise to claims which sound in damages or equitable compensation and they should be permitted to continue. But that does not mean that the Bank is not entitled to possession.
Again, in Australian & New Zealand Banking Group v RQA Accountants Pty Ltd [2013] NSWSC 165 one of the defendant’s complaints in seeking to resist possession was that the Bank fraudulently transferred money from one account to another rendering it unavailable as working capital. It was alleged that the Bank behaved unconscionably in that way and others. Adamson J held at [51] that even if the Bank were in breach, that would not prevent it from relying on the mortgagors’ breaches to found its right to possession of the property.
In each of Corry, Voukidis and v RQA Accountants summary judgment for possession was sought and obtained notwithstanding the claims that were sought to be made. In each case those claims amounted to alleged wrongdoing on behalf of the Bank which somehow prevented the mortgagors from meeting their commitments under the mortgage and loan agreement. In that way they are indistinguishable from the complaints in the present case.
The First Defendant placed some reliance on cases involving competing disputes between landlords and tenants such as British Anzani (Felixstowe) Ltd v International Marine Management (U.K.) Ltd [1980] 1 QB 137, and Beasley v Darcy (1800) 2 Sch. & Lef. 403 which is referred to in British Anzani. Mr Colman took me in particular to a passage concerning Beasley set out in British Anzani (at pp 150-1) where Lord Redesdale LC had said in O’Mahony v Dickson (1805) 2 Sch. & Lef. 400 at 412:
“In the case in the House of Lords,” that is, Beasley v Darcy, “there was no question ‘whether so much rent was due or not’; there was no doubt on that subject; and therefore the case there must have been decided on a distinct ground: viz, that although the rent was due yet the money that was due to the other party for an unliquidated demand, ought, in point of conscience, under the circumstances, to have been paid by the landlord, in order to enable the tenant to pay his rent; the nature of the demand for damages, supposing a loss by the tenant of the produce of the land, arising from the act of the landlord. I must presume that that decision was right…”
However, there is no analogy here between landlords and tenants on the one hand, and mortgagees and mortgagors on the other. Landlords and tenants owe mutual ongoing obligations. In many cases a tenant may be able to set off rent against a claim for damages for a failure to repair, for example. There is no issue about impugning the landlord’s title as there is in relation to a mortgagee’s right to possession.
The First Defendant submitted in reliance on McDougall J in RHG Mortgage Securitiesv BNY Trust [2009] NSWSC 1011 at [75] to [80] that it cannot be said on an a priori basis that relief against forfeiture would not be available, and that it was arguable that equity would intervene here when all the facts were exposed at a final hearing. However, as McDougall J made clear at [5], the first issue he had to decide was whether there was a serious question to be tried as to whether an Event of Default had occurred. The remarks concerning relief against forfeiture must be viewed in that context. In the present case there is no dispute that a default has occurred. The issue here is whether the cause of the default can be raised as a set-off to the claim for possession including a consideration of the contractual terms between the present parties.
The matters raised by the First Defendant in the present case do not impeach the title of the Plaintiff, nor can they be said to so directly connected with the claim that it would be unjust to allow the Plaintiff to recover without taking into account the First Defendant’s counterclaim.
However, even if the matters raised by the First Defendant could be said to amount to a set off the First Defendant would not be entitled at this stage to raise the matters by virtue of clause 11.21 of the loan agreement.
Clause 11.21 provides as follows:
All payments to be made by you under the Contract must be made without set-off or counterclaim and free and clear of any withholding or deduction, unless prohibited by law.
Bryson J had to consider a similar clause in a guarantee in GE Capital Australia v Davis. That clause provided:
SUSPENSION OF GUARANTOR’S RIGHTS
8.1 As long as the Guaranteed Money or other money payable under this guarantee and indemnity remains unpaid, the Guarantor may not without the consent of GE Capital:
(a) in reduction of its liability under this guarantee and indemnity, raise a defence, set-off or counterclaim available to itself, the Debtor or a co-surety or co-indemnifier against GE Capital or claim a set-off or make a counterclaim against GE Capital;
Bryson J said:
[93] Primacy of the plaintiff’s right to payment: ouster of jurisdiction. The effect of the obligations in cl.8.1 is that the guarantors were contractually bound to pay the amount of money owing by the debtor when it was demanded. It was a contract to make an amount of money available when it was demanded. It was not an element of the obligation that it was subject to or limited by any process of ascertaining whether the debtor should be allowed any credits or set-offs, in respect of the security or of any other matter. Irrespective of the existence of security, and irrespective of the state of progress of any attempt at realising the security, it was and remains the obligation of the guarantors to provide to GE Capital the money amount of the debtors’ obligation. The provisions relating to suspension of the guarantor’s rights including cl.8.1 give effect to the amplitude of this obligation, and remove the possibility that the guarantors might in any way compete with GE Capital in attempts to recover from the debtors. Clause 8.1 does not bar the guarantors from making any claims or enforcing any rights against either GE Capital or the debtors; it suspends those rights so long as the guaranteed money remains unpaid, and the suspension can be ended at once if the guarantors meet their contractual obligation and pay the amount of the guaranteed money. Once they do that, they can bring any proceedings they wish against GE Capital or against the debtors, notwithstanding cl.8.1; but the effect of cl.8.1, and of cl.8 generally, is that until they make that payment they are contractually bound to the proposition that they are not entitled to bring any claims or proceedings or to act in any of the manners referred to. The jurisdiction of the Court is not ousted in any respect, the rights of the guarantors are suspended but otherwise not impaired, and they can pursue their rights as they wish if they first comply with what the Guarantee and Indemnity makes their primary obligation.
…
[97] The jurisdiction of courts and the rights of parties to make claims before courts are not conferred by contract and cannot be ousted by contract. However there is in my opinion no infringement of this principle where parties agree that in stated circumstances a particular sum of money will change hands without the opportunity at the same time to obtain judicial disposition of any other claim between them. In the contract of guarantee there is no infringement of the principle where parties agree to ensure that the guaranteed sum will be paid, and make this the more certain by postponing litigation raising any cross-claim or set-off.
[98] The effect in substance of the provisions of the guarantee including cl.8.1(a) is that there is no limit on the right to resort to the courts if the guarantor first meets the obligation the protection of which is the primary purpose of the guarantee and indemnity, and pays the amount of the debt. It is well established in this area of the law that the guarantor can have recourse to securities given by a principal debtor to indemnify himself, but that he cannot do so until he has paid the whole debt. The validity of modifications of what would under the general law be the rights of guarantors is well established. These contractual provisions extend the ways in which the guarantors’ remedies are postponed, and extend the creditor’s freedom from competition in enforcement of its rights. The condition which must be fulfilled is directly related to the purposes of the agreement. (emphasis added)
In answer to this the First Defendant pointed to the absence in the mortgage of a clause similar to clause 11.21 of the loan agreement. This was said to be significant on a summary judgment application because it was a matter that formed part of the factual matrix for argument at the final hearing.
This submission should not be accepted. It is a matter of law on the construction of the documents whether clause 11.21 of the loan agreement operates although there is no corresponding provision in the mortgage. There is no challenge to the circumstances of the entry into the loan agreement and mortgage. In that way there is no factual matrix to which this argument could be relevant. Nothing in the mortgage suggests in any way that clause 11.21 of the loan agreement does not operate with full effect. A clause limiting any right of set-off would not be expected to be found in a mortgage which is ultimately a document of title. It is a clause ordinarily found in loan agreements and guarantees. The mortgage is a security for the obligations in the loan agreement and any guarantee.
There were certain deficiencies in the evidence to make out the defence raised. It was apparent, for example, that the inability of the First Defendant to meet the requirements under the loan agreement and mortgage predated the alleged wrongdoing of the Bank in forwarding mail to wrong addresses. Moreover, there was little evidence of the First Defendant’s financial position so that a link could be made between the inability to pay the instalments due under the loan agreement and the loss of the contracts with Select Cellars and PMO Global Consulting.
However, for the purposes of the summary judgment application I have assumed in favour of the First Defendant that the First Defendant had established the link between the inability to pay the instalments and the loss of the contracts. I have also assumed in the First Defendant’s favour that the acts of the Bank in forwarding the correspondence to the wrong addresses was done negligently and in breach of other duties which existed between the Bank and the First Defendant.
Conclusion
The First Defendant has no defence to the claim for possession of the land. I am satisfied of the other matters required to be proved under r 36.8 UCPR. The Plaintiff is entitled to summary judgment for possession.
I make the following orders:
1. Judgment for the Plaintiff for possession of the whole of the land in folio identifier 3/555428 being the land situated at and known as 1390 Illaroo Road, Illaroo (also known as 1390 Illaroo Road, Camberwarra West and also known as 1390 Illaroo Road, Tapitallee) in the State of New South Wales.
2. The First Defendant is to pay the Plaintiff’s costs.
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