Dynamic Direct Pty Ltd v Horne and McDonald, Slater and Lay
[2011] VCC 293
•22 February 2011
| IN THE COUNTY COURT OF VICTORIA | Revised |
Not Restricted
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL LIST
EXPEDITED CASES DIVISION
Case No. CI-10-02008
| DYNAMIC DIRECT PTY LTD | Plaintiff |
| (ACN 006 612 559) | |
| v | |
| STIRLING LINDLEY HORNE (as Trustee of the Bankrupt Estates of | First Defendant |
| DAVID ROBERT GEORGE and SALLY-ANNE RAHER) | |
| and | |
| McDONALD SLATER & LAY (a firm) | Second Defendant |
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| JUDGE: | HIS HONOUR JUDGE SHELTON |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 31 January and 1, 2 and 3 February 2011 |
| DATE OF JUDGMENT: | 22 February 2011 |
| CASE MAY BE CITED AS: | Dynamic Direct Pty Ltd v Horne and McDonald, Slater & Lay |
| MEDIUM NEUTRAL CITATION: | [2011] VCC 293 |
REASONS FOR JUDGMENT
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Catchwords: Construction of clause in deed – whether creates immediate equitable interest or only option to obtain equitable interest in land – whether option exercised – rectification – whether other caveatable interest – claim in contract and negligence against solicitor who prepared deed – Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 – Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 – Murphy & Anor v Wright [1992] NSWCA 168, URJ 7 – Crampton v French (1995) V ConvR 54-529 – Evans v Advertising Department Pty Ltd [2009] VSC 587 – Troncone v Aliperti (1994) 6 BPR 13291 – Iaconis v Lazar [2007] NSWSC 1103 – Investment & Merchant Finance Corporation Ltd v Kirkwood Estates Ltd (1975) 5 ALR 191 – Re Dixon (1922) 39 WN (NSW) 89 – Williams v Burlington Investments Ltd (1977) 121 SJ 424 – Penny Nominees Pty Ltd v Fountain (BC8902224 NSWSC 2 May 1989) – Canadian Imperial Bank of Commerce v Rehnby (1992) 22 RPR (2d) 93 – Bernstein v Georgakakis and Registrar of Titles [2010] VSC 52 – Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 1 ALR 169 – Capital Finance Australia Ltd v Karabassis (2003) 11 BPR 21,123
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M T Lapirow | Ian Moffatt Solicitors |
| For the First Defendant | Mr S W Stuckey | Holman Webb |
| For the Second Defendant | Mr N P De Young | Lander & Rogers |
| HIS HONOUR: |
1 This proceeding is principally concerned with the construction of a Deed of Acknowledgment of Debt and Guarantee made on 3 March 2008 by Sally- Anne Raher (“Raher”) and David Robert George (“George”) (“the Deed”).
Background
2 Raher and George were directors of Australia Mailing Pty Ltd (“Australia Mailing”). It carried on a mailing house business. The plaintiff carried on a similar business. In early 2007, both the plaintiff and Australia Mailing were looking for new premises from which to carry on their businesses. It was decided to carry on both businesses from premises at 17-23 Redwood Drive, Dingley. The plaintiff took a lease of these premises pursuant to a lease dated 15 February 2007. It then sub-let half of these premises to Australia Mailing pursuant to a sub-lease dated 19 February 2007. Raher and George executed guarantees of the same date guaranteeing Australia Mailing’s obligations pursuant to the sub-lease. The sub-lease and guarantees were prepared by the second defendant, the plaintiff’s solicitors.
3 The plaintiff and Australia Mailing did work for each other and were considering a merger of their businesses. The Australia Mailing business did not prosper and by the end of 2007 it was in financial difficulties and owed a substantial sum to the plaintiff for rental, outgoings and for services rendered.
4 At this time, Raher and George were considering placing Australia Mailing in liquidation and set up a new company, Australia Mailing Holdings Pty Ltd (“AM Holdings”), to carry on the business of Australia Mailing. The sub-lease was transferred from Australia Mailing to AM Holdings by a Deed of Transfer of sub-lease, also dated 3 March 2008 prepared by the second defendant.
5 Following several discussions between Raher and George on behalf of Australia Mailing and Alan Geoffrey Reid, chief executive officer of the plaintiff (“Reid”) and Andrew Walter Osborne, the commercial manager of the plaintiff, Raher and George executed the Deed which had been prepared by Andrew Shaw, an employee solicitor with the second defendant. The text of the Deed is as follows:
“THIS DEED of Acknowledgment of Debt and Guarantee is made on the 3 day of March 2008 by SALLY-ANNE RAHER of 354 Doncaster Road Balwyn North 3104 and DAVID ROBERT GEORGE of 8 Tresize Street Warrandyte 3113 (“the Guarantors”).
RECITALS
A. The Guarantors are Directors of Australia Mailing Pty Ltd (ACN 050 279 760) (‘Australia Mailing’). B. Australia Mailing operates a mail distribution business and has had past business dealings with Dynamic Direct Pty Ltd (ACN 006 612 559) (‘Dynamic’), C. Dynamic dealt in business with Australia Mailing on the basis of representations by the Guarantors in their capacity as Directors of Australia Mailing that it would be paid in the ordinary course of business and it has relied on these representations to its detriment. D. Australia Mailing is currently indebted to Dynamic in the sum of $350,876.20 (‘the Debt’). Annexed hereto and marked ‘A’ is a Schedule of the Debt as at 29 February 2008. E. The Guarantors are the Directors of a corporate entity known as Australia Mailing Holdings Pty Ltd (ACN 128 009 923) (‘AM Holdings’) that will be involved in the mail distribution business and the Guarantors have requested that Dynamic have business dealings with this entity in the future. NOW THE GUARANTORS AGREE THAT in consideration of the forbearance of Dynamic to enforce its right of re-entry against Australia Mailing pursuant to the Sub-Lease of 17-23 Redwood Drive Dingley 3172 dated the 19th day of February 2007 and in consideration of the continuing willingness of Dynamic to engage in business dealings on commercial terms with Australia Mailing or AM Holdings:
1. The Guarantors hereby jointly and severally guarantee to Dynamic:
a. the due and punctual payment of the Debt;
b. the due and punctual observance and payment of all debts arising from all future business dealings between Dynamic and Australia Mailing; and c. the due and punctual observance and payment of all debts arising from all future business dealings between Dynamic and AM Holdings.
2. The Guarantors agree, acknowledge and declare that that (sic) the Guarantee which is contained in Clause 1 is and shall be an irrevocable and continuing guarantee and shall remain in effect until:
a. the due and punctual payment of the Debt;
b. the due and punctual observance and payment of all debts arising from all future business dealings between Dynamic and Australia Mailing; and c. the due and punctual observance and payment of all debts arising from all future business dealings between Dynamic and AM Holdings.
3. Dynamic shall, at its option, be entitled to require the Guarantors to provide such security as it deems reasonably necessary including but not limited to taking a charge of all the Guarantors estate and title I and to all real property wheresoever situated to secure the payment of:
a. the Debt;
b. all debts arising from all future business dealings between Dynamic and Australia Mailing; and c. all debts arising from all future business dealings between Dynamic and AM Holdings.
4. This Deed of Acknowledgment of Debt and Guarantee shall be binding on the heirs, executors, administrators and assigns of the Guarantors.
5. This Deed is governed by the Law of Victoria.
SIGNED SEALED & DELIVERED
et cetera.”
6 Four days after the execution of the Deed on 7 May 2008, the plaintiff lodged caveats (“the caveats”) against the title of one property in the name of Raher and the titles of two properties in the name of George and his wife as joint proprietors (all three properties are hereinafter referred to as “the properties”). It asserts that it did so pursuant to Clause 3 of the Deed. On 18 February 2010, the plaintiff obtained judgment in this Court against Raher and George in the sum of $635,499.59 together with damages by way of interest in the sum of $36,770.00, with costs to be taxed on Scale D. On 10 April 2010, Raher and George each presented Debtor’s Petitions and on that date, the first defendant was appointed trustee of the bankrupt estates of Raher and George.
7 The first defendant made application to the Registrar of Titles pursuant to s.89A of the Transfer of Land Act 1958 (“the Act”) for the removal of the caveats. The Registrar gave notice to the plaintiff pursuant to s.89A(3) of the Act which, in accordance with that sub-section, indicated that the caveats would lapse on 27 May 2010 unless the application was abandoned, or the Registrar was notified that proceedings were on foot to substantiate the claim of the caveator. Hence this proceeding was issued on 11 May 2010.
8 In this proceeding, the plaintiff seeks a declaration that it has an interest in the properties in the form of an equitable charge and was therefore entitled to lodge the caveats against the properties. The first defendant contends that the plaintiff has no such caveatable interest and that it ranks as an ordinary creditor in the bankrupt estates of Raher and George. In the event that I determine that the plaintiff does not have a caveatable interest in the properties, the plaintiff claims alternatively against the second defendant for breach of its retainer or alternatively in negligence on account of the failure of the second defendant to properly advise it on the further steps it was required to take to exercise its option pursuant to Clause 3 of the Deed.
9 I turn firstly to consider the construction of Clause 3 of the Deed.
Construction of Clause 3 of the Deed
10 The plaintiff and the second defendant contended that Clause 3 of the Deed conferred upon the plaintiff an immediate interest in the properties by way of an equitable charge and therefore an entitlement to lodge the caveats on 7 March 2008. The first defendant contended that Clause 3 only conferred an option to obtain an interest in the properties and that this option had not been exercised.
11 So far as construing Clause 3 is concerned, in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, at 109, Gibbs, J stated:
“It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, ‘even though the construction adopted is not the most obvious, or the most grammatically accurate’, … Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas & Co. Ltd. v. Arcos Ltd. that the court should construe commercial contracts ‘fairly and broadly, without being too astute or subtle in finding defects’, should not, in my opinion, be understood as limited to documents drawn by businessmen for themselves and without legal assistance. …”
12 In Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337, at 352, Mason, J stated:
“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.”
13 I turn to construe Clause 3 in accordance with the above principles.
14 In my view, it is clear and unambiguous that Clause 3 on its wording did not confer upon the plaintiff an immediate interest in the properties by way of an equitable charge but merely an option to obtain such an interest. I agree with the submission of Mr Stuckey, who appeared for the first defendant, that the use of the words “shall” and “at its option” indicate that the plaintiff is required to do something in the future prior to obtaining an interest in the properties. Clause 3 could easily have provided for the immediate granting of a charge. For example, the second defendant’s file had upon it a document from its precedent bank which contained the following clause:
“In consideration of this loan the Borrower HEREBY CHARGES in favour of the lender all #his (sic) estate and interest in property and further consents to the Lender lodging a caveat or mortgage affecting the borrower’s property in security for the loan.”
Such a clause, suitably modified, would have given an immediate interest by way of an equitable charge in the properties to the plaintiff.
15 Here, all the plaintiff obtained was an option to obtain an equitable charge over the properties which would have supported the caveats.
Was the Option Exercised?
16 Given my conclusion that Clause 3 of the Deed merely conferred an option on the plaintiff, the next issue is whether the option has been exercised. The plaintiff and the second defendant submit that the lodging of the caveats over the properties on 7 March 2008 was an exercise of the option conferred by Clause 3. In the caveats, the plaintiff claims an estate or interest in the properties described as “an equitable interest as chargee”.
17 The right to lodge a caveat is given by s.89 of the Act which provides that a caveat can be lodged by “any person claiming any estate or interest in land”. Traditionally there must be an existing estate or interest in land before a caveat can be lodged over it. The lodging of a caveat does not create an estate or interest in land. Rather the caveat is lodged to protect such an estate or interest.
18 Mr De Young, who appeared for the second defendant, sought to rely upon a number of cases which suggested that the mere lodging of the caveats was an exercise of the option and gave the plaintiff an equitable charge over the properties.
19 In Murphy & Anor v Wright [1992] NSWCA 168, URJ 7, the Court of Appeal considered the effect of the following clause:
“… In the event of default by the Borrowers in payment of moneys due under the Security Documents or in performance or observance of any covenants therein then the Lender shall in addition to the rights set out herein or in the Security Documents be entitled to attach the debt due to any of the assets of the Guarantor or Guarantors whether such assets be real or personal and further the parties hereto agree that in the event of such default the Lender may register a caveat against any property registered in the name of any or all of the Guarantors until the Moneys Secured are repaid.”
20 Handley JA commented:
“The cases thus illustrate how a power over property conferred by its owner can, when exercised by the donee, create a specific security over that property. In my opinion the action of the Lender in lodging the caveat operated as an exercise of its option to attach its debt to the subject property, and created an equitable charge over that property.”
21 In Crampton v French (1995) V ConvR 54-529, Harper J considered the following clause in a loan agreement:
"… ‘In the event that the borrower defaults under this agreement the borrower authorises the lender to lodge any necessary caveat against property known as 28 Portland Street, Mulgrave to better secure the amount outstanding including any interest.’"
22 His Honour construed this clause as constituting a security in the form of an equitable charge.
23 Mr De Young also relied upon Evans v Advertising Department Pty Ltd [2009] VSC 587. There, Vickery J considered the following clause:
“’It is a term of this agreement (and a condition subsequent to the Lender making the Initial Advance) that the Borrower shall procure and maintain until the Lender shall have received 100 cents in the dollar of the Redemption Sum, in a form acceptable to the Lender such legally enforceable (and registered if so required) mortgages, guarantees and/or indemnities and other securities for payment of the Redemption Sum or any part thereof as are, in the Lender’s unfettered discretion required by the Lender, and that all obligations required to be performed by any party with respect thereto are duly and punctually performed.
The Borrower acknowledges the Lender’s caveatable interest in respect of the redemption Sum under this agreement and confirms the Lender’s rights and entitlements to lodge such caveats in respect of the Redemption Sum until the Lender shall have received 100 cents in the dollar of the Redemption Sum.’”
24 His Honour stated, at paragraph 36:
“In my reasons delivered ex tempore on 2 December 2009 following the hearing of argument in this matter, I expressed the opinion that cl 9 of the loan agreement was too uncertain to give rise to any equitable or legal interest in the property in favour of Advertising. I have reconsidered that view. In my opinion, cl 9 of the agreement gives to the lender an entitlement, so long as moneys are outstanding under the loan, to claim an equitable charge over Torrens Title land owned by the borrower during the currency of the loan. This entitlement may be exercised by the lender lodging a caveat against such property, as was done in this case. Clause 9 manifests an intention of the parties to achieve this consequence, and the agreement when read as a whole shows an intention by the parties to it that, at least Torrens Title property owned by or made available to the borrower during the currency of the loan, could constitute security for the loan, and would do so once a valid caveat was lodged in respect of such property.”
25 After referring to Murphy & Anor v Wright and Crampton v French, his Honour stated, at paragraph 38, that:
“The strongest authority relied upon by the caveator, Advertising, in this case was the New South Wales case of Troncone v Aliperti[1] where the clause in question simply read:
‘The debtor authorises the creditors to lodge a caveat on any
property owned by the debtors to protect his interest.’”[1] (1994) 6 BPR 13291
26 The Court of Appeal held that this clause gave rise to an equitable charge.
27 At paragraph 39 of Evans, his Honour noted that in Iaconis v Lazar [2007] NSWSC 1103, at paragraph 23, Young CJ in Eq. made the following comment on the decision of Troncone v Aliperti:
“The current commercial enthusiasm for this sort of clause in a contract and for lodging a caveat was given a great boost by the decision of the Court of Appeal in Troncone v Aliperti (1994) 6 BPR 13,291. This decision has often been interpreted by persons seeking charges as meaning that every time there is an agreement that X can lodge a caveat over any property Y may own, that an equitable charge is created. It should be remembered, as McLelland CJ in Eq said in Coleman v Bone (1996) 9 BPR 16,235 at 16 and 239, that the true principle is that “Where the authority to lodge a caveat is given in connection with an obligation by A to pay money to B, and there is no sufficient indication to the contrary, the implication is that the estate or interest granted is an equitable charge to secure payment to B of that money.”
28 Here, particularly in light of the comments by Young CJ in Eq. upon Troncone, the crucial distinction between the cases relied on by Mr De Young and the matter before me, is, in my view, that no authority was given by Raher and George for the plaintiff to lodge the caveats.
29 Further, Mr Stuckey relied upon a number of cases which he submitted were supportive of his stance.
30 Firstly, in Investment & Merchant Finance Corporation Ltd v Kirkwood Estates Ltd (1975) 5 ALR 191, Ward J considered whether a caveatable interest was created by the following clause:
“… If so required by Kirkwood Bohemia Downs shall execute in favour of Kirkwood a second mortgage over the Kurundi Station in the Northern Territory to secure payment to Kirkwood of the moneys payable under the contract such mortgage to be prepared by Kirkwood's solicitors at the cost of Bohemia Downs and to contain such terms and conditions as may be required by Kirkwood's solicitors. … .”
[emphasis added].
31 His Honour held that Clause 3 did not create a caveatable interest. In doing so, he distinguished Re Dixon (1922) 39 WN (NSW) 89 where Street CJ considered the following provision:
“I hereby undertake to give you a mortgage over all my real and personal property of whatsoever nature and description and wheresoever situate. … .”
32 Street CJ held that this provision gave rise to a caveatable interest in the land. Ward J distinguished this decision on the basis that on the matter before him there was no right to specific performance until a request for a mortgage had been made. As is apparent, the provision under consideration by his Honour is similar to Clause 3 in the Deed.
33 In Williams v Burlington Investments Ltd (1977) 121 SJ 424, the House of Lords considered a provision whereby a developer agreed that if requested by the landowner, he would enter into a legal charge in favour of the landowner of such land as the developer owned when the request was made to secure monies owing. Lord Russell of Killowen stated that this provision did not create a present equitable right to the security but that it was merely an agreement that in some future circumstances a security should in future be created.
34 In Penny Nominees Pty Ltd v Fountain (BC8902224 NSWSC 2 May 1989), Young J considered whether the following clause gave rise to a caveatable interest.
“’…That I shall furnish upon demand such security in such form and value as may be required by you from time to time in amount and value sufficient at all times in your opinion to secure any of my obligations to you whether contingent future or otherwise’.”
[emphasis added].
His Honour stated, at page 3:
“If a person promises to give a mortgage and the promisee has given valuable consideration for such promise, then an equitable mortgage exists from that moment in time and if necessary the court will decree specific performance of that agreement; see eg Lamont v Osborn [1902] 28 VLR 434 and Re Dixon (1922) 39 WN (NSW) 89. If, however, the agreement is subject to a condition then it would not seem to me that any specifically enforceable obligation to give a mortgage arises until the condition is satisfied. Accordingly, if one has an agreement with X, if so required by Y, by notice in writing from Y, shall execute a mortgage, no specifically enforceable interest arises until Y makes that demand. This view is supported by the decision of Ward J in Investment and Merchant Finance Corp Ltd v Kirkwood Estates Ltd (1975) 5 ALR 191, 195. On this basis the second defendant would only have an interest in the land as from the date of demand; … .”
35 Here, as there, there is a condition to be satisfied, namely requiring Raher and George to provide security. As indicated, his Honour distinguished Re Dixon, and cited with approval Investment & Merchant Finance Corporation.
36 In Canadian Imperial Bank of Commerce v Rehnby (1992) 22 RPR (2d) 93, the Supreme Court of British Colombia considered a letter of undertaking which stated:
“…
(b)
the customers shall on demand of the Bank execute and deliver to the Bank a legal mortgage of the aforesaid lands ….”
[emphasis added].
37 The Court stated
“The letter of undertaking as drafted, without more, does not constitute or create an equitable charge. It is an executory contract by which the promisor agrees to execute and deliver a legal mortgage upon the demand of the promisee bank.
Once the Bank does make its demand, an equitable mortgage is created, along with entitlement to a legal mortgage. In the case at bar, the equitable mortgage came into being on or about April 11th, 1991, the date of the Bank’s letter of demand.”
38 In Bernstein v Georgakakis and Registrar of Titles [2010] VSC 52, Beach J considered the following clause in an agreement:
“…
(b) That the Debtor [Dr Bernstein] agrees and acknowledges that it or he will execute an unregistered mortgage within seven (7) days from the date of this agreement of not less than THREE MILLION DOLLARS ($3,000,000.00) in value, in favour of the Creditor [Mr Georgakakis] as mortgagee over the property owned by the Debtor [Dr Bernstein] or registered in the name of the Debtor [Dr Bernstein] at the option of the Creditor [Mr Georgakakis]. (c) That the Debtor [Dr Bernstein] acknowledges and authorises the Creditor [Mr Georgakakis] to immediately lodge forthwith a caveat or any other notice as recognised by law over the property situated at 5 Dunlop Street Kew in the (sic) Victoria or on any other property owed (sic) or registered in either the name of the Debtor [Dr Bernstein] at the option of the Creditor [Mr Georgakakis].”
39 His Honour stated:
“[28]The first defendant contends that, on its proper construction, the agreement creates an equitable charge in his favour over Dr Bernstein’s equitable interest in the property. It is trite that, in order to support a caveat, the caveator must have an estate or interest in the land and that a mere contractual right given by one party to another to lodge a caveat will not support the caveat in the absence of a caveatable interest. Clause 4(c) of the agreement on its own, cannot support the caveat. The issue is whether cl 4(b) (or the agreement construed as a whole) creates the requisite interest.
[29] Clause 4(b) provides for the execution of an unregistered mortgage within seven days of 8 August 2005 over property owned by Dr Bernstein or registered in his name ‘at the option of the creditor [Mr Georgakakis]’. There is no evidence that Dr Bernstein executed any such mortgage, or indeed any mortgage at all in favour of Mr Georgakakis. Similarly, there is no evidence that Mr Georgakakis ever required Dr Bernstein to execute a mortgage. In this respect, there are parallels between this case and the decision of Ward J in Investment and Merchant Finance Corporation Ltd v Kirkwood Estates Ltd. In that case, the court upheld a submission that an agreement to execute a mortgage if so required did not constitute a caveatable interest where there was no evidence of any such requirement ever having been made. To like effect in this case, there being no evidence of Mr Georgakakis exercising the option referred to in cl 4(b), there can be no caveatable interest.
[30] Whilst it is correct to say that it is not necessary that any general words of charge should be used in order to create a charge in equity, looking at the agreement as a whole, I am unable to conclude that it is reasonably arguable that the agreement creates a charge of the kind alleged by the first defendant. Clause 4(b) relates to the ability of Mr Georgakakis to call upon Dr Bernstein to execute a mortgage over all of Dr Bernstein’s property, whereas cl 4(c) gives permission to lodge a caveat over only the Dunlop St property. It is not possible to construe cll 4(b) and (c) as providing either a charge over Dr Bernstein’s interest in the property or a charge over all of Dr Bernstein’s property.”
40 It will be noted that again Investment and Merchant Finance Corporation was cited with approval. In a footnote to paragraph 46 of the judgment, his Honour indicated the he was aware of the judgment in Evans.
41 On the basis of these authorities, I conclude that the lodging of the caveats over the properties cannot be regarded as an exercise of the option granted by the plaintiff under Clause 3 of the Deed.
42 The second defendant also seeks to rely upon letters dated 7 March 2008 forwarded by the Registrar of Titles to Raher and George pursuant to s.89(3) of the Transfer of Land Act advising them of the lodging of the caveats as being an exercise of the option under Clause 3 of the Deed. However, since the lodging of caveats by itself did not, as I have concluded, give rise to an exercise of the option, the mere notification of the lodging of the caveats likewise cannot be regarded as an exercise of the option.
Rectification
43 At the commencement of the hearing, I gave leave to the plaintiff to further amend its Amended Statement of Claim to plead rectification in the alternative. The pleading is as follows:
“21.
Alternatively, shortly prior to signing the Deed, the plaintiff and Mr George and Ms Raher orally agreed that Mr George and Ms Raher would grant to the plaintiff an equitable charge over the land.
PARTICULARS
The agreement was reached in a discussions (sic) between Alan Read (sic) of the Plaintiff and Mr. George and Mr (sic) Raher in February 2008. The material substance of the conversation was to the effect alleged.
22. Clause 3 of the Deed was intended to embody the agreement alleged in paragraph 21 above.
23. The Deed was signed by Mr George and Ms Raher and entered into by the plaintiff in the belief that it embodied the agreement alleged in paragraph 21 above.
24. In the event that the Court determines that clause 3 of the Deed did not contain or embody the agreement alleged in paragraph 21 above, which is denied, the document was drawn up and signed under a mutual mistake of fact.”
44 The approach to be taken when rectification is sought is stated by Mason J in Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 1 ALR 169 at 178:
“The conditions according to which relief by way of rectification will be granted have been variously stated. In Fowler v Fowler (1859) 4 De G & J 250, at 265; 45 ER 97, at 103, Lord Chelmsford LC said that the person seeking rectification must establish clearly “that the alleged intention to which he desires [the instrument] to be made conformable continued concurrently in the minds of all parties down to the time of its execution, and also must be able to show exactly and precisely the form to which the deed ought to be brought”. On other occasions statements have been made which emphasize that it is for the plaintiff to show that by the writing sought to be rectified the parties intended to record the terms of an antecedent oral bargain and that by common mistake there is a disconformity between the oral bargain and the writing (United States of America v Motor Trucks Ltd [1924] AC 196, at 200, per Earl of Birkenhead).
The difference in expression is not of importance. It is explained partly by the difference in the character of written instruments sought to be rectified and partly by the more recent desire to emphasize that the remedy is designed to relieve against the mistaken expression of the true agreement of the parties.
As Buckley LJ said in Lovell & Christmas Ltd v Wall (1911) 84 LT 85, at 93; ‘For rectification it is not enough to set about to find what one or even both of the parties to the contract intended. What you have to find out is what intention was communicated by one side to the other and with what common intention and common agreement they made their bargain.’
What is of importance is that the purpose of the remedy is to make the instrument conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately. And there has been a firm insistence on the requirement that the mistake as to the writing must be common to the parties and not merely unilateral, except in cases of a special class to which I shall later refer.
It is now settled that the existence of an antecedent agreement is not essential to the grant of relief by way of rectification. It may be granted in cases in which the instrument sought to be rectified constitutes the only agreement between the parties, but does not reflect their common intention. ….”
45 As appears, the plaintiff seeks rectification based on an agreement reached in discussions between Reid, Raher and George in February 2008.
46 Reid stated that a meeting was held in his office in late January 2008 with Raher and George. He stated that he indicated to them that he was disappointed at the continuing outstanding debt and that he would need to obtain some sort of security over that debt. His evidence then continues:
“… David and Sally looked at me and said they would do everything they can to pay the debt and I said, ‘That’s not going to basically help me when I speak to the board’. The next part of the conversation was I said, ‘I’ve spoken to our solicitors and they are advising for us to put caveats over their properties to secure the debt’. David popped up and said, ‘Well, we’ve got a number of mortgages over our properties, it’s not going to do you any good’. I said to him, ‘Well, that’s the way we’re going to move’. Both David and Sally had a quick discussion about why we had not paid their debt and so, therefore, this is the way we’re heading. On that basis they weren’t too happy and the meeting basically closed.”
47 Under cross-examination by Mr Stuckey, the following exchange occurred:
“Q: You recall you gave evidence yesterday about a discussion with Mr George in February of 2008 in which he said that his properties had multiple mortgages on them?--- A: That’s right.”
48 Reid appears to agree that the meeting which he had stated in evidence-in- chief took place in late January 2008, in fact took place in February 2008. However, under cross-examination shortly thereafter by Mr De Young, Reid agreed with the proposition that the meeting took place in early January 2008.
49 Reid agreed under cross-examination by Mr De Young that no agreement was reached at the meeting. In his final address, Mr Stuckey assumed that this meeting was the basis of the plaintiff’s claim for rectification and no exception was taken to this by the other counsel.
50 I agree with Mr Stuckey’s submission that at this meeting whenever held, no agreement was reached between Reid on behalf of the plaintiff and Raher and George, let alone an agreement that they would give an equitable charge over the properties.
51 This was the only meeting of which evidence was given in any detail by Reid. There was no evidence before me of negotiations with respect to the terms of the Deed as might have been expected with a rectification claim. Reid gave evidence that at some stage he handed over the matter for finalisation to Andrew Osborne, the plaintiff’s accountant. Osborne gave evidence that this occurred in early January. It is with Reid however that the agreement was allegedly made, not with Osborne.
52 Submissions were made to me that there was a discrepancy between the evidence given by Reid on the one hand and Raher and George on the other with respect to whether or not mortgages and caveats were discussed. It is not necessary for me to make a finding upon which version of the evidence I prefer. Nor is it necessary for me to consider the evidence of Raher and George on the issue of rectification. For me to rectify Clause 3 of the Deed, it is necessary for the plaintiff to establish that the common intention of the parties was not recorded in Clause 3 but rather that their common intention was expressed in paragraph 21 of the Statement of Claim. As appears, there is no evidence before me that Reid entered into the oral agreement alleged in paragraph 21.
53 The claim for rectification fails.
Other Caveatable Interest
54 Mr De Young contended that the mere granting of an option by Clause 3 of the Deed itself gave rise to a caveatable interest in the properties.
55 He sought to rely upon comments made in ‘The Law of Options and Other Pre-Emptive Rights’ by Donald J Farrands, Law Book Company 2010, with respect to equitable interests arising upon the grant of an option. The author refers to “two concurrent equitable interests arising upon the grant of an option”, firstly “creation of an immediate equitable interest in aid of the remedies for any breach of the option” and secondly, “creation of a contingent equitable interest in the subject matter of the option”. In support of his submissions, Mr De Young relied upon Re Dixon. As indicated, this case was distinguished in Investment & Merchant Finance Corporation and Penny Nominees and, impliedly, in Bernstein, where Beach J cited with approval Investment & Merchant Finance Corporation.
56 Mr De Young also sought to rely upon Capital Finance Australia Ltd v Karabassis (2003) 11 BPR 21,123, where Gzell J considered the following clause:
"If Customer does not pay any of the Money on the due date, Guarantor must pay the whole of that money to Comlease immediately upon demand by Comlease and at that time each Guarantor grants to Comlease a legal mortgage of any land now or hereafter held personally by that Guarantor in order to secure the Guarantor's obligation to pay the Money and further appoints authorised officers of Comlease as attorney to perfect this security."
57 His Honour held that this clause gave rise to an equitable interest “to call in aid a Court of Equity to grant relief in the nature of specific performance against the recalcitrant guarantors”. I note however that in Investment & Merchant Finance Corporation, Re Dixon was distinguished on the basis that specific performance was not an available remedy. Capital Finance Australia Ltd v Karabassis is distinguishable on this basis.
58 As to the creation of a contingent equitable interest in the subject matter of the option, Mr De Young gives the example of the grant of an option to purchase land creating an equitable interest in the property the subject matter of the transaction. This is a well-established principle, recognised at the time of the decisions in the cases referred to above, such as Investment & Merchant Finance Corporation, Penny Nominees and, impliedly, Bernstein which are strongly supportive of the first defendant’s position. This principle was not referred to in these judgments and clearly not regarded as relevant.
59 I conclude that the mere granting of an option by Clause 3 of the Deed does not itself give rise to an equitable interest in the properties which would support the caveats.
The Claim against the First Defendant
60 I conclude that the plaintiff does not have a caveatable interest in the properties and therefore the caveats over the properties should be removed. The plaintiff’s claim against the first defendant is dismissed.
61 This enlivens the claim against the second defendant.
The Claim against the Second Defendant
62 The claim against the second defendant is set out in paragraph 20 of the Further Amended Statement of Claim. It reads:
“In the event that the this Honourable Court were to determine that the Plaintiff had not obtained a caveatable interest in the land, the Plaintiff failed to obtain such interest due to the Second Defendant failing to carry out its retainer, or in the alternative, in carrying out its retainer in a negligent manner by reason whereof the Plaintiff will suffer loss and damage.
PARTICULARS OF BREACH OF RETAINER
AND/OR OF NEGLIGENCE
If, which matter is denied by the Plaintiff, the First Defendant’s contentions are upheld by the Court, and that the Deed did not create an equitable charge over the land, but merely created an option exercisable by the Plaintiff to create such equitable charge; the Second Defendant breached its retainer, or in the alternative, was negligent in that:
a)
it did not advise the Plaintiff of any further steps it was required to undertake to exercise the option;
b)
it did not advise the Plaintiff of any further steps it was required to take upon exercise of the option to create the equitable charge;
c)
it lodged on the Plaintiff’s behalf each of the caveats referred to in the Statement of Claim; by reason whereof it represented to the Plaintiff and the world at large that the Plaintiff had a lawful right to such caveatable interest in circumstances where the same did not exist;
d)
it did not advise the Plaintiff that any delay on the Plaintiff’s part in exercise (sic) the alleged option, or creation of an equitable charge would postpone its interests to other creditors of David Robert George and Sally-Anne Raher which obtained equitable charges or legal charges subsequent to 8 March 2008;
e)
it did not advise the Plaintiff that any delay on its part in exercise (sic) the alleged option, or creation of an equitable charge would render it an unsecured creditor for the purposes of the Bankruptcy Act or otherwise impair its security.
… .”
63 As appears, the claim against the second defendant relates not to the wording of Clause 3 of the Deed but rather to the failure of the second defendant to advise the plaintiff after the execution of the Deed that further steps were required on its part to obtain an equitable charge which would support a caveatable interest in the properties.
64 Shaw indicated in evidence that he did not advise the plaintiff to take any further steps to enforce its options since he was of the view that Clause 3 of the Deed already gave the plaintiff a caveatable interest in the properties. With this belief, he then lodged the caveats a few days after the Deed was executed.
65 Mr De Young, in his written closing submissions indicated, correctly in my view, that the question I had to determine was:
“Should a reasonably competent solicitor have construed the clauses as conferring the alleged ‘option’, and then give advice to the client about how to exercise the option?”
66 In my view, the answer is a resounding “yes”. Mr De Young submitted that reasonable minds might differ about the proper construction of Clause 3 and that therefore it was not negligent for Shaw to construe the Clause in the way he did. In my view, a prudent solicitor should have realised that Clause 3 of the Deed was open to a different interpretation to that put upon it by Shaw, particularly as he departed from the clear wording of the second defendant’s precedent for a document which would have given an immediate interest in the properties and supported a caveat.
67 The plaintiff sought that I adjourn its case with respect to its claim for loss and damage should I conclude that there was negligence on the part of the second defendant. This application was opposed by the second defendant. The plaintiff particularises its claim against the second defendant as follows:
“In the absence of a caveatable interest in the 3 pieces of land the Plaintiff will be an unsecured creditor for the purposes of the administration of the bankrupt estates of David Robert George and Sally-Anne Raher.
The liabilities of the said bankrupt estates to its unsecured creditors (such liabilities being calculated without reference to the Plaintiff[‘]s claims) are such that no dividend is likely to be distributed to the Plaintiff or any other unsecured creditor.
The Plaintiff’s loss will be [the] difference between the amount of equity which would have been available to it as a secured creditor, less the dividend (if any) payable to it as an unsecured creditor of the bankrupt estates as well as the costs incurred by it in seeking to enforce the caveats lodged by the Second Defendant.”
68 In my view, it is appropriate to adjourn the question of the plaintiff’s loss and damage to enable a more accurate estimate of the plaintiff’s loss to be calculated once the properties have been sold and prior secured creditors are paid out. Such an approach has saved the expense and time of calling evidence in support of the plaintiff’s claim for damages against the second defendant and no prejudice to the second defendant was shown by such an approach.
69 The plaintiff, in its Prayer for Relief, seeks that I make an order that the properties be sold. Mr Lapirow, who appeared for the plaintiff, indicated that the plaintiff was not seeking such relief at this stage.
Conclusion
70 The plaintiff’s claim against the first defendant is dismissed.
71 The plaintiff’s claim against the second defendant succeeds.
72 I adjourn the plaintiff’s application with respect to loss and damages against the second defendant to a date to be fixed.
73 I give liberty to apply to the parties.
74 I will hear further from the parties as to the precise form of orders I should make with respect to the removal of the caveats and others matters.
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