Epic Feast P/L v Mawson KLM HLDGS P/L & Anor No. Scgrg-97-910 Judgment No. 6391 Number of Pages 17 Real Property

[1997] SASC 6391

IN THE SUPREME COURT OF SOUTH AUSTRALIA

DOYLE, CJ

CATCHWORDS:

Real property - Torrens system - caveat - plaintiff claimed existence of mortgage over land of which defendant is registered proprietor - mortgage not registered - defendant exercised option to purchase land - no caveat was lodged to protect option - defendant letter lodged transfer and became registered proprietor - permissive caveat lodged by plaintiff before settlement - transfer expressed to be subject to caveator's claim - whether interest identified in caveat legitimate - whether requirements of s26 of Lawof Property Act satisfied - whether sufficient memorandum in writing evidencing an agreement to create an interest in land - whether doctrine of part performance made out - consideration of scope of doctrine - competition between unregistered equitable interests - effect of a holder of earlier equitable interest failing to caveat - effect of lodgment of caveat by holder of latter equitable interest on earlier equitable interest's priority - nature of interest created by an option agreement. Real Property Act, 1886 ; Law of Property Act, 1936 s26, referred to. Leros Pty Ltd v Terera Pty Ltd (1992) 174 CLR 407; Coles KMA Ltd v Sword Nominees Pty Ltd (1986) 44 SASR 120; Barba v Gas & Fuel Corporation of Victoria (1976) 136 CLR 120; J & H Just (Holdings) Pty Ltd v Bank of NSW (1971) 125 CLR 546; Avco Financial Services v Fishman [1993] 1 VR 90, applied. Thomson v McInnes (1911) 12 CLR 562; Harvey v Edwards, Dunlop & Co Ltd (1927) 39 CLR 302; ANZ Banking Group Ltd v Widin
(1990) 102 ALR 289; Pirie v Saunders (1961) 104 CLR 149; Maddison v Alderson
(1883) 8 App Cas 467; Steadman v Steadman [1976] AC 536; Regent v Millett
(1976) 135 CLR 679; J C Williamson Ltd v Lukey & Mulholland (1931) 45 CLR
282; McBride v Sandland (1918) 25 CLR 69; Riley v Osborne [1986] VR 193; Mia v Phony (1993) 6 BPR 13 141, considered.

HEARING:

ADELAIDE, 9-11 September 1997 (hearing), 3 October 1997 (decision)

#DATE 3:10:1997

#ADD 7:10:1997

Appearances:

Counsel: Mr J E Lunn

Solicitors: Minter Ellison

Defendants:

Counsel: Mr D E Clayton QC with him Mr M Deller

Solicitors: Matthew Deller

Order: order for the removal of Epic's caveat.

DOYLE CJ

This is a case in which one of two innocent parties must suffer a substantial loss. The wrongdoer, a person with whom each of them dealt, is not before the court and apparently is not worth suing. The company on behalf of which he performed various acts is before the court as the first defendant, but is not capable of meeting its obligations.

This is the essence of the case. Mr Jurkovic is a director of the plaintiff, Epic Feast Pty Ltd ("Epic"). Mr Keith Bowling (to whom I will refer as "Bowling") is or was a director of various companies involved in the development of a fairly large property, the site of a building known as Estcourt House. The property comprised land which was referred to as the Estcourt House Land (this was one parcel) and what was called the lower land (the other parcel). One of these companies is the defendant, Mawson KLM Holdings Pty Ltd ("MH"). Bowling was the sole director and secretary of MH. MH was the purchaser of the Estcourt House land from the Minister of Tourism. The companies needed money to purchase the property and to complete the development. Bowling persuaded Mr Jurkovic to advance to him or to one of the companies a total of $210,000, and got a company in which Mr Jurkovic was involved to do work worth about $50,000 on the property. Mr Jurkovic says that Bowling promised on behalf of the companies to execute a mortgage over the Estcourt House land ("the EH land"). However, the mortgage was never executed. Meantime the second defendant Starmaker (No 51) Pty Ltd ("Starmaker") had become registered as first mortgagee over the EH land. It became so registered when MH bought the EH land from the Minister for Tourism. Later, Epic lodged a caveat to protect its interest as equitable mortgagee. This was at the time that Starmaker, unknown to Mr Jurkovic, was arranging to buy the land from MH pursuant to an option granted to it when MH bought the EH land. The caveat was lodged by Epic while the purchase was being organised. Starmaker learned of the caveat after the purchase contract was executed, and decided to take a transfer subject to EF's caveat. Bowling did not tell Mr Jurkovic about the dealings with Starmarker or tell Starmaker about his dealings with Mr Jurkovic.

If the interest protected by the caveat is unenforceable, Mr Jurkovic and Epic will lose their money, it appears. If the caveat is enforceable, Starmaker will have to meet MH's obligations, because there seems to be no prospect of MH doing so.

Both parties have my sympathy, because they acted in good faith, even though the transactions in which they involved themselves with Bowling were unusual transactions. But my responsibility is to decide the case according to law.

The Caveat

SM took a transfer of the EH land subject to Epic's caveat. The caveat was lodged at the Lands Titles Office on 25 October 1996 and entered on the Certificate of Title on 30 October 1996.

Solicitors acting for SM had searched the title on 24 October, at which time another caveat was noted on the title, but not that of Epic. The documents for the purchase of the EH land were prepared on 1 November 1996 and, it seems, executed that day, save that the Transfer was not executed by SM until 8 November. Later that day another search revealed Epic's caveat. The Transfer was then altered to make it subject to the Epic caveat (and, as it happened, the other caveat and SM's own mortgage) and lodged for registration.

I do not need to go into the circumstances under which these things happened. The fact is that SM is now the registered proprietor of the land. MH has made no complaint about the registration of the Transfer. SM has lodged and had registered the Transfer in a form that means that it is subject to any rights that Epic may have in the EH land: Coles KMA Ltd v Sword Nominees Pty Ltd (1986) 44 SASR 120. The registration of the Transfer did not in any sense validate Epic's claimed interest in the EH land. But the form of the Transfer is effective to prevent its registration from defeating the unregistered interest of Epic, if Epic can establish that it had such an interest: Leros Pty Ltd v Terera Pty Ltd (1992) 174 CLR 407 at 420 Mason CJ, Dawson and McHugh JJ.

However, it is the interest or rights set out in the caveat that are preserved. An interest or right that is not set out in the caveat will not be protected by the caveat. This must follow from the nature and purpose of a caveat: cf Leros Pty Ltd v Terera Pty Ltd (1992) 174 CLR 407 at 423 Mason CJ, Dawson and McHugh JJ.

The interest of Epic is identified in the caveat as follows:

"An Estate and Interest as Equitable Mortgagee under and by virtue of a Loan Agreement dated 13 September 1996 between the said Caveator and the said Caveatee in the sum of $400,000 (Four Hundred Thousand Dollars) plus interests, costs and other charges."

The issue is, then, whether the evidence in this case leads to the conclusion that Epic has and can enforce the claimed interest.

The facts

I now turn to the facts.

The only witness for Epic was Mr Jurkovic. MH has not defended the proceedings, although SM, joined as a defendant, has done so. There was no evidence contradicting Mr Jurkovic's evidence.

I find that Mr Jurkovic was basically a truthful witness. However, I find that his memory of events is not completely reliable, particularly as to the sequence of events. His memory was shown to be defective in relation to when demolition work was carried out at Estcourt House, and in relation to when he made a trip to Kangaroo Island to inspect land offered by Bowling as a security for moneys borrowed. In addition, his evidence was given in a laconic manner. At times his description of events was lacking in the sort of detail that helps one make sense of events. He is also a man who takes little interest, as best I could tell, in "paperwork" and in legal details. That is not a criticism of him, but it does explain why details of the sort that a lawyer, and some people in business, would ensure were at least adverted to, were not adverted to.

For these reasons, while I accept Mr Jurkovic as a truthful witness, it is necessary to scrutinise his evidence with some care when one comes to the finer details, as one has to in a case like this.

Mr Jurkovic is the manager of Royal Park Salvage Pty Ltd ("Royal Park"). Royal Park was contracted to perform work at Estcourt House. As I have already mentioned, Bowling was involved in companies that were redeveloping this property. In addition to MH, there was another company called Mawson KLM Developments Pty Ltd ("Developments"). Bowling seems to have used the names of MH and Developments rather indiscriminately. It is unclear which company contracted with Royal Park.

On about 3 June 1996 Bowling spoke to Mr Jurkovic at the latter's office. He told Mr Jurkovic that he (presumably meaning one of the companies) was in financial difficulty. Although Mr Jurkovic said that at this time the demolition work was three quarters complete, I find that at this time it had barely started.

Bowling sought a loan of $50,000. This might have been in the context of talk about Mr Jurkovic being contracted in the future to carry out some fairly extensive building work on the development (see T40-41). I do not accept that at this stage MH was due to make a progress payment to Royal Park (cf T41-42). I consider that that must have been later on, if a progress payment was ever due.

With surprising willingness, Mr Jurkovic drew a personal cheque for the amount of $50,000. Bowling wrote out an acknowledgment of receipt. He used a letterhead that was conveniently ambiguous - it was headed "Mawson KLM". The acknowledgment reads as follows: "I acknowledge receipt of the sum of Fifty Thousand Dollars ($50,000) by way of loan to be repaid at settlement of Escourt House due on or before 26th June 1996. I will pay interest at bank overdraft rates together with any fees incurred by you. This amount I acknowledge is being loaned to me personally.

Yours faithfully

KEITH BOWLING"

It was signed by "Keith Bowling" and dated 3 June 1996. This document was tendered as exhibit P17.

There is no doubt that the loan was made. Mr Jurkovic drew a cheque on his personal cheque account.

Later in June, Bowling told Mr Jurkovic that about $200,000 was owed to Stockport (Civil) Pty Ltd ("Stockport") for work done on the EH land, but mainly on the lower land that was part of the same redevelopment. This was in the context of Bowling explaining that he could not repay the $50,000 on 26 June. He sought a further loan from Mr Jurkovic. Mr Jurkovic said (T47) that there was also talk about payment for the demolition work, but I find that if that was discussed it was payment for work mainly yet to be done. Bowling told Mr Jurkovic that he needed the loan for two or three months (T48), and would repay it when he settled on the EH land (T48). However, Mr Jurkovic later said that that really meant a month or two after settlement (T111).

Mr Jurkovic said that Bowling offered him a lump sum payment of $100,000 (to be paid, I gather, when the advance was repaid), if Mr Jurkovic would help him out. I accept Mr Jurkovic's evidence that such an offer was made, but whether it was made at this time is another matter.

Mr Jurkovic also said that on this occasion there was talk about a mortgage. According to Mr Jurkovic, Bowling offered as security a mortgage over certain land on Kangaroo Island, land owned by System One (Australia) Pty Ltd. Mr Jurkovic said that after having been flown to Kangaroo Island by Bowling to inspect the land (T49), he told Bowling that he was not interested in that land. (In cross-examination, Mr Jurkovic agreed that this trip must have been several weeks later, in mid-July.) He said that Bowling then offered, and he accepted, a mortgage over the EH land, in return for providing further financial assistance.

Mr Jurkovic then negotiated a settlement with Stockport for $160,000. Just how he achieved the reduction in the amount owing was not adequately explained, but does not matter. By letter dated 4 July (P19) he advised Stockport that he would pay that amount. On 9 July he attended at the Lands Titles Office, when the purchase of the EH land (it had been delayed several times) was completed, and handed over a bank cheque, provided by EF, for $160,000.

When he arrived, he met Michael Bowling, Bowling's son. He handed to Mr Jurkovic an envelope, in which was a letter dated 8 July. The letter was on the usual letterhead (see above). The letter read as follows:

"Dear Sir

Re: Loan $250,000 - to Mawson KLM Developments Pty Ltd

We have today arranged for System One (Australia) Pty Ltd CAN 008 296 660 to execute a mortgage to you over its Flinders Chase property on Kangaroo Island. We will have fresh documentation prepared to replace it over the Tennyson land.

Yours faithfully

KEITH BOWLING"

This letter was tendered as P20. Also enclosed was a mortgage, unexecuted, over the Kangaroo Island land. Mr Jurkovic said that he told Michael Bowling and then Keith Bowling (who was also at the Lands Titles Office) that he had had not agreed to accept a mortgage over the Kangaroo Island land (T52-53). He said that Keith Bowling apologised, and said that due to "stress and pressure" (T53), he had not had time to prepare the correct documents, but said "I will get them to you as soon as possible" (T54). Mr Jurkovic then handed over the cheque for $160,000 to Stockport, and the settlement of the purchase of the development land then proceeded.

There are two significant features of the letter just referred to. The first is the amount of the loan referred to. On Mr Jurkovic's evidence the total due to him and to Epic at this time was $400,000. He said that in addition to the $250,000 referred to in the letter, a further $150,000 was due to him or to Epic - $50,000 for the demolition work and $100,000 for the lump sum fee. The letter refers to an amount of only $250,000. In cross-examination (T90-91), Mr Jurkovic agreed that the amount stated in the letter was probably the loan of $50,000 to Bowling and the payment of $200,000 (it seems that Bowling did not know about the negotiated reduction) to Stockport. That feature of the letter casts some doubt over Mr Jurkovic's evidence that agreement had already been reached on the payment of the fee of $100,000, and on his evidence that the demolition work was more or less complete, and that $50,000 was payable to Royal Park for that work.

Also significant is the reference to Developments. It was the proprietor of the other parcel of land, the lower land, adjacent to the EH land. That being so, the reference to "the Tennyson land" (Tennyson is the suburb in which the land is situated) casts some doubt on Mr Jurkovic's evidence that the oral arrangement was for a mortgage over the EH land.

Then there is the admission made by Mr Jurkovic in cross-examination (T106-114) that he went to Kangaroo Island to inspect the land owned by System One (Australia) Pty Ltd on 20 July. As he had earlier (T49) linked his rejection of security over the Kangaroo Island land to his trip to Kangaroo Island, the fact that the trip was not until 20 July suggests that he did not reject that security on 9 July at the Lands Titles Office. However, Mr Jurkovic remained adamant, despite the confusion, that he had rejected the proposed security over the Kangaroo Island land on 9 July, and had been promised a mortgage over the EH land on that day or before then.

In considering all this, I have to bear in mind that Bowling appears to have been a plausible man, who would say what the occasion demanded from his point of view.

In the end, I accept Mr Jurkovic's evidence to the extent of finding that by about mid July, he had been orally promised, as security, a mortgage over the EH land, and that he had been promised a lump sum fee of $100,000 in consideration of the loan of $50,000 to Keith Bowling and the payment of the claim of Stockport. One can understand that the parties might have treated the moneys advanced and the lump sum fee differently, the latter not being secured by a mortgage. Whether the $50,000 for the demolition work was already payable is something that I cannot determine. But this uncertainty does not matter. This agreement to give a mortgage (be it made on 9 July or later in July) is not the agreement identified in the caveat. But these dealings between Mr Jurkovic and Bowling provide the background to the events of 13 September.

Unfortunately for Mr Jurkovic, he continued to trust Bowling. He must have known that MH was borrowing money to purchase the development site, and that the lender would take a mortgage over the land. He acknowledged this in cross-examination (T69). He also agreed, somewhat reluctantly, that he knew that the consent of the first mortgagee would be required before there could be a second mortgage: T71-74.

On 13 September Mr Jurkovic again met with Bowling at the former's office. Mr Jurkovic's evidence (T56) was that he complained to Bowling that he had been waiting for a mortgage, but that had not been provided, and that he complained "I've got nothing in writing." The upshot of this was that a document was prepared, then and there, by Mr Jurkovic's secretary, and signed by both men. This document records the agreement referred to in the caveat. It is as follows. "13th September, 1996

LOAN AGREEMENT

I, Keith Bowling, as agreed have personally and on behalf of my companies loaned from Epic Feast Pty Ltd and Petar Jurkovic the total sum $400,000.00, (Four Hundred Thousand Dollars), plus any incurred fees and interest.

The repayment of this loan is (sic) take the form of the following:

Part 1 $100,000.00 Consultant FeeIncentive payment to Epic Feast Pty Ltd for making the settlement of the Tennyson Development Eventuate Part 2 $160,000.00 Repayment to Epic Feast Pty Ltd for moneys paid to Stockport Civil on behalf of Keith Bowling & Companies NB. The amount originally owed to Stockport Civil by Keith Bowling was $200,000.00. Epic Feast negotiated this down to $160,000.00 due to the fact that the difference was an outstanding amount owed to Epic Feast. Part 3 $40,000.00 The difference from the Stockport Civil settlement to be paid to Epic Feast Pty Ltd. Part 4 $50,000.00 Payment to Epic Feast Pty Ltd for the demolition of Escort House plus variations, (at half price), for asbestos removal. Part 5(a) $50,000.00 Lent by Petar Jurkovic over and above his personal overdraft facility charged at a rate of 20% interest plus establishment fees and other bank charges. Part 5(b) Abovementioned interest, fees and charges accruing and to be calculated at time of settlement of loan.

This loan has a settlement date of no later than the 30th September, 1996.

This loan agreement deals only with the Escort House Development at Tennyson. In the event of Keith Bowling and/or companies reneging on the above loan and incentive repayments there will be no other alternative but to proceed with legal action for the recovery of all moneys outstanding.

(signed) (signed) ................................. .......................................... Mr. Keith Bowling Epic Feast Pty Ltd (Petar Jurkovic)

Dated .........13th .........this day of ....September...the year ...1996."

The document requires some explanation. The first item, $100,000, is the lump sum fee already referred to by me. The second item, $160,000, is the amount of the payment made to Stockport. Alongside each of these Bowling wrote "agreed" and appears to have initialled that word.

The third item, $40,000, is the difference between the amount of the Stockport claim against MH and Developments and the amount paid by Epic to Stockport. Alongside that item Bowling wrote "to be negotiated". Mr Jurkovic explained (T57 & T120) that Bowling "probably" wanted a share of the negotiated reduction. Documents produced under subpoena (D36, D37, D38) suggest that the Stockport claim was for about $175,000. The origin of the figure of $200,000, as the amount of the Stockport claim, was never satisfactorily explained by Mr Jurkovic.

The fourth item, $50,000, is the amount said by Mr Jurkovic to be payable to Royal Park for salvage work. Mr Jurkovic said in evidence that, because of the problems with getting payment, the entitlement to that amount was somehow transferred from Royal Park to Epic, and in return Epic was to perform services for Royal Park. Royal Park was a family company, and the arrangement was reached so that other family members would not suffer a loss. I accept Mr Jurkovic's evidence about that, but the arrangement between Epic and Royal Park was not explained in any detail. Alongside this item Bowling wrote "not sure". The evidence left that unexplained, save that Mr Jurkovic said that Bowling wanted "clarification" about the asbestos that was removed (T57). I am satisfied that by then most of the work had been performed. Mr Jurkovic acknowledged that a small amount was yet to be done. However, Mr Jurkovic's evidence about how the amount was arrived at was unclear. The documents to support the figure (P15) were limited. The circumstances lend support to the suggestion put to him that $50,000 was simply a round amount selected by Mr Jurkovic and that the amount actually due might be less.

Alongside item 5(a) Bowling wrote "agreed as to $50,000". I take that to be a reference to the principal and the interest payable on the amount advanced by Mr Jurkovic personally.

Mr Jurkovic did not really explain the handwritten reservations (see T119 and following), except to refer to Bowling as, in effect, "a smooth operator". Nor could he explain the absence of any reference to a mortgage, other than by reference to his own lack of legal experience and Bowling's ability to lead him astray, as he put it (T120-T121).

I find that by this document Bowling acknowledged liability on behalf of MH for an amount of at least $310,000, but that liability for the balance of $90,000 was not acknowledged. I find that there was consideration to support the acknowledgment. The consideration lay in Mr Jurkovic and Epic agreeing to forbear from enforcing their claims before 30 September. I find that of the amount of the liability that Bowling acknowledged, $260,000 was due to Epic. There is no basis for a finding that item 5(a), the amount advanced by Mr Jurkovic, was owed to Epic.

I am also prepared to find that on this occasion it was orally agreed that MH would grant a mortgage over the EH land to secure the liability to Epic and to Mr Jurkovic. Although, in his evidence on the point, Mr Jurkovic made only a glancing reference to the grant of a mortgage being discussed on 13 September (see T56), I accept that the giving of that security was common ground and had been for some time at least. This conclusion is supported indirectly by the references in earlier documents to the giving of security.

Pausing here, I therefore find that by about mid July Bowling had orally agreed, on behalf of MH, to grant a mortgage over the EH land to secure the sum of $250,000, and that there was consideration for that promise (the payment to Stockport), even though the $50,000 was advanced to Bowling personally. I further find that on 13 September, the earlier arrangement being in the background, Bowling orally agreed, on behalf of MH, that at least $310,000 was owing to Epic and to Mr Jurkovic, and that the promised mortgage over the EH land would secure this amount, and probably anything else later found to be due. The consideration for the further agreement was the further forbearance.

But this tangled tale does not end here. About a week later Mr Jurkovic and Bowling met again, apparently at Mr Jurkovic's office. On this occasion Mr Jurkovic pressed Bowling again about the mortgage (T58). While Bowling was there, Mr Jurkovic rang his solicitor, and in consultation with Bowling, gave instructions by telephone for the preparation of a loan agreement between Epic and MH, a mortgage over the EH land in registrable form, and granted by MH to Epic, and a guarantee by Bowling. Now, a new arrangement was proposed. The loan was to be for 12 months, a new interest rate was fixed, and the principal increased to $600,000. The extra $200,000 was a fee to compensate Epic for the delays and inconvenience, and for the extension of the period of the loan (T60, T125-126). The documents to effect this arrangement (P23, P24 and P25) were delivered the next day or about a week later (see T60 and T133). Bowling had promised to attend and to sign them, but did not do so. Some time later, perhaps in October, Bowling told Mr Jurkovic that SM had refused to consent to a second mortgage (T134).

I find that the agreement of 13 September was not terminated by the arrangement made on 18 September. Although Bowling agreed to execute the documents discussed by telephone, I find that the effect of the oral arrangements was that the earlier agreement would cease to have effect only when replaced by the proposed new agreement, and that never happened.

As between Epic and MH things remained as they were on 13 September.

Since 24 July 1996 SM had held a registered mortgage over the EH land, securing an advance of $1,220,000. That money was advanced to enable MH to purchase the land. Clause 1(m) contained a covenant against the grant of any mortgage or charge without SM's consent. SM also had a written option agreement with MH (D30) dated 9 July 1996. That gave it an option to purchase the EH land for the amount payable under the mortgage, the option being exercisable between midnight on 2 November 1996 and midnight on 3 November 1996. No caveat was lodged by SM to protect the option.

Evidence was given by Mr Tomblyn, a director of SM. I accept his evidence. He said that SM knew nothing of the dealings between Epic and MH. The advance secured by mortgage was due to be repaid by 4 November, 1996. On 31 October he met with Bowling, who said that he was having difficulty raising the necessary money. This resulted in discussions. The upshot was an agreement for the exercise of the option on 1 November (D31), a contract for the sale of the EH land for the amount due under the mortgage (D32), and a joint venture agreement (D33) under which MH and SM would, in certain events, share in the profits made on a sale of the land. All of these agreements were executed on 1 November. That day MH executed a transfer of the EH land to SM. The transfer was handed to SM, but not executed by it that day.

A buyer was found for the EH land, and a contract signed on 5 November (T148), at a price of $1,940,000. On 6 November Bowling cancelled that contract. It appears that he did so without reference to representatives of SM. They were understandably annoyed. That led to SM deciding to treat the joint venture as at an end, and to execute and register the transfer of the EH land. The transfer was executed by SM on 8 November. As I have already mentioned, SM then learned of the caveat that had been lodged by Epic. The transfer as executed by KM was not subject to any encumbrances. The transfer was altered after execution, by SM's solicitors, to make it subject to the caveat (lodged some months ago, of another party) subject to SM's own mortgage (which was transferred to a related company), and subject to Epic's caveat. The transfer was lodged and registered.

No complaint has been made by MH about any of this, and I proceed on the basis that SM is the duly registered proprietor.

It has been necessary to outline the tangled dealings of Bowling, to put in context the issue that remains. That is, the nature and enforceability of the arrangement made on 13 September between Epic and MH, this being the interest protected by the caveat.

The interest claimed by Epic

The caveat protects an interest of Epic as equitable mortgagee.

There is no doubt that an agreement by a borrower, to execute a mortgage over land of which the borrower is the registered proprietor, will, if specifically enforceable, give rise to an interest on the part of the proposed mortgagee that can accurately be described as an equitable mortgage: see Francis, Mortgages and Securities (3rd ed) p198; Fisher & Lightwood's Law of Mortgage (Australian ed) paras 1.26 and 1.28 and 4.14. It is such an interest that I understand the caveat to assert. Such an interest, if it exists, is capable of protection by a caveat.

The agreement of 13 September

The issue then arises of whether there was, on 13 September, an agreement between Epic and MH for the grant of a mortgage over the EH land and whether that agreement (if made) is specifically enforceable.

On my findings (see above), on 13 September Bowling agreed on behalf of MH to grant a mortgage over the EH land. I am prepared to infer that that was the land intended by Mr Jurkovic and Bowling to be the subject of the mortgage, and referred to in conversation on 13 September. On my findings, on that day Bowling acknowledged a liability for $310,000, leaving MH's liability for a further $90,000 up in the air. Although the caveat can protect only the interest identified by it, I consider that an interest as equitable mortgagee for the sum of $310,000 is, under the circumstances, encompassed within and substantially the same as, the interest identified by the caveat. I find also that Bowling purported to act for, and had apparent or ostensible authority to bind, MH, despite the free and easy approach that he took to the identity of the entity for which he was acting.

I find that there was consideration for this agreement. The consideration is found in the grant of further time for repayment. But for that, Epic was entitled to call for payment forthwith of the money due to it.

Specific enforcement - a sufficient memorandum

In my opinion the terms of the mortgage can, for the purposes of specific performance, be identified from the signed "Loan Agreement" (P16), from the oral agreement to grant a mortgage over the EH land, from the Real Property Act (SA) ss261 and Part XIII, and by a process of necessary implication.

But the agreement for a mortgage must, to be enforceable, satisfy the requirements of s26 of the Law of Property Act (SA). That section provides: "26(1) No action shall be brought upon any contract for the sale or other disposition of land or of any interest in land, unless an agreement upon which such action is brought, or some memorandum or note thereof, is in writing, and signed by the party to be charged or by some person there unto by him lawfully authorised.

(2) This section does not affect the law relating to part performance, or sale by the court."

There is an obvious difficulty. The "Loan Agreement" (P16), makes no reference to the grant of a mortgage. That was agreed orally.

There is a clear distinction between the borrowing of money and the giving of security for repayment, although both events often occur together. It is not possible to treat the "Loan Agreement" as a sufficient memorandum simply because it records the loan, or forbearance, for which the mortgage was intended to provide security. Is the lack of writing fatal to Epic's claim?

I should interpolate here that although the pleading filed by SM (SM was joined as a defendant after the proceedings were instituted) does not plead the absence of a written memorandum, counsel agreed that I should deal with the case on the basis that the point had been taken.

In the circumstances of this case, in which Epic seeks to encumber SM's interest as registered proprietor of the EH land, I consider that SM is entitled to rely upon non-compliance with s26, even though, by its default, MH is taken not to be relying upon that ground of defence. In these proceedings Epic asserts a right under a contract with MH, a right that must be established before Epic can have a valid claim as against SM. In such circumstances it would seem to follow that SM is entitled to raise defences that were open to MH: cf Voumard, The Sale of Land (7th ed) para 2070.

I return to the question of whether there is a sufficient memorandum of the agreement to satisfy the requirements of s26. It is not necessary for the necessary memorandum to be found in a single document. There is some uncertainty about the circumstances in which a document signed by the party to be charged may be taken to refer to another document in which necessary matters not found in the first document may be found. On one view the document signed must refer to another document, expressly or by implication, before reference can be made to that other document: Thomson v McInnes (1911) 12 CLR
562 esp at 569 Griffith CJ. A later, and more liberal view, is that it is sufficient that the signed document refers to some other transaction, that transaction can then be identified by oral evidence and, if documents constituting that transaction contain the necessary terms, there is a sufficient memorandum: Harvey v Edwards, Dunlop & Co Ltd (1927) 39 CLR 302 at 307 Knox CJ, Gavan, Duffy and Starke JJ. The authorities on the point are reviewed by Hill J in his judgment in ANZ Banking Group Ltd v Widin (1990) 102 ALR 289 at 297-301. In my opinion, it is permissible for me to apply the law as stated in the later High Court decision.

In the present case, the "Loan Agreement" (P16) sufficiently identified the parties, the moneys loaned, and the term of the loan. But what is lacking is a sufficient reference to the agreement to give a mortgage over the EH land as security for the loan. The "Loan Agreement" does not refer to any other document. Can the introductory words "I ... have personally and on behalf of my companies loaned from Epic Feast ..." be taken as a reference to some other transaction, and if so, can the agreement to grant a mortgage be found there in writing?

I consider that the introductory words of P16 can be taken as a reference to the loans or advances previously made, and that in this way reference may be made to the letter of 8 July 1996. The letter (P20 - set out above) relates to the payment made by Epic to Stockport, and does contain a reference to "fresh documentation" to replace the proffered mortgage over the Kangaroo Island land. I consider that "fresh documentation" means a mortgage. It may be that P20 is to be understood as referring to the EH land owned by MH, in view of Mr Jurkovic's evidence that he had never been interested in a mortgage over the Developments land, and that such a mortgage had never been discussed or offered. However, a difficulty in the way of that conclusion is the fact that P20 refers to a loan to Developments, the owner of the lower land.

Moreover, the reference to P20 is a reference to an earlier, and now superseded, arrangement, involving a lesser amount of money (although an amount included in P16).

There is the further difficulty that P20 precedes the agreement of 13 September. The cases suggest that usually the memorandum relied upon will be created after the contract that it evidences. That, however, is not always so. A written offer, by its subsequent oral acceptance, may become a sufficient note or memorandum: Pirie v Saunders (1961) 104 CLR 149 at 151. However, as I have already said, in referring to P20 one is referring to a document that evidences an earlier arrangement, to the same effect in some respects as the agreement or arrangement of 20 September, but still a different or distinct arrangement.

In my opinion it is stretching the authorities too far, and stretching too far the notion of a sufficient memorandum found in connected documents, to call in aid a piece of writing that reflects an earlier and different arrangement.

It gives me no pleasure to so conclude, but regret over the operation of a provision like s26 should not cause the court to stretch the law to breaking point to achieve what might seem a fair result.

I therefore conclude that the requirements of s26 are not satisfied by making reference to P20.

Two other matters should be referred to under this head.

Reference to exhibit P17 (set out above) cannot assist the plaintiff for the reasons just touched upon, as well as because it makes no reference to a grant of a mortgage and the giving of security.

That leaves for consideration a letter tendered as P26. It is written on the usual letterhead, and reads as follows: "9 July, 1996

Mr Peter Jurkovic 1146 Old Port Road ROYAL PARK SA 5014

Dear Peter

RE: SECURITY FOR MONEY OWED TO EPIC FEAST

Thankyou so much for helping us to settle Estcourt House; without your help it wouldn't have happened.

I'm sorry that Keith hasn't had time to talk to you, but as you would realise he has been very busy trying to get settlement today.

I will arrange to get you a mortgage over the Estcourt House development to properly secure all the money that we owe you.

In the meantime please accept this letter as a Charge over the land.

Yours sincerely

(Signed)

MICHAEL C BOWLING FOR & ON BEHALF OF MAWSON KLM HOLDINGS PTY LTD. AND MAWSON KLM DEVELOPMENTS."

The origin of this letter is somewhat mysterious. Mr Jurkovic said that he did not receive it "on or about 9 July 1996" (T66). He thought that he first saw it in about February or March 1997. He found it on his desk one morning, when checking his mail. That was all that he said about the letter.

In the course of evidence there were occasional references to Michael Bowling, the signatory of the letter, as being the son of Keith Bowling. I know that he was not a director of MH, but I have no knowledge of the role that he played in the affairs of that company.

In view of the circumstances in which it first came to Mr Jurkovic's attention, I am not prepared to accept, on the balance of probabilities, that it was written on the date that it bears or with the authority of MH. I make it clear that I do not imply any suspicion about Mr Jurkovic. He volunteered the circumstances set out above. Even if I were to accept it as what it appears on the face to be, there remains the difficulty that this letter also evidences an arrangement other than the arrangement of 13 September 1996, although once again there is the common thread of an agreement to give security.

For these reasons, reference to P17 or to P26 does not supply the necessary written memorandum evidencing the agreement to give security.

Specific enforcement - part performance

The absence of a sufficient written memorandum is not necessarily fatal. Section 26(2) expressly preserves "the law relating to part performance". The law relating to part performance was developed by the Court of Chancery. Its origin appears to be in the notion that equity, or the Court of Chancery, may prevent the use of or reliance upon the requirement for writing when to do so would amount to a form of fraud. The law on this point is usually traced to the decision of the Earl of Selbourne LC in Maddison v Alderson(1883) 8 App Cas 467 at 475-476 where he said:

"... the defendant is really 'charged' upon the equities resulting from the acts done in execution of the contract, and not (within the meaning of the statute) upon the contract itself. If such equities were excluded, injustice of a kind which the statute cannot be thought to have had in contemplation would follow. ... The matter has advanced beyond the stage of contract; and the equities which arise out of the stage which it has reached cannot be administered unless the contract is regarded. The choice is between undoing what has been done (which is not always possible, or, if possible, just) and completing what has been left undone. ... it is not arbitrary or unreasonable to hold that when the statute says that no action is to be brought to charge any person upon a contract concerning land, it has in view the simple case in which he is charged upon the contract only, and not that in which there are equities resulting from res gestae subsequent to and arising out of the contract."

While the rationale of the doctrine of part performance is the prevention of fraud, its entanglement with provisions such as s26 has caused it to be treated at times as an evidentiary principle or rule. But, in my respectful opinion, as is pointed out in Meagher Gummow and Lehane, Equity Doctrines and Remedies (3rd ed) para 2045:

"The principle of part performance is undoubtedly ... a rule of substantive law, not evidence. The principle does not provide a means of proving anything. What it provides is an equity entitling a plaintiff to enforce the provisions of an agreement which would otherwise be unenforceable for want of writing. Where the principle applies, the contract is, of course, proved by oral evidence: but that proof is not itself an application of the principle ..."

There is some doubt about the nature of the acts of part performance that will suffice. I am indebted to Hill J for his judgment in ANZ Banking Group Ltd v Widin (1990) 102 ALR 289 at 301-306 where he thoroughly reviews the cases. I agree with his conclusion that in Australia the possibly more liberal view taken by the House of Lords in Steadman v Steadman [1976] AC 536 has not been approved by the High Court (see in particular Regent v Millett (1976) 133 CLR 679) or applied by State courts. I apply the principle as it is stated by Dixon J in J C Williamson Ltd v Lukey and Mulholland (1931) 45 CLR 282 at 297:

"Equitable relief is obtainable, notwithstanding the Statute of Frauds, by a party who in pursuance of his contract has done acts of performance consistent only with some such contract subsisting ..."

That is, the acts relied upon must be consistent only with some such contract as that alleged. Likewise, in McBride v Sandland (1918) 25 CLR 69 at 78, Isaacs and Rich JJ referred to "...some contract of the general nature of that alleged." In Regent v Millet (supra) Gibbs CJ said (at 683):

"It is enough that the acts are unequivocally and in their own nature referable to some contract of the general nature of that alleged ..."

I turn then to the facts, to enquire whether there are acts performed by Epic, done for the purpose of performing its contract (in the sense of required or permitted by the contract) which point to the existence of a contract such as that alleged ie a contract to give a mortgage or some form of security, as security for the loan referred to in P13.

The first difficulty is the sparsity of acts, subsequent to 13 September upon which Epic may rely, other than the events about one week later when a new transaction was proposed - a loan of $600,000 for 12 months. As part of the proposed new transaction, Epic arranged for the preparation of a mortgage document. Although there is a common thread to the events of 13 September and the events one week later, I do not consider that that is enough. On the latter occasion the parties proposed a new arrangement to replace that of 13 September. I consider that it would be taking the law of past performance further than I, sitting as a single judge, should take it, to treat a proposed new arrangement of a similar type as constituting acts of part performance of an earlier arrangement. There is the further difficulty that that proposed new arrangement would have replaced the arrangement of 13 September if it came into effect.

After that, one is left with nothing by way of part performance other than the two advances of money (made in June and July) and the forbearance to enforce repayment during September.

The mere payment of money has generally not been regarded as a sufficient act of part performance. The payment of money has been treated as equivocal, meaning, I think, referable to a variety of possible arrangements, and not necessarily to a contract such as a contract of purchase: see ANZ Banking Group Ltd v Widin (supra) at 302-303; Meagher Gummow and Lehane (supra) at para 2041. In the present case the past advances of money (even if able to be referred to), and the forbearance to sue, are obviously referable to a mere contract of loan, and cannot be regarded, on the balance of probabilities, as referable to or pointing to an agreement to grant a mortgage or to give some sort of security for the advances made or the forbearance promised: cf Riley v Osborne [1986] VR 193 at 199 Kaye J. There is no act on the part of Epic which leads to the conclusion that there was an agreement on 13 September for the grant of a mortgage or other security to secure the moneys then owing to Epic and/or to Mr Jurkovic.

When one considers the principle that underlies past performance, that of "charging" the defendant upon the equities arising from the acts of part performance, it is difficult to see how past advances can give rise to an equity to support a later promise to give security, even when that later promise is seen as, to some extent, replacing an earlier promise. The same point cannot be made in relation to the forbearance after 13 September, but as to that there remains the problem that mere forbearance to sue for moneys advanced is not of its nature referable to an agreement to give security, and no other act is available that remedies that deficiency.

I therefore conclude, with some regret again, that there are not sufficient acts of past performance on the part of Epic of the oral agreement to grant a mortgage or give security over the EH land, for that agreement to be enforceable despite the lack of a sufficient memorandum in writing.

Equitable priority

Even if Epic were to overcome the difficulties identified by me, a further difficulty would remain.

The equitable interest that Epic relies upon must, to be of any value as against SM, take priority over SM's interest as registered proprietor of the EH land. By taking a transfer subject to Epic's caveat, SM has accepted its interest subject to such interest as Epic might be able to establish, and that must mean subject to such interest entitled to priority over the interest of SM, as Epic might be able to establish.

The option agreement (D30), between MH and SM, gave SM an immediate equitable interest in the EH land, although the interest was a contingent interest: Barba v Gas and Fuel Corporation of Victoria (1976) 136 CLR 120 at 137, Gibbs J. That equitable interest arose on 9 July 1996, when the option was executed.

That equitable interest arose earlier in time than any interest as equitable mortgagee under the agreement of 13 September 1996.

As between competing equitable interests, the general rule is that if the merits are equal, priority in time of creation gives the better equity: Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265 at 276, Kitto J. There is no doubt that this general principle applies to the equitable interest in land conferred by an option. In Barba v Gas and Fuel Corporation of Victoria (supra) Gibbs CJ said (at 137):

"It was held in Morland v Hales and Somerville (1910) 30 NZLR 201 that the equitable interest which passes to the grantee when an option is granted prevails over the rights of a person who, after the grant of the option but before its exercise, has contracted to purchase the land without notice of the existence of the option."

I take Gibbs J to be indicating his acceptance of that decision.

In the light of that, it follows that SM was entitled to exercise its option and claim an interest as registered proprietor free of any later equitable interest created by MH, unless for some reason SM's earlier equitable interest is to be postponed to that later interest.

The failure of SM to lodge a caveat to protect its interest is not, of itself, a ground for deferring its equitable interest to a later equitable interest held by Epic: J & H Just (Holdings) Pty Ltd v Bank of NSW (1971) 125 CLR 546. All the more is this so when one bears in mind two further matters. First, that as registered mortgagee SM could have expected to be given notice of the creation of any further encumbrance over the title of MH: see clause 1(m) of the mortgage and Avco Financial Services v Fishman [1993] 1 VR 90 at 94. Secondly, Mr Jurkovic did not at any stage search the title to the EH land, and so the failure to lodge a caveat had no effect upon his dealings with MH.

The later lodgement of a caveat by Epic, and the registration of a Transfer subject to that caveat, does not deprive SM of the entitlement to priority, for the interest derived from the option over Epic's equitable interest.

It follows from that that, in my opinion, SM's interest as registered proprietor is in any event entitled to priority over the equitable interest claimed by Epic.

Other matters

Mr Jurkovic acknowledged in evidence that he knew that MH had borrowed funds to complete the purchase of the EH land, admitted that he knew or assumed that there was a mortgage over the EH land to the lender. He conceded that he realised that it was usual for a mortgagee's approval to be required before a second mortgage could be granted. However, on the last point his evidence was somewhat equivocal - he was not sure if the mortgagee's consent was a matter of courtesy or a legal requirement: T134.

The registered mortgage held by SM contained a restraint in the usual terms against the grant of a further mortgage. It follows, I consider, that Mr Jurkovic and Epic had constructive notice of that restriction. That might have given SM grounds for restraining the registration of a second mortgage in favour of Epic: see Nia v Phuong (1993) 6 BPR 13141; Fisher and Lightwood's Law of Mortgage (Australian ed) para 10.3. However, no such claim was made by SM in these proceedings. Perhaps that was because the mortgage has now been transferred to another entity, or because SM acquired the land by exercising its option rather than under the mortgage. Either way, no claim was made by SM to restrain registration of a mortgage to Epic, and no submissions were made to me on this point.

Indeed, although Mr Clayton QC for SM claimed the benefit of s26 of the Lawof Property Act, no submissions were made on either side relating to part performance or the circumstances in which it is proper to link one piece of writing to another.

The main argument for SM was that there never was a clear agreement for a mortgage. Mr Clayton QC argued, in particular, that the concluding words of P16 (set out above) were inconsistent with such an agreement. I have, by implication, already rejected that submission. I did so because I accept that P16 was drawn up largely by Mr Jurkovic, who was quite unskilled in legal matters, and because I accept his evidence that he treated this document as providing the basis for the mortgage that, as I accept, Bowling orally agreed to give.

Mr Lunn, counsel for Epic, sought a declaration against MH, in default of pleading, that Epic was entitled to an equitable mortgage over the EH land. It may be that Epic is entitled to such a declaration as against MH. I am prepared to hear further submissions on that. However, Epic is not entitled to a declaration that that interest takes priority over the interest of SM, for reasons given by me.

Conclusion

I decline to grant any declarations in favour of Epic against SM. The effect of my decision is that SM's interest in the land takes priority over (and extinguishes) any equitable interest that Epic had. Accordingly, on its counterclaim SM is entitled to a declaration to that effect and to an order for the removal of Epic's caveat.

I wish to hear the parties as to the terms of the judgment that should be entered.