Farrow Mortgage Services Pty Ltd (in Liquidation) v Victor Tunevitsch Pty Ltd and Tunevitsch, Victor Valentine and Tunevitsch, Virginia Kaye

[1998] TASSC 64

64/1998

PARTIES:  FARROW MORTGAGE SERVICES PTY LTD

(IN LIQUIDATION)

v
  VICTOR TUNEVITSCH PTY LTD

TUNEVITSCH, Victor Valentine
TUNEVITSCH, Virginia Kaye

TITLE OF COURT:  SUPREME COURT OF TASMANIA
JURISDICTION:  ORIGINAL
FILE NO/S:  1383/1991
DELIVERED:  22 May 1998
HEARING DATE/S:  17 March 1998
JUDGMENT OF:  Underwood J

CATCHWORDS:

Mortgages - Mortgages and charges generally - The mortgage - Covenants - For the payment of interest - Compound - Construction of covenant for payment of principal and interest - Simple or compound interest.

Conveyancing and Law of Property Act 1884 (Tas), s90 and Sch5.
Prenn v Simmonds [1971] 1 WLR 1381, applied.
Bakker v Chambri (1986) 4 BPR 9234, referred to.

Aust Dig Mortgages [11]

Mortgages - Mortgages and charges generally - The mortgage - Covenants - For the payment of interest - Other matters - Interest merges in judgment for principal.

Ex parte Fewings In re Sneyd (1883) 25 Ch D 338; General Credits (Finance) Pty Ltd v Brushford Pty Ltd and Others [1975] 2 NSWLR 786, applied.

Aust Dig Mortgages [13]

Procedure - Judgments - Effect of judgments - Merger of cause of action - Judgment for mortgage principal and interest - Claim merges in judgment for principal sum.

Ex parte Fewings In re Sneyd (1883) 25 Ch D 338; General Credits (Finance) Pty Ltd v Brushford Pty Ltd and Others [1975] 2 NSWLR 786, applied.
Aust Dig Procedure [496]

REPRESENTATION:

Counsel:
             Plaintiff:  S P Estcourt
             Defendant:  S B McElwaine
Solicitors:
             Plaintiff:  Bradfields
             Defendant:  Shaun McElwaine

Judgment category classification:
Court Computer Code:  
Judgment ID Number:  64/1998
Number of pages:  7

Serial No 64/1998
File No 1383/1991

FARROW MORTGAGE SERVICES PTY LTD (IN LIQUIDATION) v VICTOR TUNEVITSCH PTY LTD, VICTOR TUNEVITSCH,
VIRGINIA KAYE TUNEVITSCH

REASONS FOR JUDGMENT  UNDERWOOD J

22 May 1998

Introduction

In order to secure the repayment of a loan of $68,250 from the plaintiff to the first defendant, the latter executed a mortgage on 27 July 1989.  To better secure the performance of the covenants in the mortgage, on the same day, the directors of the first defendant, who are the second and third defendants, entered into a guarantee agreement with the plaintiff, guaranteeing the first defendant's performance of the covenants.  The mortgage provided that the principal sum lent was $68,250 and that this sum was to be repaid on 15 June 1990.  The mortgage also provided for the payment of interest.  The defendants did not repay the whole of the principal sum on the due date and the plaintiff commenced these proceedings by the issue of a writ on 30 October 1991 to recover the unpaid principal sum and interest. 

The Application for Summary Judgment

The plaintiff made an application for summary judgment.  The defendants resisted it.  The application was heard by Cox J (as he then was).  In his reasons for judgment published on 21 December 1994 (B65/1994), his Honour found that the plaintiff was entitled to summary judgment for the unpaid capital sum and simple interest thereon at the rate provided for in the mortgage and made an order accordingly.  However, on the hearing of the application, counsel for the plaintiff sought judgment for compound interest on the basis that the terms of the mortgage provided it with an entitlement to capitalise unpaid interest.  Cox J declined to entertain this claim because the statement of claim pleaded an entitlement to recover only simple interest.  His Honour considered that there would be no injustice to the defendants if he gave the plaintiff leave to amend its statement of claim to plead entitlement to recover interest capitalised in accordance with the terms of the mortgage. There followed some further submissions with respect to certain calculations and, on 23 December 1994, judgment was entered for the plaintiff against the defendants in the following terms:

"IT IS THIS DAY ADJUDGED that the plaintiff recover against the defendants an amount of $58,326.83 together with interest and costs as aforesaid AND that the defendants have unconditional leave to defend the balance of the claim."

Pursuant to the leave given, the plaintiff delivered an amended statement of claim on 29 June 1995.  In it, the plaintiff claimed an entitlement to interest on the basis that the terms of the mortgage entitled the plaintiff to capitalise unpaid interest on the 27th day of each month. 

The Issues

At trial, the parties called no oral evidence, but tendered into evidence the mortgage (P1) and the agreement of guarantee (P2).  The pleadings, the documentary evidence and the judgment entered on 23 December 1994, require the Court to determine whether, upon a proper construction of the mortgage, the plaintiff has an entitlement to capitalise interest.  If no, there will be judgment for the defendants.  If yes, the Court is required to determine whether, upon a proper construction of the guarantee agreement, the second and third defendants are obliged to indemnify the first defendant with respect to its obligation to pay such interest.  If no, there will be judgment for the second and third defendants.  Assuming one or both of the first two issues are determined in the plaintiff's favour, the third question is, whether upon a proper construction of the mortgage, the plaintiff is entitled to capitalise the interest monthly, as claimed in the statement of claim, or half yearly.  Again, assuming that the first and/or second issues are determined in the plaintiff's favour, the final question is whether the entitlement to capitalise interest merged in the judgment entered on 23 December 1994, or whether the plaintiff is entitled to recover such interest to 6 March 1998, being an agreed date, close to the date of trial. 

Agreed Facts

The parties agreed on the following facts which will enable judgment to be entered in accordance with the determination of the above issues.  In the event there is a finding that, upon a proper construction of P1 and P2, the plaintiff has an entitlement to compound interest, that entitlement is:

(a)       if the interest is capitalised with monthly rests to 6 March 1998, $136,993.77;
(b)       if capitalised with half yearly rests to 6 March 1998, $114,223.39;

(c)if capitalised with monthly rests to 23 December 1994, and thereafter calculated at the statutory rate of ten per cent to 6 March 1998, $82,413.97; or

(d)if capitalised with half year rests to 23 December 1994 and thereafter calculated at the statutory rate of ten per cent to 6 March 1998, $70,406.98.

The Mortgage

Whether or not the plaintiff is entitled to capitalised interest depends on the terms of the mortgage.  This is a construction point. 

The mortgage starts off helpfully in this respect by providing on the first page:

"Interest shall be payable at the higher rate and the acceptable rate calculated in the manner set out in Clause 12 of this Mortgage."

The next clause deals with how the interest is payable.  It is a little difficult to follow.  In substance, it provides that interest is payable monthly.  Assistance in understanding the first sentence of this clause, which is just over eighty words long, is gained if it is borne in mind that the first payment of interest on the 27th of the month may not be a full month's interest.  The clause reads:

"Monthly on the monthly anniversary of the date of the first payment of interest hereunder during the term of this mortgage computed from the date hereof with the first of such monthly payments to be made on the earlier of the day immediately prior to the first monthly anniversary of the date upon which the advance or any part thereof is first made and the 27th day of the month following the month in which the advance or any part thereof is first made."

Then follows a standard mortgage clause in the following terms:

"In consideration of the above principal sum lent or agreed to be lent at the request of the Mortgagor and the Guarantors named in Clause 25 to the Mortgagor by the Mortgagee the Mortgagor -

FIRSTLY, for the purpose of securing to the Mortgagee the payment in the manner mentioned above of the principal sum and interest on that sum, HEREBY MORTGAGES to the Mortgagee all the estate and interest of the Mortgagor in the land described above."

The mortgage is in two parts.  The first part is in the form prescribed for the purposes of the Lands Titles Act 1980, s72.  It sets out (inter alia) the principal sum lent, the date for repayment and the clauses to which I have just referred.  There follow ten printed covenants, the first of which is a covenant to pay the principal sum "in the manner and at the time above set forth".  The second provides:

"2   That the Mortgagor will in the meantime pay interest on the said principal sum at the rate, in the manner, and at the times above set forth."

After the ten printed covenants there is a reference to "Clauses 11 - 28 annexed hereto."  The annexure is the second part of the mortgage.  It is twelve pages long and contains twenty-eight typed clauses.  Clause 12 (which comprises an even longer sentence than the one to which I have referred) provides for a payment of interest at the rate of 17.25 per cent if the interest is paid on the due day or within the next seven days, and 22.25 per cent if it is not so paid.  Without the assistance of a full stop, cl 12 proceeds in the following terms to make provision for capitalisation of interest at the option of the mortgagor [the first defendant]:

"... provided that the Mortgagor is not otherwise in default hereunder the Mortgagor may elect to have the interest payable hereunder capitalised for the term of the loan and in that event the Mortgagee shall capitalise the interest payable hereunder on each of the respective dates upon which the same is payable by adding such interest to the principal sum outstanding and such capitalised interest shall itself bear interest from the date of such capitalisation at the rate of interest from time to time payable hereunder."

Clause 27 appears on page 11 of the annexure.  Curiously, it appears as the second clause under the heading "Guarantee from the Guarantors" but none of the clauses, including cl 27, make any reference to the guarantee agreement.  Clause 27(3) provides:

"(3)  That interest may be captialized."

By virtue of the provisions of the Conveyancing and Law of Property Act 1884, ss90 and 91 and Schs4 and 5, cl 27(3) is given the following extended meaning:

"2     The words 'interest may be capitalized' shall imply. — In case any interest upon the moneys for the time being owing on this security (inclusive of any interest which may be added to principal by virtue of this present proviso), or any part thereof respectively, or any commission or charges, shall remain unpaid on any half-yearly day of payment, the same may be turned into principal, and shall thenceforth be deemed part of the principal moneys intended to be hereby secured, and shall carry interest in like manner, and the covenant for payment of principal moneys and interest shall extend to all additions to the said principal moneys arising from such capitalized interest, or commission, or charges, and the interest to accrue due thereon, and the premises hereby mortgaged shall stand charged therewith accordingly: And further that, until realized or fully discharged, this security shall be a continuing security for the full amount of the said hereinbefore mentioned indebtedness and liability and all other moneys expressed to be hereby secured, and it shall be optional with the mortgagee whether all or any moneys which may from time to time be paid in or standing to the credit of the account of the mortgagor with the mortgagee shall be applied in or towards satisfaction of the moneys hereby secured or not."

The mortgage, cl 9, reinforces the statutory provisions by providing:

"9 That the covenants and provisos implied by virtue of the Conveyancing and Law of Property Act 1884 by the use of any words herein set forth shall be as fully and effectually implied as if such covenants and provisos were set out fully herein."

On behalf of the plaintiff, Mr Estcourt submitted that the plaintiff's entitlement to capitalisation of interest arose out of the mortgage, cl 27(3).  He then submitted that the reference in the implied provision to six monthly rests was varied by the requirement to pay interest monthly and the reference in cl 12(1) to the capitalisation of interest with monthly rests at the option of the first defendant.  For authority to so vary the implied clause, Mr Estcourt relied upon the mortgage, cl 21(2) which provides:

"(2)      Whenever reference is made to a covenant contained herein such reference shall be deemed to include all covenants agreements conditions and provisions herein expressed or implied by virtue of any statute for the time being in force or howsoever otherwise and to the extent (if any) that the provisions implied herein by any statute now or hereafter in force are inconsistent with any of the covenants herein contained then the covenants herein contained shall prevail to the extent of such inconsistency so far as the statute permits and the statutory provisions are modified accordingly."  [Emphasis added]

It is not as simple as Mr Estcourt submitted. The mortgage, cl 9, in effect sets out verbatim, the implied covenant imported by virtue of the Conveyancing and Law of Property Act. It is difficult to see how, consistent with cl 9, cl 21(2) has effect to impliedly modify the covenant implied by virtue of the Act to substitute for the words "on any half yearly day of payment" the words "on any monthly day of payment".

The terms of this mortgage are to be given their ordinary meaning.  See Prenn v Simmonds [1971] 1 WLR 1381. The mortgage provides for payment of interest every month after the first payment of interest. The first payment of interest is fixed as being the earliest of one day short of a month after the loan was made and the 27th of the month after the month in which the loan was made. The clause authorising capitalisation of interest, expressed by the Conveyancing and Law of Property Act, s90 and Sch5, is, by virtue of the mortgage, cl 9, "fully set out". It provides for capitalisation of interest remaining "unpaid on any half yearly day of payment." There is no inconsistency within the meaning of the mortgage, cl 21, that warrants modification of the statutory provision from half yearly day of payment to monthly day of payment. There is no reason why the mortgage cannot, as does this mortgage, fix one anniversary for the payment of interest and another anniversary for the capitalisation of unpaid interest. Similarly, there is no inconsistency in the mortgage providing one anniversary for capitalisation of unpaid interest at the option of the mortgagor and another anniversary for capitalisation in the case of the mortgagor being in default in the payment of interest.

For the defendants, Mr McElwaine submitted that upon a careful reading of the whole mortgage, it did not provide for any capitalisation of interest at all.  First, Mr McElwaine submitted that the obligation to pay interest arises from the mortgage printed cl 2, which provides:

"2     That the Mortgagor will in the meantime pay interest on the said principal sum at the rate, in the manner, and at the times above set forth."

Mr McElwaine submitted that "the said principal sum" was a reference to $68,250 and not a reference to that sum, together with any unpaid interest.  Prima facie the submission is correct, but printed cl 2 has to be read in conjunction with cl 27(3) which imports the capitalisation of interest clause from the Conveyancing and Law of Property Act.  The implied clause relevantly provides for the capitalisation of interest if:

"... any interest for the time being owing on this security (inclusive of any interest which may be added to principal by virtue of this proviso) ... shall remain unpaid ... the same may be turned into principal and shall thenceforth be deemed part of the principal moneys intended to be hereby secured ...".  [Emphasis added.]

This clause is, in part, a deeming provision.  Thus, interest unpaid for the specified period is deemed to be part of the principal sum in respect of which the mortgage, cl 2, imposes the obligation to pay interest. 

Second, Mr McElwaine submitted that the mortgage, cl 12 (referred to above), sets the rates at which interest is payable.  This is correct.  The rates set out in cl 12 are payable by virtue of the obligation in printed cl 2 to pay "at the rate ... above set forth" and the following words that appear after the principal sum of $68,250:

"Interest shall be payable at the higher rate and the acceptable rate calculated in the manner set out in Clause 12 of this Mortgage."  [Emphasis added.]

By virtue of the deeming provision, interest unpaid for the requisite period becomes part of the principal sum and thus there is no inconsistency, as Mr McElwaine submitted, between expanded cl 27(3) and printed cl 2, requiring payment of interest on the "said principal sum". 

Third, Mr McElwaine submitted that the rate clause (cl 12) calculates the rate "upon the moneys secured or so much as shall from time to time be outstanding"; cl 21(1) defines "moneys secured" to mean "the advance" and, in turn, defines "the advance" to mean "the said principal sum of sixty eight thousand two hundred and fifty dollars".  Thus, it was submitted, that the rate clause applied only to that sum of money and did not extend to include any capitalised interest.  I accept that by virtue of cl 21(1) the reference in the rate clause to "moneys secured" is a reference to "the said principal sum of sixty eight thousand two hundred and fifty dollars".  However, "the said principal sum" can only refer to the sum set out on the first page of the mortgage, and by virtue of expanded cl 27(3), the principal sum is deemed to include any capitalised interest.  Consequently, upon a proper construction of the mortgage, the expression "said principal sum of sixty eight thousand two hundred and fifty dollars" means that sum, together with any capitalised interest.

I accept the following statement taken from the judgment of Young J in Bakker v Chambri (1986) 4 BPR 9234 as a correct statement of the law:

"I believe a Court approaches this type of question of construction on the basis that unless there is a clear agreement to pay compound interest, interest is taken to be simple interest. This proposition is put slightly differently in the authorities, but I believe it amounts to this (see eg Broughton v Rodd (1867) 6 SCR (Eq) 102, 107; Daniel v Sinclair (1881) 6 App Cas 181, 189; Deutsche Bank v Banque des Marchands de Moscou (1931) 4 Legal Decisions Affecting Bankers 293, 295-6; Domaschenz v Stanfield Properties Pty Ltd (1977) 17 SASR 56, 60-61 and Fisher and Lightwood's Law of Mortgage, 9th Edition, p630)."

For the reasons given, I am satisfied that the mortgage, cl 2(3), clearly authorises an entitlement to compound interest calculated on half yearly rests.  It may be, as Mr McElwaine submitted, that the mortgage draws a distinction between "the said principal sum" and "other moneys secured", as the mortgage, cl 21(1), includes in the definition of "moneys secured", "all other moneys payable by the mortgagor to the mortgagee pursuant to the mortgage."  However, it is unnecessary to explore this issue in the light of the conclusion I have reached that the principal sum is deemed to mean the sum of $68,250, together with any interest capitalised in accordance with the mortgage, cl 27(3).

The Guarantee

Mr McElwaine submitted that even if the mortgage imposed a liability on the first defendant to pay compound interest, the terms of the guarantee agreement did not cast that obligation upon the second and third defendants. 

The primary obligation of the second and third defendants is imposed by the guarantee agreement, cl 1, to "make due and punctual payment of the moneys hereby secured as defined in the Schedule hereto as and when the same shall become due and payable".  Relevantly, the guarantee agreement defines "moneys hereby secured" to mean:

"3(i)the sum of Sixty eight thousand two hundred and fifty dollars lent or agreed to be lent by the Mortgagee to the Mortgagor, any further advances made by the Mortgagee to the Mortgagor and all other moneys payable by the Mortgagor to the Mortgagee pursuant to the Mortgage and this Guarantee;

(ii)all moneys advanced or otherwise made available by the Mortgagee to the Mortgagor from time to time pursuant to the Mortgage, any subsequent agreement or other document and from time to time remaining outstanding together with interest thereon;

(iii)...

(iv)...

(v)any other moneys which are now or may hereafter be or become owing or remain unpaid by the Mortgagor to the Mortgagee pursuant to the Mortgage ...".

Mr McElwaine submitted that the guarantee agreement only guaranteed payment of interest on moneys advanced or otherwise made available by the mortgagee to the mortgagor.  I do not accept that construction of the guarantee agreement.  The Schedule, cl 3(i), clearly imposes an obligation to pay (inter alia) $68,250 and "all other moneys payable by the Mortgagor to the Mortgagee pursuant to the Mortgage and this guarantee".  Further, cl 3(v) imposes an obligation to pay any other moneys which may become owing by the mortgagor to the mortgagee pursuant to the mortgage.  These expressions clearly include capitalised interest which I have determined is payable by the mortgagor to the mortgagee pursuant to the mortgage.

Merger in the Judgment dated 23 December 1994?

By the writ and statement of claim in these proceedings, the plaintiff claimed principal and interest due and payable pursuant to the terms of the mortgage, printed cl 2.  Except in so far as leave to defend was given, those proceedings were terminated by the judgment entered on 23 December 1994.  The principle is that unless a contrary intention is expressed in the mortgage, the right to recover principal and interest in the mortgage merges in a judgment for the principal sum.  Thereafter, interest is recoverable at the statutory rate in accordance with the Supreme Court Civil Procedure Act, s165, which is currently ten per centum per annum. In Economic Life Assurance Society v Usborne and Others [1902] AC 147 at 149, Lord Halsbury cited with approval the following passage from Ex parte Fewings In re Sneyd (1883) 25 Ch D 338 at 355:

"When there is a covenant for the payment of a principal sum, and a judgment has been obtained upon the covenant for that sum, it is plain that the covenant is merged in the judgment, and, if there is a covenant to pay interest which is merely incidental to the covenant to pay the principal debt, that covenant also is merged in a judgment on the covenant to pay the principal debt.  Of course a covenant to pay interest may be so expressed as not to merge in a judgment for the principal ; for instance, if it was a covenant to pay interest so long as any part of the principal should remain due either on the covenant or on a judgment."

The above passage was applied in General Credits (Finance) Pty Ltd v Brushford Pty Ltd and Others [1975] 2 NSWLR 786. In that case, application of the stated principle resulted in the claim for interest not merging in the judgment, as the mortgage provided that interest had to be paid "so long as any moneys shall remain owing on the security of these presents or on any judgment or order in which the covenant for payment thereof may be merged".  See also Anderson v Bahrynowski [1964] Tas SR 105; McDonald v Scovie [1980] Qd R 477.

There are no words in the mortgage to indicate that the parties intended that any obligation to pay interest would not merge in any judgment for payment of the principal sum.  I find that, accordingly, the plaintiff is only entitled to recover interest at the statutory rate after the date judgment for the principal sum was entered.

Application of the above findings to the agreed facts would, but for one matter, entitle the plaintiff to judgment against the defendants for $70,406.98.  The remaining matter is a submission made by Mr McElwaine that, as pleaded, the statement of claim raises no cause of action against the first defendant.  I infer from the way the submission was put and the response to it that any judgment against the first defendant is likely to be unsatisfied in any event and therefore the submission had no practical significance.  However, before proceeding to order judgment in accordance with the foregoing, I will need to hear counsel further with respect to this aspect of the matter.