First Trade Consulting Pty Ltd v Kirfield Limited - [2006] WASCA 174

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE COURT OF APPEAL (WA)

CITATION: FIRST TRADE CONSULTING PTY LTD -v- KIRFIELD LIMITED & ANOR [2006] WASCA 174

CORAM: STEYTLER P
McLURE JA
BUSS JA

HEARD: 13 APRIL 2006

DELIVERED : 30 AUGUST 2006

FILE NO/S: CACV 6 of 2006

BETWEEN: FIRST TRADE CONSULTING PTY LTD
Appellant
AND
KIRFIELD LIMITED
First Respondent
REGISTRAR OF TITLES
Second Respondent

ON APPEAL FROM:
Jurisdiction              :  SUPREME COURT OF WESTERN AUSTRALIA
Coram  :MASTER NEWNES
Citation  :KIRFIELD LIMITED - v - FIRST TRADE CONSULTING PTY LTD & ANOR [2005] WASC 277
File No  :CIV 1696 of 2005

Catchwords:

Real property - Caveat - Whether builder arguably entitled to equitable lien - Turns on own facts

Legislation:

Transfer of Land Act 1893 (WA), s 138B

Result:

Appeal allowed

Category: B

Representation:

Counsel:

Appellant:     Mr M M Mony de Kerloy
First Respondent           :     Mr P K Walton
Second Respondent      :     No appearance

Solicitors:

Appellant:     Mony de Kerloy
First Respondent           :     Jackson McDonald
Second Respondent      :     No appearance

Case(s) referred to in judgment(s):

First Trade Consulting Pty Ltd v GRD Kirfield Limited [2006] WASCA 175
GRD Kirfield Ltd v First Trade Consulting Pty Ltd [2004] WASC 158
Hewett v Court (1982) 149 CLR 639
Kirfield Ltd v First Trade Consulting Pty Ltd [2005] WASC 82

Case(s) also cited:

Bomford v Barrett [2002] WASC 304
Butler v Fairclough (1917) 23 CLR 78
Custom Credit Corporation Limited v Chellaston Pty Ltd, unreported; SCt of WA; Library No 930340; 10 June 1993
Custom Credit Corporation Limited v Ravi Nominees Pty Ltd (1992) 8 WAR 42
Deputy Commissioner of Taxation v Corwest Management Pty Ltd [1978] WAR 129
Eades v Reilly, unreported; SCt of WA; Library No 980675; 20 November 1998
H G & R Nominees Pty Ltd v Caulson Pty Ltd (2000) V ConvR 54-630
Halse v Embling, unreported; FCt SCt of WA; Library No 970734; 22 December 1997
Johnson Tiles Pty Ltd v Esso Australia Limited (2000) 104 FCR 564
Kovacic v Elcham, unreported; SCt of NSW; No 2479 of 1996; 2 July 1996
KT & T Developments Pty Ltd v Tay (1995) 13 WAR 363
Morris v Morris [1982] 1 NSWLR 61
Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255
Porter v McDonald [1984] WAR 271
Shirlaw v Taylor (1991) 31 FCR 222
Wilson v Metaxas [1989] WAR 285

STEYTLER P: I agree with McLure JA.
McLURE JA: The appellant appeals from the order made by Master Newnes on 21 December 2005 extending the operation of caveat J264968 until further order. The respondent lodged the caveat on 28 April 2005 over six strata title apartments in a multi‑storey building on the corner of St Georges Terrace and Victoria Avenue, Perth ("the land").
In 2001, the appellant was the registered proprietor of the land. A building contract dated 5 February 2001 between the appellant as proprietor and the respondent as builder provided for the conversion of the building into 108 strata title residential units, a penthouse apartment and five strata title retail apartments. The building contract did not provide the respondent with any security interest in the land (or the strata units).
As a result of disputes between the appellant and the respondent, the respondent suspended work under the building contract in May 2002. In order to enable the building work to proceed, the parties entered into a written agreement described as a Heads of Agreement ("the Heads of Agreement"). Under cl A2 of the Heads of Agreement, the appellant granted to the respondent, and agreed to immediately execute, a second mortgage over the penthouse apartment to secure all moneys owed by the appellant to the respondent arising under or in connection with the building contract. In addition, under cl A4 of the Heads of Agreement, the appellant charged five strata unit apartments (V402, G406, G505, G605 and G804) to secure the payment by 31 October 2002 of future progress payments under the building contract and interest thereon (defined as "the Payments"). On 28 June 2002, the respondent lodged caveats over the penthouse and the five strata title units the subject of the Heads of Agreement ("the original caveats").
The disputes went to arbitration. The appellant was largely successful in an interim award in the arbitration. The respondent was largely successful in an appeal against the interim award heard by a Commissioner of this Court: GRD Kirfield Ltd v First Trade Consulting Pty Ltd [2004] WASC 158. The interim award was recently reinstated by this Court: First Trade Consulting Pty Ltd v GRD Kirfield Limited [2006] WASCA 175.
In January 2005, the appellant requested the respondent to withdraw the original caveats so that the apartments could be sold. The appellant's solicitors advised that their client had entered into a contract to sell the apartments for the total sum of $4,800,000 and, although an amount of

$5,542,411.09 was owing under the first mortgage, the first mortgagee was willing to accept the sale proceeds of $4,800,000 in satisfaction of its debt.

The respondent refused to withdraw the original caveats. The appellant caused a notice to be issued by the Registrar of Titles pursuant to s 138B of the Transfer of Land Act 1893 (WA). The respondent then applied to the Court to extend the operation of the original caveats. The application came before Blaxell J who refused to extend their operation: Kirfield Ltd v First Trade Consulting Pty Ltd [2005] WASC 82. Blaxell J found there was a serious issue to be tried in respect of the respondent's claim to a caveatable interest but found the balance of convenience was overwhelmingly in favour of the appellant in circumstances where the market value of the apartments was less than the amount owing to the first mortgagee under its mortgage. He was satisfied on the evidence that the six apartments the subject of the original caveats were subject to a first mortgage which secured a residual sum of $5,542,411. The appellant had entered into an agreement to sell the six apartments for a total sum of $4,800,000 and the first mortgagee had agreed to accept that amount in satisfaction of the first mortgage debt. It was accepted that the total sale price of $4,800,000 represented the true market value of the apartments. The first mortgagee is not identified in the reasons nor is there any reference to any assignment or discharge of the first mortgage. The priority rules relating to tacking and marshalling were not raised or considered.
After the original caveats lapsed, the respondent lodged the caveat the subject of this appeal ("the further caveat"). The six apartments or units the subject of the further caveat (the "disputed units") had no connection with the security property the subject of the Heads of Agreement. The respondent commenced proceedings for an extension of the operation of the further caveat. The respondent claimed it had an equitable lien over the apartments. It relied on two grounds: first, that it was entitled to an equitable lien in respect of the work and materials provided to the appellant for the construction of the apartments for which work and materials it had not been paid, relying on Hewett v Court (1982) 149 CLR 639; and second, by subsequently encumbering the penthouse for more than its market value, the appellant had arranged its affairs so as to deprive the respondent of the security provided under the Heads of Agreement.
The appellant resisted the respondent's application to extend the further caveats on two grounds: first, that the respondent had no caveatable interest in the disputed units and second, having sold the disputed units the subject of the further caveats prior to the further caveats being lodged, the appellant had no beneficial interest in them. It was said that notice of the respondent's application had been given by the appellant to the purchasers of the units, none of whom had appeared in the proceedings.
The appellant's evidence as to the circumstances of the sale of the disputed units is to the following effect. St George Bank Ltd financed the renovation project the subject of the building contract and was the original first mortgagee. In response to pressure from St George Bank in late 2002, the appellant arranged with certain investors in the project to purchase the disputed units thereby releasing funds to the appellant to enable it to reduce its debt to St George Bank. All apartments were acquired by the investors at full list price. All or most of the investors had made their investment in the project through the Victoria Centre Unit Trust, the trustee of which was Supreme Asset Pty Ltd. The transactions followed a common form of which Unit G401 was an example. That was sold on 31 October 2002 to Supreme Asset Pty Ltd as trustee of the Victoria Centre Unit Trust for $510,000. The sum of $385,000 was required to discharge the first mortgage to St George Bank. The sum of $399,000 was borrowed from another financier of which $385,000 was paid to St George Bank. The balance of the purchase price (in this case some $125,000) was used to pay out the loan to the investors who applied it in reduction of the purchase price. Although each strata unit was secured to the full extent of the appellant's indebtedness to St George Bank, it appears that, in the usual way, St George Bank had identified the amount it would accept to discharge the first mortgage from an individual strata unit. The sales of the disputed units took place between September 2002 and April 2003. However, the appellant remained registered on the titles as proprietor of the disputed units.
It emerges from the Master's reasons that the identity of the first mortgagee changed before the sale of the security property the subject of the Heads of Agreement (and before Blaxell J refused to extend the original caveats). The Master states in his reasons that some time before January 2005, the original first mortgage held by St George Bank Ltd over the apartments the subject of the original caveats was discharged and replaced by a mortgage to Ben Vorlich Investments Pty Ltd ("Ben Vorlich"). Ben Vorlich was associated with the appellant. The Master also noted that there was no explanation from the appellant as to why the St George Bank mortgage was replaced or how the apartments over which the original caveats had been lodged subsequently came to be mortgaged to Ben Vorlich for more than their market value.
He continued (at [65]):
"[F]or reasons which are currently far from clear, the security which [the respondent] was given in relation to the building contract to persuade it to resume work in July 2002 was rendered worthless because [the appellant] subsequently mortgaged it for more than its value, while at the same time there remained substantial equity in the balance of the apartments in the development. On the basis of the material before me it appears that the way in which [the appellant] arranged its affairs was not inevitable or necessary."
If the Master was correct and the St George Bank first mortgage had been discharged, priority issues would have arisen. However, at no stage in the proceedings before Blaxell J or the Master did the respondent or the appellant provide clear evidence of all the relevant facts upon which an assessment of priority depends. Upon questioning by this Court, counsel for the appellant informed the Court from the bar table the first mortgage originally held by St George Bank was not discharged but was assigned on two occasions, the second assignment being to Ben Vorlich and that Ben Vorlich may have "tacked" amounts owed to it by the appellant onto the indebtedness secured by the first mortgage at the time of the assignment. Further, the first mortgage was registered on each strata title unit owned by the appellant and secured the full amount of the appellant's indebtedness from time to time to the first mortgagee. Thus, the first mortgagee had security over all of the strata units owned by the appellant whereas the respondent's security under the Heads of Agreement was limited to six apartments. In those circumstances, the doctrine of marshalling may also have applied. However, at no stage has the respondent claimed priority and there is insufficient evidence to determine the respondent's priority position vis‑a‑vis the first mortgagee or its assignees, including Ben Vorlich, applying the priority rules relating to tacking (in particular the rule in Hopkinson v Rolt which prevents tacking where the prior mortgagee has notice of the interest of the subsequent mortgagee) and marshalling. It is necessary to put those matters aside.
The Master, correctly in my respectful opinion, rejected the respondent's first ground that, as a builder, it was entitled to an equitable lien over the property on which it carried out construction work. There is no challenge to this aspect of the Master's decision nor to the correctness of the test he applied (being whether there was a serious question to be tried and where the balance of convenience lay).
The Master's conclusion that the second ground raised a serious question to be tried is affected by a misunderstanding of the facts and what appears to be a change in the scope of the respondent's claim. Both parties to the appeal proceeded on the basis that, for the purposes of the appeal, the statement of claim correctly states the facts and the case advanced by the respondent. Those facts are as follows. The project the subject of the building contract was financed by advances from St George Bank to the appellant which were secured by a first registered mortgage over the land and subsequently over the strata titles that issued as a result of the registration of the strata plan. The strata plan was registered on 11 March 2003 following which new certificates of title for each apartment issued. The appellant was registered as the proprietor of each of the strata lots on the strata plan.
Paragraphs 23 and 24 state:
"First Transfer of First Mortgage
23.On or about 30 April 2003 St George transferred its estate and interest in the First Mortgage over the apartments the subject of the Original Caveats to Bank of Western Australia Limited ('BankWest').
Second Transfer of First Mortgage
24.On or about 18 June 2004 BankWest transferred its estate and interest in the First Mortgage over the apartments the subject of the Original Caveats to [Ben Vorlich]."
The respondent's claim concerning the defeat of its security under the Heads of Agreement is in the following terms:
"33.After the making of the Heads of Agreement and without the knowledge of the [respondent], [the appellant] arranged its affairs such that:
(a)St. George discharged the First Mortgage insofar as it effected, inter alia:
(i)the Disputed Units [the units the subject of the further caveat];
(ii)apartment G806, being Lot 101 … in Certificate of Title Volume 2518 Folio 401 ('Lot 101').
(b)new mortgages were registered against the titles to the Disputed Units and Lot 101 ('the New Mortgages') in favour of various financial institutions to secure the repayment of advances made by those financial institutions;
(c)the sums secured by the New Mortgages were less than the value of the Disputed Units [Particulars supplied];
(d)the [appellant] did not apply the whole of the funds advanced on the security of the New Mortgages in reduction of the sum due under the First Mortgage;
(e)by no later than 31 December 2004, the sum secured by the First Mortgage was greater than the value of the apartments the subject of the Original Caveats [the residual sum secured by the first mortgage was $5,542,401 and the value of the apartments was $4.8 million];
(f)by no later than 31 December 2004 Ben Vorlich agreed to accept the sum of $4,800,000.00 in full and final satisfaction of the sum due under the First Mortgage;
(g)on or about 16 May 2005 Ben Vorlich discharged the apartments the subject of the Original Caveats from the First Mortgage.
34.The manner in which the [appellant] arranged its affairs referred to in paragraph 33 above was not inevitable or necessary.
Particulars
(a)The [appellant] could have sold the Disputed Units and Lot 101 and applied the whole of the net proceeds of sale in reduction of the sum due under the First Mortgage;
(b)The [appellant] could have applied the whole of the funds advanced on the security of the New Mortgages in reduction of the sum due under the First Mortgage;
(c)Further particulars may be provided prior to trial.
35.The effect of the arrangements referred to in paragraph 33 above was to deprive the [respondent] of the security envisaged by the Heads of Agreement for the payment by the [appellant] to the [respondent] of the monies to which the [respondent] was or may become entitled under or in connection with the Building Contract alternatively to diminish such security.
36.Further or alternatively, the [appellant] knew or should have known that the effect of the arrangements referred to in paragraph 33 above would be to deprive the [respondent] of the security envisaged by the Heads of Agreement for the payment by the [appellant] to the [respondent] of the monies to which the [respondent] was or may become entitled under or in connection with the Building Contract alternatively to diminish such security [Particulars supplied].
37.In the premises the [appellant] would be acting unconscientiously or unfairly if it was to dispose of the Disputed Units which are the subject of the [further] Caveat without the consent of the [respondent] or the liability of the [appellant] to the [respondent] under or in connection with the Building Contract having been discharged."
It is apparent from the statement of claim that the sole basis of the respondent's complaint is that the appellant did not apply the whole of the net proceeds of sale of the disputed units and Lot 101, or the whole of the funds advanced on the security of the New Mortgages, in reduction of the sum secured under the first mortgage. The appellant's evidence as to the circumstances of the sales of the disputed units appears to be the source of the allegations in par 33 of the statement of claim. Counsel for the respondent conceded that there was no claim that the appellant acted for an improper purpose; it relies solely on the effect of failing to pay these amounts in reduction of the sum secured under the first mortgage. The respondent's claim is not based on the transfer of the first mortgage to Ben Vorlich or any increase in indebtedness secured by the first mortgage. These are the matters on which the Master relied for his conclusion that there was a serious question to be tried which justified the extension of the further caveat. It is necessary for this Court to consider the respondent's claim as currently formulated.
It is clear from the Heads of Agreement that the parties intended the security to be confined to the penthouse and the units nominated therein. Clause A4 materially provides that the appellant:
"Hereby charges as beneficial owner of the units specified in the Schedule … (the 'Mortgaged Units') to secure the due and punctual payment by the Owner to the Builder of the Payments. Upon the making of the Payments the Builder is to release this security. The Owner must not further mortgage or encumber any of the units. The Owner agrees that the Builder may lodge a subject to claim caveat to protect its interest hereunder.
Subject to the prior payment in full of all monies owing by the Owner to the St George Bank, approximately twenty five million dollars … , the proceeds from the sale of the Mortgaged Units will be paid to the Builder in satisfaction of the Payments … "
The Heads of Agreement also provided for a substitute security in the event that any of the Mortgaged Units were sold before 31 October 2002. Blaxell J, correctly in my respectful opinion, rejected the respondent's argument that the appellant could not remove the original caveats unless it provided substitute security by way of other strata title apartments of equivalent value.

Moreover, the Heads of Agreement makes no express or implied provision requiring the appellant to pay the full amount of the net price received from the sale of other (unsecured) apartments, or the full amount advanced by way of secured refinancing on sale, in reduction of the indebtedness secured by the first mortgage. Indeed, it is to be expected that in ordinary commercial circumstances a person in the appellant's position would retain any surplus funds that were not required to effect the discharge of the first mortgage in order to ensure its continuation as a going concern, including the payment of its liabilities.

The evidence shows that the relevant transactions relating to the disputed units occurred between September 2002 and April 2003. Practical completion of the project did not occur until September 2002. In this case, the arm's‑length financier and first mortgagee, St George Bank, agreed to discharge its first mortgage on the disputed units for a sum below the full amount of the debt secured and the sale price of the unit and the amount secured by the subsequent financier. The evidence supports an inference that St George Bank determined the amount it required in order to discharge the first mortgage from individual apartments, no doubt having regard to its assessment of its entire security position from time to time. The fact that the security position had changed by the time the assignee Ben Vorlich sold the security property in 2005 provides no support for the respondent's claim. I see no arguable basis for a claim that the appellant's failure to apply the surplus funds from the sale of the disputed units in reduction of the amount secured by the first mortgage was unconscientious so as to give rise to an arguable claim of an equitable lien or other proprietary interest in the units. Further, I see no evidential foundation for any other arguable proprietary claim to the disputed units.
For these reasons, I am satisfied that the respondent's claim is unarguable and the further caveat ought not to have been extended. In these circumstances, it is unnecessary to address matters going to the balance of convenience, including matters arising out of the reinstatement of the interim award. I would uphold the appeal and set aside the order made by Master Newnes on 21 December 2005 extending the further caveat.
BUSS JA: I agree with McLure JA.