Gogetta Equipment Funding Pty Ltd v Mark and Liz Pty Ltd
[2018] VSC 91
•1 March 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S CI 2016 05036
| GOGETTA EQUIPMENT FUNDING PTY LTD (ACN 124 102 647) | Plaintiff |
| v | |
| MARK & LIZ PTY LTD (ACN 165 166 290) | Defendant |
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JUDGE: | LANSDOWNE AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 26 June 2017; further evidence and submissions to 14 February 2018 |
DATE OF JUDGMENT: | 1 March 2018 |
CASE MAY BE CITED AS: | Gogetta Equipment Funding Pty Ltd v Mark & Liz Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2018] VSC 91 |
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CONTRACT – Whether standard terms in a separate unsigned document incorporated into a signed contract – If so, whether the terms create a charge or only an obligation to give one on request – held that terms incorporated and created a charge – Ange v First East Auction Holdings Pty Ltd [2011] VSCA 335 applied.
PRIORITIES – Contest between a charge first in time given for equipment finance and later equitable mortgage given for business lending – Which is the ‘better equity’ – Comparison of conduct of each lender – Both lenders found to have been derelict to some degree – The charge first in time nevertheless postponed because the giving of it was not critical to the credit, whereas the grant of the mortgage was critical to the subsequent lending and this was reflected in the conduct of the respective lenders and documentation of the interests – Clark v Raymor (Brisbane) Pty Ltd [No 2] [1982] Qd.R. 790 considered.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr W H C Forrester | Results Legal Solutions |
| For the Defendant | Mr D Williams QC | Conlan Cummings Lawyers |
TABLE OF CONTENTS
Introduction and summary............................................................................................................... 1
Competing claims and procedural history.................................................................................... 1
Plaintiff’s claim.............................................................................................................................. 1
Defendant’s claim.......................................................................................................................... 2
Procedural history........................................................................................................................ 3
Issues.................................................................................................................................................... 4
The plaintiff’s charge......................................................................................................................... 5
Admissibility of the evidence..................................................................................................... 5
Incorporation of the Standard Terms and Conditions............................................................. 6
Evidence relating to incorporation................................................................................... 8
Legal principles of incorporation and application to these facts............................... 10
Construction of clause 6.8 of the Standard Terms and Conditions..................................... 12
Conclusion................................................................................................................................... 12
Priority of the interests.................................................................................................................... 13
Legal principles........................................................................................................................... 13
Parties’ submissions................................................................................................................... 14
Defendant’s claim.............................................................................................................. 14
Plaintiff’s claim.................................................................................................................. 16
Discussion.................................................................................................................................... 16
Chronology......................................................................................................................... 16
Comparison of conduct.................................................................................................... 22
Conclusion as to the ‘better equity’................................................................................ 27
Conclusion and orders.................................................................................................................... 28
HER HONOUR:
Introduction and summary
This dispute concerns the surplus proceeds of sale of land known as 12 McGuire Court, Greenvale formerly owned by Mr John Ruffo (the Property). The Property was sold at auction on 24 April 2016. After payment to the first registered mortgagee, Pepper Finance Limited, and costs of sale, $76,862.15 in funds remained. The plaintiff and the defendant each claim the whole of those funds.
For the reasons that I now set out in detail I have concluded that the plaintiff has made out its charge and so its claim to the funds, but its charge should be postponed to the equitable interest of the defendant. As the funds will be insufficient to meet the defendant’s interest let alone both, the whole of the funds should be paid to the defendant.
Competing claims and procedural history
Plaintiff’s claim
John Ruffo formerly conducted a business through his company JV Produce Australia Pty Ltd, under the trading name JV Produce. Mr Ruffo was the sole director and shareholder of that company from its inception on 17 September 2014 until it was placed into external administration and then wound up by order of this Court made 8 June 2016.
The plaintiff provides equipment funding to small and medium businesses by purchasing the equipment a customer wishes to lease from it and then renting that equipment to the customer. Mr Ruffo entered into rental agreements with the plaintiff in respect of the following equipment from the plaintiff on the following dates:
Date
Item
6 November 2014
2007 Toyota Forklift
7 November 2014
2006 Mercedes Benz Sprinter
7 November 2014
2005 Toyota Hilux SR Ute
4 February 2015
2007 Mercedes Benz C280 Avantgarde AMG Sedan
10 February 2015
2011 Mercedes Benz Sprinter
Mr Ruffo is identified on each of these agreements as ‘the Hirer’, said to be trading as JV Produce. The plaintiff claims that pursuant to the standard terms and conditions of the rental agreements entered into on these dates Mr Ruffo granted the plaintiff a charge over all his property, both real and personal.
Mr Ruffo had defaulted under each of the rental agreements by July 2015, and was in permanent arrears under all but one of agreements from May 2015. The plaintiff gave him a ‘final notice’ for each agreement by letter dated 28 October 2015. The plaintiff subsequently lodged a caveat over the Property, registered on 26 November 2015, claiming an interest dating from 6 November 2014 by way of the agreements.
Mr Ruffo only became the registered proprietor of the Property on 31 December 2014 i.e. after the date of the first three rental agreements. The plaintiff does not pursue its initial claim to a charge over the Property in respect of these first three rental agreements. The plaintiff claims the sum of $84,422.70 repayment of principal under the final two rental agreements dated respectively 4 February 2015 and 10 February 2015, plus interest. Interest as at the date of trial totalled $3,212.17.
Mr Ruffo became bankrupt on 21 June 2016. The sale of the Property settled on 18 August 2016. The surplus funds ($76,862.15) have been since that date held in the trust account of the solicitors for Mr Ruffo on the sale, who are also the solicitors for the defendant. I was informed at the trial that as at that date the funds were now in the order of $79,000. Prior to the commencement of the proceeding, the trustees of Mr Ruffo’s bankrupt estate were put on notice of the parties’ competing claims and indicated that they did not wish to be heard.
Defendant’s claim
The defendant claims an interest as equitable mortgagee pursuant to an unregistered mortgage given by Mr Ruffo over the Property, which is dated 1 June 2015 but said to have been executed by Mr Ruffo on 29 May 2015. The mortgage secured an advance to JV Produce Australia Pty Ltd in the sum of $80,000, and provided for monthly interest payments commencing 1 July 2015. The solicitors for the defendant did not register the mortgage, but promptly lodged a caveat giving notice of it. The caveat was registered on 3 June 2015. At that time there was no notification on the Register by way of caveat of the interest claimed by the plaintiff.
The principal sum of $80,000 included a pre-existing debt of $30,000 owed under an earlier loan from the directors of the defendant, Mark and Elizabeth Dohrmann, to Mr Ruffo personally. A further $50,000 was advanced pursuant to the loan agreement between the defendant and Mr Ruffo’s company. As well as security over the Property, Mr Ruffo gave the defendant a personal guarantee for the full amount of $80,000. Mr Dohrmann in his affidavit has provided alternative calculations of principal and interest owing, depending on whether the principal is regarded as $80,000 or $50,000. On either calculation, the amount now owing exceeds the available surplus funds. No issue was taken by the plaintiff with reliance by the defendant on the principal as recorded in the mortgage i.e. $80,000. In the absence of any objection, and given that this is the advance secured by the mortgage, I will proceed on the basis that the defendant’s equitable mortgage secures the sum of $80,000 plus interest.
The defendant’s evidence is that it has not received any payment of interest or principal pursuant to the loan agreement or mortgage from any person. The defendant claims the whole of the principal sum of $80,000, together with interest payable under the mortgage. As at 17 March 2017 the interest is said to be in the sum of $67,200. Accordingly, as at that date, the amount claimed by the defendant was $147,200, which exceeds the amount of the surplus funds. I assume that the defendant’s claim still exceeds the surplus funds as at today’s date.
Procedural history
By agreement between the plaintiff and the defendant, the plaintiff commenced this proceeding by originating motion filed on 9 December 2016, joining the defendant as the sole defendant. I made procedural orders by consent on 6 March 2017, which orders also made provision for notification of the proceeding to the trustees of the bankrupt estate of Mr Ruffo. The orders permitted the trustees to seek to be heard. I made those orders because although the trustees had been notified of the disputing claims, it was unclear at that time whether they had been notified of the commencement of the proceeding.
The trustees subsequently confirmed by letter dated 22 March 2017 that they did not wish to be heard in the proceeding or be joined to it as parties but that if there were surplus funds remaining after determination of the competing claims of the plaintiff and the defendant, those surplus funds should be paid to the bankrupt estate.
The proceeding was referred to me for hearing at trial by his Honour Justice J Forrest and I heard it at trial on 26 June 2017. The trial proceeded by way of untested and un-contradicted affidavit evidence and submissions. In other words, no witness was cross–examined, and there is no evidence from either party contradicting the evidence in the other’s case. I apologise for the delay in consideration following the hearing. Once I was able to commence that consideration I identified a potential lacuna in the evidence in the plaintiff’s case, not identified at trial, and permitted further evidence and submissions. The plaintiff filed a further affidavit and made further written submissions, and the defendant further written submissions.
Given the small quantum of the amount in issue, in the procedural orders that I made on 6 March 2017 I reminded the parties of their obligations pursuant to s 22 of the Civil Procedure Act 2010 to keep costs proportionate. Prior to the trial I required them to exchange costs estimates. According to those estimates, the parties’ combined costs up to and including the trial totalled $73,811.98. It can be observed that these combined costs approximate the amount in dispute.
Issues
There is no dispute as to the existence of the defendant’s charge. Nor is there any dispute that, if the plaintiff has made good its charge, its interest predates that of the defendant. Neither party disputes the calculation of the amount sought by the other. Accordingly, the issues are as follows:
(a) Has the plaintiff established its charge?
(b) If so, which of the interests should take priority, given that the plaintiff’s interest is first in time?
The plaintiff’s charge
The plaintiff relies on a charging clause in what is said to be the standard terms and conditions of the plaintiff’s rental agreements. The defendant took initial objection to the admission into evidence of these standard terms. If that objection was good, the plaintiff’s case would fail at the outset for want of evidence of any charging clause. I ruled on the objection at the trial, with brief oral reasons. I now elaborate those reasons.
Admissibility of the evidence
I allowed the objection in part, striking out paragraph 15 of the affidavit of Chloe Cameron sworn 30 November 2016 (Ms Cameron’s affidavit), by which she deposed that the rental agreements ‘were subject to the plaintiff’s standard terms and conditions version 5’. I accept the defendant’s submission that Ms Cameron’s evidence to this effect is not admissible in the absence of any personal knowledge by her of the plaintiff’s dealings with Mr Ruffo. In the absence of such personal knowledge, the paragraph purports to state a conclusion of law.
I did not, however, exclude the evidence in the following paragraph of Ms Cameron’s affidavit of a document she exhibits bearing the letterhead of the plaintiff and entitled ‘Rental Agreement Standard Terms and Conditions’, which bears the footer ‘Version 5.0-22/07/2014’ (Standard Terms and Conditions).[1] It follows from my ruling on paragraph 15 that Ms Cameron cannot say that this document was incorporated by reference into the documents signed by Mr Ruffo, but I consider that by her evidence that she is a, or the, Risk and Audit Officer of the plaintiff, Ms Cameron has qualified herself to give evidence of documents used by the plaintiff in its dealings with customers generally.
[1]Affidavit of Chloe Cameron sworn 30 November 2016, Exhibit CC-8 (Ms Cameron’s Affidavit).
The defendant’s submission is that there is no evidence that links the Standard Terms and Conditions with the documents Mr Ruffo signed, and so the Standard Terms and Conditions are irrelevant and inadmissible. I ruled against this objection on the basis that the defendant did not object to Ms Cameron’s evidence of the documents that Mr Ruffo agrees he signed, and the February signed documents each contain a reference to a document described as ‘the Standard Terms and Conditions (Version 5.0)’. The defendant’s objection as to connection with the signed documents goes in my view to weight only. It is a matter for the Court whether or not the plaintiff has proved that the documents admittedly signed by Mr Ruffo included by reference the Standard Terms and Conditions.
Incorporation of the Standard Terms and Conditions
I now turn to that issue. Before I do so, it is important to record the receipt of a further affidavit in the plaintiff’s case, and further submissions by both parties in response to an email sent by the Court to the parties on 24 January 2018. I caused that email to be sent because the text on the final page of the copy of the 10 February 2015 agreement in evidence is quite hard to read and in preparation of these reasons I saw for the first time that the two relevant rental agreements bear different version numbers. Neither of these issues was the subject of any comment or submission at the hearing.
The email reads as follows:
Dear Practitioners,
Her Honour has asked me to contact you to advise that she will be in a position to deliver her reasons shortly. She apologises that she was unable to do so earlier.
In the course of preparation of her reasons, her Honour has noted that the relevant rental documents signed by Mr Ruffo (Exhibits CC-5 and CC-7) to Ms Cameron’s affidavit have in their footers different version numbers. Accordingly, it may not be possible to infer that the text on the final page, on which the plaintiff relies to show incorporation of the standard terms and conditions in CC-8, is identical. The final page of CC-5 appears complete and is legible, but the final page of CC-7 appears to have some sections either redacted or obscured, and is also very hard to read.
As this issue was not addressed at the hearing, her Honour will give the plaintiff the opportunity to supply a replacement for CC-7 (verified on affidavit) in which the final page is complete.
The Court will also give the parties the opportunity to make short further written submissions on the issues identified in this email, if they wish.
The plaintiff is directed to supply to the Court and to the defendant any replacement copy of CC-7 (verified on affidavit) on which the plaintiff relies, and any short further written submissions relating to incorporation of the standard terms and conditions in CC-8 into CC-7, by 7 February 2018. The defendant may supply responsive short written submissions by 14 February 2018. If further time is required, please let me know as soon as possible.
Kind regards …
In response to that email, the plaintiff filed a further affidavit, being an affidavit of Elton Grace sworn 5 February 2018, and further submissions. The defendant filed responsive submissions. The defendant contends that the plaintiff has gone beyond what was permitted by the leave afforded in the email in both its further affidavit and its submissions. The defendant’s submission is that the only matter on which further evidence was permitted was the supply of a replacement for the agreement dated 10 February 2015 in which the final page is complete. It follows in the defendant’s contention that the permitted submissions were similarly limited in so far as they rely on evidence. The defendant takes no objections to further legal submissions by the plaintiff as to incorporation by reference.
The plaintiff sought to file reply submissions, but I refused that leave because I consider that the costs that would be thereby caused (not just to the plaintiff, as the defendant would incur perusal costs), when added to the costs already incurred, would be disproportionate to the quantum and issues in the case.
On reflection, I can see that the description in the email of the scope of permitted further submissions could be read as inviting submissions on issues other than the text of the 10 February 2015 agreement. However, I accept the defendant’s submission that the permitted further evidence was plainly limited to a replacement copy of the agreement dated 10 February 2015 in which the final page is complete. Leave was not given for further evidence as to the versions of the rental agreements or incorporation therein of the Standard Terms and Conditions, such as the evidence Mr Grace seeks to give at paragraphs 14-16 of his affidavit. It follows that to the extent the plaintiff’s further submissions depend on evidence (as opposed to legal principles), they were only permitted in relation to the replacement copy of the agreement dated 10 February 2015.
Accordingly, I accept the defendant’s submission that the only admissible portions of Mr Grace’s affidavit are the qualifying paragraphs 1-3, and the paragraph that exhibits a colour version of the agreement dated 10 February 2015. I also agree that the plaintiff’s further submissions should be confined to paragraphs 1-2, 14-17 and 19.
I now consider the evidence relating to incorporation, including the replacement copy provided of the 10 February 2015 agreement.
Evidence relating to incorporation
The starting point is that Mr Ruffo did not sign the Standard Terms and Conditions themselves, although he signed the various rental agreements. His evidence is that he was not told by any of the plaintiff’s representatives that the agreements contained clauses giving security.[2] He does not say, although plainly he had the opportunity to say if this was the case, that he never received a copy of the Standard Terms and Conditions or had never read them.
[2]Affidavit of John Ruffo sworn 20 March 2017 [7] (Mr Ruffo’s affidavit).
Mr Ruffo agrees that he signed the documents exhibited by Ms Cameron in respect of each of the last two rental agreements.[3] The title of each document is ‘GoGetta Rental Agreement’. Under that heading, the following appears:
Rental Agreement and Tax Invoice
ABN 88 124 102 647
The Schedule
[3]Ibid, and Ms Cameron’s affidavit, Exhibits CC-5 and CC-7.
I accept the submission of the plaintiff that although each of these signed documents is entitled an ‘agreement’ it is sub-titled as a schedule, thereby implying that it is a schedule to a larger document.
The plaintiff relies on the text on the final page of the relevant agreements/schedules to establish incorporation of the Standard Terms and Conditions. The exhibited copy of the document signed by Mr Ruffo relating to the Mercedes Benz Sedan is not dated, but according to the uncontradicted evidence of Ms Cameron, which I accept, it was returned signed by Mr Ruffo on 4 February 2015.[4] The document is noted in its footer to be ‘Version 5.4 - 4/2/2015’. The relevant text in the agreement of 4 February 2015 (Version 5.4) reads:
The Hirer and each and every Guarantor (where applicable) acknowledges that it has, prior to signing this agreement, read the provisions of the Standard Terms and Conditions (Version 5.0) and having had the opportunity to obtain legal advice in respect of that document, that it understands and agrees to be bound by them. This contract will be governed by the Standard terms and conditions and in the event of any inconsistency between the Important Information set out on this document and the standard terms and conditions, the standard terms and conditions shall prevail.
[4]Ms Cameron’s affidavit, [13].
The document signed by Mr Ruffo relating to the Mercedes Benz Sprinter is dated 10 February 2015. It is noted in its footer to be ‘Version 5.3 – 24/12/2014’. The text on the final page of the copy of the agreement dated 10 February 2015 in evidence at the hearing is blurred and portions of it are obscured. The text in the colour replacement agreement dated 10 February 2015 is no more complete than that which appears in the black and white version earlier in evidence, but it has been reproduced at a larger scale and so is slightly less blurred, and slightly easier to read.
The readable text in the same portion of the agreement dated 10 February 2015 reads:
agreement, read the provisions of the Standard Terms and Conditions (Version 5.0) and having had the opportunity to obtain legal advice in respect of that document, that it understands and agrees to be bound by them. This contract will be governed by the Standard terms and conditions and in the event of any inconsistency between the Important Information set out on this document and the standard terms and conditions, the standard terms and …[illegible]
I consider that notwithstanding the different version numbers of the two agreements, it is a fair inference that the whole paragraph in the agreement dated 10 February 2015 is in the same terms as that which appears in the same portion of the agreement dated 4 February 2015, and that both refer to the Standard Terms and Conditions in evidence, which are identified in the footer as ‘Version 5.0-22/07/2014’. Although this can only be seen in the documents themselves, and not from the portions as quoted in this judgment, the text that can be read in the 10 February 2015 agreement begins in the same position on the page as the text in the 4 February 2015 agreement (the word ‘agreement’ begins a line in both). Further, the text in each is in the same terms (including containing the same capitalisation). The only difference that I could ascertain between the two versions of agreement is in the form of the text in item 8, which is not material to the issue of incorporation.
Even restricting the relevant text in the 10 February 2015 agreement to that which can be read in that agreement alone, in my view it sufficiently records that the person signing, Mr Ruffo, acknowledges that he has read the Standard Terms and Conditions in Version 5.0; has had the opportunity to get legal advice in respect of them; and understands them and agrees to be bound by them. The portion acknowledging that the Standard Terms and Conditions shall prevail in the event of any inconsistency between them and the signed document does not appear in the readable text in the 10 February 2015 document, but that is not material as no such inconsistency is here relied upon.
The defendant submits that I cannot be satisfied that the Standard Terms and Conditions in evidence, which bear the description ‘Version 5.0-22/07/2014’ are the ‘Version 5.0’ referred to each of the signed documents in the absence of evidence to that effect. I do not accept this submission. There is nothing to suggest that there are any other standard terms that might apply, and I think it is a fair inference from the Version number that the Standard Terms and Conditions in evidence are those referred to in the rental agreements.
Legal principles of incorporation and application to these facts
Counsel for the plaintiff has helpfully summarised in the plaintiff’s further submissions relevant authorities as to incorporation of standard terms and conditions by reference to them in a signed document. The defendant takes no issue with this summary. In Ange v First East Auction Holdings Pty Ltd,[5] a decision of the Victorian Court of Appeal, Sifris AJA, with whom Neave and Tate JJA agreed, upheld the judgment of a trial judge that general auction conditions which were not attached to a signed agreement had nevertheless been incorporated into the agreement by reference. A significant factor tending to that conclusion was that the paragraph of the agreement immediately above the signature of the consignor stated that the agreement was subject to the general conditions and that the consignor had read and accepted those conditions. That is the same situation as in this case. Sifris AJA also considered, as had the trial judge, whether the auction house had taken reasonably sufficient steps to bring the general conditions to the attention of Mrs Ange, and held that it had. In the course of that discussion, Sifris AJA considered Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd[6] (Maxitherm) an earlier decision of the Court of Appeal, in which the Court had left open the possibility that ‘the inclusion of an unusual term, at least in an unsigned document, may require its proponent to take special steps to bring it to the attention of the other party, for otherwise it may not be reasonable to assume consent to the term’.[7]
[5](2011) 284 ALR 638; [2011] VSCA 335.
[6][1998] 4 VR 559.
[7]Ibid, per Buchanan JA 569.
In this case, there is no evidence that the plaintiff took any steps to bring Mr Ruffo’s attention to the Standard Terms and Conditions, and in particular to the charge said to be contained therein, other than requiring him to acknowledge that he had read them and agreed to be bound by them. I was not, however, taken by the defendant to Maxitherm, nor was any argument put by the defendant that the charge was not incorporated into the agreement because insufficient steps had been taken to bring it to Mr Ruffo’s attention. A similar argument was put on the priorities point, to which I will turn shortly, but not in relation to incorporation. In the absence of argument to that effect, and having regard to the signed acknowledgment by Mr Ruffo in each agreement that he has read the Standard Terms and Conditions in Version 5.0, understands them and agrees to be bound by them, and the absence of any denial by him that he had received a copy or read them, I find that the Standard Terms and Conditions were incorporated into each of the February 2015 rental agreements.
Construction of clause 6.8 of the Standard Terms and Conditions
The next issue is the proper construction of clause 6.8 of the Standard Terms and Conditions. The defendant contends that, even if incorporated into the rental agreements in question, the clause was ineffective to create a charge over the Property.
The clause reads as follows:
6.8 Caveat/Mortgage etc.
a)The Hirer (and where the Hirer is unincorporated, each Proprietor of the Hirer) and each and every Guarantor named in Item 3 of the Schedule charges as a fixed and floating charge all their property, both real and personal, with the payment of all monies now or in the future owing under this Agreement.
b)If requested under this clause by the Owner, the Hirer and each and every Guarantor named in Item 3 of the Schedule will, at their own expense execute –
(i)a consent to caveat or other like instrument under the Real Property Legislation of any jurisdiction in the form prepared by the Owner or its Solicitors over any or all of the Hirer’s and Guarantor’s property; and
(ii)a mortgage or charge or other like instrument under the Real Property Legislation of any jurisdiction over any or all of the Hirer’s and Guarantor’s property, in a form and containing terms and conditions to the sole satisfaction of the Owner.
The defendant submits that the effect of clause 6.8(b) is that a further instrument is required to create any charge under 6.8(a). I disagree. In my view, the charge is created by paragraph (a), having regard to the active verb ‘charges’. Paragraph (b) is directed to the preparation of instruments to register the charge or give notice of it, not to its creation. This is shown by the opening words of paragraph (b) which refer to request ‘under this clause’ i.e. paragraph (a) is the dominant paragraph creating the charge, and paragraph (b) is directed only to proof or implementation of the charge.
Conclusion
I conclude that the charging clause contained within clause 6.8 of the Standard Terms and Conditions was incorporated into each of the February rental agreements signed by Mr Ruffo and was effective to charge his interest in the Property. It is now necessary to consider priority of the parties’ respective interests.
Before leaving the issue of the effectiveness of the plaintiff’s charge, I note that after the supply of the further submissions from each party it came to my attention that a charging clause apparently in the same terms as clause 6.8 here considered was the subject of an earlier decision of this Court, Morris Finance Pty Ltd v Commonwealth Bank of Australia and ors.[8]Neither party had referred me to this decision, but I did not consider it necessary to draw it to their attention as incorporation of the charging clause or its effectiveness was not in that case in dispute.
[8][2017] VSC 260.
Priority of the interests
Legal principles
In determining which of two competing equitable interests should take priority over the other, the test is where the better equity lies. The test was stated in this way by Kitto J in Latec Investments Limited v Hotel Terrigal Pty Ltd (in liq):[9]
In all cases where a claim to enforce an equitable interest in property is opposed on the ground that after the interest is said to have arisen a third party innocently acquired an equitable interest in the same property, the problem, if the facts relied upon as having given rise to the interests be established, is to determine where the better equity lies. If the merits are equal, priority in time of creation is considered to give the better equity. This is the true meaning of the maxim qui prior est tempore potior est jure: Rice v. Rice. But where the merits are unequal, as for instance where conduct on the part of the owner of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist, the maxim may be displaced and priority accorded to the later interest.[10]
[9](1965) 113 CLR 265.
[10]At 276.
This approach was endorsed in the later High Court case of Heid v Reliance Finance Corporation Pty Ltd (Heid).[11] The Chief Justice, with whom Wilson J agreed, quoted the passage above with approval, and Mason and Deane JJ also applied the ‘better equity’ test, describing it as a ‘more general and flexible principle’ than postponement by the doctrine of estoppel.[12]
[11](1983) 154 CLR 326, per Gibbs J at 333.
[12]Gibbs CJ at 333; Wilson J at 348; Mason and Deane JJ at 341.
Some particular consequences of this test are relevant here. First, one of the competing interests will ordinarily be earlier in time than the other. Here, it is conceded that the plaintiff’s interest, if proved, is earlier in time than that of the defendant. Priority in time is only one factor in determining which is the better equity, however, and so the interest first in time will only have priority if the merits are otherwise equal.
Next, in assessing the respective merits of the competing interests, the conduct of both parties is relevant, not just the conduct of the holder of the interest first in time.[13]
[13]Heid, per Mason and Deane JJ at 341.
Third, the failure of the party whose interest is first in time to lodge a caveat to give notice of that interest prior to the creation of the second interest, does not in itself require that the interest first in time be postponed to the later interest. It is ‘just one of the circumstances to be considered in determining whether it is inequitable that the prior equitable owner should retain his priority’.[14]
[14]Heid, per Mason and Deane JJ at 342.
Parties’ submissions
Each of the parties relies on factors that support its own claim, and detract from the other’s claim.
Defendant’s claim
The defendant relies on the following factors and submissions to support its contention that its interest should take priority to that of the plaintiff:
1. The defendant through its solicitor searched the title to the Property immediately before advancing funds and taking its equitable mortgage. This search did not reveal the plaintiff’s interest. The defendant would not have advanced funds if it had been aware of the plaintiff’s interest.
2. The defendant immediately lodged a caveat to give notice of its interest.
3. In addition to the title search, the defendant’s solicitor inquired directly of Mr Ruffo if there was anyone else with a ‘mortgage’ over the Property, other than the first registered mortgagee,[15] and Mr Ruffo replied that there were no other ‘securities’ against the Property.[16]
[15]Mr Conlan’s affidavit at [34].
[16]Mr Ruffo’s affidavit at [6]; Mr Conlan’s affidavit at [34].
4. As far as Mr Ruffo was aware, his statement was correct.
5. Mr Ruffo was not told by any of the plaintiff’s representatives that the rental agreements he signed contained clauses giving security over his property, including the Property once he became the registered proprietor.
6. The plaintiff’s charge was hidden in the midst of the rental agreements, which on their face were merely motor vehicle leases.
7. No property of Mr Ruffo is identified in the charge or schedule to the rental agreement, and there is no evidence that the plaintiff made any enquiry as to Mr Ruffo’s property when considering his application to rent the equipment the subject of the rental agreements.
8. The plaintiff assumed a risk by its standard practice of not lodging a caveat promptly on granting of the charge.
9. The plaintiff did not lodge a caveat to protect its interest until Mr Ruffo was substantially in default.
10. The defendant asserts that there was no other reasonable means open to it to become aware of the charge, other than appropriate enquiry of Mr Ruffo, which was made.
Plaintiff’s claim
The plaintiff relies on the following factors and submissions to support its claim:
1. It is first in time.
2. Mr Ruffo had entered into multiple rental agreements which all contained reference to the Standard Terms and Conditions and an acknowledgement that he had read them.
3. There is no requirement on a chargee to promptly lodge a caveat to give notice of the charge, and it was not unreasonable for the plaintiff to lodge a caveat only once a hirer is in default.
4. There was a prior history of lending by the principals of the defendant to Mr Ruffo’s parents, and subsequently to him, and on each of those two prior occasions the borrowers had defaulted. Given this background, the defendant’s solicitor should have made more detailed inquiries of Mr Ruffo to identify any possible other encumbrances over the Property before the third loan.
5. The defendant should be regarded as being on constructive notice of the plaintiff’s security, given the relationship between the solicitor for the defendant, Mr Conlan, and Mr Ruffo.
Discussion
As is apparent, each party relies both on factors that support the merit of its own security and factors that detract from the merit of the other party’s security. The analysis of these factors requires a detailed chronology, which I now set out.
Chronology
The subject loan and mortgage over the Property was preceded by two previous loans from, and mortgages to, the directors of the defendant. Mr Gerard Conlan, the solicitor for the defendant, acted for the directors of the defendant on each of those two previous loans. The first loan was given on 8 July 2014 in the sum of $240,109.22 by Mark and Elizabeth Dohrmann to Antonio and Sarina Ruffo (Mr John Ruffo’s parents) , who were at that time the registered proprietors of the Property. It was secured by a second unregistered mortgage over the Property, and a first registered mortgage over vacant land owned by Mrs Ruffo, at Euphoria St, Craigieburn. A caveat giving notice of the equitable mortgage over the Property was noted on the title on 23 July 2014. Payments of interest under both mortgages were due monthly in arrears, commencing 10 August 2014 and the principal was due to be repaid on 10 July 2015.
No interest payments were made under either mortgage, and the Dohrmanns, through Mr Conlan, commenced proceedings for possession and debt pursuant to the Euphoria St mortgage in October 2014 in the County Court. Judgment in default of appearance was entered in favour of the Dohrmanns on 28 November 2014.
Meanwhile, Mr John Ruffo, the son of Antonio and Sarina Ruffo, registered his company JV Produce Australia Pty Ltd on 17 September 2014. He was at all times the only officeholder and only shareholder. He applied to the plaintiff for rental finance through a broker by application signed 21 October 2014 in his own name, giving ‘JV Produce’ as a trading name. The Rental Application Form enquires if the applicant owns his or her home, and has a space for the value of the home to be entered and the amount outstanding under any mortgage. The form as signed by Mr Ruffo gives the Property as his address, but states that he was renting. In other words, there is no indication on the application that he owns any real estate, and nor is there any indication on the application form that security over any property may be required.
Mr Ruffo entered into the first of the five rental agreements with the plaintiff on 6 November 2014, and a further two on 7 November 2014. In each of the five agreements, he personally is described as the ‘hirer’, with an ABN number and the trading name of ‘JV Produce’. The ABN number is not that of JV Produce Australia Pty Ltd. There is no business name search in evidence to show who was the registered proprietor of the trading name ‘JV Produce’ (assuming it was registered) or the owner of the ABN on the rental agreements. There is also no evidence to show that the plaintiff made any enquiries to satisfy itself of the accuracy of the information on Mr Ruffo’s application form, let alone whether he owned any property that could be the subject of the charge on which it relies.
After judgment was entered against his parents, Mr Ruffo met Mr Conlan with them and offered to assist their financial situation. He negotiated with Mr Conlan to allow the Property to be transferred to him (the Dohrmann’s retaining their judgment for possession in respect of the Euphoria St property) on the basis that he would pay $100,000 to the Dohrmanns in reduction of the debt owing, and refinance the balance of his parents’ debt to the Dohrmanns by himself taking out a loan from them secured over the Property, once it was transferred to him. Mr Conlan’s evidence, which is not contested, is that Mr Ruffo paid the $100,000, entered into a loan agreement with Mr and Mrs Dohrmann for the balance of his parents’ debt, and signed an undated mortgage of the Property to Mr and Mrs Dohrmann on 23 December 2014. Mr Ruffo became the registered proprietor of the Property on 31 December 2014 on which date his mortgage to Pepper Finance Corporation Ltd was also registered. Mr Conlan did not lodge a caveat giving notice of the equitable mortgage.
The loan agreement of 23 December 2014 between the Dohrmanns and Mr John Ruffo required repayment of the principal ($195,790.95) and interest owing under it, on 23 February 2015 i.e. two months later. Mr Ruffo did not comply with the agreement. The evidence does not disclose whether he made any payment, and, if so, in what sum. Mr Ruffo entered into the final two rental agreements in February 2015, during this period.
Although Mr Conlan does not state this specifically, I infer that he took no action immediately Mr Ruffo went into default under the loan agreement because he assumed that his outstanding debt to the Dohrmanns would be met from the sale proceeds of the Euphoria St land. Unfortunately, this did not occur. On 2 May 2015 the Euphoria St land was sold by the Dohrmanns as mortgagees in possession. Mr Conlan deposes that the sale price was ‘considerably less than I had expected to sell it for, and it meant that the Dohrmanns’ position was not as secure as I had originally thought’.[17] On 12 May 2015, Mr Conlan instructed another lawyer in his firm to inform Mr Ruffo that the amount required to pay out the loan as at the date of settlement of the Euphoria St sale on 23 July 2015 would be $52,088.44.
[17]Mr Conlan’s affidavit, [27].
Mr Dohrmann gave Mr Conlan instructions on 14 May 2015 to accept $30,000 in full settlement of this outstanding debt, provided it was paid by 23 July 2015. Mr Ruffo had already, in early April 2015, approached Mr Conlan with a view to obtaining further finance to ‘regularise’[18] his loan from the Dohrmanns and invest further in his business. Mr Conlan’s firm then commenced to make enquiries with potential lenders for a loan to Mr Ruffo of $80,000 ($30,000 as the compromise payout of the existing debt to the Dohrmanns, and $50,000 by way of further sum), to be secured by second mortgage over the Property.
[18]Mr Conlan’s affidavit [25].
What Mr Conlan may not have known, is that by early May 2015 i.e. at a time when Mr Ruffo had approached him seeking further investment finance, being already in default on his loan from the Dohrmanns, he was also in default of most of his rental agreements with the plaintiff. The account statements exhibited by Ms Cameron are difficult to read on their face, as they all bear the same Contract ID number. In oral argument, the parties identified the statements relating to the two rental agreements entered into by Mr Ruffo in February 2015, presumably by reference to the due date of the first contract instalment. Assuming this method to be correct for the other statements, they show the following:
· Mr Ruffo first defaulted on 27 February 2015, when a payment on the 6 November 2014 rental agreement was dishonoured. He continued to make some payments on that agreement, but from 4 May 2015 when another payment was dishonoured, he was in continuous arrears.
· Another payment by Mr Ruffo was dishonoured on 27 February 2015, on one of his 7 November 2014 rental agreements. He was in continuous arrears under that agreement from 29 May 2015 and under the other 7 November 2014 agreement from 10 July 2015.
· In respect of the rental agreement the parties identified as being entered into on 4 February 2015, a payment made by Mr Ruffo was dishonoured on 11 May 2015 and Mr Ruffo was in continuous arrears from that date.
· In respect of the rental agreement the parties identified as being entered into on 10 February 2015, a payment was dishonoured on 15 April 2015 and Mr Ruffo was in continuous arrears from 4 May 2015.
In short, had Mr Conlan asked Mr Ruffo if he was in arrears in respect of any other agreement when he met with him on 21 or 22 May 2015 to discuss a further loan to his company from the Dohrmanns, and had Mr Ruffo answered truthfully, the answer would have been that he was in arrears in respect of three of his five rental agreements with the plaintiff.
Mr Conlan was plainly alive to the possibility that any further loan to Mr Ruffo may not be adequately secured if there was any other charge on that property other than the first registered mortgage. Mr Ruffo answered, and given that his evidence was not contradicted or tested on this point, answered honestly that to his knowledge there was not. The plaintiff says that the defendant through Mr Conlan should have gone further, and asked Mr Ruffo about other debts, not just other securities. Had that enquiry been made, then the rental agreements would have been revealed (if Mr Ruffo answered honestly) and scrutiny of those agreements or enquiry of the plaintiff may have revealed the earlier charge.
The defendant’s counsel says that further enquiry of this type was unnecessary, given that this type of lending is asset based i.e. the lender’s assessment is made not on the basis of serviceability of the loan, but on the basis of the value of the security available in the event of default. This submission would appear consistent with the response of Mr Dohrmann when approached to see if he would lend further to Mr Ruffo. He expressed reservation about the identity of proposed borrower, saying ‘the borrower’s name doesn’t excite me’[19] but said he would proceed if the higher interest rate was 4% (the same as the rate under the earlier Dohrmann loan to, and mortgage from, Mr Ruffo), rather than the 3% Mr Ruffo sought. In other words, if Mr Dohrmann had concern about Mr Ruffo’s capacity to pay, already proved doubtful at the higher interest rate that Mr Dohrmann sought, he was still prepared to take the risk of non-payment.
[19]Email dated 20 May 2015 from Mr Dohrmann to Mr Conlan’s firm, part of Exhibit GAC-27 to Mr Conlan’s affidavit.
Counsel for the defendant also submits, and I accept this, that it cannot be assumed that a person seeking finance will necessarily answer questions about other indebtedness honestly. The fact is, however, that Mr Ruffo did answer honestly, when asked about other security against the Property, and so may well have been frank about other aspects of his financial position if asked. There is no evidence of any enquiry at all by the defendant, however, except as to other security.
Mr Conlan did not merely accept Mr Ruffo’s word that there was nothing else secured against the Property - he conducted a title search before proceeding with the loan. Mr Conlan’s evidence, which is not contradicted and not tested under cross examination, is that had Mr Ruffo said that there was another charge against the Property, or had the title search revealed this, then the loan to him from the defendant may not have proceeded. The title search did not reveal any other security, and so Mr Conlan caused the loan and mortgage documents to be emailed to Mr Ruffo on 28 May 2015, the day he conducted the title search. Mr Ruffo signed the documents in Mr Conlan’s presence on 29 May 2015. They were returned signed by the vendor by 3 June 2015, on which date Mr Conlan caused a caveat to be lodged to protect the defendant’s interest. Although it seems that Mr Conlan and the defendant did not know this, on the same day that Mr Ruffo signed the further loan agreement and mortgage, 29 May 2015, he failed to pay an instalment payment due under one of his 7 November 2014 rental agreements, and was in arrears under that agreement thereafter.
As noted earlier, the legal test for the determination of priority is where the better equity lies. This requires a consideration of the conduct of each party in relation to their respective interests, and a comparison of that conduct. It is the whole conduct of the parties that is relevant, not time limited to the period before the creation of the interest.[20] I now turn to that comparison.
[20]Clark v Raymor (Brisbane) Pty Ltd [1982] Qd.R. 790, per Andrews SPJ at 791 and Thomas J at 796, with whom Campbell CJ agreed.
Comparison of conduct
In his Rental Application Form, Mr Ruffo said that he rented his home. There is no evidence that the plaintiff conducted any enquiry as to any other real estate or other property owned by Mr Ruffo against which the charge may take effect prior to accepting his application and entering into the first rental agreement with him. There is no evidence of any subsequent enquiry made by the plaintiff before the subsequent rental agreements. I infer that the plaintiff was prepared to hire equipment to Mr Ruffo even if he did not own any real estate.
Nor did the plaintiff draw Mr Ruffo’s attention to the charging clause, although as discussed earlier Mr Ruffo acknowledged that he had read the Standard Terms and Conditions and agreed to be bound by them. It is trite law that a person who signs a document known to contain contractual terms is bound by those terms even if he or she has not read them.[21] However, I accept the defendant’s submission that this charging clause was ‘fairly well hidden’ in the rental agreements. It did not appear in the documents signed by Mr Ruffo (the Schedules); the only reference at all to security in those schedules is to a monetary sum described as the ‘Security Bond’; and there is no positive evidence that a copy of the Standard Terms and Conditions were ever supplied to Mr Ruffo.
[21]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 185.
Further, I accept the defendant’s submission that rental of motor vehicles may not automatically suggest to a hirer that security over other property will be an aspect of the transaction, given that the lessor already retains property in the vehicles. This assumption would be reinforced by the explicit reference in the signed documents, the Schedules, to:
· the continuing ownership of the equipment by the plaintiff, unless purchased by the hirer;
· the necessity for a security bond (but no reference to security by charge); and
· and the plaintiff’s right of repossession.
The phrase ‘fairly well hidden’ is drawn from the judgment in Clark v Raymor (Brisbane) Pty Ltd [No2][22] (Clark), the case on which the defendant principally relies. In that case, the contest of equities was between a charge given by one of the joint registered proprietors of a property in the course of his business as a plumber and the equitable interest of subsequent purchasers of the property. Although the charge was first in time, the Queensland Court of Appeal upheld the decision of the trial judge to postpone the charge to the equitable interest of the purchasers. After consideration of the authorities, Thomas J, who wrote the lead judgment concluded in words on which both parties here rely:
In the end it comes down to this. On the one hand we have a general equitable charge fairly well hidden in the middle of a commercial guarantee and held somewhere in the office of a plumber’s supplier. The property to which it is said to give a prior claim was not named or identified. Apparently nothing was done to dissuade the owner from dealing with it….equity still recognises such a charge when taken from an individual, even though it be kept under lock and key and is unable to be found by the most diligent searcher. Although these factors do not affect the intrinsic validity of the interest, they are relevant to the standard of conduct to be expected from the holder of such an interest if he wishes to use it to upset other specific dealings with the relevant property…(the chargee) lodged no caveat to warn third parties that they could deal with such land only subject to the interest of the chargee.
On the other hand the purchaser did nothing unusual. It entered into a contract in the usual form, and searched the title before paying the balance purchase monies. It obtained the appropriate documents…and promptly lodged them for registration. It was not capable of doing anything more. In particular there was nothing it could have done to have discovered the chargee’s interest.[23]
[22][1982] Qd.R.790.
[23]Ibid 799-800.
Ms Cameron states in her affidavit that ‘(i)t is the standard practice of the plaintiff to only lodge a caveat over a customer’s property once their account is in arrears’.[24] That may be a cost effective commercial practice, but the plaintiff thereby assumes the risk that the customer will have granted other charges over their property to third parties who were ignorant of the plaintiff’s pre-existing claim. Further, the plaintiff did not lodge a caveat immediately Mr Ruffo was in arrears – it waited until he was very substantially in arrears. The plaintiff lodged a caveat on 24 November 2015, only after Mr Ruffo failed to respond adequately, or perhaps at all, to the plaintiff’s ‘final notice’ for each rental agreement sent to him on 28 October 2015.
[24]Cameron affidavit, [19].
Those notices[25] state that the plaintiff has made earlier request for payment in respect of each rental agreement, but those earlier requests are not in evidence. Mr Ruffo first defaulted under two of the agreements on 27 February 2015, and was in arrears under two agreements from 4 May 2015, and under a third from 11 May 2015. In addition to the February dishonoured payments, there were dishonoured payments on 15 April 2015 and 11 May 2015. Had the plaintiff taken action to protect its interest by lodging a caveat as a result of any of those dishonoured payments, or arrears, prior to 28 May 2015 then the subsequent loan to the defendant would, on the evidence, not have proceeded.
[25]Exhibit CC-9 to Ms Cameron’s affidavit.
I also note that while the ‘final notices’ request immediate payment, and threaten a bad credit record, they do not refer to the charging clause or give any indication that action may be taken, or is entitled to be taken, against Mr Ruffo’s property. This suggests that the charging clause was not front of mind, even to the plaintiff and even after Mr Ruffo was in substantial arrears.
I accept the plaintiff’s submission that mere failure to lodge a caveat is not enough to dislodge the priority of the equity first in time. I also note that the individual dishonoured payments, and the arrears prior to 28 May 2015 were relatively small in amount. However, in the absence of evidence as to exactly what, if anything was done when Mr Ruffo first went into default, and why no action was taken on the charging clause until after he was in substantial default, in particular after he was in default under a number of the agreements, I am not satisfied that the plaintiff took appropriate action to safeguard its interest against the possibility that its defaulting debtor would look for financial help elsewhere and give security for it.
In some earlier reported cases, the priority of an interest first in time is displaced where the holder of that interest armed the borrower with the ability to borrow further, without notice of the prior interest.[26] That clear case is not the case here. However, the plaintiff’s relaxed approach to safeguarding its interests placed third parties who were approached by Mr Ruffo for finance, including the defendant, at substantial risk.
[26]This situation is referred to in the extract from Kitto J in Latec Investments Limited v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265, 276.
As against this, I am concerned at the limited nature of the steps the defendant took to ensure that the security proposed was adequate. It is in this respect that the plaintiff seeks to distinguish Clark from the facts of this case. Put shortly, the plaintiff submits that the defendant could have learnt of the plaintiff’s charge had Mr Conlan made enquiry of Mr Ruffo as to his debts, as well as to other securities.
If the defendant by its directors had had no prior knowledge of Mr Ruffo, or in their prior dealings with him he had complied with his obligations, then I accept that enquiry as to his business debts in addition to other charges on his property was not required. But this was not the case. Mr Ruffo had already defaulted on one loan from the directors of the defendant; that loan was in turn taken out due to default by his parents; no other lender considered his proposal for further finance attractive; sale of Euphoria St had not returned what Mr Conlan had expected, and so he was conscious that security over the Property was now critical; and, although the remaining debt had been compromised, Mr Ruffo was still unable to pay it except by further finance. There were many warning signs.
I do not accept the submission of the defendant that Mr Conlan did not need to ask about other debts, only about other security, because this was an asset based loan. The viability of an asset based loan depends on there being sufficient equity in the proposed security, and enquiry about other debts may have led to other encumbrances earlier in time being revealed. Such enquiries are prudent precisely because a borrower may not know, or understand, that an earlier loan was secured, or may not be truthful about it.
I do not, however, accept the submission of the plaintiff, which appears in the plaintiff’s written submissions, but was more faintly pressed at the hearing, that Mr Conlan was on constructive notice of the plaintiff’s security. The submission requires at a minimum proof on the evidence that Mr Conlan was Mr Ruffo’s solicitor at the time of the loan to his company from the defendant. I do not consider that on balance this is shown. Certainly Mr Ruffo approached Mr Conlan seeking finance, and if Mr Conlan were thereby to be construed Mr Ruffo’s broker, a broker is usually regarded as the agent of the borrower, rather than the lender. Mr Conlan had, however, explicitly acted only for the Dohrmanns in the December 2014 loan from Mr and Mrs Dohrmann to Mr Ruffo personally. Mr Ruffo had his own solicitors in that loan.[27] Mr Ruffo did not retain solicitors for the later subject loan, but I do not think it can thereby be inferred that Mr Conlan acted for both Mr Ruffo and his company and the defendant in that loan. The documents that he prepared, and steps he took to register the caveat show that he acted for the defendant. Furthermore, in the email to Mr Ruffo enclosing the loan, mortgage and other documents for his signature, Mr Conlan’s employee recommended to Mr Ruffo that he seek his own legal advice.[28] The fact that Mr Conlan proceeded without ensuring that this occurred does not mean that he acted for Mr Ruffo.
[27]Mr Conlan’s affidavit, [21] and Exhibit GAC-15.
[28]Mr Conlan’s affidavit, [41] and Exhibit GAC-29.
The plaintiff’s submission as to the capacity in which Mr Conlan acted in the transactions as between Mr Ruffo and the Dohrmanns was no doubt prompted by Mr Conlan’s own evidence[29] that he was retained as Mr Ruffo’s solicitor for sale of the Property. On closer examination of the contract for sale, however, it was signed not by Mr Ruffo but by Mr Dohrmann as his attorney. I accept the submission of the defendant that consistently with his other work for the Dohrmanns, Mr Conlan was in substance acting for them on a quasi-mortgagee sale, not for Mr Ruffo the registered proprietor.
[29]Mr Conlan’s affidavit, [49].
Conclusion as to the ‘better equity’
In my view, neither party protected their security interests with appropriate diligence. By ‘appropriate’ diligence, I mean the diligence that, in the case of the plaintiff, may have protected its interest against the claims of a subsequent lender ignorant of the earlier security. As discussed earlier, had the plaintiff acted in May 2015 or earlier to lodge a caveat once Mr Ruffo was in default, then the defendant would have been on notice of the plaintiff’s claim.
In the case of the defendant, I mean the diligence that may have protected it against an earlier claim, not noted on the title. Had the defendant gone further with its enquiries when considering the further loan and asked Mr Ruffo about other debts, and not just other securities, then the plaintiff’s charge may have been revealed.
Accordingly, if all else was equal, then I would conclude that both parties having been derelict to some extent, the priority of the interest earlier in time should remain.
I do not consider, however, that all other factors are equally balanced. The deciding factors in my view are, first, that on the evidence the charge on which the plaintiff now relies was not critical to its grant of finance to Mr Ruffo, whereas the mortgage on which the defendant relies was critical to its decision to enter into the further loan. This difference in significance is objectively reasonable, given that the plaintiff held other security for its finance in the form of the security bonds and ownership of the vehicles. Secondly, the existence and centrality of the mortgage was made plain by Mr Conlan to Mr Ruffo, whereas he was not told by the plaintiff of the existence of the plaintiff’s charge. These factors are reflected in the documentation prepared for the respective transactions. The plaintiff’s charge appears in a separate document to those which Mr Ruffo signed, and there is no evidence that he was supplied with a copy of that document. By contrast, Mr Ruffo signed the mortgage on which the defendant relies, and received a copy of the Memorandum of Common Provisions.[30]
[30]Mr Conlan’s affidavit, [40] and [42].
For these reasons, I consider that the plaintiff’s interest should be postponed to that of the defendant. There being no challenge to the monetary calculation of the defendant’s interest, and the surplus funds being insufficient to meet it, the consequence is that the whole of the surplus funds should be paid to the defendant.
Conclusion and orders
I will ask the parties to prepare orders to give effect to these reasons, and will hear them if required in relation to costs. In that regard, I put the parties on notice that this may be a case where the usual costs consequence, that costs follow the event, is not appropriate, or should be modified to some degree. I make this observation having regard to:
· the near equivalence of the combined costs of the parties’ to the amount in issue; and
· the criticisms I have made of the defendant’s enquiries prior to entering into its transaction.
These observations are preliminary and tentative and there may, of course, be submissions that the parties wish to put to the contrary or other factors on which the parties wish to rely that bear on costs.
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