Heid v Reliance Finance Corporation Pty Ltd

[1983] HCA 30

HIGH COURT OF AUSTRALIA

Gibbs C.J., Mason, Murphy, Wilson and Deane JJ.

HEID v. RELIANCE FINANCE CORPORATION PTY. LTD.

(1983) 154 CLR 326

6 October 1983

Real Property (N.S.W.)—Equity

Real Property (N.S.W.)—Torrens System—Priorities—Equitable interests—Vendor's lien—Unregistered mortgages—Competition—Contract of sale—Certificate of title and signed transfer containing acknowledgment of payment of price delivered by unpaid vendor to purchaser—Unregistered mortgage taken by vendor to secure unpaid price—Failure to lodge caveat—Registration of transfer—Subsequent unregistered mortgages by purchaser to third parties. Equity—Priority—Notice—Purchaser of real property under uncompleted contract—Representation by purchaser of absolute interest in property before payment of price that he held absolute interest—Unregistered mortgage induced by representation—Vendor's conduct—Negligence.

Decisions

October 6.
The following written judgments were delivered:-
GIBBS C.J. The appellant, Mr. Heid, was, prior to 30 June 1977, registered under the Real Property Act 1900 (N.S.W.), as amended, as the registered proprietor of land at Glenhaven in New South Wales ("the land"). On 27 May 1977 he agreed orally to sell the land to Connell Investments Pty. Ltd. ("Connell Investments"), one of a group of companies controlled by Newman, McKay &Co., a firm of mortgage brokers, the principal of which was D.N. McKay. The price was to be $165,000. Of that sum $15,000 was to be paid in cash on completion - $10,000 to the appellant and $5,000 to a friend, Mr. Moll - $100,000 was to be deposited on call with Chancellor Finance Pty. Ltd. ("Chancellor Finance"), another of the companies controlled by Newman, McKay &Company, and $50,000 was to be secured by a mortgage over the land. The agreement was made in the offices of Newman, McKay &Co., and there McKay introduced the appellant to one Peter Gibby, whom he described as the "company solicitor", and who, he said, would be able to handle the transactions in connexion with the sale; he added that there would be a saving in cost if the company solicitor acted for both parties. The appellant, who trusted McKay, agreed that Gibby should so act. In fact, Gibby was not a solicitor; he was an unqualified employee of Newman, McKay &Co. The appellant signed an authority dated 27 May 1977 addressed to the bank of New South Wales authorizing the bank to hand to Gibby a certificate of title, but the authority was incomplete, and a further authority to the Bank to hand the certificate of title of the land to Gibby was signed on 2 June 1977. At some time between 27 May and 2 June 1977, the appellant signed, and left with Gibby, a contract of sale and a memorandum of transfer of the land. The contract of sale was not produced at the trial - it was said to have been lost - but the evidence shows that it was stamped on 2 June 1977. The memorandum of transfer bears the date 2 June 1977. It states that the appellant, therein referred to as "the transferor", in consideration of ONE HUNDRED AND SIXTY-FIVE THOU- SAND DOLLARS ($165,000) (the receipt whereof is hereby acknowledged), paid to the transferor by the undermentioned Transferee hereby transfers to Connell Investments Pty. Ltd. of 25 O'Connell Street, Sydney hereinafter referred to as the Transferee an estate in fee simple" in the land. During the same period, or perhaps a little later, a memorandum of mortgage was signed by the appellant as mortgagee and signed and sealed by Connell Investments as mortgagor; it records that the mortgagor mortgages the land to the mortgagee to secure payment of $50,000 and interest. This document is undated and was never registered. (at p331)

2. In the Supreme Court the question whether the appellant had received any of the purchase price was in issue, but the findings made in relation to that question by the learned primary judge, Kearney J., were confirmed by the Court of Appeal and are no longer disputed. Kearney J. found that the amount of $15,000 which was to be paid in cash was in fact paid, but that the $100,000 was never deposited by Connell Investments with Chancellor Finance. It appears that soon after 2 June 1977 the appellant received two deposit notes from Chancellor Finance - one for $100,000 for the term of one year (not at call, as agreed), and one for $40,000. The appellant telephoned McKay, who said that the notes had been issued in error and should be disregarded. It was found that in fact Connell Investments had not deposited with Chancellor Finance the sum of $100,000 for the benefit of the appellant. It follows that of the purchase price for the land, $150,000 remains owing, and of that sum $50,000 is secured by the unregistered mortgage. It was held - and this is not challenged - that the appellant had a vendor's lien on the land in the sum of $100,000. (at p331)

3. Once Gibby had obtained the certificate of title and the memorandum of transfer, McKay commenced to use those documents for the purpose of raising money which his firm appears to have needed desperately. On 10 June 1977 a memorandum of mortgage was executed by Connell Investments in favour of the first respondent, Reliance Finance Corporation Pty. Ltd. ("Reliance Finance") to secure repayment of an advance of $80,000 then made by Reliance Finance and future advances and interests. At the time when the advance was made Mr. Raphael, the solicitor for Reliance Finance, was given the certificate of title to the land and the memorandum of transfer from the appellant to Connell Investments, as well as the memorandum of mortgage by Connell Investments to Reliance Finance, and it is no longer in dispute that he handed over the money advanced by Reliance Finance because he relied on the acknowledgement of the receipt of the purchase money set out in the memorandum of transfer, and on the fact that the transfer was regular on its face and accompanied by the certificate of title. On 22 June 1977 Mr. Raphael lodged the memorandum of transfer for registration and on the same day lodged a caveat to protect the interest of Reliance Finance as mortgagee. On 30 June 1977 the memorandum of transfer was registered and the caveat lodged by Reliance Finance was noted on the title. On 4 July 1977 a memorandum of mortgage was executed by Connell Investments in favour of the second respondent, Mr. Alexander, to secure repayment of an advance of $40,000 and interest. On 5 July 1977, Reliance Finance made a further advance of $20,000 to Connell Investments, and a deed was executed varying the mortgage by Connell Investments to Reliance Finance by increasing the principal sum secured to $100,000. On 6 July 1977 Mr. Alexander lodged a caveat to protect his mortgage. None of these mortgages was registered. It was not until 23 September 1977 that any caveat was lodged by the appellant, and neither Reliance Finance nor Mr. Alexander knew, at the times when their respective advances were made, that the appellant had or claimed any equitable interest in the land. Advances had in the meantime been made by other parties, who had also been granted mortgages by Connell Investments, but those parties have ceased to be involved in the litigation and it is not necessary to refer to the transactions concerning them. (at p332)

4. In the proceedings brought in the Supreme Court of New South Wales, Kearney J. held that the appellant is entitled to an equitable lien for the sum of $100,000 together with interest at 10 per cent and that this lien ranks in priority ahead of all the other equitable interests in the land. He further held that Reliance Finance and Mr. Alexander both have equitable interest in the land as mortgagees, and that the interest of Reliance Finance ranks in priority ahead of the equitable interest of Mr. Alexander as to the advance of $80,000, but after Mr. Alexander's equitable interest as to the advance of $20,000. He held that the appellant further has an equitable interest in the land as mortgagee for $50,000 which ranks in priority after the equitable interests of Reliance Finance and Mr. Alexander. On appeal, the Court of Appeal varied this order and held that the vendor's lien of the appellant was postponed to the equitable interests of Reliance Finance and Mr. Alexander. The dispute between Mr. Alexander and Reliance Finance as to their respective priorities as regards the further advance of $20,000 had been settled and is no longer in issue. (at p333)

5. On the appeal before us Mr. Alexander was not represented and it is convenient first to discuss the question which arises between the appellant and Reliance Finance. Each of those parties had an equitable interest in the land - the appellant because of his vendor's lien, and Reliance Finance as an equitable mortgagee. "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 (1853) 2 Drew 73, at p 78 (61 ER 646, at p 648) . 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": Latec Investments Ltd. v. Hotel Terrigal Pty. Ltd. (In liq.) (1965) 113 CLR 265, at 276 . In the present case the interest of the appellant was first in time. The question therefore is whether his conduct in handing to Gibby a completed memorandum of transfer, containing an acknowledgment of payment and accompanied by the certificate of title, thus enabling Connell Investments to represent itself to Reliance Finance as having a title free from outstanding equitable interests, has the consequence that Reliance Finance has the better equity, and that the appellant's interest should be postponed to that of Reliance Finance. (at p333)

6. In Rimmer v. Webster (1902) 2 Ch 163, at p 173 , Farwell J. stated the following proposition which appears to govern cases such as the present:
"If the owner of property clothes a third person with the apparent ownership and right of disposition thereof, not merely by transferring it to him, but also by acknowledging that the transferee has paid him the consideration for it, he is estopped from asserting his title as against a person to whom such third party has disposed of the property, and who took it in good faith and for value."
There is no doubt as to the general correctness of that proposition: see also Capell v. Winter (1907) 2 Ch 376, at p 381 , and Tsang Chuen v. Li Po Kwai (1932) AC 715, at pp 728-729 . It is illustrated by the decision in Rice v. Rice. In that case the vendors, who had not in fact received the purchase money, delivered to the purchaser the title deeds indorsed with a receipt acknowledging payment. The purchaser made a mortgage by deposit of the deeds. It was held that possession of the deeds and the fact of the indorsement of the receipt gave the mortgagee a better equity, so that his equitable interest prevailed over that of the unpaid vendor. Kindersley V.-C. said (1853) 2 Drew, at p 83-84 (61 ER, at p 650) :

". . . they (the vendors) voluntarily armed the purchaser with the means of dealing with the estate as the absolute legal and equitable owner, free from every shadow of incumbrance or adverse equity. In truth it cannot be said that the purchaser, in mortgaging the estate by the deposit of the deeds, has done the vendors any wrong, for he has only done that which the vendors authorized and enabled him to do."

This passage was cited with approval in the judgment of the Judicial Committee in Abigail v. Lapin (1934) 51 CLR 58, at p 68 . In that case the respondents (Mr. and Mrs. Lapin), one of whom was indebted to one Heavener, transferred certain land to Mrs. Heavener as her husband's nominee. The transfers were absolute in form but were in fact given as security for the debt. After the transfer was registered, Mrs. Heavener executed a registrable mortgage in favour of the appellant (Abigail) as security for advances made by him. It was held that the equitable mortgage of Abigail took priority over the Lapins' equitable right to redeem. Lord Wright, who delivered the judgment of the Judicial Committee, approved (1934) 51 CLR, at p 64 the reasons of Gavan Duffy and Starke JJ. in this court which concluded as follows (see Lapin v. Abigail (1930) 44 CLR 166, at p 198 ):

"In our opinion, the Lapins are bound by the natural consequences of their acts in arming Olivia Sophia Heavener with the power to go into the world as the absolute owner of the lands and thus execute transfers or mortgages of the lands to other persons, and they ought to be postponed to the equitable rights of Abigail to the extent allowed by the Supreme Court."

Lord Wright went on to say (1934) 51 CLR, at pp 68-69 :

"Apart from priority in time, the test for ascertaining which encumbrancer has the better equity must be whether either has been guilty of some act or default which prejudices his claim; in the present case the respondents on the one hand enabled the Heaveners to represent themselves as legal owners in fee simple, while on the other hand it cannot be said that Abigail did or omitted to do anything which he should have done in lending the money on the security, though he might, by registering the mortgage, have secured the legal title. . . ."

Lord Wright pointed out (1934) 51 CLR, at p 70 that it was only in an artificial sense that it could be said that the Lapins had made any representations to Abigail and continued (1934) 51 CLR, at p 71 : "It is true that in cases of conflicting equities the decision is often expressed to turn on representations made by the party postponed, as, for instance, in King v. King (1931) 2 Ch 294 . But it is seldom that the conduct of the person whose equity is postponed takes or can take the form of a direct representation to the person whose equity is preferred: the actual representation is, in general, as in the present case, by the third party, who has been placed by the conduct of the party postponed in a position to make the representation, most often as here because that party has vested in him a legal estate or has given him the indicia of a legal estate in excess of the interest which he was entitled in fact to have, so that he has in consequence been enabled to enter into the transaction with the third party on the faith of his possessing the larger estate." (at p335)

7. The decisions in such cases as Rimmer v. Webster and Abigail v. Lapin may be based, alternatively, on the principle that a person who hands over title deeds to an agent with authority to deal with the property in a restricted manner cannot rely on the restrictions as against the third party who had no notice of them, and on the doctrine of estoppel. The former principle is said to have its origins in equity, and has been distinguished from estoppel (see Capell v. Winter (1907) 2 Ch, at p 382 ), but it seems to me that it may be regarded as a particular form of estoppel. However, either principle will determine the present case, and it is sufficient to deal with the question whether the ordinary rules of estoppel prevent the appellant from asserting his equitable interest against the respondents. The essential elements of an estoppel by representation, summarily stated, are that there must have been a representation (by words or conduct or, if there was a duty to speak or act, by silence or inaction) upon the faith of which the representee has acted to his detriment. No direct representation in the present case was made by the appellant to Reliance Finance but, as Lord Wright explained in Abigail v. Lapin, that is immaterial. The act of the appellant in allowing Gibby to have the certificate of title and the memorandum of transfer which acknowledged receipt of the purchase price armed Gibby's employer with the means of dealing with the land as absolute legal and equitable owner; in other words it armed Connell Investments "with the power of going into the world under false colours": Dixon v. Muckleston (1872) LR 8 ChApp 155, at p 160 . When in these circumstances Reliance Finance acted to its detriment on the assumption, to which the appellant's conduct had contributed, that no adverse equitable interest existed, the appellant is estopped from setting up his equitable interest. The result may be explained in point of principle by saying (as was said in Lapin v. Abigail (1930) 44 CLR, at p 198 ) that the appellant is bound by the natural consequences of his acts, although I would prefer to say, in the words of Griffith C.J. in Barry v. Heider (1914) 19 CLR 197, at p 208 , that "the transfer operated as a representation, addressed to any person into whose hands it might lawfully come without notice", that Connell Investments had an absolute interest. (at p336)

8. It was submitted that in the present case no estoppel was raised against the appellant, because the fraudulent conduct of Gibby was not a natural consequence of the appellant's acts, and that the appellant was not guilty of any negligence in entrusting Gibby with the memorandum of transfer and the certificate of title. The foundation of this argument was that the appellant was entitled to believe that Gibby was a solicitor, and that it was not unreasonable of the appellant to allow Gibby to have the memorandum of transfer and certificate of title for the purpose of completing the transfer when payment was received, and that the misapplication of such documents by a fraudulent solicitor was not a natural consequence of entrusting them to him. It was accepted by the learned judges of the Court of Appeal that if an owner of land engages a solicitor to act upon the sale of it, and gives to the solicitor the certificate of title and an executed memorandum of transfer, the owner's interest will not necessarily be postponed to someone who is led by the possession of those documents by the transferee to believe that the latter is the sole legal and equitable owner, since the conduct of the owner in those circumstances "is entirely in accordance with established practice, and is necessary to enable conveyancing transactions to be completed," and that the position is no different when the one solicitor acts for both the vendor and the purchaser. The argument for the appellant, proceeding from this assumption, was that the position is the same in the present case, where the appellant believed Gibby to be a solicitor, even though it was known that Gibby was an employee of Connell Investments. (at p336)

9. If, in truth, it is in accordance with common usage for a vendor of land to entrust to his solicitor a completed and receipted memorandum of transfer before payment of the purchase price has been made, for the purpose of allowing the solicitor to complete the transaction when the payment is made, it might well be held that a vendor who gave the documents to his solicitor in those circumstances would not be guilty of any neglect of duty to those who might subsequently act on the faith of the documents, and that he would therefore not be estopped, by his failure to guard against the possible fraud of the solicitor, from asserting his equitable interest as unpaid vendor: cf. Rimmer v. Webster (1902) 2 Ch, at p 172 . Although the broad principle stated in Lickbarrow v. Mason (1787) 2 TR 63, at p 70 (100 ER 35, at p 39) that "wherever one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss must sustain it", is often repeated and relied on, "warnings have often been given of the danger of applying it literally as a rule of law, and more than once attention has been recalled to the need of a duty and some neglect of it before the occasioning of the loss can be correctly attributed to the party sought to be made responsible": Thompson v. Palmer (1933) 49 CLR 507, at p 546 . However, it is unnecessary for the purposes of the present case to consider these questions further, or to discuss the cases in which it has been held that a person has not been deprived of an equitable interest by reason of the fraudulent acts of his solicitor. The fact is that Gibby was not a solicitor. But he was, as the appellant knew, an employee of Newman, McKay &Company, and therefore, in effect, of Connell Investments. The appellant gave the receipted memorandum of transfer and the certificate of title to an employee of the purchaser believing that he was a solicitor and trusting him to deal honestly and fairly with the documents entrusted to him. The appellant trusted Gibby because he trusted McKay. The case is indistinguishable from any other in which an unpaid vendor trustingly puts a purchaser in a position to represent himself as absolutely entitled to the land in law and in equity. It was imprudent of the appellant to have accepted, without further inquiry, the statements by McKay and Gibby that the latter was a solicitor. However, even if Gibby was a solicitor, there is no proof of any custom whereby a vendor delivers to a solicitor employed by the purchaser, but acting for the vendor as well, a receipted memorandum of transfer before payment of the purchase price has been received, and judicial notice cannot be taken of the existence of any such custom. If, contrary to my opinion, the appellant acted reasonably in accepting without inquiry that Gibby was a solicitor, his knowledge that Gibby was an employee of Newman, McKay &Company meant that in giving the documents of title to Gibby he failed in his duty to those persons into whose hands the documents might subsequently come to take care that they would not be misled by them. If it is necessary to find a breach of a duty of that kind before an estoppel comes into existence, the breach occurred when the vendor delivered the indicia of title to the purchaser or his servant or agent notwithstanding that he had not received the purchase price. The present case falls squarely within the principle of such decisions as Rice v. Rice (1853) 2 Drew 73 (61 ER 646) , Rimmer v. Webster (1902) 2 Ch 163 and Abigail v. Lapin (1934) 51 CLR 58 . It is unnecessary finally to decide whether that principle applies when the indicia of title are delivered to a solicitor in conformity with the ordinary course of conveyancing practice, for this is not such a case. (at p338)

10. For these reasons the Court of Appeal was right in holding that the equitable interest of Reliance Finance as mortgagee prevailed over that of the appellant. By the same reasoning, the interest of Mr. Alexander also takes priority over the interest of the appellant. By the time that Mr. Alexander made the advance to Connell Investments, that company had become registered as proprietor of the land, and although Mr. Alexander did not see the memorandum of transfer, it was held by the Court of Appeal that the registration allowed Connell Investments to hold out to Mr. Alexander that, subject to the interest of Reliance Finance, it had a good title, and that Mr. Alexander acted on the faith of this representation. This finding was not attacked. In the case of Mr. Alexander also, all the elements necessary to ground an estoppel are present. (at p338)

11. In reaching these conclusions it is unnecessary to rely on the appellant's failure to take any action when he received the erroneous deposit notes shortly after 2 June. The appellant's failure to lodge any caveat in respect of his vendor's lien (the belated caveat lodged on 23 September referred only to his interest as mortgagee) was not in itself fatal to his case, but if he had promptly lodged an appropriate caveat that would have been a means of giving notice to Reliance Finance and Mr. Alexander of his equitable interest: cf. J. &H. Just (Holdings) Pty. Ltd. v. Bank of N.S.W. (1971) 125 CLR 546, at pp 554-555, 557-559 . (at p338)

12. For these reasons the decision of the Court of Appeal was right and the appeal should be dismissed. (at p338)

MASON AND DEANE JJ. As Gibbs C.J. has related the facts and the issues which arise in this appeal there is no need for us to repeat them. (at p339)

2. Where the merits are equal, the general principle applicable to competing equitable interests is summed up in the maxim qui prior est tempore potior est jure - priority in time of creation gives the better equity. But where the merits are unequal and favour the later interest, as for instance where the owner of the later equitable interest is led by conduct on the part of the owner of the earlier interest to acquire the later interest in the belief or on the supposition that the earlier interest did not then exist, priority will be accorded to the later interest: Latec Investments Ltd. v. Hotel Terrigal Pty. Ltd. (In liq.) (1965) 113 CLR 265, at p 276 ; Abigail v. Lapin (1934) 51 CLR 58, at p 63 ; I.A.C. (Finance) Pty. Ltd. v. Courtenay (1963) 110 CLR 550, at pp 575-576 . (at p339)

3. A common illustration of conduct on the part of the owner of an equity which postpones his interest is the arming of a third person with the indicia of title, such as the delivery of title deeds and an instrument of transfer of the property containing or accompanied by an acknowledgement that the third party has paid the consideration for it in full. Generally speaking in this situation a person who acquires an interest from the third party for value without notice of the prior interest takes in priority: Abigail v. Lapin (1934) 51 CLR, at p 68 et seq , reversing Lapin v. Abigail (1930) 44 CLR 166 ; the dissenting judgment of Gavan Duffy and Starke JJ. in Lapin v. Abigail (1930) 44 CLR, at pp 197-198 ; Tsang Chuen v. Li Po Kwai (1932) AC 715, at pp 728-729 ; Rice v. Rice (1853) 2 Drew 73 (61 ER 646) ; and Rimmer v. Webster (1902) 2 Ch 163, at p 173 ; cf. Courtenay (1963) 110 CLR, at p 578 . To use the words of Lord Selborne L.C. in Dixon v. Muckleston (1872) LR 8 Ch App 155, at p 160 , words which have often been repeated in the cases to which we have referred, the owner of the first equity is said to have "armed" the third party "with the power of going into the world under false colours". (at p339)

4. The theoretical basis for granting priority, in such circumstances, to the later interest has been the subject of debate. Some have found the basis in the doctrine of estoppel; others have identified a more general principle that a preference should be given to what is the better equity on an examination of the circumstances, especially the conduct of the owner of the first equity. In favour of a person to whom the third person disposed of the interest without authority and who took it without notice of the outstanding interest and for value, Farwell J. in Rimmer v. Webster (1902) 2 Ch, at pp 173-174 , thought that this conduct created an estoppel, a view that seems to have been endorsed by the Judicial Committee in Tsang Chuen (1932) AC, at pp 728-729 . But in Capell v. Winter (1907) 2 Ch 376, at p 382 , Parker J. vigorously denied that the principle was based on estoppel. Although he did not refer to Rimmer v. Webster, he examined two of the earlier decisions and correctly asserted that they were not based on estoppel. He pointed out that in Rice v. Rice, a decision on similar facts, Kindersley V.-C. embarked on a consideration of which was the better equity and held "that the incumbrancer had the better equity, because he was in possession of a title deed containing the proper indorsed receipt, and which did not therefore put him upon inquiry, whereas the conduct of the vendor in parting with such deed made it inequitable for him to rely on the priority of his lien in point of time". (at p340)

5. And in Abigail v. Lapin, (1934) 51 CLR, at p 68 , the Judicial Committee, after quoting the judgment of Kindersley V.-C. in Rice v. Rice with approval, said: "Apart from priority in time, the test for ascertaining which encumbrancer has the better equity must be whether either has been guilty of some act or default which prejudices his claim. . . ." (at p340)

6. It is difficult, if not impossible, to accommodate all the cases of postponement of an equity under the umbrella of estoppel. In Dixon v. Muckleston (1872) LR 8 Ch App, at p 160 , Lord Selborne L.C. pointed out that the holder of the first equity might arm the third party with the indicia of title by mean of express representation, positive act or omission, or negligence, though he unnecessarily confined it to "wilful and unjustifiable neglect". As the Judicial Committee noted in Abigail v. Lapin. (1934) 51 CLR, at p 71 , it is seldom that the conduct of a person whose equity is postponed takes the form of a direct representation to the person whose equity is preferred or is otherwise such as to found a conventional estoppel in pais. The actual representation is usually made by the third party who has been enabled to make it by the holder of the first equity, who has, for example, armed the third party with the indicia of title. In this situation, it is the adoption of the fiction that what the third party does is within the actual authority given by the holder of the first equity that fits the case to the doctrine of estoppel: see Rice v. Rice (1853) 2 Drew, at pp 83-84 (61 ER, at p 650) ; approved in Abigail v. Lapin (1934) 51 CLR, at p 68 ; Rimmer v. Webster (1902) 2 Ch, at pp 172-173 ; Central Newbury Car Auctions Ltd. v. Unity Finance Ltd. (1957) 1 QB 371, at p 391 . But the true position is that in the situation contemplated, where there is fraud on the part of the third party, the first holder gives no authority, express or implied, to him to make the representation to the second holder: see the discussion by Starke J. in Thompson v. Palmer (1933) 49 CLR 507, at pp 526-527 . While the conduct of the holder of the first equity may, in such a case, be blameworthy, the operative representation was neither made nor authorized by him. (at p341)

7. For our part we consider it preferable to avoid the contortions and convolutions associated with basing the postponement of the first to the second equity exclusively on the doctrine of estoppel and to accept a more general and flexible principle that preference should be given to what is the better equity in an examination of the relevant circumstances. It will always be necessary to characterize the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct is such that, in fairness and in justice, the earlier interest should be postponed to the later interest. Thus in Latec Investments (1965) 113 CLR, at p 276 Kitto J. said that the case where the conduct of the prior owner leads the later owner to acquire his interest on the supposition that the earlier interest does not exist - the test stated by Dixon J. in Lapin v. Abigail (1930) 44 CLR, at p 204 - was just one "instance" of a case when the merits are unequal: see also Lapin v. Abigail (1930) 44 CLR, at pp 185-186 , per Isaacs J.; General Finance Agency, etc., Co. (In liq.) v. Perpetual Executors and Trustees Association, etc. (1902) 27 VLR 739, at pp 742-744 . To say that the question involves general considerations of fairness and justice acknowledges that, in whatever form the relevant test be stated, the overriding question is ". . . whose is the better equity, bearing in mind the conduct of both parties, the question of any negligence on the part of the prior claimant, the effect of any representation as possibly raising an estoppel and whether it can be said that the conduct of the first or prior owner has enabled such a representation to be made. . . .": Sykes, Law of Securities, 3rd ed. (1978), p. 336; see also Dixon v. Muckleston (1872) LR 8 Ch App, at p 160 ; Latec Investments (1965) 113 CLR, at p 276 . Thus elements of both negligence and estoppel will often be found in the statements of general principle: see, for example, Lapin v. Abigail (1930) 44 CLR, at p 204 , per Dixon J. (at p342)

8. It may be that an equitable interest will not be postponed to an equitable interest created later in time merely because there is a causal nexus between an act or omission on the part of the prior equitable owner and an assumption on the part of the later equitable owner as to the non-existence of the prior equity. Fairness and justice demand that we be primarily concerned with acts of a certain kind - those acts during the carrying out of which it is reasonably foreseeable that a later equitable interest will be created and that the holder of that later interest will assume the non-existence of the earlier interest. (at p342)

9. Thus, the mere failure of the holder of a prior equitable interest in land to lodge a caveat does not in itself involve the loss of priority which the time of the creation of the equitable interest would otherwise give (J. &H. Just (Holdings) Pty. Ltd. v. Bank of N.S.W. (1971) 125 CLR 546 ), notwithstanding that the person acquiring the later interest had, before acquiring that interest, searched the register book and ascertained that no caveat had been lodged. 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. (at p342)

10. In deciding whose is the better equity in this case it is necessary to ask whether there has been an act, neglect or default of the kind mentioned on the part of the appellant. We need to consider what are the reasonably forseeable consequences of his act in entrusting Gibby with the instrument of transfer and the authority to collect the certificate of title. Lord Selborne L.C. in Dixon v. Muckleston (1872) LR 8 Ch App, at p 160 had pointed out that the holder of the first equity is bound by the natural consequences of his positive acts. More recently in Courtenay (1963) 110 CLR 550 Kitto J. made use of this concept in considering whether there was negligence on the part of the first holders which resulted in a postponement of their interest. There the vendor received a portion of the purchase money in cash, and agreed to accept a mortgage back from the purchasers (the Courtenays) to secure payment of the balance. The transfer and mortgage were left with the vendor's solicitor to lodge for registration. The solicitor lodged the documents but later fraudulently withdrew them from registration. The solicitor for a sub-divider (Denton) later relied upon the ostensibly clear title. (at p342)

11. Kitto J. (1963) 110 CLR, at p 578 , speaking of the Courtenays' conduct, said, adopting the Dixon v. Muckleston (1872) LR 8 Ch App, at p 160 formula, that the question was "whether their conduct was such that the deception was a natural consequence", so that they might fairly be said to have armed the third party with the power of going into the world under false colours. He went on to say (1963) 110 CLR, at pp 578-579 :
". . . the answer to the question, in my opinion, is that in the circumstances it was not reasonably to be foreseen by the Courtenays or their solicitor that a third party might, without inquiring of them, part with money on an assumption that, contrary to all ordinary experience, their transferor's solicitor had their authority to withdraw from registration the transfer which to all appearances they were absolutely entitled to have registered . . . But the Courtenays did lodge their transfer for registration, and in my judgment it is not to be laid at their door that Denton's solicitor was deceived by the assurances of a rogue."
See also per Taylor J. (1963) 110 CLR, at p 590 . (at p343)

12. The question then is whether the risk of some such deception as that practised by McKay was reasonably foreseeable when the appellant delivered to Gibby the signed instrument of transfer and the authority to collect the certificate of title. In Union Bank of London v. Kent (1888) 39 Ch D 238, at p 248 , Fry L.J. said:
"I know of no decided case in which the mortgagee has been postponed on the ground that he did not take precautions against a future fraud by the mortgagor; and I do not know of any general rule which obliges you to assume that every person with whom you are dealing is likely to be a knave."
But this comment does not deny that in some situations a person may be under a duty to take care to avoid or minimize the risk of fraudulent or deceptive conduct by others or that a person may be negligent in placing another in a position in which he can readily misrepresent to a third party that he is the owner of property. (at p343)

13. There are two elements of special significance in the appellant's conduct. The first is that the instrument of transfer signed by the appellant contained an acknowledgement of the receipt by him of the purchase money which was in fact unpaid and which lay at the heart of his equitable lien. The second is that the appellant left the signed instrument of transfer together with the authority to collect the certificate of title with Gibby, who, as far as the appellant was led to believe, was a solicitor acting for the purchaser as well as for the appellant and, moreover, was a servant of a group of companies or firms of which the purchaser corporation was a member. The two circumstances are interrelated. (at p344)

14. In the Court of Appeal Hope J.A. (with whom Glass and Mahoney JJ.A. agreed) thought that if Gibby had been an independent solicitor the appellant would have been entitled to retain his priority. His Honour said (1982) 1 NSWLR 466, at p 482 :
"If an owner of land engages a solicitor to act upon the sale of it, and gives to the solicitor the certificate of title and an executed memorandum of transfer of the land, whether in favour of the purchaser or without a named transferee, the owner has enabled the solicitor to arm the purchaser, or has armed the solicitor, with documents allowing the purchaser, or the solicitor (or some other person) to appear to the world as the absolute owner of the land. But this conduct may not postpone the owner's interest, for it is entirely in accordance with established practice, and is necessary to enable conveyancing transactions to be completed. The fact that in such a case the owner's action is based upon a trust that his solicitor will deal with the documents in accordance with his authority is not something which in itself will lead equity to postpone his interest." (at p344)

15. We agree with his Honour's remarks, though we would prefer to say that, having regard to the established practice in conveyancing transactions and the trust which the client reposes in his solicitor to deal with the documents in accordance with his authority, the risk of deceptive use of the documents by the solicitor is not, in the ordinary case, a reasonably foreseeable consequence of entrusting the solicitor with the documents. A contrary view would entail delay and complexity in the completion of conveyancing transactions. Seemingly the vendor would always need to be present. (at p344)

16. The situation revealed by the facts in the present case is, of course, far removed from the usual conveyancing transaction in which vendor and purchaser are represented by separate solicitors. The primary judge and the Court of Appeal expressed different views as to the outcome of the present situation in which the vendor instructed an employee of the purchaser to act for him. (at p344)

17. The case for the appellant here is that it was reasonable for him to accept and act upon McKay's representation and on that basis to hand to Gibby the instrument of transfer and the authority to collect the certificate of title in order to complete the transaction. In short, the appellant submits that the case is to be determined on the footing that he reasonably believed that Gibby was a solicitor acting for both parties, not on the footing that he was merely an employee of the purchaser. There are two flaws in this argument. The first is that, in all the circumstances of the present case, including the circumstances that Gibby was introduced to the appellant as an employee who was concerned with the transaction on the purchaser's behalf, it was reckless for the appellant, without further inquiry, to accept McKay's representation that Gibby was a solicitor who could act for him. The second is that the appellant, knowing that Gibby was an employee, should reasonably have apprehended that Gibby might be required by the purchaser to act in accordance with its instructions and in its interests and that there was a risk that Gibby might give effect to that requirement. There was therefore a greater risk that the documents might be put to use for the purposes of the purchaser, in a manner inconsistent with the appellant's interests, than would have been presented by the delivery of the documents to an independent solicitor retained by the appellant. The principal foundation of a client's justifiable trust that his solicitor will not use the documents of title in a conveyancing transaction for unauthorized purposes - the duty which the solicitor owes to his client - is necessarily compromised if the solicitor owes a duty as an employee in relation to the very transaction in which he is instructed. (at p345)

18. Accordingly, we must look at the case as one in which the appellant handed the documents to an employee of the purchaser. The delivery of the documents to the employee armed the purchaser with the capacity to represent itself to be the true owner of the property and to engage in fraudulent and deceptive conduct of the kind which took place. The risk of the purchaser engaging in that conduct was reasonably foreseeable. Indeed, that conduct, though not intended by the appellant, was the natural consequence of his positive act in handing over the documents to Gibby - in effect to the purchaser - without taking any steps, as for instance, by lodging a caveat, to protect himself and others who might otherwise be deceived by misuse of the documents. (at p345)

19. The inevitable conclusion therefore is that there was negligence on the part of the appellant. It led - and this is not in dispute - to an assumption by Reliance Finance and by Mr. Alexander that the appellant's interest no longer existed. It follows that, in all the circumstances, Reliance Finance and Mr. Alexander have the better equities. (at p345)

20. The appeal should be dismissed. (at p345)

MURPHY J. The issue concerns competing unregistered (equitable) interests in land under the Real Property Act 1900 (N.S.W.). The appellant's vendor's lien having been created earlier in time would usually take priority, but the respondents' contend that his conduct would make that inequitable. (at p346)

2. Between 27 May and 2 June 1977 the appellant signed a memorandum of transfer of land containing an untrue acknowledgement that he had received full payment of the purchaser price. He did so innocently, in the expectation that these would be handed over on settlement when the purchase price would have been received. What he did was common practice, for the convenience of the vendor; it avoids his being present at settlement to sign. However in the ordinary course of commerce such acknowledgements are relied upon by persons, such as the respondent finance corporation, who advance moneys on documents evidencing title to land. It would be commercially inconvenient and inefficient if they could not safely rely upon acknowledgements which in fact have been made by vendors. (at p346)

3. The appellant handed over the memorandum and the certificate of title to a person he believed to be a solicitor, and that person's employer used them to obtain moneys fraudulently from the respondents who relied on the acknowledgement. The appellant concedes that the respondents were not negligent. In my opinion it makes no difference whether the appellant did or did not reasonably believe that the person was a solicitor, or whether or not the person was a solicitor, or whether or not the person was also acting for or employed by the prospective purchaser. The appellant "armed" a third party "with the power of going into the world under false colours": Dixon v. Muckleston (1872) LR 8 Ch App 155, at p 160 . His equitable interest should not prevail over that of the respondents. (at p346)

4. As a general principle, a party who makes such an untrue statement must, as between himself and an innocent third party, bear any loss resulting from his bringing it into existence. This is consistent with statements in the English cases such as Rice v. Rice (1853) 2 Drew 73, at pp 83-84 (61 ER 646, at p 650) ; Rimmer v. Webster (1902) 2 Ch 163, at p 173 ; Tsang Chuen v. Li Po Kwai (1932) AC 715, at pp 728-729 ; and the Privy Council decision in Abigail v. Lapin (1934) 51 CLR 58 . It accords with the broad principle stated in Lickbarrow v. Mason (1787) 2 TR 63, at p 70 (100 ER 35, at p 39) "wherever one of two innocent persons must suffer by the acts of a third, he who has enabled such third person to occasion the loss must sustain it". (at p346)

5. Australian authority is to the same effect: see Barry v. Heider (1914) 19 CLR 197, at p 208 ; Thompson v. Palmer (1933) 49 CLR 507, at pp 547-548 ; and I.A.C. (Finance) Pty. Ltd. v. Courtenay (1963) 110 CLR 550, at p 578 . In Lapin v. Abigail (1930) 44 CLR 166, at p 198 Gavan Duffy and Starke JJ. stated:
"It our opinion, the Lapins are bound by the natural consequences of their acts in arming Olivia Sophia Heavener with the power to go into the world as the absolute owner of the lands and thus execute transfers or mortgages of the lands to other persons, and they ought to be postponed to the equitable rights of Abigail to the extent allowed by the Supreme Court."
On appeal this was approved by the Privy Council (1934) 51 CLR 58, at p 64 . Although that passage refers to "natural consequences", in my opinion the rule should not be confined to natural consequences. Also, the rule should not be confined to circumstances where the party making the untrue statement has acted negligently, I prefer the statement in the same case made by Dixon J. (1930) 44 CLR, at p 204 :

". . . The act or default of the prior equitable owner must be such as to make it inequitable as between him and the subsequent equitable owner that he should retain his initial priority. This, in effect, generally means that his act or default must in some way have contributed to the assumption upon which the subsequent legal owner acted when acquiring in equity.

No doubt, when the appellants executed transfers which expressed the consideration as the receipt of a money payment, they did something which might well have operated to lead a person who dealt with the transferee on the faith of the transfers and read the statement of the consideration, to suppose that she had bought the land and paid the purchasemoney, and thus become the beneficial owner." (at p347)

6. Where a person creates a danger which will cause harm to others if it gets out of control the general theme of the law is that strict liability should apply, that is, he is liable for harm to others even without his negligence. To sign an untrue acknowledgment on a memorandum of transfer that the purchase price has been received is to create a dangerous instrument which, if it falls into the wrong hands, may be used to injure prospective purchasers or those who advance money on the security of the land. Here, as between himself and the innocent third parties, who acted without negligence, the appellant should bear the loss. (at p347)

7. The appeal should be dismissed. (at p347)

WILSON J. I have had the advantage of reading the reasons for judgment prepared by the Chief Justice. I agree with those reasons and with the conclusion to which they lead. There is nothing that I wish to add. (at p348)

2. The appeal should be dismissed. (at p348)

Orders

Appeal dismissed with costs.