Nolan v MBF Investments Pty Ltd

[2011] HCATrans 302

[2011] HCATrans 302

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M39 of 2011

B e t w e e n -

DAMIEN JOHN NOLAN

Applicant

and

MBF INVESTMENTS PTY LTD (ACN 005 731 957)

Respondent

Application for special leave to appeal

FRENCH CJ
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 28 OCTOBER 2011, AT 10.54 AM

Copyright in the High Court of Australia

MR C.W.R. HARRISON, SC:   If the Court pleases, I appear with my learned friend, MR T.J. SOWDEN, on behalf of the applicant.  (instructed by Nicholas O’Donohue & Co Lawyers)

MR R.M. GARRATT, QC:   If the Court pleases, I appear with my learned friend, MR L.E. HAWAS, for the respondent.  (instructed by Rigby Cooke Lawyers)

FRENCH CJ:   Thank you.

MR HARRISON:   Your Honours, the first matter, if I may, is unfortunately a correction.  In the application book ‑ ‑ ‑

HAYNE J:   Starting at the high point, are we, Mr Harrison?

MR HARRISON:   No, your Honour, but it is important and I just do not want to omit it.  If we start at the application book and go to the applicant’s summary, which commences at application book 240, at application book page 247, paragraph 36 I have asserted:

Secondly, the analysis ignores the distinction between Mr Collie’s then presently enforceable and quantified entitlements as at the date of auction, and his later quantified and disputed claims.  These were distinguished and identifiable from exhibit P1.  Schedule E to P1 demonstrates that as at the date of settlement quantified entitlements as against the Applicant were only $198, 503.55 –

That is incorrect.  It should read as at the date of auction quantified entitlements as against the Applicant were $281,870.35 and as at settlement the quantified entitlements were $533,382 as against, on Mr Nolan’s calculations, available funds of $562,000.  Might I go first to what we would contend, although it is clearly obiter, the point of general interest, which is whether or not one can contract out the duty of good faith as was found by the Court of Appeal.  That point first appeared at paragraph 221 of ‑ ‑ ‑

FRENCH CJ:   Is not your principal problem the factual character of the decision made here which turns on, as it were, an on‑the‑spot decision of the mortgagee’s representative at auction?

MR HARRISON:   Indeed.

FRENCH CJ:   How does that convert to a special leave question?

MR HARRISON:   We say it converts to a special leave, your Honour the Chief Justice, on the basis that – first of all we submit that it is sufficiently tainted with error that is worthy of review.  That is the primary decision of the Court of Appeal overturning the judge below.  There are a number of reasons for that.  We say that unfortunately out of what has come from that is a wholly novel proposition, with respect, which is that one can – by way of obiter, that one can ‑ ‑ ‑

HAYNE J:   But that is the point, Mr Harrison, it is an obiter dictum. 

MR HARRISON:   It is, your Honour.

HAYNE J:   They get to the answer that there was no breach of duty separately.

MR HARRISON:   They do, your Honour.

HAYNE J:   Why should we take it?  That is a question of fact.

MR HARRISON:   Because, your Honour, the question of no breach of duty is one that is very troublesome.  As Professor Butt pointed out in his article, you have to explain these things to your clients and they are difficult to explain.  If I can take your Honour to the reasoning, application book 197 at paragraph 154, second sentence.  It is asserted:

Although Mr Macnish’s advice that changing the order of sale was ‘fraught with danger’ may have been conservative, it was not obviously wrong.

That is a conclusion.  That conclusion is based on the various matters that follow.  Paragraph 155:

We consider that there was sufficient doubt about whether Lot 3 would sell and the amount for which it would realise, to justify the decision, which MBF took after the sale of Lot 2, to sell Lot 1 before auctioning Lot 3.  Lot 3 was in fact passed in at auction, though it sold afterwards.

Now, on the Friday before there had been an offer of $975,000 for the good lot, lot 2.  There was an estimate of 600 to $660,000 for lot 3 and, in fact, the estimate of how much it would take to pay out the mortgagee was calculated on an assumed total auction realisation of 2.2 million.  So there was no question at all that if all three lots were sold, there was going to be a considerable surplus and there was a very live issue as to whether or not there would be sufficient from the sale of the two vacant lots to discharge the mortgagee and it may well have been ANZ.

HAYNE J:   If you sold them.

MR HARRISON:   Sorry, your Honour?

HAYNE J:   If they were sold.

MR HARRISON:   If they were sold.  Now, why were they not sold?  Lot 3 achieved, as we know from the video, which is exhibit 5, a reserve of 645,000.  That is the price that was achieved under the hammer and then it was passed in.  The Court of Appeal says, well, it took 30 minutes to 60 minutes to negotiate 690, but the mortgagee passed it in.  They passed it in after eight minutes and the eight‑minute factor is completely ignored in all the propositions that appear in the judgment.  It is just utterly disregarded.

HAYNE J:   Assume you got leave.  Assume we wrote a judgment.  What are we going to say that is of utility to more than the parties?  No doubt the parties’ interest is who wins who loses, but what more are we going to do?

MR HARRISON:   You are going to clarify the law on an unusual area which is whether or not selling an excess of lots, in disregard of the clear evidence that appears at the time, can amount to a breach of duty and that is important in the context of the progression that is developing in legislation throughout the country.  There is now only Victoria, Tasmania, Western Australia and South Australia that have a duty of good faith.  You have Queensland and the Northern Territory which have passed specific legislation which says you cannot contract out of that duty.  As of next Tuesday, New South Wales will adopt the Corporations Act test 420A and will also contain within that that cannot be contracted out of, to end a sentence with a preposition.

So this is an important area and one in which we face the risk to go to the obiter point in terms of the capacity to contract out.  That does not take any account of the concession that was always quite properly made throughout by the mortgagee that the deed would be subject to a duty of good faith.  The Court of Appeal note that and disregard it.  So, clearly, on their analysis, a breach of a duty of good faith can be immunised by a deed such as this.  Secondly, we do not understand how the duty of good faith can be sliced and diced, to us a colloquialism, and can have various incidents, some of which out of which one can contract.  We would say it is like the trinity; it is one and indivisible. 

The next issue is, it is said, well, you could not include this in a normal mortgage, these disputes do not spring out of the ground.  There is inevitably a history where the mortgagor seeks more time.  He seeks to induce a new purchaser.  He seeks to refinance.  He seeks to postpone an auction.  What happens then or what will happen now is that every mortgagee solicitor will be negligent if they do not say to their mortgagee, well, there is this decision of the Court of Appeal of Victoria that says that if you enter into a deed in which the mortgagor contracts out of his right, that will protect you irrespective of what happens.  So you should postpone the auction for a month and on that basis procure such a consent.

FRENCH CJ:   This is propping up your application by reference to the obiter?

MR HARRISON:   It is, your Honour.  That is why it is important.  We also say that it is a very bizarre situation in which, if the mortgagor is a private individual and also the predominant purpose of the acquisition of the loan funds, that is half or more, is for private purposes, then the deed is not inviolate.  It is subject to review under the Credit Act irrespective of quantum for unfairness.  So that is a very unsatisfactory situation where, if this situation arises again and someone relies upon a deed that has been entered into, you then have a reply by way of seeking essentially review under the Credit Code.

So in terms of the obiter point, we say that it is a point very much of public interest and I will return to the issues why we say that the primary decision is just unsustainable.  It does not, with respect, in a Fox v Percy or Dederer type point, explain why the evidence of Mr Date Jnr, for example, was preferred over the evidence of Mr Mitchell.  Mr Mitchell is an experienced real estate agent who gave evidence that his firm was involved in 30 to 40 per cent of all the sales in Kew, had been for the last 10 years.  Mr Date, by contrast, the following year got one of the few sole listings he had ever had in Kew.  He was not present during the auction of lot 3 and his evidence was accepted by the Court of Appeal and they say nothing about Mr Mitchell’s detailed evidence as to why he says lot 3 could have sold and there would not have been a problem.  Then they say, going over the page application book 198 at 157:

There was an added danger.  While there is no general obligation on a mortgagee to sell the whole of the mortgaged property if it does not choose to do so, the mortgagee must not, in selling what it does sell, deliberately destroy its value by failing to sell what would normally and naturally form part of what it does sell.

That, we would have thought, would have been the subject of expert evidence.  There was no such evidence given.  That is a proposition that has arisen, as far as we are aware, in the judgment.  Then we go to the point of whether or not the possibility that Mr Collie would seek to enforce his claim over the property.  There is no problem with Mr Collie seeking to enforce his claim over the property.  Once the house lot is released and is free to Mr Nolan, then he can go to the court, have a variation on the injunction that restrains him and procure finance in order to pay out Mr Collie.  That was always the proposition.  Then there is this proposition at 160:

MBF was not required to take the chance that Mr Nolan would be able to raise a loan –

That is in direct contrast to the finding on the damages question that they see no reason to reject that finding by the judge.  These things have to be explained to one’s client, and this is all in the context of these defences.  The defence we came to meet at trial, as is set out in the various witness summaries, was in accordance with the advice given by Mr Justice Beach of the injunction application, MBF took advice, took advice on the day after Mr Nolan had renewed his request, after the purchaser of lot 2 had indicated they had no interest in lot 1, and that advice was received from real estate agents and those estate agents, in the presence of Mr Dickson, said that you should not change the order of sale.  Reject Mr Nolan’s advances.

FRENCH CJ:   This all falls within, does it, the framework of your first ground of appeal at 238?

MR HARRISON:   Yes, your Honour.

FRENCH CJ:   That is that the Court of Appeal held it was wrong to hold it:

was not a breach of the duty of good faith –

to sell the property contrary to wishes –

because there was a possibility that the respondent would be prejudiced by acceding to the applicant’s request.

You say they set the test wrongly.

MR HARRISON:   That is right.  Well, we say they set the test wrong because a mere possibility or no basis, I think were the terms that were used or no prospect of there being anything other than certainty – I mean, you can never have certainty about anything, but we say they articulated the test too high, but on the evidence they, with respect – if I could go back.  The case we came to meet was one in which MBF had taken advice on the day and that advice was not to accede to Mr Nolan’s request and that case evaporated at trial because no one swore up to it; not in‑chief.  There was no real estate agent who was prepared to give evidence, of those who were

called, including Mr Budden and Mr Jenkins, who are named in the various witness statements, who were prepared to say they gave any advice at all to Mr Date Snr.  What we had, by contrast, as appears in the last page of the application book, was the evidence of Mr Macnish, who was advising Mr Date Snr.  Line 25, it is a question:

Was it your advice to MBF that once an order of sale had been set, irrespective of what happened thereafter, it should be adhered to?‑‑‑Yes, your Honour.

So do I take it from that that it wouldn’t have mattered if Lot 2 had got 1.5 million, you would have stuck to the order and sold Lot 1?‑‑‑Yes, we would have.  Yes, unless it came to the point where Lot 2 had brought more money than MBF required and then two lots would be taken off the market – or Lot 1 would be taken off the market –

So there is no application of mental process at all, we would submit, by the mortgagee to the problem that presents itself on the day, which is you came in the morning with an estimate of 975 for lot 2, an estimate of 600 to 660 for lot 3.  You then get 1.3 million.  There is no impediment to selling lot 3.  Mr Date Snr, Mr Macnish years later at trial are unable to identify any problem.  They are unable to articulate any danger during the course of the trial and then we have this cobbled together causation analysis, with the greatest of respect, which seeks to justify a finding that there was no possibility that the sale of lot 3, which reached the upper end of the range, 645 within eight minutes, there was no possibility that the sale of that would have obviated the sale of the man’s house. 

I can go into much greater detail, but that is essentially what it is all about.  Perhaps I should briefly say in terms of damages, we would say that, with respect, the parties have not been well served at either level and if we were to get leave and succeed on appeal, then this should go back for rehearing.  The other point about whether or not there is a divergence of duty – of analysis, it turns on the view you take on paragraphs 159 and 160 of the judgment and whether you consider that there was, if one accepts that the law is that the duty of a mortgagee is to deal with the mortgagor and other claimants equally, whether or not there is an indication there that Mr Collie was treated more favourably and that would be a breach of the existing jurisprudence.

FRENCH CJ:   Thank you Mr Harrison.

MR HARRISON:   If your Honour pleases.

FRENCH CJ:   We will not need to trouble you, Mr Garratt. 

The applicant for special leave raises a question about the application of the constraints imposed by section 77(1) of the Transfer of Land Act 1958 (Vic) upon the exercise of a mortgagee’s power of sale. Those constraints require the mortgagee to act in good faith and to have regard to the interests of the mortgagor, grantor or other persons. The central complaint in this case relates to the order in which the mortgagee sold at auction certain lots the subject of the security.

In our opinion the decision of the Court of Appeal depended on the particular circumstances of the case including a decision made by the mortgagee’s representative at auction.  It is not attended with sufficient doubt to warrant the grant of special leave.

Special leave will be refused with costs.

AT 11.11 AM THE MATTER WAS CONCLUDED