O'Callaghan & Ors v Custom Credit Cor

[2000] HCATrans 163

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P30 of 1999

B e t w e e n -

PETER JOHN O’CALLAGHAN, JOHN JOSEPH HEDIGAN, ALLAN JAMES MYERS and ALEX CHERNOV

Applicants

and

CUSTOM CREDIT CORPORATION LTD

First Respondent

ALAN EDSON LEDGER

Second Respondent

CHARLES ANTHONY CANDLIN FEAR

Third Respondent

Application for special leave to appeal

GAUDRON J
McHUGH J

TRANSCRIPT OF PROCEEDINGS

FROM PERTH BY VIDEO LINK TO CANBERRA

ON FRIDAY, 14 APRIL 2000, AT 12.34 PM

Copyright in the High Court of Australia

__________________

MR S.P. WHELAN, QC:   If it please the Court, I appear with my learned friend, MS J.A. DODDS‑STREETON, for the applicant in that matter.  (instructed by Freehill Hollingdale & Page)

MS C.J. McLURE, QC:   If it please the Court, I appear with my learned friend, MR K.L. CHRISTENEN, for the respondents.  (instructed by Tottle Christenson and Blake Dawson Waldron)

GAUDRON J:   Yes, thank you, Mr Whelan.  Perhaps I should just note before you commence that it has been made known to the parties that the members of the Court as it is presently constituted know the applicants at least in a professional context but in that regard they are in the same position as other members of the Court and I understand there is no objection to the Court being constituted in the manner it is today.

MR WHELAN:   That is correct, your Honour.

GAUDRON J:   Yes, thank you.

MR WHELAN:    Your Honour, this matter concerns the relationship between some receivers of a tenant of commercial property in Western Australia, the mortgagee who appointed those receivers and the applicants who were the landlords of the tenant.  It calls for a consideration of the relationship between the privately‑appointed receiver, the mortgagee and the third party landlord, both in the absence of contract at general law, one might say, and under the terms of the particular arrangement which the mortgagee and the lessor third parties entered into here and the case raises the peculiar nature and incidence of the agency created by security documents between the privately‑appointed receiver and the borrower.

GAUDRON J:   Well, does it?  It only raises that question if you succeed, first, in having the clause construed in the manner for which you contend.

MR WHELAN:    Yes, that is so, but the clause, your Honours may or may not have seen, is not an easy one and the manner in which one comes to divine its meaning is largely informed by the position from which one starts.  Justice Anderson – and I think it is fair to say the Full Court’s reasoning did not greatly advance the sophistication of the analysis from Justice Anderson ‑ ‑ ‑

GAUDRON J:   Is it Justice Anderson or Justice Kennedy?

McHUGH J:   No, Justice Anderson at first instance.

MR WHELAN:    Justice Anderson at first instance.

GAUDRON J:   Yes.

McHUGH J:   I will have to tell you I approached it from the basis that it ought to make some commercial sense and the construction contended for by the respondents does not seem to me to make commercial sense, but that said, I have to tell you that the language of the clause is such that I do not see for the moment how you can avoid the result that the courts in Western Australia have reached in respect of the matter.

MR WHELAN:    Yes.  Your Honour has quite put his finger on the position.  If I might just, firstly, deal with what her Honour Justice Gaudron did raise as to why do you get into consideration of the nature of this relationship and the reason is this:  the contractually produced agency between receiver and borrower is a device which has become so prevalent and well known that there is now a kind of fallacy abroad that this is a fundamental principle of our law and it is very well known that this device is effective in most circumstances to insulate the mortgagee from liability to third parties and Justice Anderson, in what would have to be said is a fairly traditional manner in the first 10 pages or so of his judgment, gives a recitation on the history and applicability of this device and its consequences.

But your Honours know that this agency is a very peculiar one, as was analysed at least to some extent by this Court in Sheahan, and we say that that foundation or that basis upon which Justice Anderson then turns to the clause is completely misconceived.  The correct basis and the correct legal foundation from which one then turns to the clause is not this contractual agency created by the security documents but, rather, the general law position of the respective parties in the absence of agreement which, broadly speaking, is that the mortgagee’s security is vulnerable to destruction at the suit of a person with whom it has no relationship.

Its security is the lease.  The landlord can re‑enter and destroy it at will on default by the tenant.  The remedy in general law for the mortgagee to meet that problem is relief against forfeiture, but there are two aspects to that which are relevant.  The first is that relief is discretionary and there is a timing problem.  If the landlord beats the mortgagee to court, the mortgagee cannot get relief.  More significant, however, though is that it is well recognised and not disputed seriously by the respondents that the price of relief against forfeiture is assumption of the full ambit of the tenant’s obligations and, your Honours, notwithstanding our best efforts, the courts below, rather than approaching the problem from that perspective, have approached it from what is, we would say, inaccurately described as the usual position or the traditional position by reference to the manner in which the contractual agency of the receiver operates so as to, in many cases, insulate the mortgagee from liability.

Now, the point that your Honour Justice McHugh raises as to construction obviously becomes the kernel of the matter.  The clause, it has to be said, does not really say what either set of parties contend for.  There is no doubt, your Honour, now, that clause 16.2, which precluded the landlords from re‑entering, was operative.  It was not contended in the Full Court that 16.2 was not operative.  That was contended at trial.  What is in issue is whether there is an obligation ‑ ‑ ‑

McHUGH J:   You say there is an implied covenant, do you?

MR WHELAN:    No, we do not.  What is in issue is – perhaps if I might just address the clause while I speak, which is set out in full in a number of places, one of which is page 35 and following in Justice Kennedy’s judgment.  What is in issue is not the fact that the landlord was precluded from re‑entry, but whether it was precluded because the mortgagee was entitled to create circumstances which prevented its re‑entry without obligation or whether it was because the mortgagee embarked upon a course which precluded re‑entry and gave the mortgagee rights but rights that were coming at a price and the price was compliance with not the terms from time to time, not some of the terms, but all the terms.

Now, at first instance or the case as put by the respondents was that what clause 16.2 was was a temporal suspension of the landlord’s rights of re‑entry.  A concession in essence was how they put it.  Something which could not impose any liability on the mortgagee.  It did nothing more than impose a burden on the landlord or, rather, preclude the landlord from taking a step it might otherwise have taken.  Justice Wheeler in the Full Court took it a step further, we would say prompted by the problems of that construction, and decided that where the clause provides that you will:

comply with and perform all and singular such terms and conditions –

that “such terms and conditions” meant only the terms and conditions which had been breached, a particularly untenable proposition, we would have thought.

GAUDRON J:   Well, I would have thought that was the ordinary meaning of the term.  Once you imported the word “such”, I would have thought that was the conclusion that was directed.

MR WHELAN:    Well, one does have to cross out “all” though, your Honour.

GAUDRON J:   Well, no, no, not at all.

MR WHELAN:    Yes.

GAUDRON J:   For your contention I think you have to read in the words “all and singular the terms and conditions of the lease.

MR WHELAN:    Well, those words appear in 16.2.1 and 16.2.2, your Honour.  You see what is prescribed or the circumstances which activate the clause are non‑payment of rent “pursuant to the terms” and non‑observance of other functions “pursuant to the terms”.  Now, that obviously means all the terms, we would submit, and when it later says “such terms”, it means all the terms again and if it is not already clear, it says it again in that it says “all and singular” and, your Honour, it would be a very peculiar provision to say, “You can preclude re‑entry by complying with some of the terms or one of the terms.”

GAUDRON J:   By complying with the terms that have been breached that give you ‑ ‑ ‑

MR WHELAN:    Yes, yes.

GAUDRON J:   Really by remedying the terms, is it not?

MR WHELAN:    Yes.

GAUDRON J:   Yes.

MR WHELAN:    It is another means of creating the suspension which is the ‑ ‑ ‑

GAUDRON J:   Your construction would, in effect, make the mortgagor a guarantor.

MR WHELAN:    The mortgagee?

GAUDRON J:   Yes, sorry, the mortgagee a guarantor.

MR WHELAN:   Yes.  Our construction is ‑ ‑ ‑

GAUDRON J:   In circumstances in which there is no covenant as such.

MR WHELAN:    Our construction is contractual relief against forfeiture.  Our construction is identical to the obligation the court would impose if there were no agreement and the mortgagee went to court after default and said, “The lease is about to be forfeited.  I will lose my security.  Give me relief.”  The court – I think we gave four copies of a series of old judgments about relief against forfeiture – the court in that circumstance invariably imposes the condition that the mortgagee accept liability under the terms, all the terms and for the past, the present and the future, and that is what is our construction and if one approaches the clause from that sound foundation, rather than from the fallacious analysis based upon the contractual agency of the receiver, whilst the clause has its problems, your Honours, we would submit our construction is far preferable, far preferable, and it does then raise the issue I canvassed earlier as to the capacity in which a receiver is acting when undertaking activities such as are provided for in clause 16.2.

Now, this Court in Sheahan addressed that in what I might call a halfway manner in that the Court considered whether a receiver who paid obligations to a third party ‑ pre‑existing obligations to a third party ‑ was acting as agent of the borrower when it did so and your Honour Justice Gaudron with Justice Dawson and I have just forgotten who was the third member of the majority now ‑ ‑ ‑

GAUDRON J:   Justice Gummow, I think.

MR WHELAN:    Gummow, that is correct, yes, held that the receiver was not acting as agent of the borrower.  Your Honours did not have to go on and decide in what capacity is the receiver acting when he does such things.  Justice Kirby decided, perhaps implicitly or perhaps explicitly, that he was acting in dual capacities as agent for the borrower and the mortgagee in such circumstances and Chief Justice Brennan held that the contractual agency did prevail.  So that this case is the opportunity to take the matter to its conclusion in that the question of the receiver’s dual capacity or shifting agency capacity, which was taken by this Court part of the way in Sheahan in the context of a preference case, could be taken to a definitive conclusion here in that here, provided your Honours take the view there is a legitimate issue of construction so as to create a proper forum for consideration of the matter, as to what capacity the receiver is acting in when he takes steps – in this case he takes steps – to obtain the protection that clause 16.2 offers to the mortgagee.

So, your Honour, it will be said against us in relation to this application that it is a construction point about an agreement not in standard form and so forth and, in our submission, your Honour, that is not a valid observation in this context and the reason is this:  there is no factual issue of concern in virtually whatever findings are made and the issue of the capacity in which these parties act and their proper legal relationship and the proper characterisation of their relationship is embedded in the construction point in that both the trial judge and the Full Court approached the construction of the clause by reference to their view of what is the proper analysis of the relationship between these parties.

McHUGH J:   But it is important in this respect, is it not, that to get to the point of principle which you say is important in the case one has to get through a question of construction and if your case fails on that, one never reaches the point of principle?  So does not that make it an unsuitable vehicle?

MR WHELAN:    Well, our case would only fail on the argument as to the characterisation of the relationships would have to be had because the construction point cannot be determined in isolation from those matters but there is the possibility that one could hear all that argument and say, notwithstanding that this is the correct categorisation of the relationship, this clause still does not respond to it in favour of the applicants, but, your Honours, we would have thought that was unlikely.

If it were accepted that the basis upon which the parties stood immediately before this clause was executed was that the mortgagee was vulnerable and its vulnerability at law would only be removed by assuming the obligations under the lease, we would have thought the construction we contend for becomes fairly compelling.  The view which has prevailed below is one under which it is said, “Well, it is a receiver which is carrying out this conduct.  Receivers are agents of the borrower.  It cannot be that the mortgagee comes under any liability or, indeed, the receivers in the absence of personal adoption,” which they disavowed ‑ ‑ ‑

McHUGH J:   Well, it goes more than a general principle.  The clause itself refers to it, does it not, in a couple of places, the receiver as being the receiver of the mortgagor?

MR WHELAN:    Yes, but whether the receiver is the agent of the mortgagee or of the mortgagor, it is still the receiver of the mortgagor, always.  I think Justice Anderson made that suggestion.  It was not one that was canvassed before him.  It is an incorrect one.  The receiver is the receiver of the mortgagor whether he is acting in his personal capacity or as agent for the mortgagee or for the borrower.

McHUGH J:   But does it not lead to the problem that it is difficult then, having regard to this clause, to come to the conclusion that by going into possession the receivers were to be personally bound as principals?

MR WHELAN:    No, our principal case is the mortgagee is bound and that relies on Sheahan because ‑ ‑ ‑

GAUDRON J:   Yes, but bound because the receivers are to be taken to be the mortgagee’s agent?

MR WHELAN:    Yes.

GAUDRON J:   Not because of anything that the mortgagor did?

MR WHELAN:    No.

GAUDRON J:   I am sorry, that the mortgagee did?

MR WHELAN:    Yes.  I always mix them up too, your Honour.

GAUDRON J:   Yes.

MR WHELAN:    Yes, that is right.

GAUDRON J:   Well, that is two rather substantial hurdles you have got to success, is it not?

MR WHELAN:    No.  Sheahan establishes our proposition that when the receiver paid rent under a pre‑existing obligation it was not acting as agent of the mortgagor.  It was not, and if your Honours just remind yourselves of what was said in the majority in Sheahan at 435, the majority pointed out that there are number of activities which a receiver undertakes where it is clear that it is not acting as agent for the mortgagor and the payment of

pre‑existing or obligations incurred by the company not incurred by the receiver to a third party is one of those circumstances.  That was the very reason why in Sheahan the majority held that it was not a payment by the company.

GAUDRON J:   But you have to take that further step, that the receivers were the agent of the mortgagee and ‑ ‑ ‑

MR WHELAN:    Yes.  Once they are not the agent of the mortgagor, they are either – they must ‑ ‑ ‑

GAUDRON J:   Acting on their own account.

MR WHELAN:    Or, yes, we will take either, but we think the correct analysis is they are acting for the mortgagee, but if it transpires that they have no principal, then authority determines that they are personally liable notwithstanding their disavowals.  Your Honours, there will always be some inhibition in determining this question.  It will probably often be a factual one.  It might be, like here, said that, “Well, it is really a construction issue.”  The issue is one of general interest or of great interest and significance in commercial life.

It has come before the Court in Sheahan in a not entirely satisfactory manner because it was a preference case and it did not really directly raise the commercial problem.  It was briefly referred to in Kendall but, again, not a satisfactory case to analyse the matter and, in our submission, notwithstanding the construction issue, this is an appropriate vehicle to explore the matter.  If your Honours please.

GAUDRON J:   Thank you.  We need not trouble you, Ms McLure.

Primarily this application raises a question as to the proper construction of a clause in a mortgage.  Unless that question is determined in favour of the applicant, other questions do not arise.  So far as concerns the construction question, there is no reason to doubt the construction adopted by Justice Anderson at first instance and on appeal by the Full Court of the Supreme Court of Western Australia.  Accordingly, special leave is refused.  The matter having been the subject of argument, it is refused with costs.

Call the next application.

AT 12.56 PM THE MATTER WAS CONCLUDED