Sancterra Pty Ltd v Selby St Pty Ltd

[2020] WASC 321

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   SANCTERRA PTY LTD -v- SELBY ST PTY LTD [2020] WASC 321

CORAM:   TOTTLE J

HEARD:   3 SEPTEMBER 2020

DELIVERED          :   7 SEPTEMBER 2020

FILE NO/S:   CIV 1422 of 2020

BETWEEN:   SANCTERRA PTY LTD

Plaintiff

AND

SELBY ST PTY LTD (IN LIQUIDATION)

Defendant

Catchwords:

Practice and procedure - Claim for rectification of instrument - Application by third parties for joinder - Where third parties' rights may be affected by rectification - Third parties joined as second defendants

Equity - Rectification - Remedies - Discretionary considerations - Where third parties assert rectification may affect their rights - Where third parties' rights challenged in related proceedings involving same parties - Requirement to establish third parties' rights - Case management - Related proceedings to be tried concurrently with rectification claim

Legislation:

Rules of the Supreme Court 1971 (WA), O 18 r 6(2)

Result:

Third parties joined as second defendants
Case management directions made

Category:    B

Representation:

Counsel:

Plaintiff	:	Mr L Christensen
Defendant	:	Mr V Ghosh
Other Party	:	Mr L Warnick

Solicitors:

Plaintiff	:	CX Law
Defendant	:	Craddock Murray Neumann
Other Party	:	Chalmers Legal Studio

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

Harris v Smith [2008] NSWSC 545

Homestyle Pty Ltd v City of Belmont [1999] WASCA 59

JJ Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (1987) 12 ACLR 1

TOTTLE J:

Introduction

1. A residential property development undertaken by the defendant (Selby Street - now in liquidation) has given rise to a tripartite dispute between Selby Street and its liquidator, the plaintiff (Sancterra), which provided finance to Selby Street, and Mr Peter Charles Langford and Mrs Pauline Mary Langford (the Langfords) in their capacities as trustees for the Majestic Superannuation Fund.  The Langfords provided finance to a company related to Selby Street and, as part of that transaction, they took security from Selby Street.

2. In broad terms the dispute between Sancterra and the Langfords revolves around the question of who has the better claim to five specified strata titled residential units in the property development.

3. Sancterra's claim against Selby Street is the subject of this action and, on the pleadings as they presently stand, it involves an application to rectify the loan agreement between it and Selby Street (the Sancterra Agreement).  The action is listed for a two day trial due to commence on 22 September 2020.

4. The Langfords advance their claims against both Sancterra and Selby Street in a separate action numbered CIV 2575 of 2018. 

5. Selby Street and its liquidator resist the Langfords' claims on a number of grounds including that the transactions relied on by the Langfords may be avoided by the liquidator or that they are voidable transactions. 

6. At a strategic conference held in CIV 2575 of 2018 the parties agreed that the most efficient method of resolving all their disputes was for Sancterra's rectification action to proceed first.  The Langfords' counsel foreshadowed an application by the Langfords to be joined as a party to the rectification action.  Accordingly, trial dates were allocated for the trial of the rectification action and the Langfords' proceedings were adjourned.  The reason for this course was that the parties agreed there was a strong likelihood that if the Sancterra Agreement was rectified then this would resolve the claims in CIV 2575 of 2018.

7. The Langfords have now applied to be joined in the action on the basis that if the Sancterra Agreement is rectified, as claimed by Sancterra, their interests will be directly affected.  Selby Street consents to joinder.  Sancterra's position is more complicated. 

8. On a reading of Sancterra's written submissions it appeared that it opposed the application.  In the course of oral argument, however, Sancterra's position emerged with greater clarity.  It did not oppose the joinder but contended that the decision to have the trial of the rectification action before any other issues were determined required reconsideration. 

A synopsis of the facts and claims

1. Sancterra's claim is founded upon a written loan agreement between it and Selby Street made on 14 June 2017 pursuant to which it lent Selby Street $15,000,000.  The Sancterra Agreement provided Selby Street would grant Sancterra security in the form of a mortgage over the development land.  The mortgage was granted by Selby Street to Sancterra.

2. By cl 3.6(b) of the Sancterra Agreement it was provided that on completion of strata titling, Sancterra would release lots 5, 37, 39, 40 and 53 on the proposed strata title plan from its mortgage.

3. Sancterra claims that cl 3.6(b) failed to record the true agreement between it and Selby Street and seeks rectification of the clause by the addition of words to the effect that Sancterra would only be obliged to release its security over the specified lots if Selby Street otherwise maintained a loan to value ratio (specified in the Sancterra Agreement) and if Selby Street was otherwise not in breach of the agreement.  Sancterra maintains that Selby Street did not maintain the loan to value ratio and was in breach of the Sancterra Agreement.  On that basis Sancterra contends it was not obliged to release its security over the five specified lots.

4. In oral submissions counsel for Sancterra foreshadowed an amendment to the claim to plead that the proposed rectified meaning of cl 3.6(b) also arose from the proper construction of the agreement.

5. The Langfords claim that pursuant to an oral agreement made on 1 March 2017 (the Langford Agreement) they lent Psaros Property Group Pty Ltd (Psaros) $2,830,555.  They allege that in consideration of that loan, Selby Street:

   (a)charged the part of Selby Street's land that would, upon registration of the strata plan, become lots, 5, 37, 39, 40 and 53;

   (b)charged the net proceeds of sale of the other parts of the land with the performance of Psaros's obligation to repay the Langfords the $2,830,555; and

   (c)granted the Langfords an option to take the title to lots 5, 37, 39, 40 and 53 upon the creation of the strata plan in discharge of the obligation of Psaros to repay $2,650,000 of the $2,830,555.

6. The Langfords allege the Langford Agreement was partly performed by the lending of $2,830,555.

7. The Langfords alleged that by executing the Sancterra Agreement containing cl 3.6(b) Sancterra represented to Selby Street that the granting of the mortgage by Selby Street to Sancterra would not defeat the Langfords' equitable interest in the five lots which had been charged to them and over which they had an option.

8. The Langfords allege that they entered into a written agreement with Psaros, Selby Street and others on 5 July 2017 which recorded the terms and conditions of the Langford Agreement.

9. The Langfords say they exercised their option in respect of the specified lots on 31 May 2018.  A contract for the purchase of the lots was executed by Selby Street in favour of the Langfords.

10. The Langfords say that Selby Street requested Sancterra to discharge its mortgage over the five specified lots and Sancterra refused to do so.  The Langfords contend that Sancterra's refusal to release the lots from its security renders the representation constituted by cl 3.6(b) of the Sancterra Agreement fraudulent for the purposes of s 68 of the Transfer of Land Act 1893 (WA) and that the registration of Sancterra's mortgage did not destroy their equitable interest.

11. For present purposes it is unnecessary to summarise all the issues raised by Selby Street and its liquidator in their defence and counterclaim to the Langfords' claim.  Relevantly, they resist the Langfords' claims on one or more of the following grounds:

    (a)The Langford Agreement involved breaches of fiduciary duties by the directors of Selby Street and knowing receipt by the Langfords of the benefits of the contract for the purchase of the five specified lots.

    (b)The liquidator is entitled to avoid the contract for purchase under s 468 of the Corporations Act 2001 (Cth).

    (c)The Langford Agreement was an unreasonable director-related transaction or an uncommercial transaction and thus voidable under s 588FE of the Corporations Act.

12. The Langfords identify the rights asserted by them which they seek to protect by being joined as parties to the action as follows:

    (a)as against the liquidator - to obtain the transfer, free of Sancterra's mortgage over the five strata lots; and

    (b)as against Sancterra - to render Sancterra's mortgage defeasible against them for fraud and to compel the release of the five strata lots from Sancterra's mortgage.

Joinder application

1. Order 18 r 6(2) of the Rules of the Supreme Court 1971 (WA) confers a discretion on the court to order that any person who ought to have been joined as a party or whose presence before the court is necessary to ensure that all matters in dispute in the cause or matter may be effectually and completely determined and adjudicated upon, be added as a party. It is pursuant to that order that the Langfords' application is brought.

2. An applicant for joinder is not required to prove the existence of an established right that will be affected in the proceedings.  It is sufficient for rights claimed by the applicant to be directly affected by an order that may be made in the action:  see Homestyle Pty Ltd v City of Belmont.[1]

   [1] Homestyle Pty Ltd v City of Belmont [1999] WASCA 59 [35]

3. Sancterra acknowledges that, 'all things being equal, the Langfords' present application ought to succeed as a person ought to be joined to prevent an injustice to them where their rights will be affected by judgment and it is necessary to have those matters determined and adjudicated upon'. 

4. Rectification of the Sancterra Agreement in the manner contended for by Sancterra would have a direct adverse effect on the interests claimed by the Langfords.  The Langfords should be permitted to participate in the present action.  They will be joined as second defendants.

Case management and the order in which the actions should be heard

1. Sancterra's position may be distilled into the following propositions:

   (a)Rectification is an equitable remedy.

   (b)Third party interests will always be relevant to the exercise of the discretion in equity to grant a remedy.

   (c)If Sancterra succeeds in establishing a disconformity between the common intention of Sancterra and Selby Street and the terms of the Sancterra Agreement it will be necessary to consider whether the Langfords' rights constitute a discretionary bar to the grant of relief.

   (d)The discretion can only be exercised if the validity of the rights the Langfords seek to protect is determined.

   (e)The validity of the Langfords' rights is challenged by Selby Street and its liquidator in CIV 2575 of 2018 and thus those proceedings must be tried either before, or at the same time as, the rectification claim.

   (f)As a consequence of (a) to (e) the Langfords' proceedings, including the liquidator's claims in relation to the transactions relied upon by the Langfords should be heard and tried together. 

   (g)It will not be possible to hear the Langfords' proceedings within the time allocated for the trial of the rectification claim.

2. On the basis of the reasoning set out above Sancterra proposes that the rectification trial be adjourned and that the actions be heard and determined concurrently.  The Langfords and the liquidator oppose this course and press for the trial of the rectification claim to proceed.  It was contended by the Langfords' counsel that Sancterra's position was not supported by authority.  That is not correct.

3. In JJ Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd,[2] Kennedy J referred to the accepted rule that rectification will not be decreed if it would prejudice a bona fide purchaser for value who had acquired an interest in the property dealt with in the instrument sought to be rectified.  His Honour thought an analogous situation arose where the party seeking rectification had been placed in liquidation as he considered the unsecured creditors of the company acquired an interest in the property of the company at the commencement of the winding up.  As rectification of the instrument, a charge by the company, would adversely affect the interests of the unsecured creditors, Kennedy J refused rectification even though he was satisfied that the instrument sought to be rectified did not accord with the common intention of the parties. 

   [2] JJ Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (1987) 12 ACLR 1.

4. In Harris v Smith,[3] Brereton J referred to the rule in more general terms saying rectification will not be decreed if to do so would prejudice the rights of a bona fide third party who has intervened.

   [3] Harris v Smith [2008] NSWSC 545 [49].

5. What is clear from these cases and from others in which the rule has been applied,[4] is that in order to exercise the discretion judicially the rights asserted by the third party must be determined.  For example, if it is asserted that the third party is a bona fide purchaser for value without notice, it must be established that is so.  It is not a matter that may be assumed in the third party's favour.

   [4] See generally Hodge D, Rectification: The Modern Law and Practice Governing Claims for Rectification for Mistake (2016, 2^nd ed), 575 - 593.

6. When this principle is applied to the issues in the dispute between the Langfords, Sancterra and Selby Street it is plain that it is necessary to determine the issues raised by the liquidator of Selby Street about the Langford Agreement before or concurrently with the rectification claim.  In the face of the liquidator's claims it is not sufficient for the Langfords to assert that they have enforceable rights in respect of the five specified lots which will be prejudiced if rectification is decreed, those rights must be established. 

7. I accept the force of Sancterra's submission that the case management decision to hear the rectification case first must be reconsidered. 

8. My understanding of the parties' rationale for proposing the rectification claim be heard and determined first was that they held a high level of confidence that a determination of the rectification claim would avoid the longer and thus more expensive trial that would be required to determine the issues raised in the Langford proceedings.  On a closer analysis of what is required to determine the issues in the rectification claim that confidence appears to have been misplaced.  The advantage, which the parties contemplated would be garnered by proceeding with the rectification claim first, is illusory.  As matters presently stand, there is no alternative other than for the actions to be heard and determined concurrently.

9. I will hear from the parties as to the orders to be made in the light of these reasons.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

AS
Associate to the Honourable Justice Tottle

7 SEPTEMBER 2020