(delivered judgment of the court)
The enactment in 1993 of s 103A of the Property Law Act 1952 gave statutory recognition to a duty of care recognised by the common law as owing by a mortgagor who has decided to exercise the power of sale of a mortgaged property to subsequent chargeholders, in particular, the mortgagor. The purpose of the provision is to protect those to whom the duty is owed in the absence of any other incentive for a mortgagee selling the property to obtain the full economic value over and above the sum which will clear the mortgage. This case raises the question whether there was compliance with the duty by the mortgagee where it was interested as a member of the partnership to which the mortgagee transferred the land. It demonstrates the Court’s responsibility, when a mortgagee sale is challenged for conflict between a mortgagee’s duty and interest, to closely scrutinise the mortgagee’s conduct. The case also demonstrates the importance of the well established principle that in all cases the Court must judge compliance with the duty in a realistic way having regard to all the circumstances in which the power of sale came to be exercised.
In this case we have concluded that the mortgagee, and its associated interests, have demonstrated that they complied with the mortgagee’s duty at the time the mortgaged property was transferred to the partnership concerned. The appeal by the mortgagor against the decision of John Hansen J to the same effect in the High Court,  1 NZLR 194, is accordingly dismissed.
The appeal concerns the mortgagee sale of a 94 hectare block of land ("the Styx land") situated at Styx outside of Christchurch which was at all relevant times until March 1999 owned by the appellants ("Apple Fields") and on which Apple Fields operated an apple growing business.
In 1997 the Styx land was zoned for horticultural purposes. Apple Fields, faced at that time with a declining apple market, decided to try to redevelop the Styx land. To this end it sought to have the land rezoned for residential purposes to enable its subdivision and development. In March 1998 a subsidiary of Apple Fields contracted with the first respondent, Damesh Holdings Ltd ("Damesh"), for Damesh to advance the subsidiary $7.5 m secured against assets owned by Apple Fields and 22 wholly-owned subsidiary companies. These securities included a first mortgage over the Styx land.
At the time, Apple Fields also had a separate series of loan agreements with ANZ Banking Group ("ANZ") under which ANZ had advanced Apple Fields $12.6 m. Securities for this loan included a second mortgage over the Styx land.
During 1998 Apple Fields faced financial pressure and in particular cashflow difficulties. It began seeking equity investors, in order to reduce its substantial indebtedness. Reports to Apple Fields’ board of directors during the second half of 1997 indicated that there were a number of companies interested in the purchase of the Styx land, or involvement in a joint venture undertaking its development. Apple Fields had approached property consultants and had marketed the land both in New Zealand and overseas in Australia and Singapore. From mid-1998 Apple Fields was attempting to sell the property outright, although it was unwilling to do so at a public auction because of the concern that publicity surrounding the sale would subject Apple Fields’ financial position to unwanted public scrutiny.
In the course of 1998 Apple Fields defaulted on loan repayments under the mortgage to Damesh and on 16 November 1998, Damesh served on Apple Fields a default notice under s 92 of the Property Law Act, seeking payment of unpaid interest by 17 December 1998. Apple Fields did not remedy the default and at the end of the year it was incurring further penalty interest under the mortgage to Damesh.
By the end 1998 two persons in particular had emerged as prospective buyers of the Styx land. They were Mr Carter of the Carter group and Mr Hughes a property developer. Mr Carter had a longstanding interest in the Apple Fields property holdings. In July 1998 he had in mind that the Carter group would acquire a third of the shares in Apple Fields. After receiving advice on the financial situation of the company, Mr Carter decided that an equity investment in Apple Fields was too risky. Nevertheless, the Carter group maintained its interest in purchasing the Styx land, exploring the prospect to the extent of having discussions with ANZ, concerning terms on which it might allow its second mortgage debt to be bought out. In September 1998 Mr Carter offered ANZ $5.25 m for that debt. Mr Carter’s continuing negotiations with Apple Fields were hampered by procedural requirements. One of the requirements of the agreement was that, because it was a major transaction, Apple Fields obtain the approval of the majority of its shareholders to the sale. The Rules of the New Zealand Stock Exchange were incorporated as part of Apple Fields’ constitution.
By November 1998 Mr Carter had become frustrated with the slow and complicated process for the purchase. In late December the Carter group made a cash offer. Apple Fields counter-offered and negotiations continued into January 1999. The Carter group offered $13.4 m for the Styx land, and a further $1.4 m was offered for an adjacent separate block of the land owned by the Kain brothers. The Kain brothers were substantial shareholders in Apple Fields. Apple Fields accepted the Carter group’s counter-offer, but subject to conditions. An understanding had been reached with ANZ in relation to what it would accept for its debt.
One of the requirements of the conditional agreement between Apple Fields and the Carter group was that Damesh would leave in its first mortgage advance on the sale of the Styx land. Mr Smith, the principal shareholder of Damesh, however was advised by his solicitor against consenting to several proposals made by Mr Carter for transfer of the land subject to the mortgage. However at the end of 1998 Mr Smith, continued to be co-operative in his dealings with Apple Fields, hoping that Damesh would be able to facilitate the sale to the Carter group.
Mr Carter sought an extension of time for the confirmation of his conditional contract with Apple Fields. The proposed contract settlement date was 22 January 1999. By early January 1999, however, Mr Kain and Apple Fields’ solicitor Mr Cone became frustrated that the dealings with Mr Carter did not seem to be reaching a conclusion. The relationship between Mr Kain and Mr Carter began to deteriorate. Apple Fields decided it no longer wished to deal with the Carter group.
Mr Smith, during October 1998, introduced the Chairman of the Apple Fields board, Mr Robertson, to Mr Hughes, as a potential buyer of the land in case the negotiations with the Carter group might falter. Initially Mr Hughes was not interested, but by early January 1999 he had changed his mind. On 11 January Mr Hughes, through his solicitor Mr van Rij, made an offer to both Apple Fields and the two Kain brothers to purchase the Styx land and an adjacent property. At this point Apple Fields through Mr Cone decided that Apple Fields would prefer to deal with Mr Hughes. ANZ also withdrew its support for Mr Carter.
Negotiations between Mr Hughes and Apple Fields moved quickly during January. Mr van Rij was informed that, before a sale by Apple Fields could proceed, Apple Fields would need the approval of the New Zealand Stock Exchange and of the Apple Fields’ shareholders unless the transaction were to proceed as a mortgagee sale. The evidence of Ms Lowe, solicitor for Damesh, was that at this time Apple Fields was under considerable pressure from ANZ to complete an early sale, in particular Apple Fields wished to retain the benefit of the understanding reached by ANZ between the Carter group and ANZ. No pressure, however was being exerted by Damesh on Apple Fields for an early sale.
Following meetings between their solicitors over the weekend of 23 and 24 January the parties entered into four contracts on 26 January 1999. Under the first ("the Damesh assignment") the second respondent, Parshelf 81 Ltd ("Parshelf"), a company owned by Mr Hughes’ family, agreed to purchase from Damesh for $8.1 m the first mortgage debt owing by Apple Fields, taking an assignment of the associated securities over the Styx land. The Damesh assignment contemplated, and was conditional on, Parshelf entering into a separate contract with ANZ under which ANZ would assign to Parshelf the second mortgage securities over the Styx land. As the final step in the transaction, the Damesh assignment provided that Apple Fields would transfer the Styx land to Parshelf in satisfaction of the total debt owing to Parshelf under the assigned first and second mortgage securities. The Damesh assignment, however, was also conditional on Apple Fields either obtaining from the Stock Exchange a waiver of the requirement that a major transaction and a related party transaction should be approved by stockholders at a general meeting, or obtaining that approval.
The second contract, known as the "Damesh contract", was concluded between Damesh and Parshelf as a back-up agreement in case the Damesh assignment should not be able to proceed. Under this agreement, Damesh contracted to exercise its power of sale under the first mortgage to sell the Styx land to Parshelf for $13.7 m. No shareholder approvals or waivers of them were required and Apple Fields was not a party to the Damesh contract. It was, however, conditional on Apple Fields securing the ANZ’s agreement to the release of its securities on terms satisfactory to Parshelf and Apple Fields. Hansen J found that this dual contractual structure was first suggested by Mr Cone on behalf of Apple Fields and agreed to by Mr van Rij for Mr Hughes. In fact Mr Cone accepted that he had devised the process. Two other subsidiary contracts were entered into to enable Parshelf to acquire all Apple Fields’ rights in the Styx land and also the Kain brothers’ adjacent land.
On 29 January Parshelf and ANZ reached agreement (the ANZ agreement) for Parshelf to acquire the second mortgage securities for $5.25 m together with accruing interest, approximately $700 per day, until settlement. Settlement was stipulated to take place by 5 March 1999 and the agreement was unconditional. ANZ also separately agreed to write off and discharge Apple Fields from any further liability for the advance concerned so that the ANZ agreement proceeded on the basis that the debt secured was $5.25 m.
The Judge found that, as at 26 January 1999 when the parties entered into both the Damesh assignment and Damesh contract, no decision had been taken that Damesh would be involved in the purchase other than as a financier. On 29 January, however, Mr Hughes and Mr Smith agreed that the interests of Mr Smith and Damesh would have the option of taking up a 50% shareholding in Parshelf which was the company which would hold and develop the Styx land. On 4 February Mr Smith decided to do so, influenced, it appeared to the Judge, by the opportunity for the active involvement of his son in the development project.
Apple Fields did not apply to the Stock Exchange for the waiver until 19 February 1999. In the letter of application Mr Cone outlined benefits that Apple Fields would receive from the sale of the Styx land. He described the transaction as being worth $21.1 m to Apple Fields, that being the amount of debt for which it would gain relief. But on 2 March the Stock Exchange refused to waive the requirement that Apple Fields obtain shareholder approval, in effect insisting on a shareholders’ meeting to approve the Damesh assignment before it could proceed.
As anticipated, a lengthy delay was unacceptable to ANZ. Its solicitors indicated that ANZ was not prepared to extend the time for completion of the ANZ agreement on which hinged the write off of a substantial part of the Apple Fields debt beyond 10 March 1999. The ANZ agreement, between Parshelf and ANZ, was not itself conditional upon the Stock Exchange waiver being granted. Faced with the ultimatum the solicitors for the parties decided to give effect to the Damesh contract as the back up mechanism structuring the transaction as a mortgagee sale. Mr van Rij was concerned, because Mr Smith was to be involved in the purchase as well as in selling the property as first mortgagee. Mr van Rij had informed Mr Cone of the dual interest on 4 March. It was known also to Mr Robertson. The Judge found that Mr Robertson was satisfied, on behalf of Apple Fields, both with the process for giving effect to the transaction and the price that was to be paid.
The outcome was that Damesh, as first mortgagee, exercised its power of sale and, on 9 March 1999 under the Damesh contract, transferred the Styx land to Parshelf, which it was to hold it on behalf of a partnership. This partnership (the Kaputone Partnership), comprised two companies, one owned by the Smith family, Styx Developments Ltd, and one owned by the Hughes family, Belfast Developments Ltd. The mortgagee sale by Damesh to the Kaputone Partnership transferred the Styx land for a price of $13.7 m. Of this, $8,122,191 went to Damesh as first mortgagee, and $5,280,405 went to the members of the Kaputone partnership as assignees of the mortgage securities originally granted to the ANZ. At Apple Fields subsequent request, a surplus of $250,470 was paid to Apple Fields and its subsidiaries. The ANZ agreement was also settled on 9 March with a payment to ANZ of $5.280 m. The actual indebtedness to ANZ at the time exceeded $13.4 m. The extra benefit secured for Apple Fields was of the order of $8.1 m.
During the period of the negotiations and up until the time of settlement of the Damesh contract, the Styx land remained zoned for horticultural purposes. By September 1998 Apple Fields had finalised its application to have the land re-zoned for residential purposes in order to enhance its value. It was known that the application was supported by officials of the Christchurch City Council and by the Canterbury Regional Council. At the time of the contract and completion of the transfer of the Styx land, it was generally considered to be highly probable that the re-zoning application would be granted within a few months. The parties to the transactions entered into on 26 January were all aware of the impending re-zoning decision, which was of course critical to the proposed development of the Styx land. It was, of course, regarded as highly relevant to the value of the land.
A number of valuations were obtained by the various interested parties. These ranged from a valuation of $8.25 m on 19 January 1999 by Fright Aubrey, to one of $25.15 m, on 16 December 1998, by HG Livingstone. Darroch Ltd, who were instructed by ANZ, valued the land at $12 m on 19 December 1998. Quotable New Zealand valued it at $23.3 million on 26 January 1999. In the High Court proceedings one valuation witness, Mr Telfer, attempted to explain the differences in these assessments of value. He was critical of analyses which placed weight on prices per hectare of sales of blocks much smaller than the Styx land. He also considered that the risks and timing of the development of a large block were critical factors to be taken into account. Having regard to sales predictions, and the length of time necessary to develop the land, Mr Telfer in his evidence valued the Styx land, as at both 26 January and 9 March 1999, at $13.5 m. The trial Judge accepted that valuation.
Finally, on the subject of value we note that Mr Carter, who was a shareholder in Apple Fields, provided a written brief of evidence to the effect that he would have attended any shareholders’ meeting called to approve the Damesh assignment and made a better offer for the land. Whether a transaction with the Carter group would have been viable, however, was highly questionable given the urgency placed on the transaction by the requirements of ANZ, and that bank’s changed attitude towards Mr Carter after the previous failed negotiations.
THE HIGH COURT PROCEEDINGS
After the settlement of the Damesh contract and following payment to it of the surplus, Apple Fields issued proceedings in the High Court against Damesh, Parshelf, Styx Developments Ltd and Belfast Developments Ltd. In its amended statement of claim Apple Fields contended that, as at 9 March 1999, Damesh as mortgagee owed the plaintiffs a duty to take reasonable care to obtain the best price reasonably attainable at the time of sale, pursuant to s 103A of the Property Law Act 1952. Damesh was obliged to exercise its power of sale in good faith for the purpose of realising its security and genuinely seeking to obtain the best available price. In selling to Parshelf, in which it had an interest, Damesh was in particular bound in all respects to give absolute preference to its obligations of good faith.
Damesh was alleged to have breached those obligations by exercising the power of sale on 9 March 1999, first, without waiting for the rezoning decision, secondly, without marketing the land on the open market, and, thirdly, without disclosing its association with the purchaser. It had also exercised the power of sale for the improper purpose of obtaining an interest in the land. Apple Fields further pleaded it had neither consented to nor acquiesced in exercise of the power of sale or the price that was paid, and it had not been permitted to ascertain whether or not its shareholders approved the Damesh contract.
Apple Fields claimed that, as a consequence the benefit of the rezoning was lost to Apple Fields along with the opportunity to obtain a better price for the land. As for the Kaputone Partnership, Styx Developments Ltd was not a bona fide transferee in particular because its principal, Mr Hughes, had been acting in concert with Damesh and its principal Mr Smith. Nor was Belfast Developments Ltd which was tarnished by its association with Damesh and Mr Smith.
In a second cause of action Apple Fields pleaded that the conduct of Damesh and the other defendants was misleading and deceptive in terms of the Fair Trading Act. Apple Fields sought declarations that there had been no valid exercise of the power of sale and orders setting aside the sale transactions.
Damesh in its statement of defence pleaded that the Damesh contract had been entered into on 26 January 1999 by Damesh and Parshelf at the request of Apple Fields. Agreement had been reached with Apple Fields by Damesh on the sale price of $13.7 m. Damesh also pleaded that a consequence of the completion of the Damesh contract was that Apple Fields received an additional benefit from the transaction of $8.1 m over and above the sale price of $13.7 m. This was the difference between what was required to pay off Parshelf to discharge the second mortgage securities over the Styx land and the amount owing ANZ under those securities prior to completion of the ANZ agreement. ANZ had, of course, released Apple Fields from liability for that difference on completion of the ANZ agreement.
THE HIGH COURT DECISION
Apple Fields’ claim of breach of duty was principally founded on s 103A of the Property Law Act 1952. It was contended that this duty was breached by Damesh on 9 March 1999, the date on which the Damesh contract was settled. Apple Fields also contended that the transfer on 9 March was in of breach of equitable duties of good faith owed by Damesh to Apple Fields. The importance of the date of 9 March 1999 was, first, that between 26 January when the four interrelated contracts were entered into and 9 March the Kaputone Partnership had been formed to acquire the land. Secondly, the liability of Apple Fields under first and second mortgage securities was reduced from $21.3 m by approximately $8.1 m by virtue of Parshelf’s settlement of the ANZ agreement. Apple Fields’ claim is that both its rights, and the duties of each of the respondents, are to be assessed in relation to actions taken at a date by which its indebtedness had been reduced.
Hansen J held that, subject to strict compliance with the duty of reasonable care imposed by s 103A, a mortgagee or a company in which a mortgagee had an interest could properly purchase the mortgaged land on exercising the power of sale. The mortgagee’s conflict of interest, in his view, gave rise to a higher duty than if the power of sale was being exercised to convey the mortgaged property to a stranger. But provided that higher duty was met the transaction would be upheld by the Court.
The Judge referred to English and Australian cases as indicating the need, in these circumstances, for the mortgagee to show protection had been given to the mortgagor’s interests by taking expert advice, first, as to the method of sale, secondly, as to steps to be taken to make the sale a success and, thirdly, as to the amount of the reserve. He emphasised, however, that it was necessary to take into account the circumstances of the particular case to ascertain if the higher duty had been satisfied in a situation involving a conflict of interest. This requirement was especially so if such advice or such steps as the cases contemplated had not been taken. Hansen J appears to have accepted that the relationship of Damesh as mortgagee with the Kaputone Partnership as transferee under the power of sale brought the higher duty of strict compliance with s 103A into application.
The Judge accepted that Damesh exercised the power of sale without taking independent advice as to the method of sale and other steps which in general would be reasonably necessary to obtain the best price. Nevertheless, he concluded that Damesh was not in breach of its duty under s 103A. First, there was a limited market for the property. This was demonstrated by the failure of the previous efforts of Apple Fields to sell it over a period of time. Secondly, the price paid for the Styx land could be regarded as fixed ‘at arms length’ from Damesh in that it had been agreed with Mr Kain of Apple Fields by Mr Hughes. Indeed Apple Fields had requested Damesh to enter into the Damesh contract under which it became bound to exercise the power of sale. Thirdly, Hansen J had regard to what he held to be the fair value of the property preferring the evidence of one particular valuer, Mr Telfer, on that point. Finally, the price had to be considered in the context of what was achieved by performance of the associated ANZ agreement. This asset resulted in the release by ANZ of Apple Fields’ debt over and above $5.25 m. Hansen J held that this element made the real value of the transaction to Apple Fields over $21 m. He took the view that in those special circumstances there was compliance with the duty under s 103A.
Hansen J also said that, if he were wrong on the question of liability, he would not have restored Apple Fields to a position in which it resumed entitlement to the equity of redemption. To unwind the transaction would have given Apple Fields an unjustified windfall of $8 m in terms of written off bank debt. Furthermore, Apple Fields itself had suggested and pressed Damesh to make a commitment to exercise its power of sale as mortgagee, in a back-up transaction, in case Apple Fields’ own transaction, the Damesh assignment should fail. For these reasons he would have confined any remedy to damages. If Apple Fields had established liability he would have awarded damages of $100,000.
The Judge held there was no deceptive or misleading conduct in terms of the Fair Trading Act and dismissed that cause of action.
SUBMISSIONS ON APPEAL
The general submission of Mr Fogarty QC for the appellant was that, contrary to the High Court judge’s finding, Damesh was in breach of its duty to take reasonable care to obtain the best price reasonably obtainable at the time of sale. He criticised the Judge’s approach as one which assumed that a mortgagee’s right to decide when to exercise its power of sale carried with it the power to sell forthwith on deciding to exercise the power. The Judge had wrongly accepted that the best price reasonably obtainable was a price that could be ascertained forthwith without making efforts over time to secure a better price. On Mr Fogarty’s argument this approach failed to recognise that the power to choose the time of sale did not excuse the mortgagee from taking reasonable precautions to obtain the best price over a period of time.
Mr Fogarty also argued that Apple Fields’ request to Damesh to enter into a contract to sell to Parshelf as a back-up to its contract to sell did not affect the statutory duty of care of Damesh as mortgagee. That was because Damesh had actual knowledge that the Damesh contract was a back-up device which sought to evade the prohibitions in the Apple Fields constitution on entering into major transactions without shareholder approval or a waiver of that requirement from the NZ Stock Exchange. In those circumstances entry by Damesh and Parshelf into the Damesh contract was tainted by their knowledge of ultra vires acts of the officers of Apple Fields. The Damesh contract was also an agreement with a financially vulnerable seller. For these reasons it could not be relied on by Damesh to support its claim that it had complied with its duty. Finally, Mr Fogarty argued that the Judge had been wrong to have regard to the ANZ contract in deciding whether Damesh had complied with its duty. The terms of the ANZ contract had not in any way forced performance of the Damesh contract. Neither did those terms diminish the duties of Damesh in relation to the exercise of mortgagee powers.
Principles of affirmation, waiver and estoppel had no effect against prohibitions in the constitution of Apple Fields, known to Damesh and Parshelf. Because of the involvement of Damesh in the Kaputone Partnership, Mr Fogarty contended that the power of sale was exercised for the purpose of preferring the partnership rather than securing repayment of the debt. He pointed to the imminence of the decision on rezoning and contended that the first mortgage debt was not at risk. All this coloured Damesh’s behaviour which was a failure to discharge its special duty when selling to a close associate. This argument was presented in terms of a breach of equitable obligations as well as the statutory duty under s 103A.
Finally, the breach of duty was not cured by the Judge’s finding that the market value of the land was $13.5 m, a finding which Mr Fogarty also challenged. He sought recission but if that was not allowed damages should be assessed at $10 m reflecting the value of the land on approval of rezoning. Finally he contended concealment of the conflict of interest amounted to breach of the Fair Trading Act.
For Damesh, Mr Harrison QC supported Hansen J’s findings that Damesh had not breached its duty under s 103A in entering into the Damesh contract; had not acted in bad faith, nor in breach of the Fair Trading Act. Mr Camp QC argued that claims for breach of s 103A turned on their particular facts and the value of case law was largely confined to the articulation of general principles. As the arguments of both senior counsel for the respondents was largely supportive of the analysis of the Judge it is unnecessary to traverse them in detail further.
THE DUTY OF CARE
Most discussions of the duty of a mortgagee in the exercise of the power of sale commence with the decision of the English Court of Appeal in Cuckmere Brick Co Ltd v Mutual Finance Ltd  Ch D 949. The Court unequivocally restated the content of the duty as encompassing not only the long recognised equitable obligation to act in good faith, but also an obligation to take reasonable care to obtain the true market value of the property at the time the mortgagor chooses to sell it.
The duty of care arose as a result of the proximity between the mortgagee who had control of the sale, including the right to choose when to sell, and the mortgagor who was vitally effected by the result. However in delivering the principal judgment of the Court in Cuckmere Brick Co Ltd, Salmon LJ was careful to indicate there were limits to the scope of duty:
I accordingly conclude, both on principle and authority, that a mortgagee in exercising his power of sale does owe a duty to take reasonable precautions to obtain the true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty the facts must be looked at broadly, and he will not be adjudged to be in default unless he is plainly on the wrong side of the line.
This qualification was reiterated by Richmond J in the first New Zealand decision after Cuckmere Brick was decided. In Alexandre v NZ Breweries Ltd  1 NZLR 497 (CA), after indicating he was content to assume a duty of care existed, he added (pp501-502):
But whether in any particular case there has been a breach of that duty should I think be judged in a realistic way and with ample regard to the fact that a power of sale is given to a mortgagee to enable him to obtain repayment of his advance.
In the Privy Council decision Tse Kwong Lam v Wong Chit Sen  1 WLR 1349, Lord Templeman cited the same passage from Salmon LJ’s judgment in Cuckmere Brick with apparent approval. Referring to the position of a mortgagee who sold the mortgaged property to a company in which he and members of his family were the only shareholders he said:
The mortgagee and the company seeking to uphold the transaction must show that the sale was in good faith and that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable at the time.
In New Zealand there followed definitive statements by this Court that the principles in Cuckmere Brick as to the nature of the mortgagee’s duty form part of the law of New Zealand. In Countrywide Banking Corp v Robinson  1 NZLR 75 (CA), 77 Cooke P delivering the judgment of the Court said:
The important point is that it is for a mortgagee contemplating selling in the exercise of a power of sale to decide if and when he will sell. In the event of his electing to sell he does owe a duty to the mortgagor at that time to obtain the best price.
Earlier in First City Corp v Downsview Nominees Ltd  3 NZLR 265, 277, a case concerned with the nature of duties owed by a receiver and a debenture holder to subsequent debenture holders, Richardson J, in delivering the judgment of the Court, had referred to the duty of care owed by a mortgagee which he regarded as supportive of his conclusion that such a duty of care was generally owed by a receiver. Both Cuckmere Brick and Tse Kwong Lam were cited in support of that proposition. The view of Gault J in the High Court that there was such a duty was upheld.
On appeal in Downsview Nominees Ltd v First City Corp Ltd  1 NZLR 513, however the Privy Council rejected the categorisation of a mortgagee’s obligation to a mortgagor as a general duty of care but did, as an exception, affirm the principle that such a duty arose in relation to exercise of the power of sale of mortgaged properties. Lord Templeman said:
The general duty of care said to be owed by a mortgagee to subsequent encumbrancers and the mortgagor in negligence is inconsistent with the right of the mortgagee and the duties which the Courts applying equitable principles have imposed on the mortgagee. If a mortgagee enters into possession he is liable to account for rent on the basis of wilful default; he must keep mortgage premises in repair; he is liable for waste. Those duties were imposed to ensure that a mortgagee is diligent in discharging his mortgage and returning the property to the mortgagor. If a mortgagee exercises his power of sale in good faith for the purposes of protecting his security, he is not liable to the mortgagor even though he might have obtained a higher price and even though the terms might be regarded as disadvantageous to the mortgagor. Cuckmere Brick Co Ltd v Mutual Finance Ltd  Ch 949 is Court of Appeal authority for the proposition that, if the mortgagee decides to sell, he must take reasonable care to obtain a proper price but is no authority for any wider proposition.
Because in Downsview Nominees the Privy Council took the view on the facts that liability was established against the receiver for breach of his equitable duty of good faith it was unnecessary for it to consider in any detail the difference in scope, if any, of the equitable duty from the common law duty. However the view has recently been expressed in England that the content of the two duties is the same: Medforth v Blake  3 All ER 99 C.A.
In New Zealand, in relation to receivers, the nature of the duty owed to subsequent debenture holders and unsecured creditors was quickly addressed by Parliament in s 19 of the Receiverships Act 1993. In relation to mortgagees generally the existence of a duty of care from the time a decision was taken to exercise the power of sale was given legislative recognition in 1993 in what is now s 103A of the Property Law Act 1952. This provision is expressed in closely similar terms to those which had applied to receivers selling property of a company since 1980. cf s 345B of the Companies Act 1955.
Section 103A and its reinforcing provision s 103B provide as follows:
Duty of mortgagee exercising power of sale
A mortgagee who exercised a power of sale of land or other mortgaged property, including exercise of a power of sale through the Registrar of the High Court under section 99 of this Act, owes a duty to the mortgagor to take reasonable care to obtain the best price reasonably obtainable as at the time of sale.
No defence or indemnity
Notwithstanding any enactment or rule of law or anything contained in the deed or instrument by or under which the power of sale is conferred,—
Against that context we take the view that s 103A is to be read as a legislative affirmation of the scope of the duty of care in negligence owed by a mortgagee who has decided to sell as recognised since 1974 by New Zealand courts. That duty developed from the principles originally stated by Salmon LJ in Cuckmere Brick in the cases referred to in this judgment up to and including the Court of Appeal’s decision in the Downsview Nominees and Countrywide Banking Corp cases. The Privy Council decision in Tse Kwang Lam was an important part of those developments. In our view that duty of care coexists with the equitable duty of good faith, but, in most cases, including the present, the duty of care will be the more onerous obligation: Commercial & General Acceptance Ltd v Nixon (1981) 38 ALR 225, per Brennan J at p 249.
Section 103A expresses the duty as owed to the mortgagor. As Mr Harrison pointed out, however, "the mortgagor" is defined in the Property Law Act as including:
any person .... entitled to redeem a mortgage according to his estate, interest or right in the mortgaged property.
A subsequent mortgagee falls within that description and accordingly is expressly entitled to benefit for the statutory recognition of the duty of care. The extent to which others such as guarantors of a mortgagor’s obligations is not a matter requiring further consideration in this case.
The duty of care owed by the mortgagee is concerned with obtaining the best price reasonably obtainable as at the time of sale. As such, it does not qualify the mortgagee’s right to decide in its own interest if and when to sell: Countrywide Banking Corp v Robinson at p 77. The reason is that a duty to sell at a particular time or at all would make the business of lending almost impracticable: see China & South Sea Bank Ltd v Tan Soon Gin  1 AC 536, 545 P.C.
Once, however, a mortgagee decides to sell it becomes subject to the duty. What constitutes reasonable care will, of course, always turn on the facts of the case. Mr Fogarty relied on some observations of Lord Templeman in Tse Kwang Lam to the effect that a mortgagee wishing to sell the mortgaged property to a company in which he was interested was required to take expert advice as to the method of sale, on how to stimulate market interest and concerning the reserve price (p 1359G). These observations followed an earlier comment that in that case there was no possible sound reason for not taking expert advice. We do not read the Privy Council’s judgment as indicating there is a general rule that a mortgagee who has decided to sell and is minded to sell to a party in which he has an interest must invariably take advice and thereafter market the property over a period of time. The judgment on this point does no more than demonstrate that in some circumstances, as in the Tse Kwang Lam case, to proceed immediately to a sale will be indicative of a breach of the duty of care. However in other cases it will not.
In the Tse Kwang Lam case the company owned by the mortgagee’s family purchased the property from the mortgagee at public auction. The company made the only bid. The auction had been advertised but advice was not sought by the mortgagee as to the method of sale or possibility of stimulating interest in the auction. Lord Templeman said (p 1356):
In the result their Lordships consider that in the present case the company was not debarred from purchasing the mortgaged property but, in view of the close relationship between the company and the mortgagee and in view in particular of the conflict of duty and interest to which the mortgagee was subject, the sale to the company for $1.2m can only be supported if the mortgagee proves that he took reasonable precautions to obtain the best price reasonably obtainable at the time of sale.
In the circumstances the Privy Council held that the mortgagee carried the burden of proof that he had taken all reasonable steps to obtain the best price reasonably payable (p 1358H). The passage cited above states the principles on which the Court will decide whether the duty under s 103A has been breached when a mortgagor transfers the property to a party in which it has an interest. Imposition of the burden of proof of compliance with the duty on the mortgagee is sufficient to ensure close and effective scrutiny by the Court of transactions that are challenged. It is neither necessary nor appropriate, however, to impose a standard of proof on the mortgagee that is higher than the civil standard.
If the mortgagee fails to persuade the Court such reasonable precautions have been taken and that the interested party bought at the best price reasonably obtainable, the remedy for the breach will as a general rule be to set aside the sale and restore to the borrower the equity of redemption (pp 31359-60). But if, as in the circumstances in Tse Kwang Lam, such a remedy is inequitable the Court’s remedy will be confined to damages.
The duty Damesh as mortgagee owed to Apple Fields as mortgagor was, in the words of s 103A, "to take reasonable care to obtain the best price reasonably obtainable as at the time of sale". It is convenient to start by considering when Damesh became subject to that duty. The authorities indicate that a mortgagee contemplating selling in the exercise of the power to sell is entitled to decide in his own interest if and when to sell. Only on deciding to sell does the mortgagee become subject to the duty of care. The same duty was then owed to ANZ as second mortgagee as was owed to Apple Fields as mortgagor.
That duty of care in this case arose at the time Damesh, effectively Mr Smith, decided to sell. Prior to deciding to sell Damesh was entitled to act in its own interests in deciding both if and when to sell. The decision to sell was made shortly before 26 January when Mr Smith decided to accede to the request by Apple Fields’ solicitor that Damesh enter into a back-up contract which would be completed if the Damesh assignment could not proceed. Until then Mr Smith was content for Apple Fields to transfer the Styx land directly to Parshelf and for there to be one agreement, negotiated by Mr Tom Kain and Mr Hughes, which would give effect to that transaction.
Subject to one qualification the point at which compliance by Damesh with the duty of care is to be assessed is when Damesh entered into the Damesh contract. The qualification arises from an argument advanced by Mr Fogarty which goes to the validity of the Damesh contract, which argument we address shortly. On 26 January 1999 Damesh became committed to exercise its power of sale to sell the Styx land to Parshelf, should it be impracticable for Apple Fields directly to do so under the Damesh assignment. It does not matter that the obligation of Damesh was in a broad sense conditional on that impracticability or on satisfactory terms being settled with ANZ for the acquisition of its securities. In terms of s 103A the question of compliance by Damesh with its duty ‘at the time of sale’ therefore requires consideration of whether entry into the Damesh contract was in compliance with the duty that had arisen only a few days earlier "to exercise reasonable care to obtain the best price reasonably obtainable."
What is the ‘best price’ in the present context is to be assessed having regard to the purpose of s 103A, which is to protect the vulnerability of those to whom the duty is owed, arising from the absence of any incentive for a mortgagee to obtain the full value of the property over and above the sum needed to clear the mortgage debt. In the present context, that means the price stipulated in the Damesh contract cannot be considered in isolation from other benefits flowing to those protected by the duty, in particular, Apple Fields as mortgagor. In this respect matters which we shortly address on the question of whether reasonable care was taken are also highly pertinent to whether $13.7 m was the best price. So is the fact that, when it must have realised its own offer was making no progress, the Carter group, the only other potential purchaser which had emerged in the months preceding the sale, failed to increase that offer prior to 26 January. We regard that fact as more significant than the evidence that Mr Carter would have offered a higher price at a shareholders meeting had one been held. It is, however, unnecessary to further examine the question of best price as this case can plainly be decided on a consideration of the question of whether reasonable care was taken by Damesh.
Damesh ended up taking an interest in the purchaser. The appellant’s argument was, in essence, that in those circumstances reasonable care required that expert advice should have been taken when the duty arose on questions of mode of sale, marketing of the property and a minimum price. Failure to defer the sale until that advice was obtained was in breach of the duty. In our view however there are four factors which indicate that the prompt entry into the Damesh contract following the decision to exercise the power of sale was in fact an exercise of reasonable care by Damesh.
First, Apple Fields itself wanted to sell at that time and on the same terms. It was concurrently itself contracting to do so and pressed Damesh to enter into a separate contract only in case Apple Fields own contract, the Damesh assignment could not proceed. Secondly, and importantly, Damesh knew, that provided payment was made promptly, ANZ would accept a sum of $5.25 m in full satisfaction of its secured debt which totalled $13 m. This made the real worth of the sale to Apple Fields in excess of $21 m. Damesh also knew ANZ was impatient to be paid and that Apple Fields desire for Damesh to enter into a back-up contract on 26 January was to better secure Apple Fields ability to make the payment and access the collateral advantage of debt write off. Delay for any reason carried the risk that ANZ would withdraw. It had indicated the arrangement would not apply after 31 January.
Thirdly, the price struck for the property of $13.7 m was negotiated by Mr Tom Kain of Apple Fields with Mr Hughes, independently of Mr Smith and Damesh. Although it was an issue strongly contested at the trial, the Judge found that as at 26 January Mr Smith had not decided that his family interests should participate in the purchase. As already indicated, that decision was taken shortly thereafter. The price struck for the land was therefore a transaction from which Damesh was truly independent.
Fourthly, and in consequence, the Judge was satisfied the allegations Mr Smith and Damesh had acted in bad faith on 26 January were without foundation. Indeed that continued to be the position throughout.
Taken together, the combination of these factors has persuaded us that Hansen J was plainly right to conclude that for Damesh, having decided to sell, to enter almost immediately into the Damesh contract was an exercise of reasonable care, despite the absence of any attempt independently to verify that a different method of sale, involving marketing of the property over a period of time, would not produce a better price. Damesh has discharged the onus which falls on it simply because eventually interests associated with Mr Smith became a member of the Kaputone partnership which acquired the Styx land. This was not a case of a mortgagee acting with unreasonable haste or in disregard of a mortgagor’s interests. On the contrary Damesh was at all times careful to respect those interests.
Mr Fogarty advanced an argument, however, that the correct date at which to consider compliance by Damesh with its duty was 9 March 1999, the date on which Damesh actually transferred the Styx land. He said that Apple Fields had acted ultra vires its constitution in promoting the Damesh contract as an alternative transaction for the sale and purchase of the land. Damesh and Parshelf knew Apple Fields required shareholders’ consent or a Stock Exchange waiver to sell the land itself and participated in a device to evade those responsibilities by concluding the Damesh contract. He said that because the Damesh contract was void when entered into, the date at which compliance by Damesh with the duty was to be assessed was that on which the transaction was settled namely 9 March 1999. By that date the ANZ agreement had been completed. Apple Fields was relieved of its debt over and above $5.25 m. Mr Fogarty argued that the arrangements with ANZ were therefore irrelevant.
We are satisfied that this attack on the Damesh contract fails. First, Apple Fields was not a party to the Damesh contract. It did not need to be. Damesh had given notice to Apple Fields of default and on 26 January it was entitled to sell subject only to compliance with its duty of care. As Mr Camp put it Damesh was unaffected by Apple Fields’ rules. The Damesh contract cannot therefore be characterised as a mechanism for evasion by Apple Fields of its duties under its constitution. Secondly, the advantage to Apple Fields of ANZ’s surrender of its rights was integral to the whole transaction. It was an advantage which had to be unlocked, and quickly, if Apple Fields was to secure that advantage. The Damesh contract was in the end the crucial means of unlocking the advantage within the time available. It overcame risks, including risks of delay, associated with the requirement for shareholders’ consent to a transfer by Apple Fields or a Stock Exchange waiver. To separate the arrangements with and payment to ANZ from the circumstances in which compliance with the duty of care is to be assessed would in our view be both artificial and irrational.
Thirdly, that Damesh ended up participating in the purchase does not in our view tarnish the transaction. The situation is close to that decided in the leading case of Farrar v Farrars Ltd (1888) 40 Ch.D. 395, where a solicitor who had acted for the mortgagee in arranging a sale subsequently decided to take up shares in the company formed to purchase the property. His actions were upheld.
As Lindley LJ put it:
It appears to us that Mr Farrar in no way disregarded his duty to his mortgagors, on the contrary, he was doing the utmost in his power to find a purchaser at the best price that could be got. At this time his interest was to get the best price he could, for his security was by no means ample, he was pursuing that interest, and was discharging his duty at the same time, and he had no conflicting interest in the matter.
This, in our judgment, settles the question. The subsequent agreements and conveyances do no more than give effect to the bargain which was entered into in November, and the real character of which has been already considered.
See also by way of contrast ANZ Banking Group Ltd v Bangadilly (1978) 139 CLR 195, 225-227 per Aickin J.
It is accordingly unnecessary for us to consider the issues of acquiescence, waiver and estoppel. Nor need we address the Judge’s contingent finding that he would have awarded damages had there been a breach of duty. Finally, we are satisfied there was no misleading or deceptive conduct and the cause of action pleading the Fair Trading Act must fail.
The appeal is dismissed.[a] Costs are awarded in favour of the respondents in the total sum of $20,000 to be apportioned equally between the first and third and second and fourth respondents respectively. The appellants must also pay the respondents’ disbursements and, in the case, of the respondents represented by Mr Harrison and Mr Matthews, travelling and accommodation expenses incurred by two counsel, all to be certified if necessary by the Registrar.
Cuckmere Brick Co Ltd v Mutual Finance Ltd  Ch D 949; Alexandre v NZ Breweries Ltd  1 NZLR 497; Tse Kwong Lam v Wong Chit Sen  1 WLR 1349; Countrywide Banking Corp v Robinson  1 NZLR 75 (CA); First City Corp v Downsview Nominees Ltd  3 NZLR 265; Downsview Nominees Ltd v First City Corp Ltd  1 NZLR 513; Medforth v Blake  3 All ER 99 C.A; Commercial and General Acceptance Ltd v Nixon (1981) 38 ALR 225; China & South Sea Bank Ltd v Tan Soon Gin  1 AC 536; Farrar v Farrars Ltd (1888) 40 Ch.D. 395; ANZ Banking Group Ltd v Bangadilly (1978) 139 CLR 195
Property Law Act 1952: s.103A
Receiverships Act 1993: s.19
G Fogarty QC and K Teh for the Appellants (instructed by Malley & Co,
R Harrison QC and H Matthews for the First and Third Respondents (instructed by White Fox & Co, Christchurch)
M R Camp QC for the Second and Fourth Respondents (instructed by Parry Field, Christchurch)
[a] Apple Fields Ltd appealed against this decision. The Privy Council (Lord Hutton, Lord Slynn of Hadley, Lord Hobhouse of Woodborough, Lord Scott of Foscote, Lord Rodger of Earlsferry) on 7 July 2003 dismissed the appeal: see Apple Fields Ltd v Damesh Holdings Ltd @www.ipsofactoJ.com/international/index.htm  Part 6 Case 13 [PC].
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