Ipsofactoj.com: International Cases [2004] Part 3 Case 11 [NZCA]




- vs -

NMFM Mortgages Ltd




11 DECEMBER 2002


William Young J

(delivered the judgment of the court)


  1. This is an appeal from a judgment of Master Thomson delivered on 18 December last year in which he granted summary judgment for the plaintiff NMFM Mortgages Ltd ("NMFM") against Mr. Philip McGaveston in the sum of $284,996 together with interest and costs.

  2. Mr. McGaveston now appeals.


  3. This case concerns a property at 68 Mountain Road, Auckland. It was acquired in May 1997 by First Investments Limited ("First") with funding from Elders Pastoral Holdings Ltd and Elders Rural Financing NZ Ltd ("Elders"). At all material times First was also indebted to NMFM which held security over its assets pursuant to a debenture dated 29 March 1996. So the property at Mountain Road was subject to a first mortgage to Elders and a second charge pursuant to the debenture to NMFM.

  4. By an agreement of 14 November 1997 First agreed to sell the Mountain Road property to Sage Securities Ltd ("Sage"). Sage was and is the alter ego of Mr. McGaveston. The purchase price was $640,000. The deposit paid was $160,000. The agreement provided for settlement on 17 March 1999. This transaction was in the nature of an underwriting arrangement as First retained a right to cancel the agreement. Although the agreement was between First and Sage, Mr. McGaveston also had rights under the agreement. These last matters appear from special conditions 17 and 18 which provided:-


    The vendor may cancel this agreement at any time prior to 17 August 1998 by written notice to the purchaser or its solicitor together with repayment of the deposit herein and a further repayment of $40,000 plus GST by way of compensation for such cancellation, both payments by way of bank cheque whereupon the purchaser shall furnish to the vendor a release of any caveat registered against the title of the property in respect of this agreement. If such cancellation and payment are effected prior to 17 March 1998, the compensation payable shall be reduced to $20,000 plus GST.


    The parties agree that this agreement is intended to confer a benefit on Philip Arthur McGaveston as shareholder of the purchaser and, for the purposes of the Contracts (Privity) Act 1982, obligations enforceable at the suit of Philip Arthur McGaveston.

    The approval of NMFM (as debenture holder) to this transaction was not obtained.

  5. In February 1998 NMFM appointed receivers in respect of First. In April 1998 First was placed in liquidation.

  6. In light of subsequent events it seems likely that the Mountain Road property was worth more than $640,000 which Sage had agreed to pay. This was more than enough to clear the indebtedness to Elders. But once receivers were appointed, it was inconceivable that First would exercise its rights under special condition 17 as this would involve the necessity to make payments to Sage and Mr. McGaveston. It was also inherently unlikely that Sage would be able to settle the contract with the receivers of First. The fundamental problem for Sage and Mr. McGaveston was that the amount owed by First to NMFM was far greater than the purchase price payable under the contract (particularly after allowance was made for the debt owed to Elders). In those circumstances, the commercial dynamics of the situation were that Sage and Mr. McGaveston were going to be out of pocket for the deposit paid and would be unable to secure any advantage associated with the difference between the market value of the Mountain Road property and the contract price under the November 1997 agreement.

  7. Mr. McGaveston and Sage sought to address these problems by outflanking NMFM. Accordingly:-


    Mr. McGaveston acquired the Elders mortgage in July 1998 (this requiring a payment by him of $562,598).


    On 18 August 1998 (the day after First’s entitlement to cancel the agreement under special condition 17 lapsed) he executed a declaration of trust in favour of Sage in respect of the Elders mortgage.


    In November 1998 Mr. McGaveston exercised the power of sale under the Elders mortgage and the Mountain Road property was sold for $900,000 plus GST.


    Mr. McGaveston and Sage retained the difference between the amount owed in relation to the assigned Elders debt and the proceeds of sale claiming to be entitled to this money by way of refund of the deposit paid and damages for breach of contract on the part of First and that this entitlement was secured by the Elders mortgage.

    At an early stage in the proceedings Mr. McGaveston also sought to contend that a claim for damages he has against First relating to another property might also be encompassed by the Elders mortgage. This contention was not advanced on appeal and we say no more about it.

  8. We are not entirely sure as to the basis for the claim to the refund of the deposit. It is common ground that First never exercised its power of cancellation under special condition 17 (which would have triggered the necessity to refund the deposit). It would plainly not be open to Sage and Mr. McGaveston to seek both a refund of the deposit and full loss of bargain damages. The case was presented to us on the basis that Mr. McGaveston was primarily relying on a claim for loss of bargain damages and the status of the claim for the refund of the deposit was not explored in any detail.

  9. Accordingly, for ease of reference we will treat the claim to the refund of the deposit as a subset of the entitlement of Mr. McGaveston and Sage to unliquidated damages for loss of bargain. Where it is necessary to distinguish between the two claims we will do so, see para [30] below.

  10. If this claim for unliquidated damages against First is not secured under the Elders mortgage, the surplus inappropriately retained by Mr. McGaveston following the sale was $284,996 (being the amount for which summary judgment was sought and obtained). We will refer to this sum as "the surplus". It is common ground that if Mr. McGaveston and Sage were not entitled to treat the surplus as being within the definition of money secured by the Elders mortgage, this money ought to have been paid to NMFM.

  11. Before dealing with the Master’s judgment, it may be of assistance to set out in a little detail the basis of Mr. McGaveston’s claim to retain the surplus.


  12. The Elders mortgage provides for assignment by the mortgagee and further that the term:-

    "[T]he Mortgagee" shall, where not inconsistent with the context, be deemed to mean, include and bind the successors and assigns of the Mortgagee.

    Accordingly, as a first step in the argument, Mr. McGaveston claims that references to "the Mortgagee" in the mortgage must be read as encompassing him and Sage. We are prepared to decide the case on the assumption that this is right although we have reservations whether Sage was an assignee of Elders. These reservations are of no particular moment given Mr. McGaveston’s personal rights under special condition 18 of the contract.

  13. The second step in Mr. McGaveston’s argument is that First breached its contract with him and Sage and that they are therefore entitled to loss of bargain damages. We think that this is right albeit that there is scope for debate as to when the breach of contract occurred. Mr. Laurenson, for Mr. McGaveston, maintained that the breach of contract occurred when Mr. McGaveston, in his role as mortgagee, sold the property under the Elders mortgage. So his contention is that Mr. McGaveston, qua purchaser under the agreement for sale and purchase, has a claim for damages against First associated with a mortgagee sale implemented by Mr. McGaveston, qua mortgagee under the Elders mortgage.

  14. The third and critical step in the argument is that the claim for unliquidated damages is secured by the Elders mortgage.

  15. The relevant provisions in the mortgage are as follows:-


    The charging clause:-

    IN CONSIDERATION of the Mortgagee providing, or agreeing to provide, to or for the Mortgagor from time to time, financial services more particularly defined as The Moneys Hereby Secured, the Mortgagee hereby convenants and agrees with the Mortgagor as herein set forth ....


    The first part of the "Moneys Hereby Secured" clause:-

    The Mortgagor will duly and punctually pay the Moneys Hereby Secured to the Mortgagee, at the times and in the manner agreed upon in writing, between the Mortgagor and the Mortgagee from time to time, or failing agreement upon demand served by the Mortgagee in the manner provided in Clause 13 hereof.


    The definition of "Moneys Hereby Secured":-

    All of the present and future direct indirect or consequent indebtedness of the Mortgagor to the Mortgagee. Without limiting the foregoing and by way of example and not limitation the Moneys Hereby Secured include:


    All moneys which are now, or may hereafter from time to time, be owing to the Mortgagee by the Mortgagor solely (and if more than one person is named as Mortgagor then severally by each person so named).


    All Moneys owed by the Mortgagor together with any person or persons




    Amounts owing in respect of the Mortgagee taking an assignment (whether absolute or by way of mortgage) of any debt or other obligation;


    Any indebtedness arising out of any guarantee indemnity bond or other obligation given or undertaken by the Mortgagor to the Mortgagee, or given or undertaken by the Mortgagee for, or at the request of the Mortgagor;




    Any other indebtedness whatsoever of the Mortgagor to the Mortgagee;

    We have emphasised the parts of the definition which are of most assistance to Mr. McGaveston and Sage.


  16. Arguments similar to those advanced on behalf of Mr. McGaveston have surfaced before. The cases have involved a number of factual permutations revolving around the common theme of mixing and matching, via assignment, of securities and debts which, prior to assignment, were not related. Sometimes it is the secured creditor who takes an assignment of a pre-existing unsecured debt and then seeks to assert that the assigned debt is within the scope of the security. In other cases, an unsecured creditor has taken an assignment of an existing security and, relying on arguments broadly akin to those advanced by Mr. McGaveston, claimed that the security extends to the pre-existing debt.

  17. Mix and match arguments, if successful, are subversive of commercial expectations in a number of respects:-

    1. As between the debtor and the secured creditor. This is a point well discussed and illustrated in Re Clark’s Refrigerated Transport Pty Ltd (in liquidation) [1982] VR 989 at 995-996.

    2. As between secured creditors. In this case, it is perfectly clear that acceptance of Mr. McGaveston’s argument would be contrary to normal expectations as between Elders and NMFM.

    3. As between secured creditors and unsecured creditors. There is not much point having a second security (as NMFM does) if unsecured creditors, by the simple expedient of acquiring the first security, can leap-frog the second charge.

    4. In a liquidation context as between a liquidator and unsecured creditors.

  18. Mix and match arguments have usually been addressed by the Courts as standing or falling by reference to the construction of the security document concerned. As will become apparent, we are of the view that the money secured clause in the Elders mortgage does not catch the claim for unliquidated damages which Mr. McGaveston and Sage have against First. Accordingly we are content to deal with the case solely on the basis of the true construction of the Elders mortgage.

  19. It might be thought to be unsatisfactory that acceptance or rejection of Mr. McGaveston’s argument should rest on narrow questions of construction of a mortgage prepared by Elders. Indeed, there are broader points of principle involved and there are at least two other lines of argument upon which Mr. McGaveston’s argument might founder even if the construction point could be resolved in his favour:-

    1. By reference to general principles of equity applying as between mortgagor and mortgagee, see for instance the judgment of Santow J in Re Modular Design Group Pty Ltd (1994) 35 NSWLR 96 at 106; and

    2. By reference to principles of public policy relating to the principled administration of the insolvency regime; see for instance the argument referred to but not ruled on in Re Clark’s Refrigerated Transport Pty Ltd (in liquidation), at 993.

    Given our conclusion as to the true construction of the Elders mortgage, it is not necessary for us to address these lines of argument.


  20. In giving NMFM summary judgment, Master Thomson took the view that:-

    1. NMFM’s entitlement to the surplus could not be prejudiced by the sale to Sage because its consent to that transaction had not been sought and obtained.

    2. In any event, the damages to which Mr. McGaveston and Sage might be entitled were not secured by Elders mortgage. This was in part because of the "financial services" flavour to the charging clause and definition. The Master also relied on a principle of construction to the effect that a money secured clause, in the absence of clear language, does not capture pre-assignment indebtedness to an assignee of the original mortgagee. On the Master’s approach it was immaterial whether the obligations relied on by Mr. McGaveston and Sage may not have crystallised until after the assignment of the Elders mortgage; it was enough that a contingent liability arose prior to the date of assignment.


  21. In this Court, Mr. Laurenson accepted that the money secured clause in this case would not capture pre-assignment indebtedness to Mr. McGaveston or Sage. This concession was appropriate given Kerr v Ducey [1994] 1 NZLR 577 and Katsikalis v Deutsche Bank (Asia) AG [1988] 2 QdR 641. He also accepted that the money secured clause would not encompass a liability to an assignee which was contingent, pre-assignment, and which crystallised after assignment. This concession was based on the decision of Santow J in Re Modular Design Group Pty Ltd, supra.

  22. Mr. Laurenson’s fundamental argument was that the liability of First to Mr. McGaveston and Sage was within the definition of money secured by the mortgage, and in particular, within the words "all future direct indirect or consequent indebtedness of the Mortgagor to the Mortgagee". He contended that the liability for damages which First had to Mr. McGaveston and Sage could truly be regarded as arising post-assignment and that there was no corresponding contingent liability prior to assignment. On this basis he sought to distinguish the Re Modular Design Group Pty Ltd decision.

  23. Mr. Laurenson also challenged the relevance of the fact that NMFM had not consented to the sale.


  24. We did not call upon Mr. Miller for NMFM to make oral submissions.

  25. In his written submissions Mr. Miller’s argument was that the money secured clause did not encompass the liabilities asserted by Mr. McGaveston and Sage. This argument was advanced on two bases:-

    1. The money secured clause in the Elders mortgage did not encompass claims for unliquidated damages; and

    2. This is particularly so when such a claim is at the at the suit of an assignee in relation to a contract which was in place at the time of assignment.


  26. The argument of Mr. McGaveston, if successful, would be in the nature of a trap for subsequent charge holders and unsecured creditors. In Katsikalis at 650 the expression "time-bomb" was used in relation to a broadly similar argument. Kerr v Ducey, supra, also addressed a mix and match argument. In that case, Thorp J picked up on the expression "time-bomb" at 585 and went on:

    The "time-bomb" analogy, indicating that the future significance of such a right would not be foreseeable by a mortgagor at the time of execution of the mortgage, signals a proper matter for concern to a Court expected to endeavour to interpret commercial documents so as to give them commercial efficacy. If the claimed right is created by a standard form all obligations security, that result would add considerably to the problems of many borrowers who have entered into such documents in knowing the extent of the security they have granted, which would be variable without their control or knowledge. In my view, the Court should, .... be slow to infer such an intention.

    A review of the cases indicates that the Courts have little appetite for mix and match arguments; this to the point where there is now, plainly, a predisposition on the part of Judges against a construction that would permit such an argument to succeed, see for instance Re Modular Design Group Pty Ltd at 102.

  27. The money secured clause refers consistently to the related concepts of money "owing" and "indebtedness". We are satisfied that these terms do not encompass, in this context, a claim for unliquidated damages. This approach is consistent with the reference in the charging clause to the expression "financial services" relied on by the Master. The more important factor, however, is that the concepts of debts and damages are conceptually different. As to this, see Chitty on Contracts 28th Edition 1999 para 22-040:-

    There is an important distinction between a claim for payment of a debt and a claim for damages for breach of contract. A debt is a definite sum of money fixed by the agreement of the parties as payable by one party in return for the performance of a specified obligation by the other party or on the occurrence of some specified event or condition; whereas damages may be claimed from a party who has broken its primary contractual obligation in some way other than by failure to pay such debt.

    In the context of the money secured clause, the word "owing" has a meaning which is complementary to indebtedness, i.e. as referring to money in respect of which there is indebtedness. This approach is also consistent with the first part of the definition (see para [14] above) which works well enough in relation to liquidated debts but would be highly unreasonable in relation to a claim for unliquidated damages.

  28. In the course of argument we discussed with Mr. Laurenson the position which would have obtained if Elders had not assigned the mortgage but rather claimed unliquidated damages against First pursuant to events unrelated to the mortgage. Mr. Laurenson contended that such an unliquidated claim for damages would, beyond question, have been secured by the mortgage. We disagree. Our conclusion is that the mortgage does not cover unliquidated claims for damages whether at the suit of Elders or an assignee. It follows that Mr. McGaveston’s argument fails irrespective of the predisposition to which we have referred in para [26].

  29. But, in any event, to interpret the money secured clause so as to encompass a claim for damages associated with contractual obligations which were in existence pre-assignment would certainly be contrary to the drift of the cases to which we have already referred. So, even if the money secured clause was broad enough to encompass a claim for unliquidated damages at the suit of Elders, Mr. McGaveston would struggle to persuade us that the clause also encompasses a claim for damages at the suit of an assignee of the mortgage based on contractual obligations which were pre-existing at the date of the assignment.

  30. As we have noted earlier (see paras [7]-[9] above), Mr. McGaveston has, from time to time, treated his claim to retain part of the surplus as being referable to an entitlement to a refund of the deposit. For ease of reference, we have treated this claim as being simply a subset of the claim for loss of bargain damages. If it is the case (and we do not think it is) that Mr. McGaveston and Sage have an independent claim to recover the deposit, then such claim must, logically, be regarded as being at least contingent as at the date of assignment and thus not within the money secured clause given the approach taken in Re Modular Design Group Pty Ltd which Mr. Laurenson did not challenge.

  31. We add one further comment. By April 1998 it was perfectly apparent to all concerned (and in particular Mr. McGaveston) that First could not settle the contract and likewise would not be in a position to exercise its right of exit under special condition 17 (because of its inability to make the payments required under that clause). There was probably an anticipatory breach at that point which was recognised in a de facto way by Mr. McGaveston when he purchased the Elders mortgage. If so, it would be difficult to resist the view that the liability which Mr. McGaveston and Sage have sought to tack on to the Elders mortgage was pre-existing as at the date of assignment. If this is the correct way of looking at the contractual situation, the money secured clause would not catch the claim for unliquidated damages which Sage and Mr. McGaveston have as against First even on Mr. Laurenson’s own argument, (see para [21] above).

  32. In those circumstances, it is unnecessary to consider whether failure to obtain NMFM’s consent to the November 1997 sale is immaterial.


  33. In those circumstances, the appeal is dismissed. The respondent is entitled to costs in the sum of $5000 together with disbursements to be fixed by the Registrar.


Re Clark’s Refrigerated Transport Pty Ltd (in liquidation) [1982] VR 989; Re Modular Design Group Pty Ltd (1994) 35 NSWLR 96; Kerr v Ducey [1994] 1 NZLR 577; Katsikalis v Deutsche Bank (Asia) AG [1988] 2 QdR 641

Authors and other references

Chitty on Contracts 28th Edition 1999


Buddle Findlay, Wellington, for Appellant

Chapman Tripp, Wellington, for Respondent

all rights reserved