|
Judgment
Gummow J, Hayne J, Heydon J, Kiefel J & Bell J
The resolution of this appeal calls for
application of "the cardinal principle of equity that the remedy must
be fashioned to fit the nature of the case and the particular facts"[1].
The nature of the present case and the particular facts engage the law
respecting sureties, their obligation to indemnify the creditor and right to
indemnity by the principal debtor, and the operation of the doctrine of
equity associated with the term "subrogation".
The
appellants (Mr and Mrs Bofinger) are husband and wife. Mr Bofinger
was a director of B & B Holdings Pty Ltd ("B & B
Holdings"), which is now in liquidation. B & B Holdings borrowed
consecutively from the first, second and third respondents ("first
mortgagee", "second mortgagee" and "third
mortgagee" respectively) on the security of mortgages over the same
real property of B & B Holdings. The appellants gave guarantees to the
first, second and third mortgagees. The guarantees were supported in each
case by a mortgage over real property of the appellants. The appellants sold
these properties and applied the proceeds in reduction of the indebtedness
of B & B Holdings to the first mortgagee.
Thereafter,
the first mortgagee exercised its power of sale over certain of the
properties mortgaged by B & B Holdings. After satisfying the balance of
the indebtedness of B & B Holdings, the first mortgagee accounted to the
second mortgagee by payment of the surplus sale proceeds and delivery of the
certificates of title and discharges of the first mortgages over two unsold
properties. The first mortgagee did not, as the appellants contend it should
have done, account to them so that they might recoup what they had paid off
the indebtedness of B & B Holdings.
The right of subrogation in favour of a surety recently was described by Sir Andrew Morritt V-C as follows (Liberty Mutual Insurance Co (UK) Ltd v HSBC Bank plc [2001] Lloyd's Rep Bank 224 at 225; affd [2002] EWCA Civ 691)[2]:
The right operates so as to confer on the surety who has paid the debt in full the rights against the debtor formerly enjoyed by the creditor or by imposing on the creditor the obligation to account to the surety for any recovery in excess of the full amount of his debt.
[emphasis added] |
That statement is important for this case because the indebtedness to the first mortgagee had been paid in full and the securities held by the first mortgagee discharged. The remedies equity provides must, as will appear, found upon the obligation of the first mortgagee to account.
Before
proceeding it is convenient to consider further the relevant principles
respecting subrogation and guarantees.
Subrogation and guarantees
In
Orakpo v Manson Investments Ltd [1977] 1 WLR 347 at 357; [1977] 1 All
ER 666 at 676 (affd [1978] AC 95)
Buckley LJ remarked that the relevant equitable considerations
respecting a claim to subrogation may differ, for example, where the basis
of subrogation is a contract of indemnity, or concerns ultra vires
borrowings by a corporation, or the lending of funds to complete a purchase
or pay off an existing mortgage. To that list may be added the subrogation
of creditors of a trustee to the trustee's lien over the trust property[3].
Therefore, if for no other reason, it is unhelpful to speak of subrogation
as if it were a "cause of action" in the sense recognised at
common law[4].
In
its widest sense, that apparently used by Buckley LJ in Orakpo,
an indemnity includes a contract obliging one person to make good the loss
suffered by another, and contracts of guarantee and those of insurance fall
within that description. The authorities dealing with the writing
requirements of s 4 of the Statute of Frauds 1677 with respect
to guarantees (but not indemnities) sought to distinguish between guarantees
and indemnities by emphasising the secondary liability of the guarantor and
the primary liability of the indemnifier. But as Mason CJ pointed out
in Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 254,
there is in this distinction "an element of ambiguity .... unless the
reference to primary liability is understood to mean ultimate
liability". His Honour added, ibid:
Once default has occurred, the party having the benefit of the guarantee can call on the guarantor to honour his promise before calling on the principal contracting party to perform his obligation, but the guarantor, having honoured his promise, can hold the principal contracting party to account by virtue of the doctrine of subrogation. |
This
notion of the ultimate liability of the principal provides a foundation for
the application of subrogation in aid of the surety. Thus, where a claim to
the benefit of securities held by the creditor is made by a surety, it was
said by Turner V-C[5]
that the equity for subrogation is derived from the obligation of the
principal debtor to indemnify the surety[6].
There is "nothing hard" in the act of a court of equity in placing
the surety in exactly the situation of the creditor with respect to those
securities[7],
because it would be unconscientious for the debtor to recover back the
securities from the creditor while the debtor was obliged to indemnify the
surety[8].
What
then are the equities where the creditor holds a first mortgage and there
are puisne mortgagees? The authorities hold that a second mortgagee cannot
complain where the surety utilises by subrogation the security held by the
first mortgagee. In Drew v Lockett [1863]
EngR 589; (1863) 32 Beav 499 [55 ER 196]
this was put on the basis that the second mortgagee took its interest with
notice and by grant from the equity of redemption enjoyed by the principal
debtor in its state remaining after giving full effect to the first
mortgage. Thus, in de Colyar's work on guarantees (A Treatise on the Law of Guarantees and of Principal and Surety,
3rd ed (1897)) it was said that the
surety was entitled to all the equities the creditor could have enforced,
adding, ibid at 330-331[9]:
And this right prevails, not merely against the original creditor of the principal debtor, but also against all persons claiming under the latter[10]. A mortgaged his estate to C, and B became A's surety for the debt. Afterwards A mortgaged the estate to D, who had notice of the first mortgage. The first mortgage was subsequently paid off, partly by B, the surety, but D got a transfer of the legal estate. It was held that the surety had still priority over D for the amount paid by him under the first mortgage, as surety for A[11]. Again, on a purchase of goods by a broker for an undisclosed principal, in a market according to the usage of which such a broker is personally liable in default of his principal, and is, therefore, a surety for the latter, the unpaid vendor's lien will pass to the broker, on default made by his principal, even though the latter may have pledged his interest in the goods to the third persons, and indorsed the delivery order to them[12]. |
The
appellants in the present appeal relied, in particular, upon the statement
of principle by Sir John Romilly MR in Drew v Lockett [1863]
EngR 589; (1863) 32 Beav 499 at 505-506 [55 ER
196 at 198]. See also In re Davison's Estate (1893) 31 LR Ir 249 at 255:
I am of opinion that a surety who pays off the debt for which he became surety must be entitled to all the equities which the creditor, whose debts he paid off, could have enforced, not merely against the principal debtor, but also as against all persons claiming under him. It is to be observed that the second and any subsequent mortgagee is in no respect prejudiced by the enforcement of this equity; when he advances his money he knows perfectly well that there is a prior charge on the property, and if he thinks fit to advance his money on such security, it is his own affair, and he cannot afterwards with justice complain. The amount being limited, it is a matter of indifference to him whether the first mortgagee or the surety is the prior claimant for that amount, and it would be, in my opinion, a violation of all principle if, when the surety pays off the debt, he were not to be entitled, as against the principal debtor and those who claim under him, to be paid the full amount due to him.
[emphasis added] |
This
statement is to be read with the earlier decision of the same judge in Gedye
v Matson (1858) 25 Beav 310 [53 ER 655].
The immediate issue in that case was whether a foreclosure suit by a first
mortgagee was defective for want of joinder of a surety who had paid off
part of the mortgage. Sir John Romilly MR ruled that the surety
"is entitled to stand in the place of the mortgagee, and is, therefore,
interested in the equity of redemption .... [and] might afterwards come and
redeem": Beav at 311 [ER at 655].
He also held that the surety was "in the situation of a subsequent
incumbrancer, and as if the mortgagor had executed a second mortgage to him.
As against the principal debtor, the surety is entitled to a charge on the
estate": Beav at 312 [ER at 656].
More recently, in Aquilina Holdings Pty Ltd v Lynndell Pty Ltd [2008] QSC 57 at [74] (noted Young, "Recent cases", (2008) 82 Australian Law Journal 760 at 762-763) Daubney J remarked that an opposite result to that in authorities such as Gedye v Matson would tend to undermine the operation of the equitable doctrine of subrogation. His Honour also said (at [53]) that the equitable doctrine did not do violence to the principles of the Torrens system[13]. Rather, the doctrine accepts the state of the register but enforces against registered proprietors conscientious obligations imposed upon them[14]. Under the Torrens system, the charge or equitable lien of the surety would support a caveat on the subject property[15].
The present dispute
The
respondents do not challenge these statements of principle. But by their
Notices of Contention they submit that the statements do not speak to the
circumstances of the present litigation. First, the debt secured by the
first mortgage had been paid in full at the date when the entitlement of the
appellant sureties was to be assessed and the first mortgage had been
displaced on the register upon exercise of the power of sale of some of the
lots and upon registration of discharges with respect to other lots.
Secondly, surplus proceeds and assets had been distributed to the second
mortgagee and thus had left the control of the first mortgagee. Thirdly, and
unlike the situation in Drew v Lockett, the sureties also had
guaranteed puisne mortgages and for that reason any entitlement they had in
equity to the surplus would prejudice impermissibly the second and third
mortgagees.
The
appellants complain that in upholding the decision of the primary judge
(Young CJ in Eq)[16]
the New South Wales Court of Appeal (Giles JA, Handley AJA and
Sackville AJA)[17]
did not give any effect to their equity as guarantors to subrogation to the
rights of the first mortgagee against B & B Holdings. This result was
reached by an answer in the negative to a question posed for separate
decision in a suit in the Equity Division of the Supreme Court.
The primary case of the appellants is that the first mortgagee had distributed the surplus in breach of the constructive trust in which the surplus was held for them as sureties. The reasons which follow lead to a conclusion which, without going to the length of accepting all of the appellants' submissions, favours allowing the appeal.
The agreed facts
Something
further now should be said respecting the agreed facts. These include
attached documents and correspondence. There emerges what may be an
incomplete account of events but it is upon this basis that the parties
choose to present the question for separate determination.
Part 28
r 28.2 of the Uniform
Civil Procedure Rules 2005 empowered the Supreme Court to make orders
for the decision of any question before trial. In such a proceeding care is
to be taken that agreed facts are stated with precision[18].
This is important, not the least because the parties to such a proceeding
will be bound by the determination of the question and will not be at
liberty subsequently in the same proceedings to advance argument or adduce
further evidence directed to showing that the separate question was wrongly
determined[19].
B
& B Holdings carried on business as a real estate developer and on land
("the Enmore land") in an inner suburb of Sydney constructed 17
town houses and one house. It was placed in liquidation by February 2006 and
the joint liquidators are the fourth respondent in this Court. They have
entered a submitting appearance.
To
finance the purchase of the Enmore land and the construction of the
buildings thereon, in 2003 B & B Holdings borrowed $7,062,000 from the
first mortgagee, Kingsway Group Limited. The interest rate initially was
nine percent per annum. Then, as the project proceeded, B & B Holdings
borrowed $1,400,000 from Rekley Pty Limited, the second mortgagee, and
finally $350,000 from Mr John Edward Skehan, the third mortgagee. The
indebtedness under these arrangements was secured in each case by registered
mortgages against the title to the Enmore land and a property of B & B
Holdings at Nullaburra Road, Caringbah. (There also appears to have been a
fixed and floating charge in favour of the first mortgagee over the assets
of B & B Holdings, but nothing turns upon this.)
The
fifth, sixth and seventh respondents ("the Solicitors") carried on
their practice at 575 Kingsway, Miranda under the name "Willis and
Bowring Solicitors". They acted for the first mortgagee and for the
second mortgagee and, at least in February 2006, for the third mortgagee as
well. The first mortgagee is Kingsway Group Limited but throughout this
period was named "Willis and Bowring Mortgage Investments Limited"
and carried on business also at 575 Kingsway. The fifth respondent, one
of the Solicitors, was a director of the first mortgagee. The eighth
respondent was an officer of the first mortgagee. The third mortgagee, the
third respondent, entered a submitting appearance in this Court.
In
this Court, counsel for the Solicitors, for the first mortgagee and eighth
respondent, and for the second mortgagee presented essentially a united
front and divided the oral argument between them.
The
first, second and third mortgages were dated respectively 31 January
2003, 14 March 2003 and 28 April 2005. In addition, by an
instrument of guarantee dated 31 January 2003 (the date of the first
mortgage) the appellants guaranteed to the first mortgagee repayment of the
amount owing from time to time under the first mortgage by B & B
Holdings. The guarantee was supported by mortgages by the guarantors to the
first mortgagee over residential premises at Caringbah ("the Willarong
Road property") and over a home unit in the same suburb ("the
Bulwarra Street property"). Both properties were owned by the
appellants. Thereafter, by instruments of guarantee dated respectively 14
March 2003 (the date of the second mortgage) and 28 April 2005 (the
date of the third mortgage) the appellants guaranteed to the second and
third mortgagees respectively repayment of the amounts from time to time
owing to those parties by B & B Holdings. The guarantees given by the
appellants to the second and third mortgagees also were secured by second
and third mortgages over the Willarong Road property and the Bulwarra Street
property. All three guarantees were relevantly in the same form.
The
loan agreement between B & B Holdings and the first mortgagee had an
expiry date of 1 February 2004. On 20 February 2004 the first
mortgagee agreed to an increase in the loan amount to $8,288,000 with an
increased interest rate and an extension to 1 October 2004. On 15 October
2004 it granted a further extension to 1 March 2005 and the loan amount
was reduced to $8,278,000. On 23 March 2005, the first mortgagee agreed
to a third extension to 1 October 2005, with a higher interest rate of
14.5 percent per annum; failure to pay the required interest amount by the
14th of each month would deprive the borrower of a lower interest rate of
9.5 percent and constitute an event of default.
Thereafter,
on 28 April 2005, B & B Holdings entered into the loan agreement
with the third mortgagee; this was secured by the third mortgage.
It
is not clear when in this period B & B Holdings defaulted on the
second mortgage. However, it defaulted on the first mortgage on 1 October
2005, and on the third mortgage on 28 October 2005.
In
China and South Sea Bank Ltd v Tan Soon Gin (alias George Tan) [1990]
1 AC 536 at 545
Lord Templeman observed that a surety, worried, for example, by the decline
in value of securities held by the creditor from the principal debtor, may
"bustle about", pay off the debt and take over the benefit of the
securities.
In
July 2005, that is to say during the currency of the third extension by the
first mortgagee and after the apparent defaults which had occasioned the
grant of the third extension, the appellants sold the Willarong Road
property. From the proceeds they paid a total of $894,044.14 to the first
mortgagee in reduction of the amount which was then owing to the first
mortgagee by B & B Holdings and secured by the first mortgage.
Thereafter, the appellants sold the Bulwarra Street property and on 5 October
2005 paid to the first mortgagee $625,190.26. This gave a total in payments
to the first mortgagee by the appellants of $1,519,234.40.
It
is important to note that following the sales of the Willarong Road property
and the Bulwarra Street property there were discharges of the mortgages over
those properties which the appellants had given not only to the first but
also to the second and third mortgagees. Thereafter the guarantees given by
the appellants remained in force but were unsecured. This may be important
for the final working out of liabilities between the appellants and the
second and third mortgagees, and may emphasise the importance to the
appellants of their claim against the Solicitors. But, given the limited
framework of the case to date, these matters were not pursued in argument.
There
had been no call by the first mortgagee upon the guarantees, and in that
sense the payments by the appellants were initiated by them. However, this
was in the circumstances of default by B & B Holdings described above.
The first mortgagee, necessarily involved so as to clear the titles, knew of
the sales of the two properties by the appellants and also knew of the
payment of the proceeds in reduction of the indebtedness of B & B
Holdings.
In
November 2005 the first mortgagee went into possession of the Enmore land.
On or about 2 February 2006, the first mortgagee completed the exercise
of its power of sale of Lot 13 of the Enmore land. By 8 February
2006 the indebtedness of B & B Holdings to the first mortgagee had been
satisfied. However, its indebtedness to the second and third mortgagees was
$1,935,671.23 and $464,267.12 respectively.
On 7 February 2006, the Solicitors wrote a letter directed to the attention of the eighth respondent, Mr Hatheier, an officer of the first mortgagee. The letter said, with reference to security over the Enmore land:
We advise that we act for the Second Mortgagee Rekley Pty Limited.
This letter is to formally request possession of the 2 remaining unsold
lots being lots 1 and 14 in the above development. |
On the next day, 8 February 2006, Mr Hatheier, describing himself as "Business Development Manager" of the first mortgagee, wrote to Willis and Bowring Solicitors, for the attention of Mr Tosolini, the fifth respondent:
We acknowledge receipt of your letter dated 7th February.
We confirm that the balance proceeds of sale of lot 13 (after discharge of mortgage) and the proceeds of sale of lot 5 are to be paid to your trust account for the purpose of being disbursed to your client. [emphasis added] |
The discharges of these first mortgages were subsequently registered on or about 8 February 2006.
On
20 February 2006, Mr Hatheier, on behalf of the first mortgagee, wrote
to one of the liquidators of B & B Holdings. He enclosed copies of the
letters of 7 and 8 February and wrote that the Solicitors were
acting on behalf of the second and third mortgagees. This presumably was in
addition to their acting for his company as first mortgagee. The letter
indicated that $268,307.30 had been provided to the second mortgagee at
settlement. It attached a summary of receipts and payments of the first
mortgagee as mortgagee in possession. This showed payments to the first
mortgagee of $3,848,000 and to the second mortgagee of $268,307 and,
significantly, made an allowance for the earlier receipt from the appellants
of the proceeds of sale of their properties. On 21 February 2006, the
whole of the proceeds of sale of Lot 5, $432,712.53, was paid to the
Solicitors on behalf of the second mortgagee.
The upshot was that by about 21 February or shortly thereafter the titles to Lots 1, 5, 13 and 14 of the Enmore land no longer showed the first mortgages by B & B Holdings and the second mortgagee had received surplus proceeds of sale of Lot 13 and the whole of the proceeds of Lot 5. Hence, as indicated in the opening passages of these reasons, the importance of the obligation to account to the appellants and of its nature and scope.
Statutory provisions
All
the lands the subject of the various mortgages were lands under the
provisions of the Real
Property Act
1900 (NSW) ("the RP
Act"), and the mortgages were registered mortgages. Section 57(1)
of the RP
Act provides that a mortgage has effect as a security but does not
operate as a transfer of land. Section 58(1)
provides for the exercise of a statutory power of sale. Section 58(2)
protects the purchaser by denying any obligation to see to the application
of the purchase money. Section 58(3)
states that the purchase money from the sale of land by a mortgagee in
exercise of power of sale "shall be applied", first in payment of
the expenses of the sale, secondly in payment of the first mortgagee,
thirdly in payment of subsequent mortgagees in order of priority and that
any surplus is to be paid to the mortgagor. However, upon that first
mortgagee equity may place requirements as to the disposition of the surplus
purchase moneys.
Adams
v Bank of New South Wales [1984] 1 NSWLR 285 at 299, 302
is authority that s 58
is to be read in a manner consistent with the equitable duty of the first
mortgagee to account to puisne mortgagees as a trustee for any surplus. The
position in equity was described as follows by Kay J in Charles v
Jones (1887) 35 Ch D 544 at 549-550[20]
as follows:
I have never heard it doubted that where a mortgagee sells, and has a balance in his hands, he is a trustee of that balance for the persons beneficially interested. He takes his mortgage as a security for his debt, but, so soon as he has paid himself what is due, he has no right to be in possession of the estate, or of the balance of the purchase-money. He then holds them, to say the least, for the benefit of somebody else, of a second mortgagee, if there be one, or, if not, of the mortgagor. What, then, is he to do? Surely he has a duty cast upon him. His duty is to say, 'I have paid my debt: this property which is pledged to me, and in respect of which I now hold this surplus in my hands, is not my property. I desire to get rid of this surplus, and hand it back to the person to whom it belongs.' .... The duty of this mortgagee was at least to set this money apart in such a way as to be fruitful for the benefit of the persons beneficially entitled to it. To that extent and in that manner he was, according to my understanding of the law, in a fiduciary relation to the persons entitled to the money. It was so held in the case of Quarrell v Beckford (1816) 1 Madd 269 [56 ER 100, and so far as I know has always been so held, and although I quite agree that the Court is very reluctant to treat a mortgagee as being a trustee in any sense while any money is due to him, still when he has paid himself, and has money remaining in his hands which is no longer his property, how can he be treated as other than a trustee of such money?" [emphasis added] |
The
appellants sought to bring themselves, by reliance upon their subrogation
rights, within the obligation of the first mortgagee to account to the
person to whom the surplus belonged, and to place their rights in priority
to any entitlement of the puisne mortgagees.
The
appellants sought to support their case by reliance upon the provisions now
made by s 3
of the Law Reform (Miscellaneous Provisions) Act
1965 (NSW) respecting the entitlement of sureties to assignment of
securities. Section 3
is the descendant in New South Wales of s 5 of the Mercantile Law
Amendment Act 1856 (UK) (19 & 20 Vict c 97).
The provisions confer upon sureties statutory rights and remedies which
furnish a summary mode of carrying into effect those otherwise available in
courts of equity[21].
The second mortgagee correctly submitted that if, as it contended, the
appellants lacked an equity supporting subrogation, s 3 would not
supply that deficiency.
The Supreme Court proceedings
By
proceedings instituted in the Equity Division of the Supreme Court of New
South Wales the appellants complained that in the circumstances they had an
entitlement to recoupment of what they had paid as sureties and that this
was in the nature of a trust binding the first mortgagee. They contended
that in accounting to the second mortgagee in the manner described above,
the first mortgagee had committed breaches of trust and that the second
mortgagee had received trust property of the appellants. They sued the
Solicitors as accountable under the principles associated with Barnes v
Addy (1874) LR 9 Ch App 244.
The
separate question was:
In the circumstances of the case, were the sums of $268,307.33 and $432,712.53 and the securities over Lots 1 and 14 SP75069 held by the second defendant in trust for the plaintiffs as at 8 February 2006? |
The
sense of the separate question was to ask whether, given that by 8 February
2006 the first mortgagee had been paid in full, it followed that in respect
of surplus moneys attributable to the sale of Lots 5 and 13 of the
Enmore land and the first mortgages over Lots 1 and 14, the first
mortgagee was trustee for the appellants up to so much thereof as would give
effect to their subrogation rights.
There
was an immediate difficulty respecting any trust by the first mortgagee over
the mortgages to it of Lots 1 and 14. The discharges were
registered on or about 8 February and thus the subject matter of such a
trust no longer existed.
In
the event, the primary judge answered the separate question wholly in the
negative. The primary judge thereafter entered judgment for the defendants
in the suit. The Court of Appeal dismissed an appeal and made a special
costs order in favour of the Solicitors. In this Court, the appellants seek
to have those orders set aside and to have an affirmative answer to the
question.
The
appellants refer to the acceptance by Hodgson J that if a first
mortgagee exercises its power of sale, the surety is entitled at least to a
charge over the balance of the proceeds[22].
The respondents counter that even if there were such a charge it bound the
subject matter only while it was in the hands of the first mortgagee.
Further, the charge would confer no more than a security interest, would not
entail fiduciary obligations owed by the chargor to the appellants, and
would not support a proprietary interest which persisted against a third
party such as the second mortgagee. Once the discharges of the first
mortgages over Lots 1 and 14 reached the hands of the second
mortgagee for registration, and the cash surplus reached its hands without
the need for retention in an identifiable separate fund, any such charge
would be spent[23].
(There may have been grounds in these circumstances for an action at law by
the appellants against the second mortgagee for money had and received, but
this was not considered in submissions to this Court[24].)
The preferred position of the appellants remained the trust in their favour. The respondents pointed to what were said to be the burdensome administration and investment duties this would entail[25].
The appropriate equitable remedy
It
is unnecessary to resolve all of these questions. The essential task is to
identify the scope of equitable relief which, in the circumstances of this
case, now adequately protects the position of the appellants that obtained
on 8 February 2006, when the indebtedness of the first mortgagee had
been satisfied.
Equitable
intervention is sought by the appellants and this would have an impact upon
the position of not just the first mortgagee but of the other respondents.
Further, while there were proceeds of sale of Lots 5 and 13 it is
not apparent from the agreed facts that they remain capable of separate
identification and, in any event, the first mortgages over Lots 1 and 14
could not provide subject matter for any trust after registration of the
discharges on or about 8 February 2006.
In
this situation assistance is afforded by a point emphasised by four members
of the Court in the joint reasons in Giumelli v Giumelli (1999) 196 CLR 101
(at 111-112 [2]-[4] per Gleeson CJ, McHugh,
Gummow and Callinan JJ)
when considering the constructive trust as a remedial response to a claim to
equitable intervention. The point is that the term "constructive
trust" may be used not with respect to the creation or recognition of a
proprietary interest but to identify the imposition of a personal liability
to account upon a defaulting fiduciary.
In Jones v Southall & Bourke Pty Ltd (2004) 3 ABC (NS) 1 at 17[26], after reviewing the authorities, Crennan J said that they:
make plain [that] the term 'constructive trust' covers both trusts arising by operation of law and remedial trusts. Furthermore, a constructive trust may give rise to either an equitable proprietary remedy based on tracing or, whether based on or independently of tracing, an equitable personal remedy to redress unconscionable conduct. The equitable personal remedies include equitable lien or charge or a liability to account. |
Earlier in her reasons (at 16) her Honour had noted that the term "constructive trust" had been applied to include the enforcement of the obligation of a defaulting fiduciary to make restitution by a personal rather than a proprietary remedy.
The
obligation to account, here by a first mortgagee, is consistent with what
was said by Kay J in Charles v Jones (1887) 35 Ch D 544 at
549-550
in the passage set out earlier in these reasons. On 8 February 2006 the
first mortgagee was obliged in good conscience both to account to the
appellants for surplus moneys and securities it held and not to undertake or
perform any competing engagement in that respect without prior release by
the appellants[27].
These obligations were fiduciary in character. As indicated by the
correspondence of 7, 8 and 20 February 2006, to which reference
has been made, the first mortgagee entered into and performed a conflicting
engagement with the second mortgagee. The result was to cause loss to the
appellants by denial of enjoyment of their entitlement to recoupment from
the surplus moneys with respect to the sale of Lots 5 and 13 and
first mortgages over Lots 1 and 14.
In
respect of its misapplication of the surplus moneys and securities and the
consequent loss to the appellants the first mortgagee is to be treated as a
constructive trustee to the extent that it must account to the appellants as
a defaulting fiduciary. It is unnecessary to seek to determine upon the
agreed facts whether the first mortgagee was a trustee in a fuller sense
which afforded the appellants a beneficial interest in the assets in
question.
Breach by the first mortgagee of its above described fiduciary obligation to the appellants would suffice to engage the principles associated with the "second limb" in Barnes v Addy (1874) LR 9 Ch App 244[28], if at any further hearing the necessary further facts are established against other respondents. In Barnes v Addy itself, the two solicitors, Messrs Preston and Duffield, had not received any trust property; the question was whether their knowledge made them accountable as parties to the breach of trust by the trustee and bound to make good as constructive trustees the loss of the trust assets.
The answer by the respondents' Notices of Contention
The respondents seek to outflank any conclusion such as that just expressed in several ways. A starting point is provided by The Equity Trustees Executors & Agency Co Ltd v New Zealand Loan & Mercantile Agency Co Ltd [1940] VLR 201 at 205 where Lowe J said:
When a guaranteed debt is paid by the surety he is entitled, unless the right is excluded by agreement or his conduct makes it inequitable to enforce it, in respect of the amount he has paid under his guarantee to the securities which the creditor holds for the debt guaranteed. This right arises not from any agreement between the surety and the creditor, though it may be excluded by agreement between them. It rests on equitable principles. [emphasis added] |
That statement of principle is plainly correct. The respondents, however, draw from the emphasised words two propositions of exception and rely upon them as an answer to any success the appellants' submissions otherwise might enjoy. First, the respondents say any right of the appellants was excluded by agreement, in particular by the terms of their guarantee of the second mortgage. Secondly, the respondents contend that this and other circumstances rendered it inequitable as between the appellants and the first mortgagee to rely upon Drew v Lockett (1863) 32 Beav 499 [55 ER 196]. Thirdly, it is said to follow that there is no footing to attach liability upon the first mortgagee to account to the appellants in respect of the surplus and so no basis for any remedy against other respondents.
The terms of the guarantee of 14 March 2003 to the second mortgagee
It
is convenient to turn first to the terms of the appellants' guarantee given
by deed on 14 March 2003 to the second mortgagee. The instrument is
described on the cover sheet as a "Deed of Guarantee and
Indemnity". The settled principle in Australia governing the
interpretation of contracts of guarantee and indemnity has been stated by
this Court in authorities the most recent of which is found in the joint
reasons in Andar Transport Pty Ltd v Brambles Ltd
(2004) 217 CLR 424 at 433-437 [17]-[23].
The principle is that a doubt as to the construction of a provision in such
a contract should be resolved in favour of the surety or indemnifier. It is
implicit in this that the doubt may arise not only from the uncertain
meaning of a particular expression but from its apparent width of possible
application.
Mr
and Mrs Bofinger were each identified as "Guarantor", the
second mortgagee as "Lender" and B & B Holdings as
"Borrower". The "Mortgage" was the second mortgage by
the Borrower, also dated 14 March 2003, and "Obligated
Person" meant any of the Borrower, Guarantor, and any other person who
was liable to the Lender for payment of the "Guaranteed Money",
being the subject of the guarantee and indemnity in cl 3 and cl 5
respectively.
Clause 3 stated:
|
Taken
by itself cl 3 does not contain a covenant by the Guarantor to ensure
that B & B Holdings meets its obligations to the second
mortgagee in priority to those owed to the first mortgagee. Such a priority
structure would have been at odds with the sequence of the registered
mortgages and the circumstances of the borrowings to finance the development
of the Enmore land. It would have required clear terms in a multi-party
priority agreement.
Clause 5 stated:
|
The lengthy provisions of cl 6 are headed "Matters Not Affecting Guarantor's Liability". Clause 6.4 is headed "Waiver by Guarantor" and its provisions were relied on in particular in submissions by the second mortgagee. The sub-clause reads:
Each Guarantor waives the Guarantor's rights as surety whether legal, equitable, statutory or otherwise which may be inconsistent with the provisions of this deed or in any way restrict the Lender's rights, remedies or recourse. |
Counsel
for the second mortgagee submitted that cl 6.4 extended to the waiver
by the appellants of any surety rights they might have in respect of another
instrument, namely the first mortgage. This was said to be the effect of the
general words "the Guarantor's rights as surety". But the critical
words which follow are "inconsistent with the provisions of this
deed". They govern also the earlier words "Guarantor's rights as
surety". The waiver effected by cl 6.4 is a waiver of such of the
Guarantor's rights as surety under the guarantee to the second mortgagee as
may be inconsistent with the provisions of the guarantee to the second
mortgagee. It is not a waiver of any of the Guarantor's rights under the
guarantee to the first mortgagee. This submission fails.
Counsel for the Solicitors sought to achieve a similar application to the first mortgage by reference to cl 3.1 and par (2) of cl 7.1. Clause 7.1 is headed "Guarantors Not To Claim Benefits Or Enforce Rights" and reads:
Until the Guaranteed Money is paid in full and all obligations of the Borrower under the Mortgage are fully and finally discharged or released, a Guarantor must not in any way:
|
Clause 7.1,
as the opening words indicate, bars the Guarantor from taking any of the
steps described in pars (1), (2) and (3) until two events have
taken place. The first is the full payment of the moneys secured by the
terms of the guarantee in cl 3; these are identified by reference only
to the second mortgage by B & B Holdings. The second event is the
discharge or release of all obligations of B & B Holdings under that
mortgage. These events had not occurred at 8 February 2006, with the
result that the restraints in pars (1), (2) and (3) were
operative.
Paragraph (1)
limits recourse to rights of the second mortgagee. Paragraph (3) is
concerned with reduction of liability "under this deed". As the
Solicitors accepted, neither paragraph constrains the exercise of rights
under a guarantee of the first mortgage.
However,
the Solicitors contended that par (2), read with cl 3.1 and the
definition of "Obligated Person", manifested a particular
intention by B & B Holdings, the appellants, and the second mortgagee.
This was that the second mortgagee would "go first" in relation to
the property of B & B Holdings and that the second mortgagee be
protected from what otherwise might be prior claims by the appellants in
reliance upon subrogation to the rights of the first mortgagee.
That
submission also should be rejected. The Guarantor falls within the defined
term "Obligated Person", as also does B & B Holdings. In
asserting subrogation to the rights of the first mortgagee against B &
B Holdings as Borrower, is the Guarantor making a claim against "any
other Obligated Person" within the meaning of par (2)? The answer
is suggested by the opening words of cl 7.1. These suspend engagement
in this activity until full payment of the moneys guaranteed by cl 3,
namely those secured by the second mortgage. Paragraph (1) then is
directed to claims by the Guarantor to rights of the Lender (the second
mortgagee), par (3) deals with claims to set-off and the like in
reduction of the liability of the Guarantor to the Lender under the second
mortgage, and par (2) with such matters relating to the guarantee of
the second mortgage as claims by the Guarantor for indemnity for obligations
under that guarantee by the Borrower or for contribution by any co-sureties.
If
there be any doubt respecting the construction of cl 7.1 in this way,
then, as indicated earlier in these reasons, the doubt is to be resolved in
favour of the Guarantor.
It
follows that in asserting rights of subrogation with respect to the first
mortgage, the appellants were not acting in breach of any restrictions
binding them by reason of the terms of the guarantee of the second mortgage.
It follows further that there was nothing inequitable as between the
appellants and the first mortgagee and the Solicitors (not parties to that
guarantee) in the appellants seeking the support of equity in the manner
described earlier in these reasons.
In
particular, contrary to the submission by the Solicitors, the appellants
were not bound to do equity by offering to perform an obligation to
"protect" the second mortgagee as the price of any equitable
relief founded on their subrogation rights in respect of the first mortgage.
In Langman v Handover (1929) 43 CLR 334 at 351
Rich and Dixon JJ said that the maxim that he who seeks equity must do
equity "does not substitute moral for legal standards in the
determination of the conditions of relief". Rather, those who ask for
the assistance of a court of equity must be willing to do justice by
accepting terms which flow from the legal or equitable rights of the
defendant to the suit.
The
result is that the grounds in the Notices of Contention based upon the terms
of the guarantee of the second mortgage fail.
The question for this Court then becomes whether the grounds of decision by the Court of Appeal should be sustained.
The reasoning of the Court of Appeal
The
members of the Court of Appeal gave differing reasons for upholding the
decision of the primary judge. Giles JA observed that it was important
that the appellants had given guarantees not only to the first mortgagee but
also to the second and third mortgagees. This distinguished the present case
from Drew v Lockett [1863]
EngR 589; (1863) 32 Beav 499 [55 ER 196].
As between the appellants and the second mortgagee the "plain
intention" was that the second mortgagee was to have resort to its
security after the first mortgagee but "prior to any entitlement [the
appellants] might have with respect to that property". The appellants
had undertaken obligations to the second mortgagee "inconsistent"
with the assertion of prior entitlement to subrogation and "the
priority which would otherwise arise" was displaced.
However,
for the reasons already explained when dealing with the Notices of
Contention, the terms of the guarantee given to the second mortgagee do not
manifest any such intention. There was no displacement of priority between
the mortgagees and the giving of the consecutive guarantees produced no
inconsistency. Each guarantee operated in accordance with its terms. There
was nothing in the circumstances rendering it inequitable for the appellants
to enjoy the rights of subrogation.
Handley AJA relied upon an application or extension of the rule in Otter v Lord Vaux [1856] EngR 694; (1856) 2 K & J 650 [69 ER 943]. Of that rule, his Honour said that it:
prevents the mortgagor derogating from his grant and obtaining an advantage from his breach of contract. The mortgagee is estopped by his grant and contract from claiming priority over the second mortgage. |
Handley AJA said that the estoppel was an estoppel by convention and added:
The position in the present case is substantially the same. The guarantors guaranteed each of the mortgages on the basis that one would be the first, another the second, and the other the third. The Principal Debtor could not have paid off the first and kept it alive for its own benefit. The guarantors, having guaranteed the second mortgage as a second mortgage, agreed in substance with the second mortgage[e] that once the first mortgagee was paid in full the second mortgagee would be paid next from one source or another before the guarantors got anything. |
There
are several obscurities in this passage. The reference in the second
sentence to "each of the mortgages", when read with "[t]he
Principal Debtor" in the next sentence, appears to be to the securities
given by B & B Holdings not those given by the appellants in support of
their guarantees. As things stood at 8 February 2006 there was no
indebtedness remaining of B & B Holdings on its first mortgage and no
occasion for B & B Holdings to pay it off and keep it alive for its
benefit. Nor, as already indicated, was there any agreement, in substance or
otherwise, between the appellants as guarantors and the second mortgagee
that once the first mortgage had been paid in full (with the contribution
made by the guarantors from the proceeds of sale of their two properties)
the second mortgagee would be paid next and before the guarantors could
recoup that contribution.
In Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 244 the Court said:
Estoppel by convention is a form of estoppel founded not on a representation of fact made by a representor and acted on by a representee to his detriment, but on the conduct of relations between the parties on the basis of an agreed or assumed state of facts, which both will be estopped from denying. |
The
reference to an agreed or assumed state of facts (not of law) is
significant. In any event, in the present case the agreed facts fall far
short of what would be necessary to establish that the priority of the
second mortgagee which is now asserted was the conventional basis of the
transaction between it and the appellants as guarantors, so that the
appellants had been estopped from asserting their right of subrogation.
Nor
does the rule in Otter v Lord Vaux depend upon reasoning which
supplies any analogy for resolution of the present appeal. The rule is
concerned with the merger of charges (including mortgages) in estates; the
mortgages by B & B Holdings were of land under the provisions of
the RP
Act and thus were "creatures of statute" to which the general
law principles of destruction by merger did not apply[29].
The rule of the common law is that whenever a greater and a lesser estate meet in the same person, without any intermediate estate, the lesser is sunk or drowned in the greater. Accordingly, at common law, where a person entitled to land acquires a security over it, a merger is conclusively presumed; the security merges and disappears in the greater estate. However, equity gives effect to an intention of the parties that there be no merger[30]. But to that acceptance of intention as controlling the outcome there is an exception. This is identified as the rule in Otter v Lord Vaux. A mortgagor who has paid off an encumbrance thereafter cannot set it up in priority to a puisne mortgage which the mortgagor has granted. Why is this so? The answer, which has the support of Viscount Haldane LC[31] and Megarry J[32], is as follows[33]:
a second mortgage, as between the parties, is a grant of the mortgagor's entire interest in the property, saving only the rights of the prior incumbrancer, and the mortgagor cannot derogate from his grant by holding the first mortgage against the second mortgagee. |
The rule in Otter v Lord Vaux has been applied to securities over personal property[34]. But as indicated above, there was no question in the present case of any merger by operation of law, with a contrary intention to which equity would not give effect.
The preferred basis upon which Sackville AJA decided the appeal was that the conduct of the first mortgagee in accounting to the second mortgagee for the surplus proceeds was not "unconscionable". His Honour answered in the negative the question he posed as follows:
But in what way is the doctrine of subrogation needed to avoid an unconscionable result? Or, to put the question another way, what would be unjust or inequitable about the net surplus from the sale of the Principal Debtor's assets going to the second mortgagee, as envisaged by s 58(3) of the [RP Act] ....? |
The
answer is that for the reasons already given the first mortgagee was
required by equity to account for the net surplus to the appellants. That
obligation was imposed upon the enjoyment by the second mortgagee of its
entitlement under s 58(3)
of the RP
Act.
His Honour also said:
The arrangements were plainly not intended to allow the appellants, by paying out the first mortgagee, to transform the second mortgagee from a secured creditor of [B & B Holdings] to an unsecured creditor presumably ranking equally with the other unsecured creditors of the appellants. |
There are difficulties with this passage. On the agreed facts the appellants had been able to sell their two properties and so raise the moneys paid by them in reduction of the indebtedness of B & B Holdings to the first mortgagee only because the three mortgagees had consented to the clearing of the title to those two properties. The second and third mortgagees had not, for example, protected their position by obtaining an agreement with the appellants and the first mortgagee expressly to deny to the appellants what otherwise would be their subrogation rights to the first mortgage over the assets of B & B Holdings.
Sackville AJA referred to the passage in Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315 at 324 [20] where, after noting that the terms "unconscientious" and "unconscionable" are used across a broad range of equity jurisdiction, Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ continued:
They describe in their various applications the formation and instruction of conscience by reference to well developed principles. Thus, it may be said that breaches of trust and abuses of fiduciary position manifest unconscientious conduct; but whether a particular case amounts to a breach of trust or abuse of fiduciary duty is determined by reference to well developed principles, both specific and flexible in character. It is to those principles that the court has first regard rather than entering into the case at that higher level of abstraction involved in notions of unconscientious conduct in some loose sense where all principles are at large. |
However,
Sackville AJA appears to have proceeded, not in accordance with that
passage, particularly its last sentence, but by asking whether and in what
way the doctrine of subrogation was "needed to avoid an unconscionable
result" and answering that there was nothing unconscionable or unjust
in the first mortgagee applying the surplus proceeds of sale to the second
mortgage. But this reasoning does not allow for the circumstance that the
surplus was computed only after allowance for the payments which had been
made by the appellants to reduce the secured indebtedness of B & B
Holdings. These payments had enlivened the doctrine of subrogation, subject
to the operation of which, and subject to contrary agreement or inequitable
conduct, the parties were to be taken to have conducted their affairs.
Sackville AJA
referred to the judgment of Kearney J in Cochrane v Cochrane
(1985) 3 NSWLR 403.
This is often, and correctly, cited as containing an orthodox statement and
application of principles respecting the interrelation between the doctrines
of subrogation and contribution. The remedy of one co-mortgagor who pays off
the mortgage in full is not of subrogation to the rights of the mortgagee
against the other mortgagor, but to contribution from that mortgagor.
Kearney J also referred to the implied indemnity by the principal debtor which reflected the ultimate liability of that party in cases of suretyship (at 405). It was that ultimate liability of B & B Holdings which in the present case founded the application of the doctrine of subrogation in favour of the appellants. Kearney J contrasted the right of subrogation with the right of contribution between those, such as the present appellants, who are subject to co-ordinate liabilities or common obligations. There equity is moved by concern that the common exposure of the contributors to the creditor and the equality of burden not be defeated by the accident or chance that the creditor select for recovery one or some rather than all of the contributors[35].
Unjust enrichment and the English decisions
The
appeal to this Court in Friend v Brooker (2009) 83 ALJR 724 at 728
[7]-[8]; 255 ALR 601 at 604,
which concerned the equitable doctrine of contribution, was correctly
conducted on the footing that the concept of unjust enrichment was not a
principle supplying a sufficient premise for direct application in a
particular case. The same is true of the equitable doctrine of subrogation.
The oral submissions for the Solicitors correctly recognised this.
In
a passage in their reasons in David Securities Pty Ltd v Commonwealth
Bank of Australia
(1992) 175 CLR 353 at 378-379,
Mason CJ, Deane, Toohey, Gaudron and McHugh JJ rejected the
submissions that in Australian law unjust enrichment was more than
"just a concept" and that it was "a definitive legal
principle according to its own terms". The use of the phrase
"unifying legal concept" earlier in the joint reasons (at 375)
must be understood with what was said in that later passage[36].
In the years which have followed the Court has reaffirmed this position[37]
and all other Australian courts are bound accordingly.
A
not dissimilar fate met the attempt to adopt "proximity" as the
"unifying theme" of the categories of case recognising a duty to
take reasonable care to avoid a reasonably foreseeable risk of injury to
another[38].
The
concept of unjust enrichment may provide a means for comparing and
contrasting various categories of liability. Reference has been made to Cochrane
v Cochrane (1985) 3 NSWLR 403
and this provides an example. Subrogation may be seen as preventing the
unjust enrichment of the principal debtor who otherwise might escape
carriage of ultimate liability and contribution prevents one of equal
obligors bearing more than its share of the burden. The two doctrines do not
let matters lie where they would fall if the carriage of risk between the
various actors involved were to be left entirely to be worked out within the
limits of their contractual obligations. But as Cochrane shows, and
as explained above, the two doctrines have different foundations in equity
and operate with different results.
The
concept of unjust enrichment also may assist in the determination by the
ordinary processes of legal reasoning of the recognition of obligations in a
new or developing category of case[39].
An example is the conclusion reached in David Securities itself, that
the vitiating factors which enliven the action for money had and received
include mistakes of fact or law. But this appeal is not in that category.
The principles of equity which govern the outcome are well developed and
have the vitality to permit further development in an orthodox fashion.
Subrogation,
like other equitable doctrines, is applicable to a variety of circumstances,
as explained earlier in these reasons. One circumstance concerns sureties,
another the paying off of an existing mortgage. But that is not to say that
subrogation is a "tangled web"[40]
in need of the imposition of the "top-down" reasoning which is a
characteristic of some all-embracing theories of unjust enrichment[41].
Such
all-embracing theories may conflict in a fundamental way with well-settled
equitable doctrines and remedies. Reference was made in the opening
paragraph of these reasons to the importance attached by equity to the
fashioning of the particular remedy to meet the nature of the case. The
administration of the remedies of injunction and specific performance
provides perhaps the most obvious examples. So also the remedial
constructive trust, as these reasons have sought to demonstrate.
Equity
has been said to lack the necessary "exacting taxonomic mentality"
when providing an appropriate remedy for unconscientious activity[42].
The better view is said to be that liability in "unjust
enrichment" is strict, subject to particular defences[43],
while "[t]he unreliability of conscience" offends the precept that
like cases must be decided alike and not by "a private and intuitive
evaluation"[44].
But
the experience of the law does not suggest debilitation by absence of a
sufficiently rigid taxonomy in the application of equitable doctrines and
remedies. And legislatures have taken the same view in Australia, notably by
calling upon equitable analogues in framing the remedial provisions laid out
in Pt VI
of the Trade
Practices Act
1974 (Cth).
As these reasons have sought to show, the relevant principles of equity do not operate at large and in an idiosyncratic fashion. So it was that in Boscawen v Bajwa [1996] 1 WLR 328 at 335; [1995] 4 All ER 769 at 777, Millett LJ, after denying that subrogation is a remedy which the court has a general discretion to impose whenever it thinks fit to do so, went on:
The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff. |
That
was said in 1995. In England matters appear now to stand differently[45].
Banque Financière de la Cité v Parc (Battersea) Ltd [1999] 1 AC 221 concerned the application or extension of the reasoning in the authorities[46] allowing subrogation of a third party to securities paid off by that party. Counsel for the successful appellants had submitted no more than that, while there is "an inevitable link" between unjust enrichment and subrogation, "the two are not co-extensive", ibid at 223. It may well be that the result in that case could have been arrived at by development of orthodox equitable principles of subrogation[47]. However, Lord Hoffmann, who gave the most detailed opinion, referred (at 231) to the use of the term "subrogation":
to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived. |
His Lordship then considered various cases in which securities were "kept alive" on the footing that a third party who paid off the security was presumed in equity to intend that it be so retained for the benefit of that party (at 232-233). Lord Hoffmann concluded (at 234):
I think it should be recognised that one is here concerned with a restitutionary remedy and that the appropriate questions are therefore, first, whether the defendant would be enriched at the plaintiff's expense; secondly, whether such enrichment would be unjust; and thirdly, whether there are nevertheless reasons of policy for denying a remedy. |
However, there is difficulty in identifying the "unjust" enrichment in subrogation cases, which necessarily involve multilateral, rather than bilateral, relationships[48]. Further, as Bryson J later explained, the reasoning of Lord Hoffmann in Banque Financière does not:
provide an explanation for the mortgagor's being treated as bound, in equity, to treat the person who paid off the previous mortgage as entitled to security under it. Restitution would provide a basis for treating the mortgagor as obliged to restore to the person who paid it the amount which had been paid to the mortgagee: the concept is inadequate for also treating the mortgagor as obliged to hold the payer secured. This is particularly clear where, as in this case, and in other cases where subrogation has been held to exist, the mortgagor in fact had no dealings with the payer, or where the payer believed that he was getting security under arrangements in which the mortgagor was not in fact involved. |
Challenger Managed Investments Ltd v Direct Money Corporation Pty Ltd (2003) 12 BPR 22,257 at 22,269.
In the present case, Giles JA described the understanding in Australia of the doctrinal basis of subrogation as "open to debate" by reason of the recent English authorities. However, for the above reasons, and contrary to the earlier suggestion in Highland v Exception Holdings Pty Ltd (In liq) (2006) 60 ACSR 223 at 239, the doctrinal basis of equitable subrogation in Australian law is not unsettled. The respondents, led by counsel for the Solicitors, in this Court correctly eschewed any attempt to support the outcome in the Court of Appeal by application of reasoning in the recent English cases.
Orders
The appeal should be allowed. Order 1 of the orders of the Court of Appeal entered 29 December 2008 and the further orders entered 8 July 2009 should be set aside. In their place, it should be ordered that: (a) the appeal to the Court of Appeal be allowed; (b) orders 1 and 2 of the orders made by the primary judge and entered on 18 February 2008 should be set aside; (c) the separate question stated on 16 November 2006 should be answered as follows:
In the absence of prior consent or release by Mr and Mrs Bofinger, on 8 February 2006 Kingsway Group Limited was obliged to account to Mr and Mrs Bofinger as a constructive trustee for any dealing by it with the moneys and securities identified in the question for decision in favour of any other party, and to pay equitable compensation to Mr and Mrs Bofinger in respect of the denial or limitation by such dealing of recoupment from those moneys and securities of moneys paid by Mr and Mrs Bofinger to Kingsway Group Limited, in total $1,519,234.40, from the proceeds of sale of their properties at 407 Willarong Road, Caringbah and 2/41 Bulwarra Street, Caringbah. |
The third and fourth respondents entered submitting appearances in this Court. The costs of the appellants in this Court, in the Court of Appeal and of the proceedings to date in the Equity Division of the Supreme Court, should be paid by the first, second, fifth, sixth, seventh and eighth respondents.
It will be for the appellants to take such steps as may be appropriate to restore the proceedings in the Equity Division for consideration of remaining issues. These will include the rate and nature of an interest component of the sum for which there is to be equitable compensation to the appellants[49].
[1] Warman International Ltd v Dwyer (1995) 182 CLR 544 at 559.
[2] See Andrews and Millett, Law of Guarantees, 5th ed (2008), §11-028 and, with respect to insurance, the statement by Kitto, Taylor and Owen JJ in British Traders' Insurance Co Ltd v Monson (1964) 111 CLR 86 at 94, that where there was no longer an outstanding right of action of the insured against a third party, "one might almost wish that some other word had been used as the label of a right which exists when it is too late for subrogation in the ordinary sense".
[3] Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 at 367.
[4] Cf Boscawen v Bajwa [1996] 1 WLR 328 at 335; [1995] 4 All ER 769 at 777; Kation Pty Ltd v Lamru Pty Ltd (2009) 257 ALR 336 at 340-341.
[5] Yonge v Reynell [1852] EngR 655; (1852) 9 Hare 809 at 818-819 [68 ER 744 at 748-749].
[6] See also O'Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200 at 223; Friend v Brooker; (2009) 83 ALJR 724 at 735 [55]; 255 ALR 601 at 614.
[7] Duncan Fox & Co v North and South Wales Bank (1880) 6 App Cas 1 at 12.
[8] Andrews and Millett, Law of Guarantees, 5th ed (2008), §11-017.
[9] See also Rowlatt on Principal and Surety, 5th ed (1999) at 160; Andrews and Millett, Law of Guarantees, 5th ed (2008), §11-015.
[10] Drew v Lockett [1863] EngR 589; (1863) 32 Beav 499 [55 ER 196]; and see In re Kirkwood's Estate (1878) 1 LR Ir 108.
[11] Drew v Lockett [1863] EngR 589; (1863) 32 Beav 499 [55 ER 196]; and see In re Kirkwood's Estate (1878) 1 LR Ir 108. [See also Aylwin v Witty (1861) 30 LJ Ch 860.]
[12] Imperial Bank v London and St Katharine Docks Co (1877) 5 Ch D 195.
[13] Cf Westfield Management Ltd v Perpetual Trustee Co Ltd (2007) 233 CLR 528 at 538-541 [35]-[45].
[14] See, generally, Barry v Heider (1914) 19 CLR 197 at 213-214; Bahr v Nicolay [No 2] (1988) 164 CLR 604 at 613, 637-639, 653-655.
[15] Cochrane v Cochrane (1985) 3 NSWLR 403 at 404.
[16] Bofinger v Rekley Pty Ltd [2007] NSWSC 1138.
[17] Bofinger v Kingsway Group Pty Ltd (2008) 14 BPR 26,167.
[18] Bass v Permanent Trustee Co Ltd (1999) 198 CLR 334 at 357 [50].
[19] O'Toole v Charles David Pty Ltd (1991) 171 CLR 232 at 244-247, 260, 298.
[20] See also Banner v Berridge (1881) 18 Ch D 254 at 269-270; Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407 at 429-430; Lloyds Bank NZA Ltd v National Safety Council [1993] 2 VR 506 at 511, 514.
[21] Embling v McEwan (1872) 3 VR (L) 52 at 53-54; Hardy v Johnston (1880) 6 VLR (L) 190 at 193.
[22] Russet Pty Ltd (In liq) v Bach unreported, Supreme Court of New South Wales, Equity Division, 23 June 1988 at 12.
[23] Cf Lord Napier and Ettrick v Hunter [1993] AC 713 at 738-739.
[24] Cf Lord Napier and Ettrick v Hunter [1993] AC 713 at 752.
[25] Cf Lord Napier and Ettrick v Hunter [1993] AC 713 at 738.
[26] See also Giumelli v Giumelli (1999) 196 CLR 101 at 119-120 [31]-[32] and the form of the orders made at first instance by McLelland J in United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 820-822.
[27] See Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165 at 199 [78]; Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 393; Bristol and West Building Society v Mothew [1998] Ch 1 at 19; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at 47; Finn, Fiduciary Obligations, (1977) at 253-254; Conaglen, "Fiduciary Regulation of Conflicts Between Duties", (2009) 125 Law Quarterly Review 111 at 119-122.
[28] See Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 159-161 [159]-[165].
[29] English Scottish and Australian Bank Ltd v Phillips (1937) 57 CLR 302 at 322-323.
[30] Commissioner of Stamp Duties (NSW) v Perpetual Trustee Co Ltd (1915) 21 CLR 69 at 87; Lewis v Keene (1936) 36 SR (NSW) 493 at 499. In New South Wales, s 10 of the Conveyancing Act 1919 (NSW) enacts that there shall be no "merger by operation of law only of any estate, the beneficial interest in which would not be deemed to be merged or extinguished in equity".
[31] Whiteley v Delaney [1914] AC 132 at 144-145.
[32] Brunner v Greenslade [1971] Ch 993 at 1002.
[33] Waldock, The Law of Mortgages, 2nd ed (1950) at 437, quoted in Sussman v AGC Advances Ltd (1995) 37 NSWLR 37 at 51.
[34] In re W Tasker & Sons Ltd [1905] 2 Ch 587 at 599-600, 603, where the property was corporate debentures. The law was altered retrospectively by s 15 of the Companies Act 1907 (UK): In re New London and Suburban Omnibus Company [1908] 1 Ch 621 at 625-626; White and Tudor's Leading Cases In Equity, 9th ed (1928), vol 2 at 34-35.
[35] Friend v Brooker (2009) 83 ALJR 724 at 732 [38]; 255 ALR 601 at 609-610.
[36] Cf Ford (by his tutor Watkinson) v Perpetual Trustees Victoria Ltd (2009) 257 ALR 658 at 684.
[37] Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 156 [151] per Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ; Lumbers v W Cook Builders Pty Ltd (In liq) (2008) 232 CLR 635 at 664-665 [83]-[85] per Gummow, Hayne, Crennan and Kiefel JJ.
[38] See Bryan v Maloney (1995) 182 CLR 609 at 619, and the later decisions collected in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 at 528-529 [18].
[39] Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 257; Lumbers v W Cook Builders Pty Ltd (In liq) (2008) 232 CLR 635 at 665 [85].
[40] See Goff and Jones, The Law of Restitution, 4th ed (1993) at 592. This statement was removed from subsequent editions.
[41] See Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 156 [151].
[42] Birks, "Equity in the Modern Law: An Exercise in Taxonomy", (1996) 26 University of Western Australia Law Review 1 at 16-17.
[43] Birks, "Equity in the Modern Law: An Exercise in Taxonomy", (1996) 26 University of Western Australia Law Review 1 at 67-68.
[44] Birks, "Equity in the Modern Law: An Exercise in Taxonomy", (1996) 26 University of Western Australia Law Review 1 at 17.
[45] The English authorities, of which the most recent was Cheltenham & Gloucester plc v Appleyard [2004] EWCA Civ 291, were analysed by Mr Tilley in his article "Restitution and the law of subrogation in England and Australia", (2005) 79 Australian Law Journal 518.
[46] Notably, Ghana Commercial Bank v Chandiram [1960] AC 732.
[47] See the note by Jackman, "Restitution and subrogation", (1999) 73 Australian Law Journal 110 at 112.
[48] See Goff and Jones, The Law of Restitution, 7th ed (2007) at 132, where the learned authors write that by reason of the tripartite relationship of the parties "it is not always easy to determine whether it is B or C who has been enriched and why a court should conclude that the enrichment is an unjust enrichment".
[49] See Hermann v Charny [1976] 1 NSWLR 261 at 270; and the authorities collected in Victorian Workcover Authority v Esso Australia Ltd (2001) 207 CLR 520 at 531-532 [24].
Representations
G J McVay with A Tsekouras (instructed by Warren McKeon Dickson Solicitors) for the appellants.
D R Sibtain with C K Amato (instructed by Watson Mangioni) for the first and eighth respondents.
C M Harris SC with H P T Bevan (instructed by Bransgroves Lawyers) for the second respondent.
R J H Darke SC with G K J Rich (instructed by Middletons Lawyers) for the fifth to seventh respondents.
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