Events Prior to 12 September 2001
3 The land the subject of this dispute is located at 228 South Terrace, Bankstown, just across the railway line from Bankstown Square shopping centre. Bankstown City Council has approved the construction on it of three 10 storey residential towers with ground floor commercial area, associated carpark and communal facilities. Nordoc purchased the property on 12 November 1999. On 12 November 1999 Nordoc granted a first mortgage to E&TM, another mortgage to E&TM, and another mortgage to the plaintiff.
4 The mortgage granted to the plaintiff was expressed to be for the purpose of securing to the plaintiff the promises made by Nordoc in certain collateral securities, together with other monies. The collateral securities included a Deed of Unit Trust dated 10 November 1999. That Deed established a unit trust of which Nordoc was the trustee. The units were divided into two classes, "A" and "B". There was only one "B" unit, and the plaintiff held it. That unit entitled the plaintiff to require Nordoc to pay it $3.7m, plus interest on that sum, in three instalments, 15, 27, and 30 months after the date of the Trust Deed. There was a provision whereby, if at the time any instalment was due, a building had been constructed on the land, the plaintiff could take certain identified lots in the strata plan of that building instead of the money. The plaintiff also held 10% of the issued "A" class units in the Trust. The "A" class units conferred rights of beneficial ownership to both capital and income of the trust fund.
5 The mortgage, which Nordoc gave to the plaintiff, acknowledged that at the date of the mortgage the sum secured was $4m.
6 The first mortgage which Nordoc gave to E&TM is dated 12 November 1999. It secured a principal sum of $6,111,000, repayable on 24 October 2000.
7 The second mortgage which Nordoc gave to E&TM is also dated 12 November 1999. It is a collateral mortgage, given to provide further security for an advance ($2,296,000) which E&TM had already made to a company called Golf Links Estate Blackheath Pty Ltd. That mortgage is registered as a second mortgage.
8 The first page of the mortgage which Nordoc granted to the plaintiff is in the standard form used by the Land Titles Office. The blanks in that form, where one states the prior encumbrances, have not been filled in. Hence, on its face it is not clear whether it is a first, second, or some subsequent ranking of mortgage.
9 Mr Albert Chahine is a director of the plaintiff and, so far as the evidence discloses, its moving spirit. He asserts that the plaintiff's mortgage over the Bankstown land should be a second mortgage, not a third mortgage. In July of this year the plaintiff commenced proceedings ("the July proceedings"), to which E&TM is a defendant, in the Supreme Court of New South Wales, seeking to vindicate Mr Chahine's view concerning the priority of the mortgages. Those proceedings allege that E&TM misrepresented to the plaintiff's solicitors what the priority of the mortgages would be, and claim damages for that alleged misrepresentation. The July proceedings had, by the time of the hearing of these proceedings, proceeded no further than issue of a statement of claim. The plaintiff has conducted the present proceedings on the basis that it is a third mortgagee. I am not asked to decide, in the present proceedings, what the agreement really was concerning priority of the respective mortgages, or what representation were made on that topic. However, the fact that the plaintiff had made this claim about the priority of the mortgages, and had begun the July proceedings, played a part in the events which led to the present dispute.
10 Companies associated with Mr Chahine spent over $960,000, in the period commencing November 1997, in obtaining building approval from Bankstown City Council for the property. Most of this money was spent on fees paid to the Council and to consultant architects, engineers and other experts. As well, substantial building work had been carried out on the property. There has been a substantial excavation of the site, and construction of retaining walls. Most of the ground or lower basement floor works, including foundations, concrete slab, lift wells and columns have been commenced. Approximately forty percent of the basement carpark has been completed. Millions of dollars have been spent on the building work to date, but at the time of the auction, the subject of these proceedings, very significant amounts of building work remained to be done. Further, there was some uncertainty about the extent to which the work which had been done was in accordance with the Council approved plans.
11 Nordoc did not repay the principal sum due under the first mortgage when it was due, on 24 October 2000. On 4 May 2001 E&TM served on Nordoc a notice under section 57(2)(b) Real Property Act 1900. That notice required repayment of the principal sum ($6,111,000), interest unpaid to 25 April 2001 ($198,607.50) plus interest which continued to accrue (at a daily rate of $2,182.50). That notice was not complied with.
12 E&TM is a company the directors and shareholders of which are Mr Jack Jordan (known as Mr John Jordan) and Mr David Jordan. Those gentlemen are father and son, respectively, and practise together as solicitors in the Sydney suburb of Cronulla. Their firm is known as Elliot Tuthill Solicitors. E&TM is a solicitor's nominee company for mortgage transactions.
13 After the date of default, Mr John Jordan had many meetings with people who represented to him that they were interested in purchasing the property. There was also some interest expressed to him in purchasing the first mortgage.
14 On 8 June 2001 Mr Chahine was telephoned by Mr Joe Metlej. Mr Metlej told him "we want to buy the property for $9M. We have been trying to find someone who can accept our offer. Can you help us?". Mr Metlej then, at Mr Chahine's request, sent Mr Chahine a fax saying "In relation to the abovementioned property, we offer $9M to include land, work to date, DA plus BA and all working drawings including engineers, architects, electrical, hydraulics and mechanical. All fees paid to council and other bodies to become ours."
15 Mr Chahine promptly passed this facsimile to his solicitor (Mr O'Brien, of Harris & Co). On 8 June 2001 Mr O'Brien in turn faxed Mr Metlej's written offer to Mr John Jordan, under cover of a document which said:
"We are instructed that your client has taken action to list the Bankstown property for sale by public auction. Please provide full details of your client's intentions in this regard.
Our client has received an offer from a prospective purchaser of the property. A copy of the offer is attached. You will note that the offer price is $9 million."
16 By a date no later than 18 July 2001 (the date of an advertising schedule tendered in evidence) E&TM had instructed Jones Lang LaSalle, real estate agents, to conduct an auction of the property. That auction was initially fixed to occur on 30 August 2001. That firm arranged for two signboards, approximately 8 feet by 10 feet to be erected on the property advertising the auction. Advertisements were arranged to be placed in both the Australian Financial Review and the Sydney Morning Herald. Coloured brochures advertising the property were prepared and mailed out to 568 potential purchasers. People who responded to the advertising campaign were sent an information memorandum about the property. In due course, copies of the contract for sale of land in relation to the property were sent to 16 different enquirers.
17 One of those enquirers was Sharon Lightner, a real estate agent at Newport Beach, who was sent a contract on 1 August 2001. She sent a fax, addressed to David Jordan, on 17 August offering $7m for the property, and offering to exchange that day. John Jordan telephoned her, and told her that the property must go to auction.
18 By 6 August there were five caveats lodged on the title of the property. One was lodged by the plaintiff, protecting its interest under the mortgage. Another was lodged by a company connected with Mr Greg Huxley, about whom more will be said later in this judgment. The other three were lodged by companies which appear, from the skimpy evidence I heard on this topic, to be unsecured creditors of Nordoc, whose debts were overdue.
19 On 27 August 2001 Jones Lang LaSalle wrote to John Jordan saying:
"Just to let you know that at approximately 2pm today I received a call from Michael Issac advising that serious disruptions may occur at the auction next Thursday and it was requested that you be advised that the site will be blackbanned by unions until all sub-contractors are paid and that the site will never be constructed until all creditors are paid.
Furthermore it is expected that unions, suppliers, the Securities Commission, sub-contractors and the media will be in attendance at the auction and will be ensuring that prospective purchasers are aware of the implications of purchasing this property.
Obviously threats of this nature need to be considered serious and would appreciate your instructions as to how you would propose us to respond in the period leading up to the auction and on auction day."
20 Leduva Pty Ltd ("Leduva") is a company run by Mr Kashlah Taouk. Mr John Jordan had acted as a solicitor for Mr Taouk for more than 25 years and for Leduva for many years. Mr Taouk has been involved in the building industry in New South Wales for about 28 years, in the course of which he has been responsible for the erection of many blocks of flats. He has borrowed money from E&TM on a number of occasions for his developments, borrowing up to $7m on at least one occasion. Mr John Jordan was familiar with the financial state of Leduva as a result of acting for Mr Taouk over the years. In September 2001 Leduva owned a number of properties - six were identified in evidence - some of which were unencumbered, some of which were mortgaged to E&TM but with substantial equity remaining after the mortgage. While Leduva's net assets were not precisely quantified in the evidence, they were worth at least several millions of dollars. Either Elliot Tuthill Solicitors, or E&TM, held the certificates of title to all Leduva's properties. Mr Taouk's business enterprises generated cash flow of the order of $40,000 to $45,000 per month.
21 Some time after advertising of the Bankstown property had commenced, Mr Taouk came to Mr John Jordan's office and said that he was interested in purchasing the property. Mr Jordan discussed the possible purchase of the property by Leduva with Mr Taouk, on several occasions, but always made it clear that he was acting on behalf of the first mortgagee, and if Mr Taouk decided to buy the property, he would need to get his own advice.
22 However, for a period in August 2001, Mr John Jordan felt able to assist Leduva in its efforts to acquire the property without there being a conflict of interest. On 14 August 2001, Mr John Jordan wrote, on behalf of Leduva, to Nordoc. He set out the basic concept of an offer which Leduva wished to make. It involved Leduva purchasing the land (and all approvals and plans associated with it) from Nordoc for $9.2 million, Leduva completing construction of the buildings, and Leduva giving Nordoc an option to purchase the finished units in the building for $46.5 million, with that option being required to be exercised three months prior to completion of the building. It was another term that:
"Nordoc is to arrange with all mortgagees and caveators on the title to agree to the above arrangement. We would expect that Nordoc would come to some arrangement with these parties to satisfy debts to them at the time the option was exercised."
23 On 15 August Mr John Jordan wrote again on behalf of Leduva to Nordoc adding two terms to the proposal which he had put the previous day. One was that the option fee which Nordoc would pay on exchange of contract, would be $2.5 million, non-refundable. The other was that the $46.5 million price which Nordoc would pay on exercise of the option would be free of GST.
24 On 16 August 2001 Mr John Jordan wrote to Mr Greg Huxley (of Jencave Pty Ltd) who was seeking, in some manner not fully explored in the evidence, to advance the possibility of Nordoc selling the land to Leduva. In that letter to Mr Huxley, Mr Jordan added some additional content to the proposal that Leduva was putting forward. The additional material included:
"Mr Taouk's instructions are clear that he expects Nordoc to have the title clear of all competing interests after the first mortgage. This coincides with the approval to be given by the first mortgagee to the arrangements. The first mortgagee would require this position to be reached, at the time of exchange of contracts, and to receive irrevocably directions, in the form of discharges evidencing satisfaction of their interest on the title. For example Artistic Builders would hand over a discharge of its mortgage, prepared as an irrevocably [sic] document, in consideration of the sale and also hand over a Notice of Discontinuance of its Supreme Court action against Elliot & Tuthill (Mortgages) Pty Limited. Nordoc may be able to arrange for the interested parties, other than the first mortgagee, to enter into some agreement with regard to the units to be purchased under the option to ensure that their interest are protected."
25 This was the first mention of any suggestion or requirement that the July proceedings be discontinued, as part of Leduva's proposal for there to be a sale of the land by Nordoc. The evidence did not explore how it happened that Leduva should be putting forward such a requirement.
26 After mentioning other details of Leduva's proposal to purchase the land from Nordoc, Mr Jordan's letter said:
"The auction of the property by the first mortgagee is to be held on the 30 August. We expect the first mortgagee will require the abovementioned matters to be completed within 7 days to allow the proper conduct of the auction if consents cannot be obtained."
27 This paragraph of Mr Jordan's letter is significantly at odds with the course which E&TM later took.
28 By 28 August 2001 Mr Taouk had retained Mr Steven Sukkar, solicitor, to act for him in connection with Leduva's possible acquisition of the Bankstown property.
29 On 28 August 2001 a lengthy conference was held at the offices of Elliot Tuthill solicitors. Mr Taouk and his new solicitors attended, as did Mr John Jordan and Mr David Jordan (for E&TM), and Mr Ghassibe and Mr Wypych. Mr Ghassibe and Mr Wypych had introduced the property to Mr Taouk, and had an arrangement with him where they would receive some sort of commission or consultancy fee if Mr Taouk was the successful purchaser. No representative of the plaintiff was present. After that meeting Mr John Jordan wrote to Mr Huxley as follows:
"The Purchaser's Solicitors are willing to prepare terms of a agreement to purchase the property which they can submit to Nordoc Pty Limited for approval but require, before entering into this expense answers to the following questions which can be faxed to Leduva Pty Limited's Solicitors. Would you also authorise me to give the Purchaser's Solicitors your email, fax and phone number.
Leduva Pty Limited wish to be assured of three major points before preparing the terms of Contract:-
1. That all Caveators and Mortgagors other than the Elliot Tuthill Mortgages irrevocably agree, prior to the time that the Contract is entered into, to discharge their Mortgage or Caveat.
2. That prior to exchange of Contracts that interest be brought up to date, by way of bank cheque, as far as the first Mortgagee is concerned. Nordoc Pty Limited should provide evidence that these monies are available and such evidence should include where the monies are presently held.
3. That the contract price be $9.2 million payable as to $6.7 million on settlement and the balance secured by way of second Mortgage. This is to allow Leduva Pty Limited to obtain finance to build the building and the second Mortgagee will need to consent to that Mortgage. An Option Agreement be entered into simultaneously with the sale Contract. Such Option to provide for a deposit of $100.00 and the balance of 2.5 million option fee to be paid either on the exercise of the Option Agreement which shall relate to the purchase of a completed building at $46.5 million. The Agreement will provide for exercise on a time of the essence basis and if not exercised the second Mortgage will provide that a discharge of the same can be registered at the time that the option expires because of non exercise.
In this regard a discharge of Mortgage should be made available at settlement of the land but to be held in trust by a Trustee pending the completion of the option period.
If the option is exercised the Option fee will be paid by Nordoc Pty Limited and used to discharge the second Mortgage. The second Mortgage will contain a condition that once the Strata Plans are presented for the second Mortgagees consent, then if that consent is not endorsed on the documentation within 7 days of presentation that the Mortgagor be appointed as Attorney on behalf of Nordoc Pty Limited to sign the documents of approval for the Plan.
Without the above matters being addressed immediately, Leduva Pty Limited will not take any further action in regard to the exchange of Contracts.
We wish to make it clear that we are acting only on behalf of the first Mortgagees and are writing this letter as a matter of expedition for the Purchaser and the Vendor of the land."
30 Nothing more was heard by anyone connected with E&TM of this proposal for Nordoc to sell the land to Leduva, until 11 September 2001.
31 The auction did not take place on 30 August. It was postponed to 10.30am on 13 September 2001, and was then to be held at auction rooms in George Street in the city. Mr John Jordan gives evidence, which I accept, that:
"We were advised by a valuer that there were interested parties in the site and that they hadn't enough time to prepare their due diligence on site. And also it was recommended by the agent that he thought another two weeks advertising would be preferable."
32 On 30 August, Mr John Jordan went on holidays. He went on a cruise, and was uncontactable. He did not return to the office until the middle of the day on 13 September, after the auction of the property had concluded. Mr David Jordan had the conduct of the matter in his absence.
33 However, Mr David Jordan did not acquaint himself with the correspondence on his father's file. He gave evidence that his father had "left detailed notes or some notes on each of the matters…which he had carriage of". Those notes did not inform him that Mr Metlej had offered to purchase the property for $9 million, and he was otherwise uninformed about Mr Metlej's offer. He could not recall, as at 13 September, that Sharon Lightner had made an offer of $7 million for the property. Notwithstanding the advice from the agent handling the auction, no additional advertising of the property took place. The signboards erected on the property advertising the auction were not altered to show the new auction date and time.
34 On 11 September, Mr David Jordan received a fax from Mr Huxley, saying that Mr Coote and Mr Palmer (from Nordoc) wanted to meet him the next day. Mr Jordan replied, asking that Messrs Coote and Palmer put any proposal in writing. No written proposal was received from Messrs Coote and Palmer, and no appointment made for Mr Jordan to meet them.
35 On 11 September Mr Jordan phoned Mr Sukkar and asked whether anything was happening with Mr Taouk and the Bankstown property. Mr Sukkar told him:
"Yes. They have got 30 days from exchange to clear the title. If they don't, the damages for the purchaser are up to five million dollars. So all Caveators will be gone. There will be a second mortgage of two million five hundred thousand dollars. I've got a Senior Solicitor, Andrew Thorpe assisting with the final amendments to these agreements."