(vi) at the same time as the mortgages were varied, the Bofingers signed an acknowledgement noting that the amount of B & B's debts which had been guaranteed by them had increased.
27 I consider that these indications show that Mr Harris' submission is established. Indeed, Mr McVay did not argue strenuously against it.
28 2. All parties have acknowledged that the right of subrogation is an equitable right. If authority is needed for it, more than one member of counsel cited to me the words of Powell J in McColl's Wholesale Pty Ltd v State Bank of New South Wales [1984] 3 NSWLR 365, 378. Although English authorities have recently flirted with the idea of subrogation having something to do with restitution and unjust enrichment, the law in New South Wales remains that it is based on unconscionable conduct; see eg Highland v Exception Holdings Pty Ltd (2006) 60 ACSR 223.
29 Mr Harris says that at the time of the sales by the Bofingers of the Willarong Road and Bulwarra Street properties, there were existing first mortgages over each of those properties and a first mortgage over each of the B & B properties in favour of the first mortgagee, a second mortgage over each of those properties in favour of the second mortgagee, and a third mortgage over each of those properties in favour of the third mortgagee. The mortgages provided by the Bofingers over the Willarong Road and Bulwarra Street properties were to secure the guarantees they provided for the B & B debts.
30 He then puts that on this basis, one would have expected that each of the mortgagees would receive payment in full of their debt subject only to the prior payment of the debts of the mortgagees with priority before the Bofingers would be entitled to any money from the proceeds of the sale of any of the properties. However, unless and until a mortgagee went into possession of any of these properties, the Bofingers would be free to sell them or any one or more of them in whatever sequence and at whatever time they thought fit, so long as the proceeds of sale were used to discharge the mortgages.
31 He then notes that had B & B sold all of its properties first, leaving the Bofingers' personal properties to be sold last, then there is no doubt that the second mortgagee would have been entitled to the proceeds of the sale of the Bofingers' personal properties. The order in which the properties were sold should not have an effect on this.
32 Mr Harris' bottom line is that the second mortgagee received no unconscionable advantage from the receipt of the balance of the proceeds of sale from the Bofingers' personal properties. Indeed, Mr Harris submits, that to recognise a right of subrogation and require the second mortgagee to account to the Bofingers for those funds would give the Bofingers an unconscionable advantage over the second mortgagee.
33 He further submits that the secured right to the proceeds of sale of the Bofingers' properties to which the second mortgagee was entitled under the Rekley mortgage would effectively be converted into an unsecured right to recover those moneys under the personal covenants in the mortgage merely because of the arbitrary decision of the Bofingers to sell the properties before all the B & B properties had been sold.
34 Mr McVay's submissions proceed along the lines that whilst subrogation is a principle of equity, by the beginning of the 21st century, the circumstances in which equity will judge a matter to be unconscionable had been standardised and that, at least apart from the extraordinary case, where a surety has partly paid off a first mortgage, then the principle stated by Rowlatt should be applied. Note that this is the sort of approach taken by Snell's Equity, 31st ed [43-20].
35 I believe the answer is somewhere between the two submissions. That is, that whether the court applies subrogation does depend on whether unconscionability is involved, but the court will normally assume that certain situations will give rise to the equity unless the circumstances otherwise dictate. When considering whether the circumstances should otherwise dictate, one must bear in mind the warning of Deane J in Muschinski v Dodds (1985) 160 CLR 583, 615 that equitable remedies must not be doled out on the basis of indulging idiosyncratic notions of fairness and justice of individual judges.
36 Although the law of subrogation has moved on since 1803, it is useful to note the remarks of one of the great fathers of equity, Lord Eldon, in Aldrich v Cooper (1803) 8 Ves 382, 389; 32 ER 402, 405, where his Lordship said:
"So, in the case of the surety, it is not by force of the contract; but that equity, upon which it is considered against conscience, that the holder of the securities should use them to the prejudice of the surety; and therefore there is nothing hard in the act of the Court, placing the surety exactly in the situation of the creditor."
37 These words were applied by Gibbs ACJ in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1978) 141 CLR 335, 348. Again, the Judge emphasised the question of unconscionability.
38 In my view, basically for the reasons given by Mr Harris, there is no unconscionability involved in the respective parties being bound by their position at law and, accordingly, there is no room for applying the equitable doctrine of subrogation as it affects sureties.
39 3. Even if I am wrong in the answer that I have given to 2, I am also of the view that in the instant case any right to subrogation has been waived.
40 The authorities are clear, as was mentioned in the submissions of all counsel, that a surety's right of subrogation may be waived by him expressly in the contract of guarantee or by implication from his conduct. In saying this I have slightly paraphrased Meagher, Gummow and Lehane, Equity Doctrines and Remedies 4th ed [9-230].
41 In the Rekley mortgage, clauses 6.4 and 7.1 read as follows:
"6.4 Waiver by Guarantor
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.
7.1 Guarantors Not To Claim Benefits Or Enforced Rights
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:
(1) claim the benefit or seek the transfer (in whole or in part) of any other guarantee, indemnity or security held or taken by the Lender;
(2) make a claim or enforce a right against any other Obligated Person or against the estate or any of the property of any of them (except for the benefit of the Lender); or
(3) raise or claim any set-off, counterclaim or defence available to any other Obligated Person in reduction of the Guarantor's liability under this deed."
42 Clause 10.14(1) of the mortgage given by the Bofingers to secure their guarantee to the third mortgagee is in not dissimilar terms.
43 In my view, the clauses I have set out clearly show that the sureties are not to claim their rights of subrogation to prejudice the secured rights of the second and third mortgagees in the mortgages from B & B which the Bofingers have guaranteed.
44 Accordingly, if there was any right of subrogation, it has been given away by contract.
45 4. It is thus academic to consider whether there was any right in the plaintiffs which could be enforced by proceedings in equity, and whether that right was a trust rather than some lesser right such as a charge.
46 Mr Perram has taken me through a series of cases, in some of which the word "trust" is used in connection with what right the surety has in this sort of situation (see Allen v De Lisle (1856) 3 Jur NS 928), but the predominant view is that there is only a charge and that it is not appropriate to impose a trust.
47 The most detailed consideration of the matter, even though it was obiter, was by Giles CJ Comm D in Austin v Royal (14 May 1998, BC 9801770) at pp 61-62. Austin v Royal is partly reported in [1998] NSW ConvR 55-863, but not the relevant passage. The case went to the Court of Appeal, where it is reported as Austin v Royal (1999) 47 NSWLR 27, but not on this point.
48 It does appear with some clarity that where a mortgagee sells and there is a surplus, that the mortgagee will hold the surplus on trust for the mortgagor; see Quarrell v Beckford (1816) 1 Madd 269, 279; 56 ER 100, 103 and Lloyd's Bank NZA Ltd v National Safety Council of Australia Victorian Division (1993) 115 ALR 93, 99. However, that is principally because traditional equity considered that the mortgagee was a trustee of the legal estate which was vested in him and so it followed that when the legal estate was sold, he was also a trustee of the proceeds. The same does not translate across into the situation where the claimant's right in equity is under the principles of subrogation.
49 The reasons given by Giles CJ Comm D in Austin's case were that it would be quite unclear what obligations would be on the trustee if there were such a trust and there are particular commercial difficulties in subjecting the creditor to the responsibilities of a trustee in the state of knowledge that he may have.
50 It may be that there is a more valid reason than in the ordinary subrogation case to declare a constructive trust in the instant case because, technically, there was a surplus in the hands of the first mortgagee at the time when the last of the town houses was sold that was necessary to discharge the first mortgage. However, even then I would be inclined to give relief by way of a charge, if any relief was to be given in view of what Giles CJ Comm D said. However, as I say, the point does not really arise in the light of my answers to the other questions.
51 5. It follows from what I have said that the answer to the separate question is "No". The plaintiffs must pay the costs of the argument of the separate question. However, there may be an argument as to whether more than one set of costs should be allowed for the defendants. The costs of the third defendant will obviously have to be allowed against the plaintiffs on a submitting basis.
52 Accordingly, I need to put the matter into my list for mention on a date suitable to counsel and unless I am advised to the contrary I will do that at 9.30 am on the first Thursday after I have delivered these reasons. On that occasion, I should also be either given some short minutes as to the ongoing conduct of the proceedings, or alternatively, the parties should suggest a date when the matter should be put in the Registrar's list for direction.