Chalik v Wales

3On 2 August 2012, Mr Wen Qua Chen ("Mr Chen"), for whom Mr Lloyd of counsel appears, seeks an order that the Fund be paid to him.

4Mr and Mrs Hong cannot be located. On 27 November 2012 an order dispensing with the service on Mr and Mrs Hong of the application in this matter was made and, by that order, service is taken to have been effected on them.

5While Mr Hua and Mr Chen are the only applicants in these proceedings seeking an order for the payment of the Fund, a number of people have claimed entitlement. Those people are Mr Samuel Piscopo ("Mr Piscopo"), Mr Bounrat Hovilai ("Mr Hovilai") and Mr Truong Sanh Ly ("Mr Ly").

6On 1 December 2009, Mr Hua entered into an "Agreement for Loan" ("the Loan Agreement") (see Exhibit A2, p 9) with Mr and Mrs Hong. The Loan Agreement states that Mr and Mrs Hong borrowed $200K from Mr Hua repayable on demand. Mr and Mrs Hong did not repay $200K on the due date as demanded. Consequently, Mr and Mrs Hong made a further agreement with Mr Hua which includes:

5. The Borrowers hereby grant to the Lender security over the Borrower's right title and interest of property situate at 148 Brown Road, Bonnyrigg Heights NSW more fully described in Folio Identifier 2/787762 (property) as security for the repayment of the principal sum, interest and any costs incurred by the Lender in entering into this agreement together with enforcement of this Agreement.

6. The Borrowers hereby consent to the Lender lodging a Caveat on the Borrowers property as herein described or any other real property which is owned jointly or severally by the Borrowers.

7On 26 March 2010, Mr Hua lodged a caveat on the title to the Property (see Exhibit A2, p 11).

8On 8 March 2011, Mr Hua lodged a second caveat on the title to the Property (see Exhibit A2, p 13) very likely because the form of the first caveat was deficient.

9Mr Hua's submissions respond to each claim respectively. Mr Chen agrees with Mr Hua's response to Mr Hovilai, Mr Lai and Mr Piscopo's claims. I will set out their claims and Mr Hua's response below.

10Mr Hovilai lodged a caveat (see Exhibit A2, p 51) on 17 May 2010 and claimed an interest in the Property as a lender under a Deed of Loan in which Mr and Mrs Hong have "offered a caveatable interest in the property as security".

11Mr Hovilai's solicitors advised Mr Hua's solicitors by letter dated 30 July 2012 that Mr Hovilai agrees to the orders sought by Mr Hua.

12Mr Ly lodged a caveat (see Exhibit A2, p 55) on 4 May 2010. The caveat only refers to a loan agreement dated 1 June 2009 and does not identify any interest in the Property.

13Mr Ly has asserted he has a right to the Fund arising out of a charging order made by the District Court on 2 September 2010.

14Mr Fernon submits that the charging order was later in time and later in priority to Mr Hua. Additionally, he submits that the charging order was made by the District Court yet s 106(1)(c) and s 126 of the Civil Procedure Act 2005 (NSW) only permits the District Court to give charging orders in respect of an equitable interest in property as opposed to a legal interest: see Paul Michael Pty Ltd (subject to deed of company arrangement) v Urban Traders Pty Ltd [2010] NSWSC 1246 per White J. At the time of the charging order Mr and Mrs Hong were registered proprietors and owned the Property as joint tenants.

15Mr Ly has not appeared in these proceedings and has not sought to advance his claim.

16On 17 January 2011 Mr Hong became a bankrupt and Mr Piscopo was appointed as his trustee. In various correspondence from Mr Piscopo to Mr Hua (see Exhibit A1, pp 97, 100, 104 and 109) Mr Piscopo challenged Mr Hua's charge pursuant to s 120 of the Bankruptcy Act 1966 (Cth). Mr Hua denies the claims of Mr Piscopo. Mr Piscopo has not filed a Notice of Motion in these proceedings, and has not appeared.

17I am satisfied that Mr Ly and Mr Piscopo have had the opportunity to advance their claims and, in view of their failure to do so, I do not intend to consider their position any further. Further, there is no material which supports a right in Mr and Mrs Hong to resist Mr Hua's claim to payment out of the Fund and they have not sought to advance any claim.

18Mr Chen claims to have a purchaser's lien arising out of a contract of sale for the Property. On 23 December 2009, Mr Chen, as purchaser, signed a contract for the sale of land with Mr and Mrs Hong, as the vendors ("the First Chen Contract"). On that day, contracts were exchanged. The purchase price was $480K (see the Affidavit of Wen Quan Chen sworn 8 October 2012, Exhibit A3, p 1, para [3] - [6]) and the contract contained a condition requiring a deposit of $210K to be paid. The contract also contained the following clauses:

2.1 The purchaser must pay the deposit to the depositholder as stakeholder 2.2 Normally, the purchaser must pay the deposit on making of this contract, and this time is essential

and "depositholder" was defined as "vendor's agent (or if no vendor's agent is named in this contract, the vendor's solicitors)".

19At the time of exchange the vendor's solicitor (who was by definition the depositholder) gave a direction to Mr Lai to provide two bank cheques - one to BRH Corporation Pty Ltd ("BRH") for $120K and one to John Hong for $95K: see Exhibit 4. The reference to $95K was treated as an error and Mr Chen provided a bank cheque in favour of BRH for $120K and one in favour of Mr Hong for $90K making a total of $210K - the deposit called for by the First Chen Contract.

20Mr Chen's solicitors, Lai & Co, lodged a caveat on the day of the exchange of the contracts. The caveat describes Mr Chen's interest as one arising from Mr Chen's position as a "Purchaser pursuant to a Contract for Sale dated 23/12/2009".

21At the time of the exchange of contracts, the only registered dealing on the title of the Property was a mortgage to the AMP Bank Ltd, but there was also noted a caveat lodged by BRH: see Exhibit A3, p 15.

22The First Chen Contract was to be completed by 22 March 2010. Before that date, Mr Hong advised Mr Chen that he was unable to complete and required further time. Mr Hong requested another three months and offered for his solicitors to prepare a further contract (see Exhibit A3, p 2, [8]).

23On 23 March 2010, Mr and Mrs Hong's solicitor (Margiotta Solicitors & Attorneys) wrote to Mr Chen's solicitors stating that there had been agreement to rescind the first contract dated 23 December 2009 and enclosing a notice of rescission and a copy of a fresh contract ("the Second Chen Contract"): see Exhibit A3, pp 109 - 110. Mr Chen entered into the Second Chen Contract on or about 23 March 2010. It is clear that Mr Chen, though his solicitor, accepted rescission of the First Chen Contract: see Mr Chen's affidavit sworn on 8 October 2012 of Exhibit A3, p 3, [9] - [13] and p 7; Mr Lai's evidence: T19.1 - 19 and the Notice to Complete, Exhibit A3, pp 97 - 98.

24The Second Chen Contract states that the deposit was $225K, however Mr Chen did not pay any additional money to the vendors on exchange of the Second Chen Contract or at any time. Nor did he lodge a fresh caveat. No fresh search was attached to the Second Chen Contract.

25 It follows from what I have said earlier that the only claims to be considered are those of Mr Hua and Mr Chen. Mr Chen accepts that Mr Hua held a valid security interest over the Property and that the interest was created earlier in time then his own lien. Mr Chen asserts, however, that by Mr Hua's failure to caveat on or close to 1 December 2009 Mr Chen is guilty of conduct that leads to postponement of his equity, and hence precludes him from being entitled to the Fund which is less than the amount of Mr Chen's claim.

26Mr Hua does not accept that Mr Chen has a purchaser's lien for the following reasons:

(1)He submits that by virtue of the contractual provisions for the deposit no purchaser's lien can exist.

(2)He submits that there is no evidence that the Second Chen Contract was ever rescinded, and rescission is a prerequisite to a lien.

(3)He submits that if, contrary to his previous submissions, Mr Chen does have a lien and that there is a question of competing priorities, then there should be no postponement of his client's equity because whilst it is true that Mr Hua did not lodge a caveat when he could have:

(a)Mr Chen conducted himself in a fashion that precludes any postponement of Mr Hua's interest, because he paid "a very unusual" (see T19.29 - 30) amount as a deposit, and (if Mr Lloyd's submissions are accepted) did not abide by the terms of the contract which required the deposit to be paid to the stakeholder.

(b)There is no evidence that Mr Chen relied on the absence of the caveat by Mr Hua, and doubt as to what Mr Chen would have been done had such a caveat been lodged.

27A statement of principle in connection with the purchaser's lien is found in Whitbread & Co Ltd v Watt [1901] 1 Ch 911; 70 LJ Ch 515; 49 WR 534; 84 LT 419 per Farwell J cited in Combe v Swaythling [1947] Ch 625; [1947] 1 All ER 838 as follows:

If a purchaser advance all or any part of the money to the vendor, and the contract is broken off, an implied contract arises, by which the purchaser has a lien on the land; and if the purchaser properly declines to complete, he has a lien for the deposit and interest on unpaid purchase-money, and for interest on the payments, and also for the costs of a suit by himself or the vendor to compel performance of the contract, and this lien attaches on the deeds. If the purchase goes off through the fault of the purchaser, of course he has no lien for what he has paid.

28There have been a number of cases in which the purchaser's lien has been held to be negated by reason of the provision in the contract for payment of the deposit to a third party as stakeholder and not to the vendor: see Combe v Swaything at 839; Chalik v Wales [2005] NSWSC 877 [34] - [36] per Barrett J (as his Honour then was); Westpac Banking Corporation v Ollis [2008] NSWSC 824, [23] per Einstein J.

29Mr Fernon relies on those authorities and says that both the First and Second Chen Contract called for the payment of the deposit to the vendor's solicitors as stakeholders. Accordingly no lien arises.

30Mr Lloyd accepted that had the deposit been paid to the vendor's solicitors as stakeholders Mr Chen would have no lien but, he contends that as a result of Mr Chen having accepted the vendor's solicitors' direction in relation to the payment of the deposit, by means of the two bank cheques, the contractual terms were not followed with the consequence that the depositholder exception to the purchaser's lien does not apply. Mr Fernon's retort to this was that the Court cannot infer that the contract was breached or varied when there is no evidence that it was. Mr Lai said that his understanding was that Mr Margiotta, the solicitor for Mr and Mrs Hong, was holding the cheques "as stakeholder pursuant to the terms of the contract" (see T22.49-50) and he said that the cheques required by the vendor's solicitors would have been handed over on exchange: see T26.42 - T27.17 evidence of Mr Lai.

31This area is further complicated by the fact that Mr and Mrs Hong and Mr Chen accepted, as at 22 March 2010, that the First Chen Contract was rescinded. Mr Lloyd contended that the Second Chen Contract could not be treated as a valid contract because no deposit was actually paid on it.

32In my view the Second Chen Contract cannot be ignored. The evidence establishes that Mr and Mrs Hong and Mr Chen proceeded on the basis that a new contract was in place. It appears that the payment by Mr Chen of the amount of $210K as a deposit under the First Chen Contract was accepted as full payment of the deposit of $225K required under the Second Chen Contract.

33The fact that the depositholder provisions were not altered in the Second Chen Contract from the provision in the First Chen Contract signifies that the parties were treating the deposit as covered by clause 2.1 of the contract notwithstanding that bank cheques had been provided to BRH and Mr John Hong. That leaves open the possibility that the vendor's solicitors continued to accept responsibility as stakeholder to refund the deposit paid notwithstanding they had required cheques and, I infer, handed over the cheques to BRH and Mr Hong. In other words the stakeholder gave a direction as to the form of the deposit to be provided by the purchaser but did not thereby obtain any release of their obligation to make good the deposit should the contract fall through by reason of the default of the vendors. If that is correct the authorities upon which Mr Fernon relies would still preclude a lien and I note that Mr Lai said that he did not hold the view that Mr Chen was entitled to a purchaser's lien over the property: see T25.47 - T.26.1).

34Whilst I think there is some attraction in the "no lien" argument, I prefer to deal with the case on the assumption that the parties to the Second Chen Contract have proceeded in a way that is inconsistent with the stakeholder provisions and that I should determine the case on the basis of competing priorities.

35Mr Lai gave evidence that "he often would do an up to date search on the day of exchange" but he did not produce any evidence of having done so in this case either on 23 December 2009 or 22 March 2010. I accept his evidence that he did pay regard to the search dated 10 December 2009 annexed to the First Chen Contract which did not reveal the Hua's interest (created on 1 December 2009). However, I am not satisfied that any further search was conducted before exchange on 23 December 2009 and I think it most unlikely given the fact that the money had already been handed over on 23 December 2009 that he conducted any further search in March 2010.

36In this context I am also prepared to assume in favour of Mr Chen that the absence of notice of Hua's caveat was a relevant matter in Mr Chen proceeding with the First Chen Contract.

37Mr Fernon referred to Person-to-Person Financial Services Pty Ltd v Sharari [1984] 1 NSWLR 745; [1983 - 84] ANZ ConvR 541; (1984) NSW ConvR 55-187 in which McLelland J (as his Honour then was) set out the approach to be taken to competing priorities when a caveat has not been lodged: see pp 747 - 748, namely:

(1)That failure by the holder of an equitable interest to lodge a caveat in respect of that interest can be sufficient to lead to postponement but does not necessarily have that result;

(2)That the effect of a failure by the holder of an equitable interest to lodge a caveat will depend upon the particular circumstances of the case;

and Mr Lloyd agrees that is how the matter should be approached. 38I regard the failure of Mr Hua to lodge a caveat as significant.

39However, I regard as of equal or more significance the following matters. Mr Chen paid a deposit far in excess of 10% of the purchase price. Not only did he, by this, expose himself to a significant risk if there was a default by the vendors, but he handed over bank cheques that, on his case as argued, deprived him of the benefit of the stakeholder provision of the First Chen Contract, and in the case of the $110K I infer was understood to be utilised to pay out the debt owed to the caveator and not be available for return: see Exhibit 3. The payment of a bank cheque as a deposit to one of the vendors was also most unusual. These circumstances have led me to the view that Mr Hua's failure to caveat should result in postponement of his interest created earlier in time to the interest of Mr Chen.

40I note that Mr Chen also gave instructions to his solicitor to pay out BRH even though the first mortgagee's approval was not sought. In Person-to-Person Financial Services Pty Ltd v Sharari (supra) McLelland J expressed the view that this was not relevant. I do not need to consider whether that is another circumstance which could be taken into account, or whether the rather odd circumstance that the First Chen Contract was rescinded without any express arrangement being made about the deposit already paid, is pertinent because, in my view, the matters mentioned in [39] are sufficient to lead to the conclusion that it is not appropriate to postpone Mr Hua's equity in favour of Mr Chen's lien assuming it otherwise to exist. It was at one point suggested by Mr Lloyd that a purchaser's lien was a higher form of security then Mr Hua's equitable interest created under the Loan Agreement, a position from which he appeared to resile, correctly in my view. As Mr Fernon pointed out a purchaser's lien is a form of equitable charge and Mr Hua's security interest arising out of the agreement between Mr and Mrs Hong and himself is also has an equitable charge that is a security whereby property is appropriated for the discharge of the debt: see Hewett v Court (1983) 149 CLR 639, (1983) 46 ALR 87; (1983) 57 ALJR 211, (1983) 7 ACLR 909, (1983) 1 ACLC 768, [1983] HCA 7, per Deane J at 663 and see E.L.G Tyler, P.W. Young, W.R. Fisher and C. Croft, Fisher and Lightwood's Law of Mortgage, 2nd Aust ed, Lexis Nexis Butterworths 2005 at 2.2 and 2.22.

Conclusion 41It follows in my view that Mr Hua had established his entitlement to the Fund in priority to Mr Chen.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 27 March 2013