Determination as to the priorities of the interests claimed
86All of the interests claimed in respect of the Property are equitable. There was no suggestion that any of the interests claimed were "mere equities" (as to which see the discussion by Bryson J, as his Honour then was, in Double Bay Newspapers Pty Ltd and others v AW Holdings Pty Ltd and others (1996) 42 NSWLR 409 at 423 - 425).
87As stated by Mason and Deane JJ in Heid v Reliance Finance Corporation Pty Ltd [1983] HCA 30; (1983) 154 CLR 326 at 339, the general principle applicable to competing equitable interests is that where the merits are equal, priority in time of creation gives the better equity. However, priority will be accorded to the later interest if the merits are unequal and favour the later equitable interest, as for instance where the owner of the later interest is led by the conduct of the owner of the earlier interest to acquire the interest in the belief or on the supposition that the earlier interest did not then exist.
88Their Honours continued (at 341 - 342):
"It will always be necessary to characterize the conduct of the holder of the earlier interest in order to determine whether, in all the circumstances, that conduct is such that, in fairness and in justice, the earlier interest should be postponed to the later interest. Thus in Latec Investments Kitto J said that the case where the conduct of the prior owner leads the later owner to acquire his interest on the supposition that the earlier interest does not exist - the test stated by Dixon J in Lapin v Abigail - was just one "instance" of a case when the merits are unequal: see also Lapin v Abigail, per Isaacs J; General Finance Agency, etc. Co (in liq) v Perpetual Executors and Trustees Association, etc. To say that the question involves general considerations of fairness and justice acknowledges that, in whatever form the relevant test be stated, the overriding question is "... whose is the better equity, bearing in mind the conduct of both parties, the question of any negligence on the part of the prior claimant, the effect of any representation as possibly raising an estoppel and whether it can be said that the conduct of the first or prior owner has enabled such a representation to be made ...": Sykes Law of Securities, 3rd ed. (1978), page 336; see also Dixon v Muckleston; Latec Investments. Thus elements of both negligence and estoppel will often be found in the statements of general principle: see for example, Lapin v Abigail, per Dixon J.
It may be that an equitable interest will not be postponed to an equitable interest created later in time merely because there is a causal nexus between an act or admission on the part of the prior equitable owner and an assumption on the part of the later equitable owner as to the non-existence of the prior equity. Fairness and justice demand that we be primarily concerned with acts of a certain kind - those acts during the carrying out of which it is reasonably foreseeable that a later equitable interest will be created and that the holder of that later interest will assume the non-existence of the earlier interest.
Thus, the mere failure of the holder of a prior equitable interest in land to lodge a caveat does not in itself involve the loss of priority which the time of the creation of the equitable interest would otherwise give (J & H Just (Holdings) Pty Ltd v Bank of New South Wales), notwithstanding that the person acquiring the later interest had, before acquiring that interest, searched the register book and ascertained that no caveat had been lodged. It is just one of the circumstances to be considered in determining whether it is inequitable that the prior equitable owner should retain his priority."
89The reference made by their Honours to the test stated by Dixon J in Lapin v Abigail [1930] HCA 6; (1930) 44 CLR 166 is to the following passage (at 204):
"In general an earlier equity is not to be postponed to a later one unless because of some act or neglect of the prior equitable owner. 'In order to take away any pre-existing admitted equitable title, that which is relied upon for such a purpose must be shown and proved by those upon whom the burden to show and prove it lies, and ... it must amount to something tangible and distinct, something which can have the grave and strong effect to accomplish the purpose for which it is said to have been produced' (per Lord Cairns LC, Shropshire Union Railways and Canal Co v The Queen). The act or default of the prior equitable owner must be such as to make it inequitable as between him and the subsequent equitable owner that he should retain his initial priority. This, in effect, generally means that his act or default must in some way have contributed to the assumption upon which the subsequent legal owner acted when acquiring his equity."
90Accordingly, the focus of the relevant inquiry is whether some identifiable conduct on the part of the owner of the earlier interest has contributed to the acquisition by the later owner of its interest such that, in all the circumstances, it would be inequitable for the owner of the earlier interest to maintain its priority. As stated by Pembroke J in Circuit Finance Australia Limited (Receivers and Managers appointed) (in liquidation) v Panella & anor [2011] NSWSC 311 at [13]:
"When courts speak of 'general considerations of fairness' in the context of a priority dispute, the search is for conduct which is both blameworthy and causative: Heid v Reliance Finance at 341. Mere unfairness in the outcome is irrelevant unless there is also some tangible conduct by the holder of the first interest which caused the holder of the later interest to act on a false premise. This is why, in such a case, the conduct of the holder of the first interest is often described as 'postponing' or 'disentitling' conduct. It is not sufficient to point to the eventual outcome and contend that it is unfair. It may well be so by some moral standard. But the unfairness of the outcome is not a reason for departing from well-established legal principle ..."
91The submissions made by JKAM included the contention that it was only the completion of the works by JKAM which had created any equity in the Property (that is, a value in excess of the amount owed by Mr Damien to the National Australia Bank), and it would thus be unfair if such equity was to be enjoyed by the holders of the earlier created interests (Champion and/or Hotray) to the exclusion of JKAM, the holder of the later acquired interest. However, as stated above, broad appeals to notions of unfairness are really beside the point unless they rest upon a consideration of the relevant circumstances in which the later interest was acquired.
92When pressed to focus upon the relevant circumstances, JKAM submitted that Champion conducted itself as if it did not have any interest in the Property. There is no doubt that Champion, believing itself to be sufficiently protected otherwise, took no steps to lodge a caveat until well after both Hotray and JKAM had acquired their interests in the Property. However, in circumstances where JKAM did not conduct any search of the register before it acquired any of its interests, it did not submit that Champion's failure to lodge a caveat was itself postponing conduct. Rather, JKAM relied upon the fact that Champion, in certain dealings it had with Joseph Elia, remained silent as to any rights it may have in relation to the Property.
93The first such dealing occurred in December 2011 when Champion sent various engineering drawings to Mr Damien (copied to Joseph Elia). The next dealings occurred in August 2012 when Champion sent various design drawings to Mr Damien and to Joseph Elia.
94JKAM submitted that it should be inferred that Champion was aware that another builder (associated with Joseph Elia) was at least contemplating completing the works on the Property. I would draw that inference from the content of the communications concerning the engineering and design drawings. Moreover, Mr Malesev accepted in cross-examination that at some point he became aware that Mr Damien was going to appoint another builder to finish off the works. JKAM submitted that in those circumstances Champion, rather than remaining silent, ought to have brought to the attention of the new builder the fact that Champion had, or claimed to have, an interest in the Property. It should be noted that it was not suggested that JKAM had sought any information or assurances from Champion as to its position, or that Champion had positively said or done anything which misrepresented its position.
95Hotray submitted that the failure of Champion to lodge a caveat amounted to postponing conduct. Mr Alcorn accepted that he was aware that Champion claimed to be owed money by Mr Damien, but maintained that he had no knowledge that Champion claimed any interest in the Property. That evidence, which was not challenged, may be accepted. However, there was no evidence that Hotray searched the register before it acquired its interest in December 2012.
96In my opinion, neither JKAM nor Hotray has demonstrated that any conduct of Champion ought, in all the circumstances, be regarded as postponing conduct justifying a conclusion that it would be inequitable for Champion to maintain its priority. Put another way, I do not consider that any of the later interests claimed by JKAM and Hotray should be regarded as a better equity than the earlier interest claimed by Champion.
97I do not think that Champion, by remaining silent as to any rights it may have in relation to the Property, engaged in any postponing conduct. As mentioned above, JKAM made no enquiry of Champion as to whether it claimed any such rights. That was the case even though Joseph Elia was aware that Mr Damien was not able to complete the building project and, by no later than July 2012, was aware that Mr Damien was in financial difficulty. There is no reason why Joseph Elia could not have made relevant enquiries of Champion. In the absence of any discourse on the subject, I do not think that it can be said that Champion made any representation to JKAM about its rights vis-à-vis the Property. I also do not think that it was reasonably foreseeable to Champion that, by acting as it did, JKAM would proceed to acquire an interest in the Property on the assumption that Champion had no interest in it. If, in December 2012, JKAM in fact assumed that Champion had no interest in relation to the Property, or would not assert any interest in the Property, such an assumption could not reasonably have been based upon Champion's conduct.
98I also do not think that Champion, by failing to lodge a caveat, engaged in any postponing conduct. Whilst such a failure can amount to such conduct, it does not do so in the present case where the later interests were acquired without first searching the register. The failure to caveat had no bearing upon the acquisition of the later interests.
99I turn now to consider the position of Hotray. JKAM submitted that it was sharp practice on the part of Hotray to take advantage of Joseph Elia's lateness to the meeting which was scheduled to take place at about 9am on 10 December 2012. It was contended that Hotray (through Mr Alcorn, who prepared the various transaction documents) understood that it was intended by all concerned that the various documents would be executed at the meeting in an order whereby JKAM's interests as purchaser and mortgagee would be created before Hotray's interest as mortgagee. It was then contended that it was sharp practice for Hotray to, in effect, take advantage of Joseph Elia's lateness by proceeding in his absence to execute its Deed and mortgage, thereby acquiring its interest first, and then failing to inform JKAM on 21 December 2012 of what had happened.
100Mr Alcorn gave evidence that there was no agreement in relation to priorities as between the various interests, although he conceded in cross-examination that had Joseph Elia attended on 10 December 2012 as arranged, it was probable that JKAM's documents would have been signed prior to Hotray's documents. I note, in this regard, that clause 2(i) of the Deed between Mr Damien and JKAM refers to the grant of a "second mortgage" to JKAM.
101Mr Alcorn deposed that on more than one occasion prior to 10 December 2012, he and/or Mr Damien had told Joseph Elia that he (Mr Alcorn) was owed a considerable amount of money by Mr Damien, that Mr Damien wanted to get the money from the proceeds of sale of the Property, and that was "what most of the $300,000 is". Presumably, that is a reference to the $300,000 that was specified as a component of the purchase price payable to Mr Damien and upon which interest would accrue if not paid by 31 December 2012.
102In the witness box, giving further evidence in chief with leave, Mr Alcorn said that on at least three occasions between about September and November 2012, at meetings in Mr Damien's office attended by Joseph Elia, it was stated that he (Mr Alcorn) "was owed considerable money by Mr Damien" and that on at least one occasion it was also stated that he (Mr Alcorn) "was to be paid from the sale of the Property".
103In cross-examination, Mr Alcorn went further. He denied the suggestion that at no stage did he say anything to Joseph Elia to the effect that he was to be given security for the debt owed to him by Mr Damien. Mr Alcorn also affirmatively asserted that he told Joseph Elia that he was to take security for the monies owed to him. Mr Alcorn offered no explanation as to why such statements, which he agreed concerned an important issue in the case, were not referred to in his affidavits. Mr Alcorn agreed that he did not show Joseph Elia any of the documents which Hotray and Mr Damien were going to sign.
104Joseph Elia, for his part, deposed, in effect, that at no stage was he told that Mr Alcorn or Hotray had any interest in the Property. He denied in cross-examination that he understood that on 10 December 2012 documents were to be executed which would secure Mr Alcorn's position. He further denied that he was told that Mr Alcorn was owed money by Mr Damien.
105Joseph Elia seemed to accept that he had been a party to some communications and discussions with Mr Alcorn, and that after first meeting Mr Alcorn (between about July and September 2012) he had discussions with him about matters "relevant to the transaction". However, he denied that he attended meetings with Mr Alcorn in the period from September to December 2012 other than the occasions (presumably 1 September 2012 and 21 December 2012) when documents were signed. He said that any "discussions" he had with Mr Alcorn were in fact confined to electronic communications. Later, however, Joseph Elia seemed to accept that Mr Alcorn was present, as Mr Damien's legal representative, at a number of meetings with Mr Damien in relation to the formulation of documents.
106I do not accept Mr Alcorn's evidence to the effect that Joseph Elia was informed prior to 10 December 2012 that he (Mr Alcorn), or any company associated with him, was going to take security over the Property. That evidence only emerged in cross-examination. It was not contained in Mr Alcorn's affidavit (sworn shortly prior to the commencement of the hearing) which dealt with the topic of the discussions with Joseph Elia. Neither was it adduced in the course of the further evidence given on that topic in his examination in chief. Mr Alcorn appreciated that what, if anything, was said about taking security was an important issue in the case, and one which ought to have been dealt with in his affidavit. It is clear that Mr Alcorn did not show Joseph Elia any of the documents which Hotray and Mr Damien were going to sign, and in one answer given in cross-examination Mr Alcorn stated that "what I do and what I have got in writing" was none of his (Joseph Elia's) business. In my view, the likelihood is that Mr Alcorn said nothing to Joseph Elia about an intention to take security over the Property. In my view, Mr Alcorn's evidence that he informed Joseph Elia that security was to be taken ought be seen as self-serving testimony, rather than as a true recollection of what occurred.
107I am prepared to accept Mr Alcorn's evidence that in the course of discussions about JKAM's agreement with Mr Damien (and in particular in relation to discussion about the $300,000 component of the purchase price) it was mentioned to Joseph Elia that he (Mr Alcorn) was owed a considerable amount of money by Mr Damien. This aspect of his evidence was not directly challenged in cross-examination. Whilst Joseph Elia denied that he was told that Mr Damien owed money to Mr Alcorn, I found Joseph Elia's evidence concerning the communications or discussions he had with Mr Alcorn to be marked by inconsistencies, and generally unimpressive. I would not accept his denial in preference to Mr Alcorn's essentially unchallenged evidence on this point.
108There was also no challenge to Mr Alcorn's affidavit evidence that at the meeting at Mr Damien's office on 21 December 2012 Joseph Elia enquired of Mr Alcorn about "your documents" and, in response, Mr Alcorn said that they had been signed on 10 December 2012 and he had already lodged a caveat to protect his mortgage. I have some disquiet about that evidence. In particular, I do not think that Joseph Elia would have asked about Mr Alcorn's documents in circumstances where (as I have found) Mr Alcorn said nothing to Joseph Elia about an intention to take security over the Property. Nevertheless, it was part of JKAM's postponing conduct case that Mr Alcorn did not inform JKAM on 21 December 2012 about the interest Hotray had taken some eleven days earlier. Accordingly, the adducing of evidence in rebuttal, and a direct challenge to Mr Alcorn in the witness box, was to be expected. In their absence, I accept, with some hesitation, that on 21 December 2012 Mr Alcorn did say something to Joseph Elia to the effect that he (Mr Alcorn) had taken security over the Property and lodged a caveat.
109In my view, JKAM has failed to establish that any conduct of Hotray would, in all the circumstances, be regarded as postponing conduct justifying a conclusion that it would be inequitable for Hotray to maintain its priority. I agree that Hotray took advantage of Joseph Elia's failure to attend as arranged on 10 December 2012. It did so by proceeding with the execution of its documents. Hotray could have delayed that process so that all of the documents would be executed on the one occasion as envisaged. Had that occurred, it is likely, as conceded by Mr Alcorn, that JKAM would have acquired its interests before Hotray acquired its interest.
110However, there was no agreement or arrangement between the parties to the effect that the interests be acquired in any particular order. Indeed, JKAM was not told that Mr Alcorn, or any company associated with him, was intending to take security over the Property. JKAM may thus be taken to have been proceeding unaware of the taking of any such interest. It was proceeding independently of whatever agreements existed as between Mr Damien and Mr Alcorn.
111JKAM had been told that Mr Damien owed a considerable amount of money to Mr Alcorn, but it appears that, once again, JKAM made no enquiry about Mr Alcorn's position, including whether he claimed or intended to claim any interest in the Property. According to Joseph Elia, he was content to rely upon the "accuracy and integrity of all legal documents concerning the property" as prepared and presented to him by Mr Alcorn who he understood to be Mr Damien's lawyer. However, in cross-examination, he conceded that he knew that Mr Alcorn was advising Mr Damien and not JKAM, and there was evidence that JKAM had its own legal advisers available to it, namely, Bayside Solicitors of Ramsgate and (by 21 December 2012) J K Solicitors of Bexley North.
112In these circumstances, Hotray's conduct in proceeding without delay with the execution of its documents on 10 December 2012 does not strike me as amounting to sharp practice. It should be noted that it was not put to Mr Alcorn in cross-examination that his conduct was of that character.
113In addition, for the reasons given earlier, I accept that JKAM was told on 21 December 2012 that Mr Alcorn had taken security over the Property and lodged a caveat. I therefore do not accept JKAM's submission that it proceeded to take its interests in ignorance of the existence of an interest claimed by Mr Alcorn or a company associated with him. It is not surprising that JKAM would proceed regardless given that it had carried out a great deal of construction work for the financially distressed Mr Damien, for which it had not been paid, and the transaction offered means by which recompense for the work might be obtained, and the opportunity to acquire a good investment.
114I also do not accept JKAM's submission that Hotray took its interest with notice of an interest held by JKAM as a mortgagee. It was contended that prior to 10 December 2012 JKAM reached a binding agreement with Mr Damien for the grant of a mortgage over the Property. This agreement was said to be evidenced by paragraphs 13 and 14 of the email sent by Mr Damien to Joseph Elia on 18 July 2012. The email commences with the words "As I understand the deal it is as follows", and then sets out fourteen points including the following:
"(1) Sale price $1,680,000
(2) Contracts to be exchanged by say 3 August 2012
...
(4) Purchaser to fund all necessary works to obtain OC for entire building except the fixing and resealing of the carpark which will be Karl Damien's responsibility
...
(6) Settlement date on say 19 October 2012
(7) On settlement purchaser to pay Karl Damien an extra $400,000
(8) Both parties to endeavour to lease the whole of the property including the gym area, the pool and upstairs offices from day 1
(9) All offers for lease are to be discussed and agreed between the Karl Damien and the purchaser
...
(11) In the event that the building is not fully tenanted by 19 October 2012 then the purchaser has the right to rescind the contract and walk away
(12) That decision must be made by 26 October 2012
(13) In the event that the purchaser decides to rescind the contract and walk away then Karl Damien will pay the purchaser $480,000 plus GST for the building works completed at the property
(14) In order to secure that payment I will grant to the purchaser a mortgage over the properties at Ironbank Ave and Keating Place."
115On the next day, Joseph Elia sent an email in response which is in the following terms:
"Hi Karl,
The purchasing company of the Camden site is JKAM INVESTMENTS PTY LTD ... . Your letter of authority is to be addressed to JKAM INVESTMENTS PTY LTD AUTHORISING THE COMPANY TO PREPARE LEGAL DOCUMENTS, LEASES, SECOND MORTGAGE DOCUMENTS FOR 8-10 IRONBANK AVE CAMDEN SOUTH AND YOUR HOUSE.
THIS WAY WE CAN FINE TUNE THE LEASES WITH THE AGENT."
116It was accepted that Mr Damien's email only records a proposed agreement as it stood in July 2012. Nevertheless, it was put that paragraphs 13 and 14 of the email evidence a separate or "stand-alone agreement" to the effect that "in the event that the purchaser decides not to pursue a contract and walk away" JKAM would be paid $480,000 plus GST for the completed building works. It was further put that this agreement had been partly performed by 10 December 2012.
117I do not agree that paragraphs 13 and 14 of Mr Damien's email can be construed as an agreement separate from the twelve other points. All fourteen points are said to constitute "the deal". Moreover, paragraphs 13 and 14, in their terms, presuppose the existence of an exchanged contract for sale which the purchaser decides to rescind. Finally, there is nothing in Joseph Elia's response to suggest that any part of "the deal" is to operate independently of any other part. The focus of his response is upon the preparation of formal legal documents.
118There is no doubt that Mr Alcorn was closely involved in the preparation of such documents, and was aware that Mr Damien was proposing to grant a mortgage over the Property in favour of JKAM. However, the conduct of the parties in the negotiations over the terms of the documents clearly showed that it was contemplated that binding agreements would only be made when the terms of the relevant documents were finally settled and the documents themselves were executed and, where relevant, exchanged.
119My conclusions that neither Champion nor Hotray was guilty of postponing conduct, and that Hotray did not take its interest with notice of an interest held by JKAM as a mortgagee, mean that priority in relation to the various equitable interests described at [85] above is to be determined by the order in which the interests were created.