Complex Scaffolding Solutions Pty Ltd v Abraham Doueihi

Judgment 1The plaintiff, Complex Scaffolding Solutions Pty Ltd, is in the business of hiring scaffolding for use on building sites. 2By statement of claim filed in court on 4 February2014 the plaintiff instituted the present proceedings against the two defendants, Abraham Doueihi and Anthony Gittany. 3The nature of the plaintiff's claim may be described shortly for the purposes of the present application. The plaintiff alleges that in June 2011 it entered into a contract to hire scaffolding to a company called Hume Highway Constructions Pty Ltd for the purposes of a building project being undertaken by that company. The company is said to be in liquidation. The company did not pay the hiring fee. The plaintiff claims that the amount outstanding is $616,000, together with interest and costs. 4The plaintiff has pleaded that the defendants were parties to the contract as guarantors. 5The contract contained the following clause 13: "In the event that either the Hirer or Guarantor breaches the agreement or refuses or neglects to pay the hirer fees, the Owner is at liberty to register a second mortgage and lodge a caveat on any real property whether present or future property of the Hirer and Guarantor to secure the outstanding fees, interest and costs. The Hirer and Guarantor hereby consent to the lodging of that caveat against their real property to secure outstanding monies owed to the Owner including outstanding hire fees, interest, damages and costs of recovery." 6Mortgage duty has not been paid on the contract under Chapter 7 of the Duties Act 1997 (NSW). I will use the term "mortgage" in the sense described in s 205(1) of that Act, as meaning any security by way of mortgage or charge over any property. 7The plaintiff lodged a caveat against the title to three properties owned by the first defendant. Upon lodgement the caveat was given No AI223177. The parties did not direct submissions to the issue of when the caveat was lodged. The required statutory declaration given by the plaintiff's solicitor was dated 5 December 2013. From markings on the caveat I infer that it was lodged in December 2013. 8As the plaintiff has not claimed any security over any property owned by the second defendant, I will henceforth simply refer to the first defendant as the defendant. 9In Schedule 1 of the caveat the following particulars of the estate or interest in the properties claimed by the plaintiff were given: "Equitable in so far as the interest of Abraham Doueihi only." 10The nature of the instrument by virtue of which the estate or interest claimed by the plaintiff was created was given as: "Contract for scaffolding Hume Highway Constructions P/L", and the date and parties to the contract were stipulated. 11By letter dated 15 January 2014 the solicitors for the defendant served upon the plaintiff a lapsing notice under s 74J of the Real Property Act 1900 (NSW) issued by the Registrar-General in respect of the caveat. 12By par 2 of its claim for relief in the statement of claim the plaintiff claimed a declaration that it is entitled to maintain a caveat over any interest or estate held by either defendant in land administered under the Real Property Act, claiming a mortgage to the extent of the judgment debt. 13By a notice of motion, also filed in court on 4 February 2014, the plaintiff claimed by order 1 an order that the caveat over the properties be extended until further order of the court. 14Alternatively, by order 2 the plaintiff sought an order pursuant to s 74O of the Real Property Act that the plaintiff have leave to lodge a further caveat in respect of the defendant's estate or interest in the properties "being a caveat (a) claiming a mortgage; (b) based in part on the terms of the [written agreement referred to above]; (c) in relation to a secured amount of $616,000 together with interest and costs". 15Ball J gave leave for short service of the statement of claim, notice of motion and supporting affidavit, and made the notice of motion returnable before the duty judge on 6 February 2014. On that date Ball J made an interlocutory order for the extension of the caveat until 19 February 2014, and adjourned the plaintiff's application based upon s 74O to the same date. 16I heard the plaintiff's claim for relief on its notice of motion in the duty list on 19 February 2014. It was necessary for me to reserve judgment because of pressure of business in the duty list on that date. The defendant responded to the difficulty that the court, had in dealing with the matter before the order made by Ball J extending the operation of the caveat lapsed, by accepting that the court should make an order extending the order made in par 1 of the orders made on 6 February 2014 until further order, solely to enable the court to give judgment on the application. I made that order accordingly. 17Counsel for the plaintiff, Mr Ash, did not seriously resist the submission made by counsel for the defendant, Mr Condon SC, that the court could not make an order extending the existing caveat, because it is clear as a matter of law that the description of the interest in the properties claimed by the plaintiff, being no more than the word "equitable", was insufficient, and that nothing in the balance of the caveat could rectify that insufficiency. Mr Condon's submission is clearly correct: see s 74F(5)(b)(v) Real Property Act, clause 7 and schedule 3 Real Property Regulations 1900 (NSW); Hanson Construction Materials Pty Ltd v Vimwise Civil Engineering Pty Ltd [2005] NSWSC 880; (2005) 12 BPR 23,355; Circuit Finance Pty Ltd v Crown & Gleason Securities Pty Ltd [2005] NSWSC 997; (2005) 12 BPR 23,403; and Schibain v Elias [2013] NSWSC 1485. 18Mr Ash pursued the plaintiff's alternative claim for relief under s 74O. For that purpose Mr Ash provided to the court a draft order to which was attached a draft of the proposed new caveat, which the plaintiff sought leave to lodge immediately upon the withdrawal of the existing caveat. 19The draft caveat described the estate or interest claimed by the plaintiff as follows: "A mortgage over the interest of Abraham Doueihi in the Land [as earlier defined], the amount of the debt comprising (1) $616,000; (2) interest @ 5% per month from 18 July 2013; and (3) costs." 20The defendant objected to the plaintiff tendering the contract into evidence, on the basis that it created a mortgage or charge upon which the required duty had not been paid under Chapter 7 of the Duties Act. As the plaintiff's application was not viable unless the contract was received into evidence, Mr Ash ultimately gave to the court the usual undertaking as to payment of the relevant duty in the terms set out in UCPR r 31.13, in order to comply with s 304(2) of the Duties Act. I thereupon admitted the contract into evidence. 21Mr Ash gave the undertaking on behalf of the plaintiff, even though for reasons that will appear below, he submitted that the contract did not create a mortgage or charge, so it did not attract liability for duty under Chapter 7. If Mr Ash's submission is correct, when the plaintiff presents the contract for the assessment of duty, it should be determined that no duty is payable. 22That dealt with the first of the problems that Mr Ash faced as a result of the position taken by Mr Condon that the contract was dutiable as a mortgage. The contract was received into evidence. Mr Condon, however, went further. He submitted that if the contract created a mortgage within the meaning of Chapter 7, as the proper mortgage duty had not been paid, any mortgage created by the contract has not at any time been enforceable by reason of s 211 of the Duties Act, which provides: "A mortgage on which duty is required by this Chapter to be paid is unenforceable to the extent of any amounts secured by the mortgage on which duty has not been paid." 23Mr Condon's submission was that the court could not make an order under s 74O of the Real Property Act, because the mortgage that the plaintiff sought to protect by the new caveat was unenforceable, and although the undertaking that the plaintiff gave to the court cured its problem in relation to the admissibility of the contract, the undertaking could not cure the unenforceability of the mortgage. Mr Condon relied upon the decisions to that effect in Boral Recycling Pty Ltd v Stephen James Wake [2009] NSWSC 712; Bellissimo v JCL Investments Pty Ltd [2009] NSWSC 1260; and ACN 075 911 410 Pty Ltd v Almaty [2011] NSWSC 333. 24Mr Ash did not contest that Mr Condon's submission would be correct if in fact the mortgage that the plaintiff sought to protect by the new caveat was actually created by the contract. 25Mr Ash submitted that the mortgage that is claimed by the plaintiff was not created by the contract. Rather, he submitted that clause 13 of the contract vested in the plaintiff an option, that the plaintiff became entitled to exercise upon default by the company in the terms set out in clause 13, to create a mortgage by the act of lodging a caveat on any property described in clause 13. Mr Ash relied upon the judgment of Handley JA (with whom Priestley JA agreed) in Murphy v Wright (1992) 5 BPR 11, 734. In that case Handley JA held that the twelfth clause in the document in question in that case conferred upon the lender an option that could be exercised on default, for the lender to attach the debt to any one of the guarantors' assets, and which could be exercised by lodging a caveat against the property: see pages 11,737 and 11,738. The act of lodgement by the lender created an equitable charge over the property. 26I accept for the purposes of this application that the majority of the Court of Appeal in Murphy v Wright found that an equitable charge over property may be created by the lodgement of a caveat in the manner described by Handley JA. 27The term of the agreement that was considered by the Court of Appeal was in the following terms: "Twelfthly - In the event of default by the Borrowers in payment of monies due under the Security Documents or in performance or observance of any covenants therein then the Lender shall in addition to the rights set out herein or in the Security Documents be entitled to attach the debt due to any of the assets of the Guarantor or Guarantors whether such assets be real or personal and further that the parties hereto agree that in the event of such default the Lender may register a caveat against any property registered in the name of any or all of the Guarantors until the Monies Secured are repaid." 28 The difficulty involved in determining the legal effect of this term is illustrated by the difference of opinion between the majority and Sheller JA. An interlocutory application such as the present is not the occasion for considering in detail the differences in the reasoning of the members of the Court of Appeal. 29Handley JA considered at 11,738 and 11,739 authorities that show that a creditor may be authorised by a debtor to take steps to create a security over the debtor's property. The debtor may agree that the relevant step to create the security is the lodgement of the caveat, which also has the purpose of protecting the security from the registration of dealings that create inconsistent estates or interests in the property. His Honour referred particularly to the concept of attaching a debt to property. 30There is a difference in wording between the provision considered by the Court of Appeal and clause 13 in the present case. The term in Murphy v Wright authorised the creditor to attach the debt that was due to the relevant property, and also authorised the creditor to register a caveat. The majority construed the term as authorising the creditor to create the charge by lodging the caveat. In the present case clause 13 gives to the plaintiff a "liberty" to do two things. The first is "to register a second mortgage" and the second is to "lodge a caveat". The authorities establish that, where the only right given to the creditor is to lodge a caveat, it might be difficult to determine whether the parties intended the lender to have a charge over the relevant property. A mere right to lodge a caveat, without more, should not give the creditor a charge: see Taleb v National Australia Bank [2011] NSWSC 1562; (2011) 82 NSWLR 489 at (61); cf Coleman v Bone (1996) 9 BPR 16,235 and Iaconis v Laza [2007] NSWSC 1103; (2007) 13 BPR 24,937. However, it may be, when all of the circumstances are considered, and the relevant term is construed in its context, the court should find by implication that the parties intended that the creditor would be entitled to a charge: see Murphy v Wright. Where the relevant term uses words such as "charge" and "mortgage" the conclusion that the term was intended to create a security in favour of the lender may be relatively easy to reach. 31In the present case the inclusion of the liberty in favour of the plaintiff to register a second mortgage assists the court to conclude that clause 13 was intended to give a right to the plaintiff to create a security over the relevant properties. 32The problem, however, is not whether clause 13 was intended to enable the plaintiff to create a security. The problem concerns the identification of the step that was required to be taken to achieve that result. In Murphy v Wright the only candidate was the lodgement of the caveat. In the present case clause 13 specifically authorised the plaintiff to register a second mortgage, and separately authorised it to protect that mortgage by lodging a caveat. 33I will not attempt to resolve the question of whether any defect in the plaintiff's case arises by reason of the circumstance that it was authorised to register a second mortgage, but the terms of that mortgage were not identified in the contract. A term which gives a creditor liberty to register a second mortgage may be effective on the basis that it must be construed as showing an intention of the parties to give the creditor a simple equitable charge over the property. Even if that construction is given to the term, there is a question as to whether the charge arises immediately upon execution of the contract, or when the creditor takes some step. If the latter, the identification of the step is a difficult matter, because it cannot be the registration of a second mortgage, when the terms of the second mortgage are not identified. Upon an interlocutory application such as the present, I would not decide the case on the basis of this issue. Counsel for the parties did not have adequate time in submissions to explore this difficult question. 34As I have noted, in the case of clause 13 the plaintiff is given two separate rights. The first is to register a second mortgage, and the second is to lodge a caveat. There are difficulties in attempting to work out the true intention of the parties, as there are inherent difficulties in the wording of the provision. The natural way for the plaintiff to create a security over the properties is simply to register the second mortgage. That being so, it is difficult to discern the purpose of the plaintiff being given the additional right to lodge a caveat. If a second mortgage is registered against the title to the properties, then the lodgement of a caveat will not be required to protect the mortgage. Perhaps the best way to construe clause 13 is to note that the plaintiff was authorised to register a second mortgage. The evidence shows that first mortgages had already been registered against the titles to the properties. The first mortgagees may not have consented to registration of the second mortgages. In that event the plaintiff's entitlement to lodge caveats may have been necessary to enable the plaintiff to protect its security arising from the second mortgages that it was entitled to create on behalf of the guarantors, but which it could not register. 35Relevantly for present purposes, two considerations arise. The first is that the act that clause 13 appears to intend will create the security is the plaintiff's causing a second mortgage to be created on behalf of the guarantors. It is difficult to construe clause 13 as giving the plaintiff alternative ways to create the security; first by causing a second mortgage to be created; and secondly by ignoring the possibility of creating a second mortgage, and by simply lodging a caveat against the title to the properties. 36On the evidence the plaintiff in the present case did not create any second mortgage, or attempt to register such a mortgage against the title to the properties. 37In the present case the plaintiff does not argue that clause 13 created a charge over the properties. If it did then the plaintiff would face the fatal difficulty discussed above, that flows from the fact that mortgage duty has not been paid on the contract. The plaintiff says that it is only the lodgement of the caveat that creates the charge. However, the better construction of clause 13 probably is that the security arises from the creation of a second mortgages. 38I will assume, contrary to the tentative view I have just expressed, that as submitted by the plaintiff, the plaintiff was authorised by clause 13 to create a charge over the properties by lodging a caveat. 39If the contract only gave rise to an option to create a mortgage, it did not immediately create an equitable interest in the property in the nature of a mortgage, and so did not attract mortgage duty. 40Section 227 of the Duties Act provides: "(1) A caveat under the Real Property Act 1900 in which an estate or interest is claimed under an unregistered mortgage is chargeable with duty. (2) The amount of duty is: (a) if the mortgage is chargeable, but not stamped, with mortgage duty - the same amount as is chargeable on the mortgage, or (b) if the mortgage is stamped, or is not chargeable, with mortgage duty - $50. (3) The person liable to pay the duty is the mortgagor. (4) This section does not apply to a caveat lodged in respect of the mortgage that is exempt from mortgage duty under Part 4." 41Frank Ticehurst et al, Baalman & Wells' Land Titles Office Practice (5th ed 1998, LBC Information Services) at [40.400] states: "Any caveat in which an estate or interest is claimed under an unregistered mortgage, loan agreement, deed of charge or similar transaction is liable to stamp duty and will not be accepted for lodgement unless it has been marked by the Office of State Revenue." 42The effect of s 227 is that, if a caveat claims that the caveator is entitled to a mortgage interest under an unregistered mortgage, the caveat itself is chargeable with mortgage duty. The amount of duty payable depends upon whether the unregistered mortgage is chargeable. If it is, but the mortgage is not stamped with the relevant mortgage duty, the amount of duty payable on the caveat is the same amount as was required to be paid as mortgage duty in respect of the unregistered mortgage. If the unregistered mortgage is stamped, or is not chargeable, the amount of mortgage duty is a flat $50. In the present case the proposed new caveat has not been stamped with any mortgage duty, whether ad valorum or $50. There is no evidence concerning the plaintiff's intention in relation to the payment of mortgage duty on the caveat. The plaintiff has not offered any undertaking to the court that it will cause the requisite duty to be paid. 43It is a somewhat strange concept that a charge over property may be created by means of the creditor exercising authority granted by the debtor to lodge a caveat over the debtor's property. At the instant the caveat is lodged it creates the security, and at the same time it protects the security against the registration of dealings that create estates or interests in the property that are inconsistent with the security. 44A special feature of the present case is that the caveat that is currently lodged against the title to the properties cannot be preserved against lapsing. If it had been a valid caveat, then it would, assuming the principle discussed by the Court of Appeal in Murphy v Wright is applicable, have created the security when it was lodged by the plaintiff. It then would have been necessary to consider whether s 211 of the Duties Act had the effect that the security was unenforceable because mortgage duty had not been paid. If mortgage duty was not payable on the contract, because the contract did not itself create a mortgage, it would be necessary to consider whether the contract and the caveat taken together did create a mortgage, and whether the contract or the caveat attracted mortgage duty either under s 204 or s 227. As s 204 states: "This Chapter charges duty on instruments that fall within the definition of a mortgage" (emphasis added), it would have been necessary to consider whether any relevant instrument was created. 45I am proceeding upon the assumption that clause 13 authorised the plaintiff to create the security by lodging the caveat, which will then protect the security so created. It is necessary to consider the effect of the current caveat, even though that caveat will become ineffective when it lapses. The effect of the caveat lapsing will be that it becomes ineffective by operation of s 74H and s 74J of the Real Property Act. The current caveat will not be avoided from its inception. Even if it was so avoided, that legal effect would not negate the fact that the plaintiff, in exercise of its authority under the contract, acted to create the security by lodging the caveat. Whatever may be the legal nature and effect of the current caveat losing its effectiveness as a protection against the registration of inconsistent dealings, that does not change the fact that the plaintiff acted to create the security when it lodged the current caveat. 46If the current caveat was effective to create a mortgage over the properties, any new caveat which might be lodged following the lapsing or withdrawal of the current caveat would not itself create the security. It would simply, in the usual way, protect the security that was created when the current caveat was lodged. 47The question therefore is whether the Duties Act required mortgage duty to be paid in relation to the security that has already been created. Section 227 will require duty to be paid in relation to the caveat itself in the manner outlined above. That will depend upon whether the security was chargeable with duty. 48If the existing security created by the lodgement of the current caveat is chargeable with mortgage duty, then as that duty has not been paid, s 211 will have the effect referred to above, as discussed in Boral Recycling, and the authorities that followed that case. That is, Mr Ash's reliance on Murphy v Wright may fail even if the contract itself did not create a mortgage. If the current caveat, either by itself or when read with the agreement, attracts mortgage duty, which has been unpaid, the mortgage created by the lodgement of the caveat will be unenforceable. Should the court in that circumstance give leave to the plaintiff to lodge another caveat under s 740 of the Real Property Act. 49Section 205(1)(a) of the Duties Act relevantly defines a mortgage as "a security by way of mortgage or charge over property wholly or partly in New South Wales at the liability date." That definition is satisfied in the present case as regards any security created by the lodgement of the current caveat. As I have noted, s 204 has the effect that mortgage duty under Chapter 7 is charged on instruments that fall within the definition of a mortgage. The question accordingly is whether the court should treat either the current caveat, or that caveat read with the contract, as being an instrument for the purposes of s 204 of the Duties Act. 50"Instrument" is defined in the Dictionary to the Duties Act as including "a written document and a written statement". 51If the effect of the lodgement of the current caveat was to create a security over the properties, that falls within the definition of "mortgage", it also falls within the concept of a written document for the purposes of the definition of "instrument". The caveat was in a real sense the instrument of creation of the mortgage, as, on the assumption I am making as to the effect of clause 13 of the contract, it was the lodgement of the current caveat that was the operative step in the creation of the mortgage. It does not matter to this reasoning that the contract, which is the source of the plaintiff's authority to create the mortgage, is itself not stamped. 52If that reasoning is correct, then the current caveat was itself a mortgage upon which mortgage duty was payable under Chapter 7 of the Duties Act, as well , in addition, as any duty required by s 277 to be paid. 53It follows that s 211 of the Duties Act has the effect that the mortgage created by the lodgement of the current caveat is unenforceable. Accordingly, the court should not make the orders sought by the plaintiff under s 74O of the Real Property Act insofar as the new caveat is sought to be lodged to protect the unenforceable mortgage created by the current contract. 54That conclusion leads to the question of whether the power that I have assumed clause 13 gives to the plaintiff to create a mortgage, by lodging a caveat, must be exercised once and for all, so that if the plaintiff purports to create a mortgage by lodging a caveat that is unenforceable, that is the end of the matter. Alternatively, if the first attempt is ineffective because the mortgage is unenforceable, does clause 13 give to the plaintiff power to make a second attempt to create an enforceable mortgage by withdrawing the current mortgage, or allowing it to lapse, by obtaining leave from the court to lodge a new caveat? If the contract gives that power to the plaintiff, the question arises whether the court in the exercise of its discretion under s 74O should assist the plaintiff to achieve that result? 55Clause 13 could not have the effect of authorising the plaintiff to exercise its option to create a mortgage twice, if the result was that more than one mortgage was in force at the same time, especially if the terms of the two mortgages were inconsistent. It is not so clear that clause 13 would prevent the plaintiff exercising the option to create a mortgage a second time, if the first attempt was ineffective in the sense that the mortgage that was intended to be created was unenforceable. In the present case the attempt to create the mortgage has not been ineffective because of some defect in the process. It has been ineffective because of a failure to comply with Chapter 7 of the Duties Act. 56It may therefore be possible that clause 13 gives the plaintiff an option to create a mortgage that may be exercised again, if a first attempt fails to create an enforceable mortgage. 57If that reasoning is correct, then it may be necessary for the court to face the issue of determining what will be required to satisfy Chapter 7 of the Duties Act in relation to a new attempt to create the mortgage by lodging a new caveat, albeit that the leave of the court will be necessary. 58I have come to the view that it will be premature for the court to finally determine the dispute on the basis of the considerations that have been discussed above. The matter was dealt with by counsel in the duty list, and they did not have time to explore all of these issues adequately. 59One issue that has not been addressed is the point that I have raised above concerning the difference in wording between clause 13 of the contract of hire and the term considered in Murphy v Wright. There is a question in this case as to whether the plaintiff was given an option to create a mortgage by taking the sole step of lodging a caveat without also creating the mortgage. I have made an assumption for the sake of argument that the mortgage could be created by the action of lodging a caveat, in order to explore the consequences concerning the fate of the plaintiff's application for leave to lodge a new caveat. I have come to the view that, on that assumption, the lodgement of the first caveat would have created a mortgage for the purposes of clause 13, but that mortgage is unenforceable because mortgage duty was not paid in respect of it. The court should not give leave to file a new caveat if the mortgage it seeks to protect is unenforceable. That led me to consider whether the plaintiff is authorised to create a new mortgage by lodging a second caveat. That possibility makes it necessary for the court to form a view about whether clause 13 requires the plaintiff to create a mortgage as a step that is separate from lodging a caveat. It also requires the court to face the issue that the plaintiff has given an undertaking to the court to pay any mortgage duty chargeable on the contract, but the plaintiff has not undertaken to pay any mortgage duty that may be payable on any new caveat, whether under s 204 or s 227 of the Duties Act. There may be a question as to whether any discretionary consideration arises under s 74O of the Real Property Act in relation to granting leave to the plaintiff to lodge a new caveat, when the lodgement of the first caveat has miscarried by reason of a failure to pay mortgage duty. There may be further complications that arise. 60I will publish these reasons for judgment on the basis that they set out provisional views on the questions that have arisen, and invite the parties to make supplementary submissions. That course is appropriate in order to give both parties an opportunity to put considered submissions dealing with the additional issues that I have canvassed in these reasons. 61If either party wishes to make any further submissions before final judgment is delivered, they should so advise my associate by email within three days of the publication of these reasons for judgment. Any further submissions should be limited to the effect of the proper construction of clause 13 of the agreement, the application of the Duties Act to the current caveat and any new caveat, the relevance to the issues if mortgage duty must be paid on any new caveat, and the exercise of the court's discretion under s 74O of the Real Property Act in these circumstances. Unless upon application I agree to a longer time, any additional submissions should be made in writing within seven days of the publication of these reasons for judgment.