Creasy's Grain Enterprises Pty Ltd v Clarke & Barwood Lawyers Colac Ltd [2004] VSC 77

6. By originating motion dated 11 February 2004, the plaintiff sought a declaration, which after minor amendments at the hearing, was in the following terms:

"That each of the following mortgages, as to each of which the Defendant is registered proprietor, secures only so much of the principal amount expressed to be thereby secured as remains outstanding and associated unpaid interest and costs as are expressed thereby to be secured namely: (a) $223,000 in the case of Mortgage U278191X granted by William Craig Sutton in favour of John Robert Davies and Vincent Anthony Vinci as mortgagees, and dated 17 May 1996; (b) $275,000 in the case of Mortgage U237183H granted by William Craig Sutton and Ruth Blanche Sutton in favour of John Robert Davies and Vincent Anthony Vinci as mortgagees, and dated 17 May 1996; (c) $395,000 in the case of Mortgage U237179S, varied to $450,000 by registered variation U362976K, and subsequently varied to $630,000 by registered variation V506542A, in each case granted by William Craig Sutton and Robyn Michelle Sutton (later Cuzens) in favour of John Robert Davies and Vincent Anthony Vinci as mortgagees, and respectively dated 17 May 1996, 24 June 1996 and 24 June 1998; (d) $366,000 in the case of Mortgage V961084K granted by W.C. & R.M. Sutton Pty Ltd in favour of Clarke & Barwood Lawyers Pty Ltd (ACN 082 672 044) as mortgagee, and dated 4 December 2000; and that none of them secures indebtedness secured by any other of them."

10. The dispute which led to this originating motion being issued involved the question of whether or not each of the four mortgages referred to above was in some way cross-linked with the other three mortgages so that the indebtedness under one mortgage was secured by the other mortgages. After the commencement of the proceeding, the defendant abandoned its previous contention that the mortgage given by W.C. & R.M. Sutton Pty Ltd could be cross-linked to the other three mortgages.

14. Very briefly, the background to the dispute involving the three mortgages is as follows. In another proceeding, which has only recently settled, the plaintiff, Creasy's Grain Enterprises Pty Ltd ("CGE"), sought in part to enforce certain mortgages given to it by William Craig Sutton. CGE's relevant mortgages were each registered on 2 July 2002 as a second mortgage behind a first mortgage registered in the name of the defendant, Clarke & Barwood Lawyers Colac Ltd ("CBLC"). There has been default under each of the three first mortgages and CBLC has taken possession of each of the mortgaged properties. Mr Sutton was made bankrupt on 12 November 2003. The trustee of his bankrupt estate did not oppose the mortgagees exercising their rights against the securities. CBLC proposed to sell the mortgaged properties by public auction in March and April 2004. Indeed, the first auctions were due to take place on 12 March 2004, which led to the urgent hearing of the originating motion and to the need for a decision with only minimal time for consideration.

17. During discussions between the solicitors for CBLC and CGE concerning the proposed sale it became apparent that the claimed cross-linking of the three first mortgages was disputed. CGE sought advice from CBLC as to the amount secured by each mortgage in order to consider its position in respect of its rights as second mortgagee, including no doubt its rights under s.87 of the Transfer of Land Act 1958 ("the TLA"). CBLC maintained that as the mortgages were cross-linked it could look to the surplus proceeds of sale of any one of the mortgaged properties to reduce any deficiency in the proceeds of sale of any of the other mortgaged properties. This proposition was strenuously disputed by CGE. Further, in a letter dated 10 February 2004 Clarke & Barwood, the solicitors for CBLC, advised CGE's then solicitors that:

"... The Auction of the land proposed for March and April will be made on the basis that each mortgage security shall have a Reserve Price equivalent to each mortgage outstanding to our client and each mortgage security will only be sold on the basis that all Reserve Prices are reached. If any mortgage sale price proves deficient none or some of the properties will be sold at our discretion. We will then retain the land and have the same managed with a view to sufficient income being earned to meet any deficiency."

This procedure was also criticised by CGE and the defendant subsequently indicated that it would not follow the course of not selling any property unless all reserve prices were reached.

23. There still remained unresolved the question of whether or not the three first mortgages were cross-linked. I turn then to an examination of these mortgages. Initially, the first mortgagees were John Robert Davies and Vincent Anthony Vinci as the nominees of the solicitors' mortgage practice operated by the firm of Clarke & Barwood. Due to changes in the regulation of solicitor mortgage lending, the mortgages were transferred to the defendant by three transfers of mortgage, each dated 5 September 2000 and each registered on 21 September 2000. It is common ground that each of the three first mortgages is a contributory mortgage and that although there was, and is, some overlap between a small number of contributors in respect of two and even three of the mortgages, the identity of the contributors in respect of each mortgage was, and is, different.

26. As can be seen from the terms of the declaration sought by the plaintiff, the three first mortgages were each dated 17 May 1996. They had the same interest rates, the same instalment dates and the same due date for repayment, namely 17 May 1998. Mortgage U278191X ("Mortgage UX") was granted by Mr Sutton alone over one property registered in his name as sole proprietor. It was said to secure an advance of $223,000. Mortgage U237183H ("Mortgage UH") was granted by Mr Sutton and his mother, Ruth Blanche Sutton, over about 12 parcels of land registered in their names as tenants in common. It was said to secure an advance of $275,000. As a result of a complicated series of transactions it appears that by June 1999 Mr Sutton had become the sole registered proprietor of the properties in question. Mortgage U237179S ("Mortgage US") was granted by Mr Sutton and his first wife, Robyn Michelle Sutton, later Cuzens, over six properties registered in their names as joint tenants. It was said to secure an advance of $395,000, which was increased to $450,000 by a variation of mortgage dated 24 June 1996, which was registered on 16 August 1996, and further increased to the sum of $630,000 by another variation of mortgage dated 24 June 1998, which was registered on 2 July 1998. On 3 November 2000 Mr Sutton became registered as the sole proprietor of these six properties. The three advances which totalled $893,000, and then $1,128,000 after both variations, were all paid to or at the direction of Mr Sutton. The three first mortgages have all been renewed every two years, the last occasion being 17 May 2002.

29. Each of the three first mortgages incorporated by reference the same registered Memorandum of Common Provisions, No. AA342 ("the Memorandum"). Clause 1(1)(a) of the Memorandum states that:

"The Mortgagor shall pay to the Mortgagee at the time or times agreed upon from time to time between the Mortgagor and the Mortgagee and if no time or times are agreed upon then upon demand the moneys hereby secured (which expression is defined in Clause 31)."

"The Mortgagor shall pay to the Mortgagee on the due date described in the Schedule the amount outstanding of the principal moneys secured (which expression is defined in Clause 31)."

These and other important expressions are defined in cl. 31 of the Memorandum, "unless the contrary intention appears".

36. The expression "moneys hereby secured" is defined in cl. 31(1)(f) as follows:

" 'moneys hereby secured' means the principal moneys secured and each and all sums of money in which the Mortgagor may now or hereafter be indebted or liable or contingently indebted or liable to the Mortgagee in any manner or on any account whatever including interest, whether capitalised as provided in Clause 6(2) or not, except such moneys (if any) as the parties in writing agree do not form part of the moneys hereby secured."

The expression "principal moneys secured" is defined in cl. 31(1)(k) as follows:

" 'principal moneys secured' means (i) the Advance; (ii) any further advances made by the Mortgagee to the Mortgagor (in the discretion of the Mortgagee) as part of the principal moneys secured; (iii) all other moneys payable by the Mortgagor to the Mortgagee which pursuant to the terms of this Mortgage are to be part of the principal moneys secured."

The expression "Advance" is defined in cl. 31(1)(b) as meaning "the amount of the advance set out in the Schedule", which term means the items set out on the face of the Mortgage itself. The expression "Mortgagor" is defined in cl. 31(1)(h) as meaning the Mortgagor including the "assigns and transferees" of the Mortgagor and "where there is more than one Mortgagor, each of them" including their respective "assigns and transferees". In addition, cl. 31(3) of the Memorandum provides that:

"Where there are two or more Mortgagors the covenants on their part herein contained shall bind them jointly and each of them severally."

The expression "Mortgagee" is defined in cl. 31(1)(g) as also including "assigns and transferees" of the Mortgagee.

The Proper Approach to Construction of the Three First Mortgages

46. The defendant's claim to cross-linking was based on what is known as the all moneys clause in the definition of "moneys hereby secured", namely, that in addition to the principal moneys secured, the mortgage secured (in its simplest form after omitting unnecessary words):

"all sums of money in which the Mortgagor may be liable to the Mortgagee in any manner or on any amount whatever ..."

50. Mr Mukhtar QC, who appeared with Mr Barber for the defendant, submitted that the proper approach to the question of the construction of the three similarly worded mortgages was to examine the words of the mortgage to see whether the contractual intention was revealed. One does not look behind the words used, he submitted, unless the intention was not clear or there was ambiguity. Mr Mukhtar referred me to a discussion of "the applicable legal principles" by Kirby P in B & B Constructions (Aust) Pty Ltd v Brian A. Cheeseman & Associates Pty Ltd[1]. Included in that discussion by the learned President, as he then was, was the statement that:

"The principles governing the use which may be made of extrinsic evidence to assist in the construction of a written agreement are generally taken ... to be those expressed by Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 352." [2]

54. Mr Mukhtar submitted that there was nothing perverse or overreaching in concluding that, in this particular situation, the all moneys clause meant what it plainly said. Each of the three first mortgages also secured in addition to the specific advance any other amount owed by Mr Sutton to Messrs Davies and Vinci, and now CBLC. The "Mortgagor" could be relevantly read as Mr Sutton alone because of the definition of "Mortgagor" as meaning "each of them" where there was "more than one Mortgager", and the joint and several nature of any covenant on the part of two or more mortgagors. The "Mortgagee" was Messrs Davies and Vinci, and now CBLC. One did not look behind the mortgage to see whether or not the contributors were the same. That was not relevant because the contributors were not the mortgagee. There was no unintended consequence, he submitted, in holding the parties to what they had apparently agreed. To conclude otherwise, Mr Mukhtar submitted, would destroy the all moneys clause.

57. On the other hand, Mr Garratt QC, who appeared with Mr Crutchfield for the plaintiff, submitted that the proper approach to construction was that adopted by Redlich J in Oversea-Chinese Banking Corporation Ltd v Malaysian Kuwait Investment Co Sdn Bhd[3] when his Honour said that:

"... the 'all monies' clause must be construed in the light of the actual language used and having regard to the context in which this mortgage came to be executed and its commercial purpose."

His Honour was there following what had been said in earlier cases, including in the joint judgment of Ormiston and Batt JJA in Ronan v ANZ Banking Group Ltd[4]:

"The clauses in the mortgage that are in question should be construed having regard to the context in which the mortgage came to be executed and by reference to the commercial purpose it was intended to serve, but otherwise the intention of the parties is to be ascertained from the language used: Re Bankrupt Estate of Murphy; Donnelly v. Commonwealth Bank of Australia ((1996) 140 ALR 46 (Hill J)); cf. also Darlington Futures Ltd. v. Delco Australia Pty. Ltd. ((1986) [1986] HCA 82; 161 CLR 500 at 510), though it is to be remembered that the mortgage is a standard conveyancing document as opposed to a single or specific business agreement."

63. Mr Garratt submitted that the context and the commercial purpose of these mortgages made it clear that each was intended to be a stand alone mortgage. There could be no cross-linking, he submitted, because the mortgagor in each case was different and the contributors in each case were different. He submitted that each mortgage only secured the particular advance referred to in the Schedule. However, when faced with the argument that this construction totally deprived the all moneys clause of any operation, he submitted that the all moneys clause should be read as only applying to some other debt owed by the same mortgagor, that is Mr Sutton alone in the case of one mortgage, Mr Sutton and his mother in the case of another mortgage and Mr Sutton and his then wife in the case of the third mortgage, to the same group of contributors.

66. As the following discussion shows, the language of the all moneys clause is, in my opinion, "susceptible of more than one meaning".[5] Moreover, as Kirby P himself pointed out in his explanation of the applicable legal principles, sometimes the ambiguity is not perceived without reference to the extrinsic evidence.[6] He also quoted[7] with approval the following passage from the judgment of McHugh J in Manufacturers' Mutual Insurance Ltd v Withers[8]:

".... few, if any, English words are unambiguous or not susceptible of more than one meaning or have a plain meaning. Until a word, phrase or sentence is understood in the light of the surrounding circumstances, it is rarely possible to know what it means. In my view evidence of surrounding circumstances will generally be admissible if it is known to both parties or sufficiently notorious to be presumed to be within their knowledge."

Therefore, it seems to me that the approach I should adopt is to construe the language used, having regard to the context of the mortgages and their commercial purpose.

72. Counsel for the plaintiff placed great emphasis on the fact that these were contributory mortgages made by solicitors in the course of their mortgage lending business and that the solicitors were therefore regulated by the Solicitors Mortgage Practice Section Rules 1996 which imposed certain specified duties and obligations on the solicitors. It was further emphasised that the contributors in respect of each of the three first mortgages were different.

75. Mr Garratt submitted that in undertaking lending on behalf of the contributors, the solicitors were acting as their agent as well as the trustee of their money. Thus, Messrs Davies and Vinci were, and now CBLC was, he submitted, acting as agent for an undisclosed principal, being the relevant contributors in respect of each separate lending transaction. He submitted that for this reason alone there was a separate lending arrangement in respect of each advance and mortgage. Each group of contributors, he submitted, would be entitled to enforce their loan made to the borrower.[9]

78. Mr Garratt further submitted that if it had been intended that each of the mortgages be "crossed-linked", it would have been open to Messrs Davies and Vinci simply to take one mortgage from each of the mortgagors and have a total figure specified as the "Advance". He submitted that in that event each contributor would be lending on a pooled security. Instead of lending a certain percentage of a loan amount secured on one parcel of land (being not more than the loan value ratio for that parcel of land), the contributor would be lending a different percentage of a different total loan amount with other persons on wider security (the permissible amount being assessed by the loan value ratio in respect of the aggregate security). Although Mr Vinci in his affidavit sworn on 26 February 2004 said that there was nothing to prevent that course being followed and that this had been "a single application" by Mr Sutton to borrow the money, he also said that:

"the only reason why 3 separate mortgages were created rather than one single mortgage over all the mortgaged lands was because although Mr Sutton was one of the registered proprietors of each of the lands sought to be mortgaged, he was in some cases a joint proprietor of those with either Robyn Michelle Sutton, or Ruth Blanche Sutton ..."

Mr Garratt argued that the fact that each of the mortgages was specified as securing a particular advance, supported the submission that each mortgage was a stand alone document, and each group of contributors was only entitled to look to the security taken out in respect of the particular advance.

83. Mr Garratt finally submitted that if there were not a separate lending arrangement in respect of each advance and mortgage, then contributors who had contributed moneys for lending on a particular mortgage could be liable to bear the shortfall in respect of a separate lending transaction. He gave as an example two loans to A, each with different groups of contributors and different security, both of which loans had resulted in different shortfalls after the power of sale had been exercised. Mr Garratt argued that if the mortgages were cross-linked then the mortgagee would be able to "apply" some of the proceeds of the sale with the lesser shortfall to improve the other shortfall and thereby equalise the extent of the two shortfalls. This would obviously be detrimental to the contributors whose shortfall was increased.

86. Counsel for the defendant submitted that the meaning of the relevant language in the all moneys clause was clear:

"all sums of money in which the Mortgagor may be liable to the Mortgagee in any manner or on any account whatsoever."

In Mortgage UX where Mr Sutton alone was the mortgagor, he was agreeing to make the mortgaged property in question also security for all other debts he owed to Messrs Davies and Vinci in addition to the particular advance of $223,000. In Mortgage UH, where Mr Sutton and his mother constituted the mortgagors, each of them was agreeing to make the mortgaged properties in question security for other debts each of them jointly or severally owed to Messrs Davies and Vinci in addition to the particular advance of $275,000. And the same for Mortgage US, where Mr Sutton and his then wife were the mortgagors. Thus, for example, if Mr Sutton remained liable to Messrs Davies and Vinci, and now CBLC, for the shortfall after a mortgagee's sale of the property secured by Mortgage UX, then Mr Mukhtar submitted, as a matter of plain language, such liability fell fairly and squarely within the definition of "moneys hereby secured" in Mortgages UH and US, and any surplus in the proceeds of sale of those properties secured by those mortgages could have been drawn on by Messrs Davies and Vinci, and now could be drawn on by CBLC.

91. There was no reason to be found in the context and commercial purpose, Mr Mukhtar submitted, to read down the plain meaning of the all moneys clause. On the contrary, he submitted, the objective circumstances supported the intention of cross-linking. He referred to the fact that the three first mortgages were taken on the same day, Mr Sutton was a party to each, the additional parties were Mr Sutton's mother and wife, each of the mortgages contained an all moneys clause and Mr Sutton received the benefit of the advances.

94. Further, Mr Mukhtar submitted that the fact that these were contributory mortgages did not detract from the argument that they were intended to be cross-linked. The relevant intention was that of the parties to the mortgages - the mortgagor and the mortgagee. The definition of the "moneys hereby secured" spoke of money for which the mortgagor might be liable to the mortgagee. Thus, he submitted, the mortgagor's obligations were to the mortgagee and not the contributors. Further, it was the mortgagee and not the contributors who could exercise rights under the mortgage such as the power of sale on default. It was the defendant's case that questions of trust, agency or rules relating to contributory mortgages were irrelevant to the construction of the mortgages. Such matters concerned the relationship, as between themselves, of the nominee mortgagee and its investor clients, not the relationship between mortgagor and mortgagee.

97. Mr Mukhtar submitted that in construing the three first mortgages one did not go behind the description of the "Mortgagee" in the Schedule as being Messrs Davies and Vinci, and now by transfer CBLC. It was therefore irrelevant that the contributors were different in the case of each first mortgage. Arguing by analogy, Mr Mukhtar referred to the doctrine of consolidation and to the established principle that the mortgagee has no right to go behind the mortgagor and inquire into equitable interests for the purpose of consolidation.[10]

101. In my opinion, the defendant is correct in its submission that the three first mortgages are cross-linked by virtue of the all moneys clause in each mortgage insofar as it relates to Mr Sutton's present indebtedness to CBLC.

104. The relevant context appears to me to be that Mr Sutton wanted to borrow a considerable sum of money; Clarke & Barwood had clients with funds available to lend; Mr Sutton did not have sufficient properties in his own name to put up as security for his borrowings, but he did have if properties which were in his name together with that of his wife or his mother were to be mortgaged; separate mortgages were therefore appropriate for the differently constituted mortgagors; the three first mortgages were granted on the same day; Mr Sutton was a party to each mortgage; Mr Sutton received the benefit of all of the advances, with the agreement of his wife and mother; and inclusion of the all moneys clause gave added protection for the contributors.

107. I accept the defendant's argument that by virtue of the definition of "Mortgagor", one has to read the all moneys clause as referring to each mortgagor's separate liability to the mortgagee, where there is more than one mortgagor. The conclusion that the three first mortgages are cross-linked has no effect on Mr Sutton. It is his indebtedness to CBLC and CGE which is secured by all of the first and second mortgages. Even if he were not bankrupt, it should not matter to him whether or not the surplus proceeds of sale of one secured property went to reduce the shortfall in paying out the first mortgage in respect of the sale of another secured property or to reduce his indebtedness to the second mortgagee, CGE.

110. The persons who potentially suffer detriment from this construction of the all moneys clause are the co-mortgagors, Mrs Ruth Sutton and Mrs Robyn Sutton. Their equity in the security property, their entitlement to a share of the surplus, is reduced to the extent that it is used to meet another debt of their co-mortgagor Mr Sutton. But as has been stated, Mrs Ruth Sutton was the mother of Mr Sutton and Mrs Robyn Sutton was his then wife. In my opinion, there is no reason to suppose that they did not intend to provide that extra security for their son or husband. After all, they had already agreed to give a mortgage over properties in which they had an interest in order to support Mr Sutton's borrowings. Thus, looking at the all moneys clause from the mortgagor's point of view, no reason has been advanced, in my opinion, to read it down in the way suggested by the plaintiff.

113. I also accept the defendant's argument that in construing the all moneys clause one should concentrate on the relationship between the mortgagor and the mortgagee, rather than looking at the position of the contributors. Thus, there was no apparent reason, in my opinion, to read down the all moneys clause from applying to all debts owed by Mr Sutton to Messrs Davies and Vinci, and now CBLC.

116. However, counsel for the plaintiff did raise an important issue with their suggestion that cross-linking the mortgages would result, in certain factual situations, in the pooling of the proceeds of two or more sales, to the detriment of contributors whose shortfall was thereby increased. Nevertheless, Mr Garratt did not point to any provision in the mortgages which either permitted or required such pooling of the proceeds and as far as I can see there is none. The normal rule would be that the funds which were contributed to make up the Advance and interest thereon should be paid out before any other debt.

119. After I had reserved my decision, I requested the parties to provide a short written submission on the question of whether cl. 6(3) of the mortgage was relevant to the construction of the all moneys clause, as it had not been mentioned in the oral argument. Clause 6(3) provides as follows:

"Unless (a) the Mortgagee otherwise determines or (b) express agreement to the contrary is made between the Mortgagor and the Mortgagee either in this Mortgage or otherwise all moneys received by the Mortgagee hereunder shall be applied first to interest payable by the Mortgagor to the Mortgagee upon the principal moneys secured, second in reduction of the principal moneys secured, third in reduction of interest payable on the moneys hereby secured other than the principal moneys secured and fourth in reduction of the moneys hereby secured other than the principal moneys secured."

123. Mr Garratt submitted that cl. 6(3) supported the plaintiff's argument because if the all moneys clauses did cross-link the mortgages, then the mortgagee could choose to pay off some other debt of the mortgagor and leave the advance unpaid to the detriment of the contributors. But equally this could be done even if the all moneys clause were given the more limited construction urged by the plaintiff. In any event, in my opinion, the nominee mortgagee would not change the order of payment because to do so would be a breach of its fiduciary duties to the contributors. They are entitled to have the mortgagee pay out their contribution first. Clause 6(3) merely confirms the usual order of payment of debts and does not really assist on the construction question.

126. As far as the contributors are concerned, there are only two relevant situations. In the first case, the proceeds of sale of a secured property are not sufficient to repay the advance and interest and costs, in which case there is a deficiency as far as the contributors to that mortgage are concerned. In the second case, the proceeds of sale are more than sufficient to repay the advance and interest and costs so that there is a surplus left over. In that case, the contributors to that mortgage are fully reimbursed so they have no interest in the surplus, and, if there is an all moneys clause relating to the same debtor, the surplus can be drawn on to eliminate or reduce the deficiency on some other sale. As Mr Mukhtar submitted, the all moneys clause therefore works to the benefit of the contributors. It does not work to their detriment. In those circumstances, once again there seems to be no reason to read down the wording of the all moneys clause to exclude the cross-linking.

129. Finally, there is the position of the second mortgagee to consider. It can have no complaint if the proper construction of the all moneys clause results in it being unable to use all or part of the surplus proceeds of sale of one security property to reduce its debt, because it had, or is deemed to have, notice of the terms of the three first mortgagees before it entered into the second mortgages. Mr Garratt raised the difficulty that cross-linking the mortgages caused for CGE in respect of its rights under s.87 of the TLA. This must be a common problem for second mortgages. It is not limited to the particular facts of this dispute. I agree with Mr Mukhtar that the only solution to this dilemma is for any second mortgagee who wishes to pay out the first mortgagee to tender all of "the money secured" by the mortgage. In respect of each of these three first mortgages, because of the cross-linking, "the money secured" by each mortgage is the total amount owed by Mr Sutton, namely, $1,128,000 plus any interest and costs. In return for that payment, the second mortgagee would be entitled to "a transfer of the interest of the mortgagee requiring such payment", that is, the first mortgagee CBLC.

133. I will hear from counsel concerning the orders which should now be made and on the question of costs.

[1] (1994) 35 NSWLR 227 at 233-236

[2] (1994) 35 NSWLR 227 at 234

[3] [2003] VSC 495 at [36]

[4] [2000] VSCA 77; (2000) 2 VR 531 at [52]

[5] [1982] HCA 24; (1982) 149 CLR 337 at 352 per Mason J

[6] 35 NSWLR 227 at 234

[7] 35 NSWLR 227 at 235

[8] (1988) 5 ANZ Insurance Cases para 60-853 at 75,343

[9] Siu Yin Kwan v Eastern Insurance Co Ltd [1994] 2 AC 199 at 207

[10] In Re Raggett; Ex parte Williams (1880) 16 Ch D 117; Sharp v Rickards [1909] 1 Ch D 109