Citation : POURZAND - v - HOME BUILDING SOCIETY LTD [2004] WASC 127

Contract - Priority of mortgages and amounts secured - Principles of interpretation - Meaning of "and" - Turns on own facts

Transfer of Land Act 1893 (WA), s 53

Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2001] 2 WLR 735

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337

Hopkinson v Rolt [1861] EngR 641; (1861) 11 ER 829

Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896

Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2001) 210 CLR 181

McCann v Switzerland Insurance Ltd [2000] HCA 65; (2000) 203 CLR 579

Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451

Pan Foods Co Importers and Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd [2000] HCA 20; (2000) 170 ALR 579

Re Peat Resources of Australia Pty Ltd; Ex parte Pollock [2004] WASCA 122; (2004) 181 FLR 454

Re The Licensing Ordinance (1968) 13 FLR 143

Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989

Royal Botanic Gardens v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436

Toll (FGCT) Pty Ltd v Alphapharm [2004] HCA 52; (2004) 219 CLR 165

Victims Compensation Fund Corporation v Brown [2003] HCA 54; (2003) 77 ALJR 1797

Australian Broadcasting Commission v Australian Performing Rights Association [1973] HCA 36; (1973) 129 CLR 99

Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389

Devries v Australian National Railways Commission (1993) 177 CLR 472

Fox v Percy [2003] HCA 22; (2003) 214 CLR 118

Hamilton v Whitehead [1988] HCA 65; (1988) 166 CLR 121

Herald & Weekly Times Ltd v Director of Public Prosecutions [2003] SASC 234; (2003) 86 SASR 70

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

Victims Compensation Fund v Brown [2002] NSWCA 155; (2002) 54 NSWLR 668

Western Australia v Watson [1990] WAR 248

1 WHEELER JA: I have had the advantage of reading in draft the reasons for decision of McLure JA. I agree with those reasons and have nothing to add.

2 MCLURE JA: This appeal concerns the construction of a Deed of Priority dated 16 December 1998 between the appellant (defendant), the respondent (plaintiff) and a Mr M Oteri ("deed of priority"). The appellant and the respondent had advanced money to Mr Oteri secured by registered mortgages over land owned by him. The issues in the appeal are narrower than the claims litigated before Pullin J who found that the appellant had breached a term of the deed of priority and awarded damages to the respondent.

3 Between 27 August 1997 and 3 February 1999, Mr Oteri was the registered proprietor of land at 4A Alness Street, Applecross ("the Alness Street property").

4 There were two registered mortgages lodged against the title of the Alness Street property in the following order:

(1) Mortgage G545917 to the appellant (registered 27 August 1997);

(2) Mortgage G647605 to the respondent (registered 27 November 1997).

5 On 27 November 1998, Mr Oteri made a cash offer to acquire a residential property at 3 Duncraig Road, Applecross ("the Duncraig Road property"). Mr Oteri's offer was accepted and a deposit of $40,000 was required and payable by 30 November 1998.

6 On 30 November 1998 Mr Oteri entered into a contract to sell the Alness Street property. The purchase price of the Duncraig Road property was approximately $100,000 more than the sale price of the Alness Street property.

7 Mr Oteri applied to the appellant for the sum of $40,000 to pay the deposit on the Duncraig Road property and for $136,500 to assist with the purchase of that property. By separate letters dated 9 December 1998 to Mr Oteri, the appellant approved the applications for finance. A condition precedent to the advance of the sum of $40,000 (under what is described as a portable loan facility) was a registered first mortgage over the Alness Street property. The letter provided that the security may be substituted

during the agreed term (three years) of the facility. Another condition precedent was the grant of a deed of priority by the respondent.

8 In relation to the loan of $136,500, also under a portable loan facility for a term of three years, the appellant required a registered first mortgage over the Duncraig Road property. There was no requirement for the respondent to grant a deed of priority.

9 Mr Oteri executed two documents supplied by the appellant entitled "Security Swap". In relation to the sum of $40,000, Mr Oteri acknowledged and agreed that mortgage G545917 over the Alness Street property was to be discharged and replaced by a mortgage over the Duncraig Road property. Mr Oteri signed a second Security Swap document in the same terms in relation to the remaining balance of $491,000 then secured by the mortgage over the Alness Street property.

10 On 3 February 1999, the two registered mortgages over the Alness Street property (G545917 and G647605) were discharged and the Alness Street property was transferred by Mr Oteri to the purchaser. The sale proceeds, together with the additional money advanced by the appellant, were applied to pay the purchase price of the Duncraig Road property.

11 On 4 February 1999, Mr Oteri became registered as the proprietor of the Duncraig Road property. On that day, two new registered mortgages were lodged against the title of that property in the following order:

12 On 30 July 1999 the appellant transferred its registered first mortgage over the Duncraig Road property to the St George Bank (Bank) and was paid out.

13 Mr Oteri subsequently became bankrupt. He defaulted in relation to the moneys advanced to him by the Bank. The Bank exercised its power of sale under the transferred mortgage and sold the property for $900,000. The Bank retained all the proceeds of sale and the respondent accepted its entitlement to do so. The respondent received nothing. The trial Judge found that the appellant had breached cl 7.1 of the deed of priority in failing to require the Bank to undertake to be bound by the terms of the deed of priority. If the appellant had caused the Bank to sign a deed of priority, the respondent would have recovered the amount owed to him by Mr Oteri ($300,000).

"Each Security Holder agrees with the other that (except in cases where the relevant transfer, assignment or dealing results from or is in pursuance of the enforcement of its Security or the exercise of rights of subrogation) it will not transfer, assign or otherwise deal with its Security without first causing any transferee, assignee or other party thereby obtaining an interest in that Security to enter into a deed by which it undertakes to be bound by the provisions of this agreement mutatis mutandis insofar as they relate to the assigning Security Holder and to the extent of that interest."

15 The question is whether "its Security" includes the appellant's first registered mortgage (H18715) over the Duncraig Road property.

16 In the deed of priority, the appellant is defined as "Home Building Society", the respondent as the "Second Security Holder" and Mr Oteri as the "Mortgagor". Clause 2 is entitled "Background" and provides:

"2.1 Home Building Society and the Second Security Holder both hold or propose to take security over the same assets of the Mortgagor.

2.2 Home Building Society and the Second Security Holder wish to regulate the ranking of their securities from the Mortgagor."

17 The deed of priority contains a definition clause which provides:

"4.1.1 'Debt' means all money ... at any time secured by a Security Holder's Security;

4.1.2 'Home Building Society Security' means Mortgage G545917 and any other security held at any time by Home Building Society over any of the Mortgagor's assets charged by that security and by the Second Security (to the extent only that that other security secures the same assets);

4.1.3 'Security' means Home Building Society's Security or the Second Security;

4.1.4 'Security Holder' means Home Building Society or the Second Security Holder;

4.1.5 'Second Security' means Mortgage G647605 and any other security held at any time by the Second Security Holder over any of the Mortgagor's assets charged by that security and by Home Building Society (to the extent only that the other security secures the same assets)."

18 The operative provisions of the deed of priority include the following covenants:

Home Building Society and the Second Security Holder agree that the Securities rank for payment as follows:

5.1.1 Home Building Society Security ranks first for payment of Home Building Society's Debt to the extent that it is:

5.1.1.1 principal and other money owing actually or contingently at any time not exceeding in aggregate $531,000.00;

...

5.1.2 the Second Security ranks second for payment of the Second Security Holder's Debt to the extent that it is:

5.1.2.1 principal and other money owing actually or contingently at any time;

...

5.1.3 the Home Building Society's Security ranks third for payment of any remaining Home Building Society's Debt.

5.2 The priorities in this agreement take effect notwithstanding:

5.2.1 any payment or credit which may be received or allowed by a Security Holder from the Mortgagor or any other person in respect of its Debt;

5.2.2 any fluctuation in the amount or amounts secured by the Securities from time to time;

5.2.3 the rule in Clayton's Case or the rule in Hopkinson v Rolt or any other rule of law or equity;

...

5.2.7 the time or order in which moneys are advanced or readvanced or indebtedness or liabilities (whether actual or contingent) incurred;

...

5.2.9 any other fact or circumstance whatsoever which might otherwise alter or postpone those priorities."

19 The trial Judge's conclusion that the deed of priority was still operative at the time of the transfer of the appellant's mortgage of the Duncraig Road property to the Bank was based on his construction of the terms "Home Building Society Security" and "Second Security".

Background Facts Known to Parties to the Deed of Priority

20 The trial Judge made findings about the background leading to the execution of the deed of priority in order to enable him to interpret the document in that light, relying on Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 at [11]. The findings made by the trial Judge are as follows:

"19 All three parties, that is the plaintiff, defendant and Mr Oteri, knew that the defendant held a first mortgage G545917 over the Alness Street property, that it secured the repayment of $491,000, that Mr Oteri had purchased the Duncraig Road property and that the first defendant was to advance a further $40,000 to assist Mr Oteri pay the deposit on the Duncraig Road property. All three parties knew that Mr Pourzand had a second mortgage G647605 registered over the Alness Street property. All parties knew that Mr Oteri intended to sell, and did sell, the Alness Street property; they knew that as a result, when the Alness Street property was sold, both the defendant's first mortgage and the plaintiff's second mortgage were to be discharged, that a new first mortgage was to be taken by the defendant over the Duncraig Road property and that Mr Pourzand was to take a new second mortgage over the Duncraig Road property. All parties knew that as a condition of the $40,000 advance, the defendant required Mr Pourzand execute a deed of priority. All parties knew that the loan of $491,000 was to be 'swapped', meaning that Mr Oteri would remain indebted for that amount as well as the extra $40,000 after the settlement regarding the Duncraig Road property. The deed of priority, when prepared, referred to the rule in Hopkinson v Rolt so all three parties can be taken to understand, in general terms at least, the effect of the rule.

20 The rule in Hopkinson v Rolt has the effect that a first mortgagee whose mortgage is taken to cover what is then due and also future advances, cannot rely on the first mortgage to recover the future advances in priority over a second mortgagee if the first mortgagee had notice of the second mortgagee before it made the new advances. Neither of the parties to the litigation deny that the rule in Hopkinson v Rolt applies to mortgages under the Transfer of Land Act. As to which, see Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 and Mercantile Credits Ltd v Australian & New Zealand Banking Group (1988) 46 SASR 407. All parties knew that the defendant knew about Mr Pourzand's mortgage, and that this meant that the defendant could not advance further moneys and treat the first mortgage as security for that further advance, unless Mr Pourzand agreed that the defendant had priority for such an advance. If Mr Pourzand did not agree and moneys were advanced by the defendant, then although the first mortgage was a first mortgage, and although it was an 'all money' security, the defendant would rank in priority after Mr Pourzand, and the additional moneys advanced would only be recoverable under the first mortgage after Mr Pourzand had been paid out the money due under his mortgage.

21 The parties therefore all understood that the deed of priority was to order the affairs of the first and second mortgagees, so that the defendant ranked first for payment of a sum not exceeding $531,000, which was the original debt plus the additional $40,000.

22 All the parties knew, or reasonable parties in their position would have known, that the mortgages over the Duncraig Road property, upon registration, were given a number by the Land Titles Office which would be different from the number on the mortgages over the Alness Street property.

23 I find that Mr Pourzand did not know that the defendant had agreed with Mr Oteri to advance a further $136,500 after settlement on the Duncraig Road property."

21 It is accepted that the further advance of $136,500 was for the purposes of, and drawn down at, settlement of the purchase of Duncraig Road property.

22 The appellant relies on six grounds of appeal. The first three challenge the correctness of the trial Judge's construction of the terms "Home Building Society Security" and "Second Security". The last three relate to the findings of fact. The appellant contends the trial Judge erred in finding that:-

(1) the respondent did not know that the appellant was going to advance further sums at settlement of the Duncraig Road property;

(2) the appellant knew the respondent was to take a second mortgage over the Duncraig Road property.

23 The appellant also contends the trial Judge should have found that the respondent knew the appellant was proposing to advance the further money on the basis that the full amount owing would be secured by a first registered mortgage over the Duncraig Road property.

24 The respondent by notice of contention claims that the deed of priority was not ambiguous and Pullin J should have construed it, without reference to extrinsic evidence, to have the same meaning as he found it to have.

25 The High Court has on a number of occasions in recent years considered the rules relating to the interpretation of contracts: see Maggbury Pty Ltd v Hafele Australia Pty Ltd at [11]; Royal Botanic Gardens v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436 at [39]; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]; and Toll (FGCT) Pty Ltd v Alphapharm [2004] HCA 52; (2004) 219 CLR 165 at [40].

26 There remains some uncertainty as to whether evidence of surrounding circumstances can be used as an aid to the interpretation of a contract only if it is ambiguous: see Carter J and Stewart A, "Interpretation, Good Faith and 'The True Meaning' of Contracts: The Royal Botanic Decision" (2002) 18 Journal of Contract Law 182 at 190.

27 The majority in Royal Botanic (Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ) stated that Australian courts should follow Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 to the extent (if any) it is inconsistent with English authorities including Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 at 912 - 913 and Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2001] 2 WLR 735 at 739, 749.

28 I infer the majority was referring to the well-known passage in the judgment of Mason J in Codelfa (at 352) that:

"The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning."

29 The requirement for ambiguity before regard can be had to surrounding circumstances is not easy to reconcile with statements in Maggbury at [11], Pacific Carriers at [22] and Toll v Alphapharm at [40]. Their substance is encapsulated in Toll v Alphapharm at [40]:

"This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction."

30 The High Court has on a number of occasions also referred to the application of the rules of interpretation to commercial contracts: see Pan Foods Co Importers and Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd [2000] HCA 20; (2000) 170 ALR 579 at 584, per Kirby J; McCann v Switzerland Insurance Ltd [2000] HCA 65; (2000) 203 CLR 579 at [22] per Gleeson CJ. It is appropriate to characterise a deed of priority between security holders as a commercial contract. Gleeson CJ said in McCann that commercial contracts should be given a business-like interpretation and that interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.

31 Further, as noted in Pacific Carriers at [22], Mason J in Codelfa set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 that:

"In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."

32 The implication in the above statements of principle is that surrounding circumstances can be used in the interpretation of contracts whether or not an ambiguity is found to exist. However, it is unnecessary to attempt to reconcile the cases because on the facts of this case, applying the test of ambiguity used in Royal Botanic, the terms "Home Building Society Security" and "Second Security" are ambiguous. I would dismiss the notice of contention.

33 Finally, it is also clear from Pacific Carriers (at [22]) and in Toll v Alphapharm (at [40]) that the surrounding circumstances must be known (or perhaps, ought reasonably to have been known) to the relevant contracting parties. That is of some significance in this case of a tripartite contract where the extent of the knowledge of the respondent is more limited than that of the appellant and the mortgagor, Mr Oteri.

The opposing cases and the trial Judge's reasons

34 The appellant's contention at trial (and in the appeal) was that if there was "other security" in addition to the nominated mortgagee the word "and" when first used in clause 4.1.2 and 4.1.5 of the deed of priority is conjunctive. The respondent contended it was dispersive (meaning "and/or") or disjunctive (meaning "or"). The trial Judge accepted the respondent's contentions and concluded that "and" meant "or".

35 The trial Judge understood the appellant's contention that the word "and" was conjunctive to have the result that the appellant had priority for the nominated amount only if the appellant held other security in addition to the numbered mortgage. He said at [40]:

"The [appellant] has on its side in relation to its submission that in ordinary parlance 'and' is used conjunctively ... However, if the word carries its ordinary meaning in this case, the outcome would be absurd. I say this because at the time the deed of priority was prepared, and when it was executed, the [appellant] was the registered proprietor of a first mortgage ... over the Alness Street property, and the [respondent] was the registered proprietor of a second mortgage ... over the same property. Neither party held any other security. ... If the word 'and' where it is first used in cl 4.1.2 meant that there was no 'Home Building Society Security' as defined in cl 4.1.2, unless the [appellant] held both the numbered mortgage and, in addition, another security fitting the description of 'other security', then the deed of priority did not have any effect when it was executed. Indeed, it would never have had any effect on the facts in this case. That interpretation would therefore defeat what the parties were trying to achieve."

36 The trial Judge misunderstood the appellant's construction submissions. In substance, the appellant's argument is that in the event there was at some future time a security that satisfied the description of "other security" the word "and" would be called into service and operate conjunctively. The appellant also contends that the phrase "held at any time" in the definition, governs only as its object, the other security and that the word "and" when used for the second time in the third line of cl 4.1.2 and cl 4.1.5 is also conjunctive. That is, it cuts back the scope of what would otherwise fall within "other security" so as to confine it to securities held by the appellant and the respondent over the same assets of the mortgagor. Thus, the definitions in these clauses address the possibility at some future time of the appellant and the respondent holding additional security (to the named mortgages) over the same asset(s) of the mortgagor.

37 Further, according to the appellant, when, and if, there arises an additional security that falls within the scope of "other security", then at that time such additional security "was to be assessed (conjunctionally) with numbered registered mortgage G545917, ...". What this is intended to convey is unclear. The next proposition is that if a numbered mortgage no longer exists by reason of discharge, "thereupon there will no longer be present the essential remaining foundation subject matter to which an 'other security' could be grafted to, ie there can be no conjunction of any thing to a nonexistent discharged registered mortgage". Thus, although its mortgage of the Duncraig Road property is relevantly "other security" as defined (because it and the respondent each held security over the same asset being the Duncraig Road property), the appellant says it is not within the definition of Home Building Society Security because its numbered mortgage of the Alness Street property had been discharged.

38 However, as the respondent correctly pointed out (and as conceded by the appellant), the discharge of the named mortgage could not be intended to have that result in all cases. Assume the appellant and the respondent subsequently obtained additional security over another of the mortgagor's assets and thereafter the appellant exercised its power of sale of the Alness Street property resulting in the discharge of the named mortgage: if the proceeds of sale were less than the secured and priority amount, the deed of priority would continue to apply to the other security.

39 The respondent contended the word "and" should be construed dispersively or disjunctively. The respondent (and the trial Judge) accepted that the ordinary meaning of the word "and" is conjunctive: Victims Compensation Fund Corporation v Brown [2003] HCA 54; (2003) 77 ALJR 1797 at 1799. However, in appropriate circumstances, it can be construed as having a dispersive or disjunctive meaning. This can occur when the context so requires (Re Peat Resources of Australia Pty Ltd; Ex parte Pollock [2004] WASCA 122; (2004) 181 FLR 454 at 475 per Steytler J) or where the word is used as a link in a list of items or is necessary to avoid an absurd result (Re The Licensing Ordinance (1968) 13 FLR 143 at 146-7 per Blackburn J).

40 The respondent says that the two defined terms in the definitions of Home Building Society Security and Second Security (the numbered mortgage and "other security") are items in a list with the result that "and" means "and/or" or "or". The respondent supports that construction by reference to the textual context, relying on the broad language of the definitions which refer to "any other security", "any time" and "any ... assets" which is said to demonstrate an intention to apply to future and different securities without temporal or other limitation. According to the respondent, it is also supported by the mutually known fact that new securities over the Duncraig Road property were contemplated by both the appellant and the respondent after the Alness Street mortgages were discharged.

41 Thus, on the respondent's construction, the definitions of Home Building Society Security and Second Security cover other securities granted at any time before or after the discharge of the numbered mortgages. The appellant says that has the uncommercial consequence that the deed of priority could theoretically apply to other security obtained in the distant future that had no connection with existing or contemplated borrowings. I deal with this submission below.

42 Generally, the purpose of a deed of priority is to modify the general law rules relating to the priority of securities and of advances made under the securities. In the case of registered mortgages, priority depends on the time of registration (s 53 of Transfer of Land Act 1893 (WA)). However, under the rule in Hopkinson v Rolt [1861] EngR 641; (1861) 11 ER 829, a mortgagee whose mortgage secures further advances cannot claim the benefit of the security for such advances in priority to a subsequent mortgage of which he had notice before such further advances were made. The trial Judge found that these principles were known to the appellant and respondent.

43 Applying the statutory and general law rules of priority to the facts in this case produces the following outcomes:

(1) The appellant's mortgage over the Alness Street property had priority over the respondent's mortgage over the Alness Street property;

(2) The further advance by the appellant secured by its mortgage of the Alness Street property to fund the deposit for the purchase of the Duncraig Road property would not have priority over moneys already advanced and secured by the respondent's mortgage of the Alness Street property;

(3) The appellant's proposed first registered mortgage over the Duncraig Road property would have priority over the respondent's proposed subsequent registered mortgage of that property;

(4) All of the advances made by the appellant to the mortgagor at or before the time of the registration of, and secured by, the appellant's first mortgage of the Duncraig Road property would have priority over the moneys secured by the respondent's second mortgage of the Duncraig Road property. That is, the advance by the appellant of $136,500 (in addition to the sum of $531,000 the subject of the deed of priority), would have priority over the sum secured by the respondent's mortgage of the Duncraig Road property. This explains why the Bank had priority over the respondent.

44 Thus, under the general law the appellant would have had priority for the full extent of the mortgagor's indebtedness whether or not it made a further advance at settlement secured by the Duncraig Road property. It is against that background that the appellant required the deed of priority from the respondent.

45 That background tends to support the conclusion that the parties may not have intended the deed of priority to apply to the Duncraig Road mortgages. However, I am satisfied that the consequence of the language used in the document in the circumstances that eventuated, is that the deed of priority did apply to that mortgage. There are a number of considerations leading to this conclusion. Firstly, there is in the abstract an obvious commercial justification for an extended definition. At some future time the appellant may seek collateral security, that is, additional security to protect its position in relation to the mortgagor's existing indebtedness. Alternatively, there may be further advances supported by additional security. As the appellant's nominated mortgage is an "all moneys security", the additional advance would also be secured by the nominated mortgage. It makes commercial sense that the priority for the nominated amount apply to such other securities. Having regard to the background, it may be thought to be unlikely that the appellant tailored the definitions to specifically cover the Duncraig Road mortgages. Whether or not it had that affect may not have been considered.

46 Secondly, the purpose of the deed of priority is to regulate the order of payments to security holders from the proceeds of realisation of the relevant security property. This is clear from cl 5.1. When considered in that light, a number of consequences follow. The most important for present purposes is that the deed of priority will be "spent" upon payment of the priority amount from the sale proceeds of the security property. So, for example, if the sale proceeds of the Alness Street property had been paid to the appellant in reduction of its indebtedness and the amount paid equalled the priority amount, the deed of priority would be fully performed and no longer operative. It is by this mechanism that the deed has a finite period of operation. For a reason which is unclear, the appellant chose not to go down this path.

47 Thirdly, consider the position if there was more than one security falling within the definitions in cl 4.1.2 and 4.1.5. It has been conceded that if the property the subject of the nominated mortgage is sold for less than the secured and priority amounts and the nominated mortgage discharged, the deed of priority would continue to operate and the appellant would be entitled to the proceeds of sale of the other security for the balance of the secured amount up to the priority amount. Furthermore, if the "other security" property was realised before the nominated security property, the appellant would be expected to have priority in respect of the proceeds from the realisation of that security property. What all of this indicates is that the deed is intended to survive the discharge of the nominated mortgage and that in order to operate in a sensible commercial way, the word "and" in the definitions was intended to be dispersive and mean "and/or". This is consistent with the appellant's contention that the phrase "any other security" is to cater for the possibility of there being no other security. On any view, the deed of priority is intended to govern priority of payments under the named securities even if, factually, there is no "other security". On the other hand, an otherwise conjunctional meaning to the word "and" is inconsistent with the intended scope and operation of the deed of priority.

48 Thus, in order for the deed of priority to operate in a conventional and commercial manner, it must have been intended that when the appellant (and respondent) had other securities, they constituted a list with "and" meaning "and/or".

49 Instead of structuring the arrangements so that the sale proceeds of Alness Street were utilised to pay the secured priority amount resulting in the deed of priority being spent, the appellant chose to discharge the nominated mortgage without requiring discharge of Mr Oteri's indebtedness. If any unforeseen consequences flowed, it is because the appellant did not take the usual steps which would bring the deed of priority to an end. There may be other ways to achieve that result; a possibility may be if the secured indebtedness is repaid and all securities discharged. However, the transfer of the security from the Alness Street property to the Duncraig Road property for the continuing (and increased) indebtedness did not have that effect. I agree with the trial Judge's conclusion, albeit for different reasons, that the appellant's mortgage of the Duncraig Road property is an "other security" within the definition of Home Building Society Security to which cl 7.1 of the deed of priority applied. I would dismiss grounds of appeal 1 to 3.

50 For the sake of completeness I will address the remaining grounds.

51 The trial Judge found that the respondent did not know that the appellant had agreed with Mr Oteri to advance a further sum of $136,500 on settlement of the Duncraig Road property.

52 The appellant contends that "the correct finding overall" should have been that the respondent knew on the date of execution of the deed of priority of the possibility that at settlement of the Duncraig Road property, the appellant may advance further moneys beyond the priority figure mentioned in the deed of priority to facilitate Mr Oteri's acquisition of the Duncraig Road property.

53 The evidence relied on by the appellant in support of its claim is the respondent's knowledge that the value of the Duncraig Road property was higher than the Alness Street property together with what it describes as the "state of his background knowledge" as disclosed in the following evidence from the respondent:

"My intention from the beginning was his borrowing X number of dollars from institutions, be it A or Y or Z, I'm second to the remaining but obviously these days you may pay all the fees but it can be interpreted as thin air but I can't understand. I don't have the ability to comprehend it but that was the way I saw it.

There's a number of points in that, obviously, Mr Pourzand, but the upshot of all that, coming back to it, is that you saw yourself on the new property ... ? --- ?As a second mortgage.

As a second mortgagee behind every cent that Home Building Society lent to Mr Oteri? --- That's right.

And if that was $667,500 so be it. That was X dollars, as you described it? --- That's right.

And you would then come second? - Exactly.

Expectation being that the bank would never have lent $667,000-odd without there being at least 35% of value left which would be more than enough to cover your second mortgage? - Or thereabouts, yes. I'm sorry for putting it in the most basic terms but that's the way I saw it.

Knowing your dealings with building societies and banks, you know that they always want to come first for everything they lend, don't they? - They do.

And that was your understanding of what was happening on this transaction as well, wasn't it? - Quite normal."

54 Insofar as that extract indicates the respondent's subjective understanding or belief, it is irrelevant to the interpretation of the deed of priority.

55 In my view, the evidence establishes that, at least, the respondent did not know whether or not the appellant was advancing further moneys beyond the priority figure at settlement. That is consistent with the trial Judge's findings. However, there is no evidence that the respondent turned his mind to the question of possibilities. I am not persuaded the finding is reasonably open. Even if it was, it would not affect the outcome on the construction of the deed of priority.

56 The appellant contends the trial Judge should have found that the respondent knew that all moneys the appellant advanced to Mr Oteri would have priority over the respondent's loan. This ground is dependent on a finding that the respondent knew the appellant was going to make a further advance over the priority amount or a possibility of that occurring. Thus, this ground fails with the previous ground. Further, insofar as the appellant is relying on the respondent's subjective intention, it is irrelevant.

57 The appellant contends the trial Judge erred in finding that it knew the respondent was to take a second mortgage over the Duncraig Road property.

58 I infer the finding relates to knowledge at the time of the execution of the deed of priority on 16 December 1998. I am satisfied that the finding was reasonably open. It is supported by the appellant's knowledge

of the financial details and mechanism for funding the amount required by Mr Oteri to fund the purchase of the more expensive Duncraig Road property which included borrowing the deposit. Although the appellant's officers, Rebecca Morris and Linton Stannard, equivocated on the question, their evidence is also capable of supporting the finding. In any event, even if the correct finding was that the appellant did not know whether or not the respondent was to take a second mortgage over the Duncraig Road property, it has no effect on the proper construction of the deed of priority.

59 For these reasons I would dismiss the appeal and dismiss the notice of contention.

60 MURRAY AJA: In this matter I have had the very considerable advantage of reading in draft the judgment of McLure JA, with which I note that Wheeler JA agrees. The reference by McLure JA to the background facts of the matter relieves me of the need to do more than refer briefly to the factual context. Further, I do not need to refer more than briefly to the reasons of the trial Judge, Pullin JA, as his Honour now is. These are very much in the nature of subsidiary reasons, and I write them only because, although I agree with the conclusion to which Pullin JA came as to the meaning and operation of the deed of priority, and although I agree with the conclusion of Wheeler and McLure JJA that the appeal should be dismissed, I have arrived at that view upon the basis that, in my opinion, there is no ambiguity in the portion of the deed upon which the appeal turns, contrary to the view of Wheeler and McLure JJA.

61 It follows that I would not uphold grounds 1-3 of the appeal, which are complaints about his Honour's construction of the relevant portion of the deed, and it is unnecessary for me to have regard to grounds 4-6, which complain of errors of fact allegedly made by the trial Judge. I would in fact uphold the notice of contention which seeks to uphold the decision of the trial Judge, that the relevant portion of the deed, "was not ambiguous and that his Honour should have construed the deed of priority without reference to extrinsic evidence to have the same meaning as his Honour found the deed of priority to have." I take the view that it is necessary to set out briefly the views I have formed in case they should be of any future relevance.

62 I should say that in my view, whether or not there was properly to be regarded as ambiguity in the terms of the deed to be construed by the

Court, evidence of the surrounding circumstances known by the parties to the deed and the purpose and object of the transaction reflected in the deed was admissible and regard might be had to it as an aid to the proper construction of the deed: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40], where the High Court applied its decision given only a few months earlier in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 461-2 [22].

63 The Court there referred to the judgment of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337, at 350, where his Honour approved the observation by Ld Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995 - 996:

"In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."

64 That is not to say, of course, that there is any special rule applicable to the construction of commercial contracts alone. For present purposes, the point to be made is that evidence of the factual matrix in which the deed of priority was made and the nature of the relationship between the parties, the purpose they had in common for entering into the deed, are all matters which may reveal what reasonable persons in the position of the parties would have understood they meant by the words used in their agreement. Having made that point, however, as I have said, in my view this case presents a problem of construction which may be readily resolved by giving to the words used their ordinary natural meaning in the context of the deed as a whole and the purpose it was evidently intended to serve, on objective inquiry.

65 As has been seen, Mr Oteri had given a registered first mortgage G545917 over his Alness Street property to the appellant (HBS). He owed them $491,000 by November 1997. It was an "all money" mortgage.

66 By November 1997, Oteri also owed $150,000 to his friend and business associate, the respondent, Mr Pourzand. To secure that loan, Oteri gave Pourzand a second registered mortgage over the Alness Street property. It bore the number G647605. Again, it was an "all money" mortgage which would secure all money owed by Oteri to the lender during the currency of the mortgage. As time passed, Mr Pourzand apparently made further loans to Mr Oteri, whose indebtedness to him grew ultimately to about $300,000.

67 By late 1998, Oteri decided to sell the Alness Street property and purchase a more expensive property in Duncraig Road, Applecross. Oteri borrowed a further sum of $40,000 from HBS to enable him to pay the deposit. This loan, it was thought, would attract the rule in Hopkinson v Rolt [1861] EngR 641; (1861) 11 ER 829, which would cause that loan to rank in priority after the loan made by Pourzand.

68 HBS therefore required a deed of priority to be entered into by Oteri as mortgagor, HBS, and Pourzand so as to provide for an agreement which would give HBS first priority in relation to a total advance of $531,000 made up of the original loan of $491,000 and the further loan of $40,000. The deed was to give Pourzand second order of priority in relation to all money owed by Oteri to him. That could not be achieved without Pourzand's consent, which he gave.

69 The deed of priority was executed by all three parties on 16 December 1998. By cl 7.1, each of HBS and Pourzand agreed that they would not transfer, assign or otherwise deal with their security without causing the transferee or other party obtaining an interest in that security to enter into a deed undertaking to be bound by the provisions of the deed of priority.

70 Oteri also required a further $136,500 which he borrowed from HBS. The settlement date for the sale of the Alness Street property and the purchase of the Duncraig Road property was 3 February 1999. The mortgages to which I have referred above were discharged and "swapped" for a first mortgage, H18715, in favour of HBS and a second mortgage, H18716, in favour of Pourzand, over the Duncraig Road property. As I have said, after that date there were further loans made by Pourzand to Oteri.

71 On 30 July 1999 HBS assigned its mortgage over the Duncraig Road property to the St George Bank. It was a refinancing operation. HBS was paid out. Mr Oteri later defaulted. The bank exercised its power of sale under the transferred mortgage, H18715. It retained all the net proceeds of sale in discharge of Oteri's obligations under the mortgage. Pourzand does not take issue with that process.

72 However, HBS failed to cause the bank to enter into an undertaking to be bound by the deed of priority. If that deed had application to the securities, respectively H18715 and H18716, then HBS breached cl 7.1. Pourzand sued HBS for damages for this breach, pleading that the Duncraig Road property, having yielded a net amount on sale of about $886,000, had the bank been bound by the deed of priority it would have been entitled to recover from the net proceeds of sale the sum of $531,000, outstanding interest and costs. The balance of the sale price would then have been available to Mr Pourzand under the deed of priority.

73 Pullin JA gave judgment for Pourzand in the sum of $352,475. It is from that judgment that this appeal is brought. The arguments advanced by both appellant and respondent are summarised and analysed in some detail by McLure JA. I need not canvass them again.

74 The question whether the deed of priority applied to the mortgages H18715 and H18716, taken respectively by HBS and Pourzand, is a matter of construction of the deed. It identifies HBS by the term "Home Building Society", and Pourzand is described as the "Second Security Holder". Clause 2 describes, as the background to the agreement contained in the deed, the fact that HBS and Pourzand "both hold or propose to take security over the same assets of the Mortgagor" and "wish to regulate the ranking of their securities from the Mortgagor". That suggests to me that the parties might be objectively taken to have intended that the deed would cover the ranking of securities they respectively had or intended to take, the common feature being that they applied or would both apply to the same assets of Oteri.

75 The operative clause, which provides for the rankings of the "Securities" for payment as between the "Home Building Society" and the "Second Security Holder" is cl 5.1. By cl 5.1.1, "Home Building Society Security" ranks first for payment of "Home Building Society's Debt" to the extent that it is "principal and other money owing actually or contingently at any time not exceeding in aggregate $531,000", interest and certain other costs. By cl 5.1.2 it is provided that the "Second Security" ranks second for payment of the "Second Security Holder's Debt" to the extent that it is "principal and other money owing actually or contingently at any time", interest and certain other costs. By cl 5.1.3 the "Home Building Society's Security" ranks third for payment of any remaining "Home Building Society's Debt".

76 McLure JA has set out in full the definition clause which provides the meaning of the terms used in the operative clause, cl 5. I need not set the definitions out again, but I note that the word "Debt" is defined to mean all money "at any time secured by a Security Holder's security", a definition again in terms consistent with the background set out in cl 2. Central to the argument, however, are the definitions of "Home Building Society Security" and "Second Security" in cl 4.1.2 and 4.1.5. In particular, as has been seen, the argument centres around the meaning of the word "and" where it first appears in each definition.

77 The word "and" can, in ordinary parlance, be used conjunctively or disjunctively, when it bears the same meaning as "or". But in this case it is clear, I think, that the word is used dispersively. In my opinion, the case is very like Re Peat Resources of Australia Pty Ltd; Ex parte Pollock [2004] WASCA 122; (2004) 181 FLR 454, where an authorisation under the Corporations Act was given to a bank and receivers, and it was held that the proper interpretation of the word "and" in that context was that each of the bank and the receivers were authorised to act separately or together. In other words, the Court held that the bank was authorised to act and the receivers were authorised to act. It followed that each of them was authorised to act separately, and both might pursue the authority together.

78 In my opinion, the situation is the same here. In the case of HBS, a security within the meaning of the deed is mortgage G545917, and that term also bears the meaning that it includes any other security held at any time by HBS over any of Mr Oteri's assets charged by that security and (on this occasion the word being used conjunctively because the deed is concerned with the order of priority for payment) a security falling within the definition of "Second Security". The same reasoning precisely applies to the definition of "Second Security" in cl 4.1.5.

79 In fact, as to Oteri's Duncraig Road property, neither the HBS mortgage, G545917, or Pourzand's mortgage, G647605, secured the loans made in relation to that property. But in the case of HBS, there was another security, the mortgage H18715, which HBS held over that property at the time when Pourzand held the second mortgage H18716 over the same property, and vice versa as to the definition of "Second Security" under cl 4.1.5. The deed applied to govern the order of priority when HBS transferred its mortgage to the bank. Clause 7.1 was breached, and in my view also the appeal should be dismissed and the judgment of Pullin JA upheld.

• Background
• Background Facts Known to Parties to the Deed of Priority
• The construction issue
• The opposing cases and the trial Judge's reasons
• Analysis
• Respondent's knowledge of further advance
• All advances by appellant to have priority
• Knowledge of the second mortgage
• Conclusion