Kimberley Securities Limited v Esber

Court of Appeal (NSW)|2008-11-25|Before: Allsop P, Macfarlan JA, Spigelman CJ, McDougall J, MacFarlan JA

CITATION: Kimberley Securities Limited v Esber [2008] NSWCA 301

JUDGMENT OF: Allsop P at 1; Macfarlan JA at 1; Gyles AJA at 10

CATCHWORDS: MORTGAGES - Construction - whether mortgages in suit secured liability of mortgagors as guarantors or principal indebtedness of third party - where mortgages interdependent upon another agreement and executed at the same time as the documents including a mortgage - Construction - extent to which extrinsic circumstances can be taken in to account in construing mortgages - Surety - whether mortgages ought to be construed in favour of mortgagors as sureties

Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; (2004) 217 CLR 424 Ayoub v Euphoric Pty Ltd [2004] NSWCA 457; (2004) 12 BPR 22,735 Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657 Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 Energy World Corporation Ltd v Maurice Hayes and Associates Pty Ltd [2007] FCAFC 34; (2007) 239 ALR 457 CASES CITED: Fitzgerald v Masters (1956) 95 CLR 420 Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 Prenn v Simmonds [1971] 1 WLR 1381 Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436; 186 ALR 289 Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; (2004) 219 CLR 165

TEXTS CITED: Spigelman CJ, "From Text to Context: Contemporary Contractual Interpretation" (2007) 81 Australian Law Journal 322 Sir Kim Lewison, The Interpretation of Contracts, 4th ed (2007) Sweet & Maxwell

Kimberley Securities Limited (Appellant) PARTIES: Marcel Esber (First Respondent) Casanda Pty Limited (Second Respondent)

COUNSEL: B A Coles QC, G A Sirtes SC (Appellant) T G R Parker SC, S Fendekian (Respondents)

SOLICITORS: Landerer & Co Lawyers (Appellant) Sachs Gerace Lawyers (Respondents)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT MEDIUM NEUTRAL CITATION: Investmentsource v Knox Street Apartments [2007] NSWSC 1214

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40150/08

ALLSOP P MACFARLAN JA GYLES AJA

Tuesday 25 November 2008 KIMBERLEY SECURITIES LIMITED V MARCEL ESBER Judgment

1 ALLSOP P and MACFARLAN JA: We have had the advantage of reading the reasons in draft of Gyles AJA. We agree with the orders proposed by his Honour and, subject to the following qualification and comments, with his Honour's reasons. We have used abbreviations as explained in his Honour's reasons. 2 The qualification we have relates to [38] of his Honour's reasons which deals with the principle of construction of guarantees or indemnities in favour of sureties. We do not agree with his Honour that there is substance in the argument of counsel for the appellant that the application of this principle of construction in the present case would assume the result. We say this because the principle of construction applies in the present case whether the mortgages are regarded as securing the liability of the mortgagors as guarantors (they having agreed by the Deed of Loan and Guarantee to guarantee a certain part of the principal indebtedness of the borrower, KSA) or as securing directly the whole of that principal indebtedness. In both of these guises the mortgages have the character of suretyship. To use language used in the joint judgment in Andar Transport Pty Limited v Brambles Limited [2004] HCA 28; 217 CLR 424, a decision to which Gyles AJA refers in [38], "both are designed to satisfy a liability owed by someone other than the guarantor or indemnifier to a third person". 3 Application of the principle of construction in the present case would not therefore be designed to determine whether the mortgagors have the character of sureties, but rather to determine the extent of their liability as sureties. This is a purpose for which the principle of construction is apt to be used. Application of the principle of construction in the present case in our view reinforces the conclusion that the appeal should be dismissed. 4 We have additional comments concerning the extrinsic material. We agree with Gyles AJA that the documentary background material and the drafts are not helpful in the determination of the issue at hand, being the objective construction of the mortgages in question. We would reserve making any comment on the admissibility of this material. The line in any given body of circumstances between impermissible recourse (in the process of construction and interpretation) to negotiations to understand the actual intentions of the parties: Codelfa Construction Pty Limited v State Rail Authority of New South Wales [1982] HCA 24; 149 CLR 337 at 348 and 352, and the legitimate scope of the identification of the "position of the parties" by reference to which the reasonable person would be taken to make the enquiry as to the meaning of the words used: Toll (FGCT) Pty Limited v Alphapharm Pty Limited [2004] HCA 52; 219 CLR 165 at 179 [40] and Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; 209 CLR 95 at 105-106 [25] may be difficult to identify. 5 The possible subtlety of the distinction can be seen in Lord Wilberforce's reasons in Prenn v Simmonds [1971] 1 WLR 1381 at 1384-1485, and the recognition that the objective commercial aim may, possibly, be ascertained from some aspect of what has passed between the parties. The distinction can also be seen in what Mason J said in Codelfa at 352 about prior negotiations and their legitimate use "to establish objective background facts which were known to both parties and the subject matter of the contract", and their inadmissibility "in so far as they consist of statements and actions of the parties which are reflective of their actual intentions or expectations". See also in this respect, Bank of Scotland v Dunedin Property Investment Co Ltd 1998 SC 657 at 665 per the Lord President; and see generally Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 at 461-462; Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; 76 ALJR 436 at 438-439 [9]-[11]; Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 at [7]-[13] and Spigelman CJ "From Text to Context: Contemporary Contractual Interpretation" (2007) 81 ALJ 322. 6 Here, the background material is unhelpful and no further discussion of it is necessary. 7 Further, Mr Coles QC, with whom Mr Sirtes SC appeared, submitted on behalf of the appellant that the provision of the mortgages pursuant to clause 6 of the Deed of Loan and Guarantee was central to the recognition that the mortgages were given to secure the moneys lent, not the moneys guaranteed. We do not agree. Before the Lender was obliged to lend the funds, the "Borrower" (KSA) was obliged to "deliver" to the Lender the "Current Security": see cl 6.1.1 of the Deed of Loan and Guarantee. The phrase "Current Security" was defined in cl 1.1 to mean the security "described in Item 6 of the schedule". Item 6 of the schedule identified each of the two mortgages in question as "… granted by the Guarantor … (as Mortgagor) to the Lender (as Mortgagee)." 8 The delivery of mortgages by the guarantors which secured the moneys guaranteed in addition to the mortgage by the borrower which secured the moneys lent would be as consistent with the language of clause 6, as three mortgages which all secured the moneys lent. The two possibilities merely reflect two different underlying commercial intentions or bargains. 9 When one turns to the mortgages in question, less violence is done to the text used by reading down the words "as Borrower" and recognising that the mortgage is given to secure the moneys due and owing by the Mortgagor pursuant to the Deed of Loan and Guarantee: in other words, the moneys guaranteed. To read down the words "Mortgagor as" in the mortgage is to change the denotation of the party referred to. 10 GYLES AJA: The question at issue in this appeal is whether two third mortgages given by different mortgagors are first party mortgages or third party mortgages - do they secure the liability of each mortgagor as a guarantor or do they secure the principal indebtedness of a third party? The answer is critical because the amount guaranteed by the mortgagor in each case is less than the principal indebtedness of the third party. 11 In each case Kimberley Securities Limited ACN 000 815 476 ("Kimberley") was the mortgagee. One mortgagor was Casanda Pty Limited ACN 069 998 090 ("Casanda"). The other mortgagor was one Marcel Esber. Marcel Esber effectively controlled Casanda. Each mortgage was relevantly identical apart from the identity of the mortgagor and the property charged. 12 The mortgages came into effect on 7 December 2000 simultaneously with a series of other documents. One was a joint venture agreement. The parties to that agreement were Kimberley (described in the Agreement as "KSL"), Knox Street Apartments Pty Limited (described in the Agreement as "KSA", but to which I shall refer as "Knox Street Apartments"), and Joseph Esber and Marcel Esber as "Covenantors". The recitals to the agreement explain the commercial background. They are as follows:

B. KSL in entering into the Joint Venture has relied on information abut the project provided to it by KSA.

C. A Development Consent and Building Consent has been issued by Council and the Works have been commenced but not yet completed.

D. KSL (as owner), and Knox Developments Pty Ltd (as developer) had previously entered into arrangements whereby Knox Developments Pty Ltd acted as developer of the Development project.

E. Knox Developments Pty Ltd, ("KD") had previously engaged a builder to carry out the Works, Elcorp Constructions Pty Ltd, ("Elcorp") but Elcorp has been placed into administration and is unable to complete the Works.

F. In order to carry out the Development KSA has procured a first mortgage facility from Law Mortgages Queensland Pty Ltd ("LMQ") being registered mortgage No. 5843332 ("the LMQ mortgage") in an amount of $12,500,000 of which to date $6,924,540 has been drawn down. KSA is currently in default under the LMQ mortgage and LMQ has proposed to exercise its Power of Sale pursuant to its mortgage and has put the property on the market by way of a tender process. In addition to the $6,924,540 drawn down under the mortgage to date KSA is further indebted to LMQ in an amount of approximately $778,598.59 in interests, costs, expenses and other charges.

G. KSA is presently not in a position to complete the Development from its own resources or to pay out its existing mortgage with LMQ or to bring its payments up to date with LMQ.

H. KSA has also entered into a second registered mortgage with the Residential Housing Corporation Limited being registered Mortgage No. 6084324 pursuant to which mortgage KSA is presently indebted in an amount of approximately $1,259,765.25 being a discharge figure as at 14 December, 2000.

I. KSA has entered into a number of contracts for the sale of Lots in the Development as set out in the First Schedule attached hereto.

J. KSL is a public company with considerable experience in property development. KSL is also able to arrange further funding and provide, from time to time, necessary guarantees to lenders, in order to either procure loans or extend existing facilities.

K. In order to complete the Works and the Development KSA requires additional funding and KSL willing to use its best endeavours to is desirous of participating in a joint venture to carry out the Development.

L. KSA and KSL have proposed to each other that: (i) KSL will manage the Development; and

(ii) on completion of the Development, any resulting profit will be shared between KSL and KSA in the manner set out in this Deed.

Marcel and Joseph Esber effectively controlled Knox Street Apartments. 13 Another one of the set of documents was a Deed of Loan and Guarantee between Knox Street Apartments as "Borrower", Kimberley as "Lender" and Joseph Esber, Marcel Esber and Casanda as "Guarantor". The Lender agreed to advance monies up to a limit of $2.7 million to the Borrower to be drawn down from time to time. The facility was to commence on 1 December 2000. The final repayment date was upon the sale of the last remaining lot in the Borrower's proposed strata subdivision of certain land or 30 November 2003, whichever was the earlier. The proposed strata subdivision was not otherwise identified. No interest was to be charged, however the Borrower was to pay the Lender fees of $2 million on the final repayment day or the earlier termination of the Deed. 14 The relevant parts of the guarantee clause in the Deed are as follows:

"10. Guarantee and Indemnity 10.1 The Guarantor (or if more than one then jointly and severally) unconditionally and irrevocably guarantees payment to the Lender of the Guaranteed Money.

10.2 If the Borrower does not pay the Guaranteed Money to the Lender on time and in accordance with this Deed, then the Guarantor must pay the Guaranteed Money to the Lender on demand by the Lender (whether or not demand has been made on the Borrower). A demand may be made at any time and from time to time.

10.3 As a separate undertaking, the Guarantor indemnifies the Lender against all liability or loss arising from any costs, charges or expenses incurred in connection and with the Guaranteed Money not being recoverable from the Guarantor under clauses 10.1 or 10.2 or from the Borrower because of any circumstance whatsoever. …

10.8 The Lender's rights under this clause 10 are additional to and do not merge with, or affect and are not affected by any Loan Security held by the Lender or any other obligation of the Guarantor to the Lender, despite any rule of law or equity or any statutory provision to the contrary." "Guaranteed Money" is defined to mean:

"any and all amounts which at any time or from time to time may for any reason be owing or payable by the Borrower to the Lender in connection with this Deed or any instrument or transaction contemplated by it, whether at law or in equity in relation to the any moneys advanced by the Lender to or on behalf of the Borrower but does not include the Fee referred to in Item 19 ". [emphasis added] 15 Relevant provisions relating to the "Loan Security" are as follows:

"6 Loan Security 6.1 The obligations of the Lender under this Deed including without limitation those under clause 2.1 are subject to; 6.1.1 The delivery by the Borrower to the Lender on or before the Commencing Date of the Current Security enforceable in accordance with its terms together with all relevant documents of title and completed forms for the registration of the Current Security as may be required by the Lender's legal advisers; and 6.1.2 The delivery by the Borrower, the Guarantor or other person to the Lender of such further Security as the Lender may in its absolute discretion at any time and from time to time require which further Security must be enforceable in accordance with its terms together with all relevant documents of title and completed forms for the registration of the Security as may be required by the Lender's legal advisers." "Loan Security" is defined to mean:

"the Current Security plus such other Security as may from time to time be provided by or on behalf of the Borrower to the Lender as security for the Principal Sum or interest on it or any other moneys from time to time payable by the Borrower to the Lender." "Current Security" means:

"the security described in Item 6 of the Schedule".

Item 6 of the Schedule lists the three mortgages granted by Kimberley , Casanda and Marcel Esber respectively to which reference has already been made. 16 The formal clauses included:

"11.6 Nothing contained in this Deed must merge, extinguish, discharge, postpone, lessen or otherwise prejudicially affect any other Security now or hereafter held by the Lender or any right or remedy conferred on the Lender by each Security nor will any other Security now or hereafter held by the Lender in any way prejudicially affect the powers and provisions contained or implied in this Deed.

11.7 The agreements and obligations on the part of the borrower and the Guarantor contained or implied in this Deed will not merge in or be extinguished upon the cancellation of the Facility or the discharge or release of any Loan Security but will remain in full force and effect and will enure to the benefit of the Lender and its successors and assigns until all moneys payable by the Borrower and/or the Guarantor to the Lender under this Deed and/or each Loan Security have been fully paid and satisfied." 17 The special conditions of each mortgage in issue commenced as follows:

"This Mortgage is given to secure the repayment to the Mortgagee of the Secured Moneys being the moneys due and owing by the Mortgagor as Borrower to the Mortgagee as Lender pursuant to the Deed of Loan and Guarantee of even date".

The phrase "Secured Moneys" was not a defined term. There was also the following covenant:

(b) covenants with the Mortgagee as provided in the Deed of Loan and Guarantee executed between the Mortgagor and the Mortgagee of even date, and as follows". 18 Clauses 1 and 6 of the covenants in each of the mortgages was as follows: "MATURITY DATE

The Mortgagor will pay to the Mortgagee the Secured Moneys or so much thereof as shall remain unpaid upon the sale of the last remaining Lot in the Mortgagor's proposed strata subdivision of the land into Strata Lots or 30 November, 2003 whichever is the earlier Collateral Security

As collateral security the Mortgagor (as Guarantor) and the Mortgagee (as Lender) have entered into a Deed of Loan and Guarantee of even date. Any breach of the said Deed of Loan and Guarantee shall be a breach of this Mortgage and any breach of this Mortgage shall be deemed to be a breach of the said Deed of Loan and Guarantee." 19 A registered memorandum containing a number of detailed provisions was incorporated into each of the mortgages but neither party has suggested that it assists in resolving the issues. 20 There was another mortgage in similar terms over other land, the mortgagor being Knox Street Apartments, securing the principal indebtedness as Borrower under the Deed of Loan and Guarantee. 21 The properties mortgaged respectively by Marcel Esber and Casanda to Kimberley were sold in early 2002 by the registered first mortgagee. The first mortgagee paid the surplus of $416,780.81 to Kimberley as a successive mortgagee. Kimberley then appropriated those funds in part satisfaction of the fees provided for in Clause 4 of the Deed of Loan and Guarantee. Each of Marcel Esber and Casanda claim that Kimberley was not entitled to that amount because the mortgage given by each of them only secured the "Guaranteed Money" pursuant to the Deed of Loan and Guarantee, which did not include the fees provided for by Clause 4. 22 The difficulty in the case concerns the identification of the monies secured by the mortgages. The clause was identical in all three mortgages and is set out in paragraph 8 above. There is no difficulty in construing the provisions of the mortgage given by Knox Street Apartments that identify the sum secured even though "Secured Moneys" was not a defined term. The explanation which followed that phrase makes sense. It was the Borrower pursuant to the Deed of Loan and Guarantee. However the same provision does not make sense in the mortgages given by Casanda and Marcel Esber respectively. Neither was the Borrower pursuant to the Deed of Loan and Guarantee. Thus, the clause cannot be given a literal meaning. Kimberley's case was that it should be construed as if the words "Mortgagor as" were omitted from the clause. On that view the monies received by it could be retained as they were monies due and owing by the Borrower - Knox Street Apartments - to Kimberley as lender pursuant to the Deed of Loan and Guarantee. The alternative construction is that the word "Borrower" should be omitted and the word "Guarantor" notionally inserted. 23 The trial judge favoured the view that the misdescription in the identification of the monies to be secured arose from the use of the word "Borrower" rather than the word "Guarantor". He pointed to the consistent use of the expression "Mortgagor" and referred to the fact that clause 6 of the mortgages described the Mortgagor as Guarantor under the Deed of Loan and Guarantee. He held that the mortgage should be read consistently with the Deed of Loan and Guarantee as securing payment of the "Guaranteed Money" as that expression is defined in clause 1.1.13 of the Deed of Loan and Guarantee. 24 Counsel for the appellant submitted that this recasting of the clause does not avoid what he describes an absurdity as at the time the mortgage was entered into no money was due and owing by the Guarantor to the Mortgagee. That could only occur in the event of the Guarantor being properly called upon at some time in the future. In other words, the clause would have to be further recast to apply only to such monies as may become due and owing by the Guarantor to the Mortgagee at some time in the future. Put another way, a guarantor never repays monies. Appellant's counsel also submits that the trial judge's interpretation does not recognise the fact that all three of the mortgages were provided by the Borrower to the Lender pursuant to clause 6 of the Deed of Loan and Guarantee before the facility came into effect rather than pursuant to the Guarantee clause. Each should be seen as security for the obligations of the Borrower. 25 It was submitted for the appellant that each of the mortgages, including the Knox Street Apartments mortgage, has the same clause defining the extent of the security. The meaning of the clause is clear in the Knox Street Apartments mortgage, and there is no warrant for reading it down in the other contemporaneous mortgages. The phrase "Secured Moneys" should be understood in that way whenever it appears. 26 It was submitted for the appellant that there is no obligation upon a Guarantor under the Deed of Loan and Guarantee to provide security. Indeed, one, Joseph Esber, did not. The liability of a Guarantor is separate from the provision of security. Clause 6 of the mortgages in issue emphasises that the guarantee obligations are "collateral" to other obligations. That clause provides that a breach of the Deed of Loan and Guarantee is a breach of the mortgage. That would indicate that a breach by the Borrower would trigger the security. The two obligations as Mortgagor and Guarantor are separate. The provisions of clause 10 of the Deed of Loan and Guarantee do not govern the obligations provided for by the mortgages. 27 Counsel for the respondents submits that the mortgages should be construed to operate in a conventional manner securing the obligations of the Guarantors who were the Mortgagors and not a third party. It was submitted that the internal evidence would indicate that the mortgages in issue were prepared using the Knox Street Apartments mortgage as a template, modifying it to meet the case of the Guarantors (e.g. clause 6), but that the modification was incomplete probably due to haste. It is pointed out that the reference to the "Mortgagor's proposed strata subdivision" in clause 1 is also inappropriate as the development was carried out by Knox Street Apartments. It is submitted that the modification proposed by it is straightforward, avoids absurdity and inconsistency and does less violence to the language than that proposed by the appellant - particularly as to the use of "Mortgagor". Even if the mortgages were provided pursuant to clause 6 of the Deed of Loan and Guarantee, clause 6 of the mortgages referred to the mortgagors as Guarantors. There is no absurdity as no monies were advanced to any party on 7 December 2000. 28 It was submitted for the respondents that the appellant's approach leads to inconsistent operation of the guarantor mortgages and the Deed of Loan and Guarantee as the personal covenant in clause 1 of the guarantor mortgages would make the Mortgagors personally liable for the fee notwithstanding the specific exclusion of the fee from the definition of "Guaranteed Moneys". Counsel sought to bolster this submission by reference to the sequence of the drafting of the agreements, referring to Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 per Mason J at 352-353. He pointed out that the express exclusion of clause 4 fees from "Guaranteed Moneys" came late, as did the joinder of Casanda as a Guarantor. 29 It was submitted for the respondents that to change the identity of the party whose obligations are secured by a mortgage is a change of substance not to be lightly effected by construction. It was also submitted that any ambiguity as to the liabilities falling within a security should be construed in favour of the surety, referring to Ayoub v Euphoric Pty Ltd [2004] NSWCA 457; (2004) 12 BPR 22,735 per McClellan AJA at [41].

Consideration 30 The task at hand is construction of the mortgages, not rectification of the mortgages. Put another way, the question is the meaning of the words that do appear rather than speculation as to what the parties might have done if their minds had been turned to the issue. 31 There is an air of unreality about this case. Both parties are agreed that the clause in the mortgages in suit that governs the monies to be secured by the mortgages cannot be applied according to its terms. It is clear enough that this is the result of a mistake of one kind or another. However, neither party has sought rectification. Thus, there is no evidence of the nature of the mistake nor as to the actual intention of the parties. Each side seeks to resolve the issue by construction. 32 The faint attempt by counsel for the respondents to glean support from the sequence of drafting that preceded 7 December 2000 is of little assistance. It is at least doubtful whether that exercise is permissible if it is posed as relevant to ascertaining the actual intention of the parties. If it is not so posed, then the relevance of it is difficult to discern. The scope and application of the exception to the general rule in the passage from the judgment of Mason J in Codelfa referred to by counsel for the respondents are controversial (cf per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ in Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 76 ALJR 436; 186 ALR 289 at [39]). In any event these facts do not neatly fit within it. However the exercise leads nowhere because the available inferences are equivocal as to the point at issue, as is so often the case with extrinsic evidence. It would be unsafe to draw any conclusions from unexplained drafting changes. Ultimately each of the respondents/Mortgagors was a Guarantor and the fees were excluded from the "Guaranteed Moneys". 33 We were referred to the well known passage from the judgment of Dixon CJ and Fullagar J in Fitzgerald v Masters (1956) 95 CLR 420 at 426-427:

"There is a superficial difficulty in cl. 8, because it purports to incorporate a set of conditions so far as they are in consistent with what has been specifically agreed upon. No real difficulty, however, is created. Words may generally be supplied, omitted or corrected, in an instrument, where it is clearly necessary in order to avoid absurdity or inconsistency. Here it would be indeed absurd to suppose that the parties, having expressed their agreement on a number of special and essential matters, should intend to incorporate by reference terms inconsistent with what they had specially agreed upon. What they must clearly have intended is to incorporate a set of general conditions except so far as they were inconsistent with what they had specially agreed upon, and cl. 8 must be read as if it said "consistent" or "not inconsistent"."

That passage was recently referred to by Basten JA in Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [28]-[29]. We were also referred to the analysis of "Mistakes and Inconsistencies" in chapter 9 of Sir Kim Lewison, The Interpretation of Contracts , 4th ed (2007) Sweet & Maxwell at 345ff. 34 The difficulty in applying those principles in the present circumstances is that whilst it can be concluded that there was a mistake, there is no certainty as to what is required to correct the mistake in order to give effect to the intention of the parties (cf Lewison, proposition 4 at 355). It would be anomalous if the requirements of correction of a mistake by rectification (where evidence of intention is available) were more restrictive than correction by construction (where such evidence is not available) (cf Energy World Corporation Ltd v Maurice Hayes and Associates Pty Ltd [2007] FCAFC 34; (2007) 239 ALR 457 at [10]-[14]). 35 In my opinion it is not possible to conclude from the textual arguments whether the parties intended that the mortgages should be third party mortgages securing the obligations of the Borrower Knox Street Apartments or should be first party mortgages securing the indebtedness of the respective Mortgagors as Guarantors. There is something to be said for each side. There is no decisive point. The significance of the apparent inconsistency between clause 10 of the Deed of Loan and Guarantee and clause 1 of the mortgages disappears if it is accepted that each deals with a separate topic - illustrated by the fact that one of the Guarantors was not a Mortgagor. 36 The problem is not solved by having regard to relevant background circumstances in order to discern the objective of the parties and their commercial purpose (see the authorities referred to by Basten JA in Kooee at [27]-[31]). Neither position is improbable from a commercial point of view. In my opinion choice between the alternatives does not rise above speculation. 37 The problem, however, is solved if approached on the basis that the mortgages must be given efficacy if possible. Neither party has suggested that they were void or unenforceable by reason of uncertainty. The mortgages were undoubtedly intended to secure the payment of money. On any view, that money would include the amount covered by clause 10 in the Deed of Loan and Guarantee. It follows from my previous opinion that it cannot be safely concluded that it was intended to include anything else. As a result, the appellant did not establish that the amount in question was owing to it by the respondents and the primary judge correctly held that its claim as to this amount failed. 38 The same result may follow if the mortgages are treated as guarantees or indemnities and the Mortgagors as sureties. On that basis the mortgages would be construed in favour of the Mortgagor sureties (see Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; (2004) 217 CLR 424 per Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ at [17]-[23] and Ayoub). However, there is substance in the argument of counsel for the appellant that the application of this principle of construction in the present case would assume the result - put another way, it is not appropriate to use the principle to determine whether the mortgages were third party or first party mortgages (cf Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ at [20]-[26]). There is also substance in the response for the respondents that each of a first party guarantor and a third party mortgagor is a surety in any event. On the other hand, there is a real difference between the two relationships. As the issue is not free from doubt, I would prefer not to rest the result of the appeal on the application of this principle of construction. 39 I would dismiss the appeal with costs. ****

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At a glance

Court

Decision date

Before

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Judgment (47 paragraphs)

Parties

Cases Cited (19)