Supreme Court of WA|2005-12-21|Before: Mr P, Heenan J, White J

Kirfield Limited v First Trade Consulting Pty Ltd & Anor [2005] WASC 277 (21 December 2005)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : KIRFIELD LIMITED -v- FIRST TRADE CONSULTING PTY LTD & ANOR [2005] WASC 277

Real property - Caveat - Charge given to builder over penthouse apartment in development to secure owner's obligations under building contract - Owner subsequently mortgages penthouse in excess of its value - Builder lodges caveat over other apartments in development - Whether builder entitled to equitable lien over other apartments - Whether serious question to be tried - Turns on own facts

Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42

Deputy Commissioner of Taxation v Corwest Management Pty Ltd [1978] WAR 129

Eades v Reilly, unreported; SCt of WA (Heenan J); Library No 980675; 20 November 1998

Graham H Roberts Pty Ltd v Maurbeth Investments Pty Ltd [1974] 1 NSWLR 93

GRD Kirfield Ltd v First Trade Consulting Pty Ltd [2004] WASC 158

H G & R Nominees Pty Ltd v Caulson Pty Ltd (2000) V Conv R 54-630

Kang v Kwan [2002] NSWSC 1187

Kirfield Ltd v First Trade Consulting Pty Ltd [2005] WASC 82

Porter v McDonald and Registrar of Titles [1984] WAR 271

Ashen House Pty Ltd v Mercantile Credits Ltd [1992] ANZ ConvR 158

Bethian Pty Ltd v Green [1978] HCA 4; (1997) 3 Fam LR 11,579

Bomford v Barrett [2002] WASC 304

Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78

Concord Municipal Council v Coles [1905] HCA 35; (1905) 3 CLR 96

Eng Mee Yong v Letchumanan [1980] AC 331

Halse v Embling, unreported; FCt SCt of WA; Library No 970734; 22 December 1997

Hinds v Uellendahl (No 2) [1992] NTSC 104; (1992) 112 FLR 222

Jandric v Jandric [1999] WASC 22

Kerrabee Park Pty Ltd v Daley [1978] 2 NSWLR 222

KT & T Developments Pty Ltd v Tay (1995) 13 WAR 363

Lydon v Ryding [2002] WASC 308

Martyn v Glennan [1979] 2 NSWLR 234

Pritchett & Gold & Electrical Power Storage Co v Currie [1916] 2 Ch 515

R & I Bank of Western Australia Ltd v Lavery, unreported; SCt of WA (White J); Library No 930567; 25 October 1993

Ruxan Pty Ltd v Peachme Pty Ltd [2004] NSWSC 1221

1 MASTER NEWNES: This is an application by the plaintiff for the extension of the operation of a caveat. It arises out of a building contract dated 5 February 2001, made between the plaintiff ("Kirfield") as builder and the first defendant ("First Trade") as proprietor, to renovate and develop a building on the corner of St George's Terrace and Victoria Avenue, Perth.

2 The work under the contract involved the conversion of the existing building into six levels containing 108 strata-titled apartments, a penthouse apartment and five strata-titled retail apartments at ground level. The contract sum stipulated was $17,925,000 and practical completion was to be achieved within 52 weeks of 15 January 2001. The contract provided for security to be held by First Trade in respect of Kirfield's obligations but did not provide for any security to be held by Kirfield. In particular, the contract did not provide Kirfield with any security over the land on which the work was to take place.

3 Kirfield commenced work under the contract on 2 February 2001. Subsequently disputes arose between Kirfield and First Trade in connection with the building contract and, on 14 May 2002, Kirfield suspended work under the contract.

4 In order to enable the building work to be completed pending the resolution of the disputes, on 27 June 2002 the parties entered into what are described as Heads of Agreement. Under cl A2 of the Heads of Agreement, First Trade granted to Kirfield, and agreed immediately to execute, a second mortgage over the penthouse apartment "to secure the due and punctual payment by [First Trade] to [Kirfield] of all the present and future obligations and liabilities of [First Trade] to [Kirfield] arising under or in connection with or provided for in the Building Contract, until all claims (including rights sounding in damages only) are settled between the parties and all other moneys payable under the Building Contract (including without limitation moneys payable and obligations under clauses A1 and A3)."

5 The Heads of Agreement further provided, so far as relevant, that:

"3. Without limiting the generality of A2, [First Trade] will pay to [Kirfield]:

(i) all future progress certificates that may be issued; and

(ii) any interest that may accrue on any unpaid progress certificate at the rate provided under the Building Contract,

4. [First Trade] Hereby charges as beneficial owner the units specified in the Schedule ... to secure the due and punctual payment by [First Trade] to [Kirfield] of the Payments. Upon the making of the Payments [Kirfield] is to release this security. [First Trade] must not further mortgage or encumber any of the units. [First Trade] agrees that [Kirfield] may lodge a subject to claim caveat to protect its interest hereunder."

6 The apartments specified in the Schedule of the Heads of Agreement were identified as Units V402, G406, G505, G605 and G804. The Schedule provided that if settlement or the sale of any one or more of the apartments occurred before 31 October 2002, then the charge would extend to another apartment being Unit G705. The Schedule also provided that where an apartment was sold a replacement apartment, to be nominated by Kirfield, with a market value at least equal to the apartment sold would be subject to the charge.

7 There were therefore two securities granted by First Trade. One in respect of the penthouse apartment to cover all claims then or thereafter made by Kirfield, and the other over the nominated apartments to secure the amount payable under progress certificates issued on or before 31 October 2002 and any interest that may accrue on such amounts.

8 Kirfield says that at the time the Heads of Agreement was entered into it was expected by both sides that First Trade would have considerable equity in the project after the debt to the project financier, St George Bank, had been repaid and that Mr Vincenzo Alessandrino, a director of First Trade, had said the penthouse apartment would remain in the ownership of First Trade and would be unencumbered or substantially unencumbered pending the resolution of the disputes between the parties.

9 Kirfield lodged caveats (the "original caveats") over the nominated apartments and the penthouse apartment on 28 June 2002 and returned to work on 1 July 2002. In January 2003 another apartment was substituted for one of the nominated apartments in accordance with the terms of the Heads of Agreement.

10 On 2 September 2002, the project architect issued a certificate of practical completion. Subsequently, further disputes arose between the parties leading to various claims and cross-claims.

11 On 8 October 2002 Kirfield referred the disputes between the parties to arbitration. On 8 December 2003 the arbitrator issued a first interim award limited to certain issues of liability. Kirfield appealed to this Court from the award and on 14 July 2004 its appeal was substantially upheld by Commissioner Odes QC: GRD Kirfield Ltd v First Trade Consulting Pty Ltd [2004] WASC 158. First Trade in turn has appealed to the Court of Appeal against that decision and that appeal is still to be heard. Kirfield says that based on the findings of Commissioner Odes QC, an amount of between $508,096 and $852,000 is owing to it by First Trade.

12 The solicitors for First Trade, by letter of 24 January 2005, requested that Kirfield withdraw the original caveats so that the five nominated apartments and the penthouse apartment could be sold. First Trade's solicitors said that First Trade had entered into a contract to sell those apartments for the total sum of $4,800,000 and, although an amount of $5,542,411.09 was owing under the first mortgage, the first mortgagee was willing to accept the sale proceeds of $4,800,000 in satisfaction of its debt.

13 Kirfield refused to withdraw the original caveats and First Trade caused a notice to be issued by the Registrar of Titles pursuant to s 138B of the Transfer of Land Act 1893 (WA). Kirfield then applied to the Court to extend the operation of the original caveats.

14 Kirfield's application came before Blaxell J who, on 6 May 2005, refused to extend the operation of the original caveats: Kirfield Ltd v First Trade Consulting Pty Ltd [2005] WASC 82. Blaxell J found that there was a serious issue to be tried in respect of Kirfield's claim to a caveatable interest in each of the apartments, but found that the balance of convenience was overwhelmingly in favour of First Trade in circumstances where the true market value of the apartments was less than the amount owing to the first mortgagee under its mortgage. As First Trade had entered into an agreement to sell the five nominated apartments and the penthouse apartment for a total sum of $4,800,000, which was less than the mortgage debt of $5,542,411.09, and the first mortgagee had agreed to accept the sum of $4,800,000 in satisfaction of that debt, an extension of the operation of the original caveats would confer no real benefit on Kirfield. The original caveats over the apartments therefore lapsed.

15 On 28 April 2005, however, Kirfield lodged a caveat (the "current caveat") over five other apartments in the development in which there appears to remain equity of some $1,127,150. Kirfield claims an equitable interest in those apartments arising out of the charge granted by First Trade under the Heads of Agreement. In the supporting statutory declaration of Mr Peter Bryant, a director of Kirfield, Mr Bryant says that an amount of approximately $500,000 is owing by First Trade to Kirfield, First Trade had mortgaged the penthouse apartment for more than its value, and accordingly, as the works carried out on the land by Kirfield improved it to the benefit of First Trade, First Trade would be acting unconscionably or unfairly if it were to dispose of any part of the land without the consent of Kirfield or the prior discharge of First Trade's liability to Kirfield. Accordingly, Kirfield has a beneficial interest in the land to the extent of First Trade's indebtedness to it.

16 First Trade has caused the Registrar of Titles to issue to Kirfield a notice under s 138B of the Transfer of Land Act in respect of the current caveat. The notice is dated 30 May 2005.

17 On 15 June 2005, Kirfield commenced these proceedings seeking an order that the operation of the current caveat be extended until further order of the Court. An interim order was made pending full argument on the application. I heard the latter on 14 September 2005.

18 First Trade did not accept that it is indebted to Kirfield in the amount claimed but accepted for the purposes of this application that it was arguable that First Trade is indebted to Kirfield in some amount. First Trade opposes, however, any extension of the operation of the current caveat on the ground that Kirfield has no caveatable interest in the apartments concerned.

19 First Trade says first, that the issue of Kirfield's security in respect of the building work was expressly dealt with under the Heads of Agreement by the provision of security over the penthouse and the nominated apartments and no other right to security has or could arise; and secondly, prior to the current caveat being lodged the apartments concerned had been sold by First Trade and, although a legal transfer of the apartments has not yet been effected, First Trade had ceased to have any beneficial interest in them at the time the current caveat was lodged.

The sale of the apartments not subject to the current caveat

20 In an affidavit dated 19 July 2005 sworn by Mr Vincenzo Alessandrino, on behalf of First Trade, the circumstances in which those sales occurred are referred to. Mr Alessandrino says that the cash funding for the development was originally derived from three sources; namely the directors of First Trade, investors (being Ben Vorlich Investments Pty Ltd, and Supreme Asset Pty Ltd as trustee for the Victoria Centre Unit Trust), and bank finance (apparently a reference to a loan from St George Bank). The funds from the directors and investors were to cover the cost of acquisition and marketing. The bank finance, together with certain non-cash funding arrangements, was to cover construction costs. Mr Alessandrino says that Kirfield agreed to acquire five apartments in the development as part of the non-cash financing. That was, in effect, to be in lieu of the final payment to Kirfield under the building contract.

21 Mr Alessandrino says that, in late 2002, St George Bank, the original primary financier of the project, was concerned about the project and started to apply pressure on First Trade to reduce the Bank's level of exposure. Mr Alessandrino says that in order to do so he arranged with certain investors in the project "to effectively purchase several of the apartments", thereby releasing funds to First Trade to enable it to reduce its debt to St George Bank. He says that investors were encouraged either to acquire an apartment outright or take over liability for the apartment until the investor determined whether they wished to purchase it outright or to on-sell it. Mr Alessandrino says that "[i]n practical terms, this meant the investors applied the value of their investment by way of deposit against an apartment and acquired finance from the lender of their choice to pay for the balance of the sale price". All apartments were acquired by investors at the full list price.

22 Mr Alessandrino says that while one or two of the investors elected to purchase and transfer the apartment outright, several of the investors agreed to acquire the apartments but defer the settlement date until they determined whether they would in fact transfer the apartment to themselves or make arrangements to on-sell it to third party purchasers. It is the latter apartments which are the subject of the current caveat.

23 According to Mr Alessandrino, since entering into these arrangements what he describes as "the intended purchaser" has in each case been entirely responsible for maintaining the mortgage over the apartment and paying the strata levies and any other costs associated with holding the apartments. The purchasers have also taken responsibility for any liability that First Trade had to the investors in the project and each of them has received any rental income and the like. First Trade has had no interest or involvement in those apartments except to hold them on trust to transfer them as directed by the purchasers.

24 The identity of the intended purchasers is not clear from the evidence. They are apparently individual investors who, as beneficiaries of the Victoria Centre Unit Trust, had invested in the project through the trustee, Supreme Asset Pty Ltd, and on whose behalf the apartments are now held by Supreme Asset Pty Ltd. No contracts of sale or any other documents identifying an individual investor or evidencing the terms of sale were produced in evidence by First Trade. The form of the transactions are themselves somewhat unusual.

25 As they follow a common form, it is convenient to take one as an illustration, as it appears from Mr Alessandrino's affidavit. Unit G401 (which as at 31 October 2002 was apparently valued at $527,000) was sold to Supreme Asset Pty Ltd as trustee of the Victoria Centre Unit Trust for $510,000. C & V Alessandrino borrowed the sum of $399,000 from Challenge Bank to discharge the mortgage to St George Bank on which the sum of $385,000 was owed, and that amount was paid to St George Bank on 10 April 2003. The balance of $125,000 is said in an annexure to Mr Alessandrino's affidavit of 19 July 2005 to have been used to pay out private investors in the Victoria Centre Unit Trust. I assume, although it is not clear, that that refers to accounting entries which had the effect that the investor's initial investment was notionally repaid and then used by the investor as the deposit on the apartment.

26 In the annexures to Mr Alessandrino's affidavit, five of the apartments are shown as having been purchased by Supreme Asset Pty Ltd with the mortgage funds having been borrowed in four cases by C & V Nominees Pty Ltd and one case by Atlanta Pty Ltd, and one apartment as having been purchased by N A Alessandrino and C Giglia with the mortgage funds being borrowed by them. Mr Neil Alessandrino is one of the two directors and shareholders of Supreme Asset Pty Ltd and is the son of Mr Vincenzo Alessandrino, a director of First Trade. Mr Neil Alessandrino was formerly an alternate director of First Trade. Mr Giglia is the general manager of First Trade. C & V Nominees Pty Ltd and Atlanta Pty Ltd are companies associated with the directors of First Trade.

27 First Trade therefore says that while the apartments remain registered on the title in its name, five of the apartments are held on behalf of Supreme Asset Pty Ltd and the other apartment on behalf of Mr Neil Alessandrino and Mr Giglia. It appears from the evidence that at the time of the transactions Supreme Asset Pty Ltd, as trustee for the Victoria Centre Unit Trust, was owed the sum of $1,030,000 from its investment in the project.

28 In Mr Alessandrino's affidavit of 29 March 2005 and filed in the earlier proceedings before Blaxell J, the transactions seem to be described a little differently. There Mr Alessandrino says that to meet the requirement of St George Bank that First Trade's indebtedness be reduced, First Trade "arranged with C & V Nominees Pty Ltd, Atlanta Pty Ltd and Neil Alessandrino and Charles Giglia, that if those parties refinanced certain apartments with their own banks and financial institutions (thereby releasing funds to [First Trade]), paid the strata levies and other costs associated with holding the apartments, and took responsibility for any liability [First Trade] had to investors in the Project, then First Trade would either transfer the apartments or the proceeds from the sale of the apartments when called upon to do so ... In practice the borrowers on each of the mortgages mentioned were both the [First Trade] and the intended purchaser (as co-covenantors) but the intended purchaser has, since the date referred to in the schedule, made all mortgage and other payments in relation to the apartments. The intended purchaser has also received the benefit of any rentals. The reference in each case to 'Equity' [the difference between the mortgage funds and the purchase price] is a reference to the amount from that apartment that the intended purchaser would need to contribute to the arrangement to repay [investors in the project]. That repayment to investors was to occur on the sale of the apartment or in the event the intended purchaser actually sought to purchase the apartment. The Equity figure is in excess of the amount owing to investors but the directors felt it prudent to ensure there was some surplus there to cover contingencies."

29 In an annexure to the affidavit in which there appears a summary of the transactions there is no reference to a purchaser of any of the apartments but rather Supreme Asset Pty Ltd and Messrs Neil Alessandrino and Giglia are respectively described as a "Trustee" of one or other of the apartments.

30 In any event, it appears from the documents in evidence that the transactions occurred on various dates between approximately September 2002 and April 2003. Mr Vincenzo Alessandrino says the total sum of $3,165,150 was agreed to be paid by the intended purchasers for the apartments. A total sum of $2,038,000 was paid to St George Bank from the proceeds of the new mortgages and there remained a total equity in the apartments of $1,127,150. As I have said, the last sum is variously described in the papers as "equity" or as an amount paid to the investors in the Victoria Centre Unit Trust.

The replacement of the St George Bank mortgage

31 It seems that at some time after that, but before January 2005, the security held by St George Bank over the apartments the subject of the original caveats was discharged and replaced by a mortgage to Ben Vorlich Investments Pty Ltd (albeit, the mortgagee is also described in the affidavit material as Ben Vorlich Ltd and Ben Vorlich Investments Inc) over the apartments. Ben Vorlich Investments Pty Ltd was one of the original investors in the project. That mortgage to Ben Vorlich Investments Pty Ltd was discharged by payment from the proceeds of the sale of the apartments after the original caveats lapsed following the decision of Blaxell J.

32 I should note in passing that there was no explanation by First Trade as to why the St George Bank mortgage was replaced, or how the apartments over which the original caveats had been lodged subsequently came to be mortgaged to Ben Vorlich Investments Pty Ltd for more than their market value, in circumstances where the remaining apartments were apparently not nearly so heavily encumbered. I should mention that a search of Ben Vorlich Investments Pty Ltd has been made by Kirfield at the offices of ASIC but the ASIC records showed no company of that name as registered.

33 It appears that Kirfield became aware that transactions of this nature had occurred in March 2005 when their solicitors were served with the affidavit of Mr Alessandrino of 29 March 2005. Mr Alessandrino also says that during the hearing before Blaxell J in April 2005 Kirfield proposed that the original caveats be replaced with caveats over the remaining apartments in the development but First Trade said it was not in a position to do that as First Trade no longer had any interest in these apartments.

34 As I have mentioned, on 28 June 2005 Kirfield lodged the current caveat over the remaining apartments in the development claiming an equitable lien. It now seeks an order extending the operation of the current caveat.

The law applicable to the extension of a caveat

35 On an application of this nature, the onus is on the caveator to demonstrate there is a serious question to be tried as to whether a caveatable interest exists: Custom Credit Corporation Ltd v Ravi Nominees Pty Ltd (1992) 8 WAR 42 at 44 - 45. Where a reasonably arguable case as to the existence of a caveatable interest has been demonstrated, the interlocutory removal of a caveat will be unusual: Custom Credit (supra) at 48 - 50. If there is a serious question to be tried, the question will not, except in the most exceptional circumstances, be determined on an application of this nature: Porter v McDonald and Registrar of Titles [1984] WAR 271 at 276. Brinsden J observed in Deputy Commissioner of Taxation v Corwest Management Pty Ltd [1978] WAR 129 at 141:

"... the jurisdiction granted by s 138 should not be exercised so as to remove a caveat unless the case is one in which it is patently clear that the estate or interest sought be protected cannot be made out ..."

36 Accordingly, if a caveator is able to demonstrate a reasonably arguable case as to the existence of a caveatable interest, the ordinary course is for the caveat to remain and the disputed question to be left for determination at trial.

37 It was submitted on behalf of Kirfield that it is not necessary to establish a relationship between a caveator and a registered proprietor, as it is not essential that a caveator derive immediate title from the current registered proprietor. All that is required is an estate or interest in the land the subject of the caveat.

38 It was submitted that Kirfield is entitled to an equitable lien over the apartments in respect of the work and materials it has provided to First Trade for the construction of the apartments and for which work and materials Kirfield has not been paid, being "a right against property which arises automatically by way of equity to secure the discharge of an actual or potential indebtedness": Hewett v Court [1983] HCA 7; (1983) 149 CLR 639 per Deane J at 663. Accordingly, an equitable lien is of a proprietary character and may constitute an interest in land: Eades v Reilly, unreported; SCt of WA (Heenan J); Library No 980675; 20 November 1998.

39 It was submitted that in determining whether an equitable lien exists the Court has regard to all of the circumstances, including the provisions of the contract and general equitable principles. Where parties are in a contractual relationship it is sufficient, independently of agreement, that there is actual or potential indebtedness on the part of the owner of the property arising from expense incurred in relation to the property, the property is specifically identified and appropriated to the performance of the contract, and the relationship between the indebtedness and the appropriated property is such that the owner would be acting unfairly if he dealt with the property without the consent of the other party or without having discharged the indebtedness. Counsel referred to Hewett v Court (supra) per Deane J at 668 - 669.

40 It was submitted that, accordingly, an equitable lien exists in favour of a builder for unpaid moneys under a building contract, even where the moneys claimed are disputed by the owner and there is no express contractual provision in the building contract charging the land with the payment of the money.

41 In this case, it was argued, the actual or potential indebtedness of First Trade to Kirfield arises from work performed and materials provided by Kirfield to construct the apartments for First Trade's benefit. It would accordingly be unfair if First Trade was permitted to deal with the relevant apartments without the consent of Kirfield or without having discharged its indebtedness to Kirfield. An equitable lien, which constitutes a caveatable interest in each of the apartments, therefore exists and there are no exceptional circumstances that would justify refusal of an extension of the operation of the current caveat.

42 It was further argued on behalf of Kirfield that at the time of entering into the Heads of Agreement it was anticipated by the parties that First Trade would retain the penthouse pending the resolution of all disputes between the parties and that ultimately the penthouse would be unencumbered. In fact, First Trade subsequently encumbered the penthouse for more than its market value. No credible explanation had been offered as to how that had come about in circumstances where the remaining apartments were nowhere near so heavily encumbered, nor was there a satisfactory explanation as to how First Trade's equity in the project came to be so substantially less than that expected at the time the Heads of Agreement was entered into.

43 It was submitted that it therefore appears First Trade had arranged its affairs so as to deprive Kirfield of the security provided under the Heads of Agreement. It also appears that the investors have contrived to convert their investment in the project into deposits against individual apartments so as to provide them with an interest in the relevant apartments, as distinct from simply a right to participate in any profits from the project.

44 It was submitted that in circumstances where First Trade and Kirfield had agreed a specific form of security in the form of a second mortgage over the penthouse in the expectation the penthouse would ultimately be owned outright by First Trade and unencumbered, and where First Trade subsequently arranged its affairs so that there was no equity in the penthouse, it is at least arguable that the conduct of First Trade is unjust and unconscionable such that Kirfield's claim that it has an equitable lien over the remaining apartments has, or may have, substance.

45 In the course of argument, counsel for Kirfield submitted that in fact it was not necessary to find that First Trade had contrived to bring about that result. It was sufficient that the parties intended Kirfield to have security over specific property and it has turned out that that security is valueless. In those circumstances First Trade has been enriched by having the benefit of Kirfield's work without the liability of the security that Kirfield was intended to have.

46 It was argued on behalf of First Trade that as a general rule no lien can or will arise from a building contract. The performance of work at the request, or for the benefit, of another will not of itself create an equitable interest. It would only be in unusual circumstances that the builder under a building contract would acquire an interest in the land giving rise to an equitable lien. There would normally have to be additional circumstances, namely that the owner expressly or impliedly agreed that the other party should have an interest in the land improved, or the builder mistakenly believes it is to have an interest in the land and the other party has stood by with knowledge of the mistake.

47 Where, however, parties agree that certain specific property is to be given as security, no equitable lien can arise in relation to other property which was not to form part of the security.

48 Counsel for First Trade submitted that the Heads of Agreement had covered the question of Kirfield's security and there was no evidence that First Trade had in any way given, encouraged or acquiesced in Kirfield forming a belief that it would have some right of security in other apartments in the development. Accordingly, there was simply no scope for an equitable lien to arise and there was therefore no serious question to be tried.

49 It was submitted that, in any event, as third party purchasers had acquired interests in the apartments which are the subject of the current caveat, the interests of those parties would be severely prejudiced if the caveat was allowed to continue in operation. Accordingly, the balance of convenience was against Kirfield and in the exercise of its discretion the Court should decline to order the extension of the operation of the current caveat.

50 The starting point, I think, is the decision of the High Court in Hewett v Court (supra). In that case Deane J (at 663) described an equitable lien as "a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness". His Honour said (at 668) that "it is difficult, if not impossible, to formulate any satisfactory statement of the necessary or sufficient circumstances for the implication of an equitable lien which is applicable to any relationship at all".

51 Deane J then set out what he considered the circumstances which are sufficient for the implication, independently of agreement, of an equitable lien between the parties in a contractual relationship, saying that "they are formulated as a statement of what is sufficient rather than of what is essential" and that "whether or not they exist or are satisfied in a particular case should ... be determined by reference to the substance of the transaction rather than its form". Those circumstances are:

(a) there be a potential or actual indebtedness on the part of the party who is the owner of the property to the other party arising from the payment or promise of payment either of consideration in relation to the acquisition of the property or an expense incurred in relation to it;

(b) that property (or arguably property including that property) be specifically identified and appropriated to the performance of the contract; and

(c) that the relationship between the actual or potential indebtedness and the identified or appropriate property be such that the owner would be acting unconscientiously or unfairly if it were to dispose of the property to a stranger without the consent of the other party or without the actual or potential liability having been discharged.

52 There is a significant body of authority that a building contract of itself does not confer on the builder any interest in the land on which the building is constructed. In Graham H Roberts Pty Ltd v Maurbeth Investments Pty Ltd [1974] 1 NSWLR 93 at 104 - 105, Helsham J noted that "[i]n no case has it been suggested that building contracts confer any interest on a builder that can be categorized as a proprietary interest in land". In H G & R Nominees Pty Ltd v Caulson Pty Ltd (2000) V Conv R 54-630, Beech J said (at 30):

" ... in the absence of an express contract with the building owner that he shall have lien over a building in respect of work performed by him on the building, a building contractor has no lien over a building or the land on which it is situated in respect of such work, unless the building owner encouraged him to form such a belief or acquiesced in him forming that belief."

53 That passage was cited with approval by Santow J in Kang v Kwan [2002] NSWSC 1187 at [202].

54 In Eades v Reilly (supra), Heenan J held that on the facts of that case there was a serious question to be tried as to whether the plaintiff builder was entitled to an equitable lien over the land on which he had constructed a building under a building contract, although the building contract contained no provision conferring any lien or other security. Heenan J was not referred to any authority directly on point.

55 In the light of the other authority to which I have referred, in my respectful opinion Eades v Reilly (supra) cannot be regarded as authority for any general proposition that a builder is entitled to an equitable lien over land on which the builder has carried out construction work. In my view, the general principle is as stated in H G & R Nominees Pty Ltd v Caulson Pty Ltd & Anor (supra), but subject to the observation of Gibbs CJ in Hewett v Court (supra) at 647 that:

"... the question [of whether an equitable lien arises] ... is not to be decided according to whether one label or another can be placed on the contract between the parties ... What is necessary is to consider the rights and obligations for which the contract provides, with a view to determining whether a lien must be implied for the protection of those rights or the enforcement of those obligations".

56 In the present case, the building contract contained no provision for security for Kirfield. I consider that had the position remained unchanged it would be clear enough that Kirfield was not entitled to any equitable lien over the subject property.

57 The position, however, did not remain unchanged. Kirfield claimed that First Trade had failed to pay money due and owing to it under the building contract and Kirfield suspended the work. It is clear on the evidence that First Trade was, quite understandably, anxious for the work to be completed and therefore anxious to resolve the dispute with Kirfield. It seems that Kirfield was also concerned either about the capacity or the willingness of First Trade to meet its financial obligations to Kirfield under the contract and required security for First Trade's obligations to it.

58 The Heads of Agreement was entered into on the basis that Kirfield would resume the building work pending the resolution of the outstanding disputes between them. It expressly provided that Kirfield should have a second mortgage over the penthouse apartment to secure any money to which Kirfield was or may became entitled under the building contract, and security over certain nominated apartments to secure any money owing under progress certificates issued on or before 31 October 2002.

59 It is contended by Kirfield that Mr Alessandrino, on behalf of First Trade, said at the time the Heads of Agreement was executed on 27 June 2002 that the penthouse apartment would remain in the ownership of First Trade and in time would be unencumbered or substantially unencumbered. In any event, it was obviously the intention of the parties that in the normal course of events First Trade would continue to have sufficient equity in the penthouse apartment to provide Kirfield with the security envisaged by the Heads of Agreement.

60 In fact, quite the reverse occurred. The penthouse, together with the other apartments provided as security, ended up being mortgaged by First Trade for a total amount that exceeded the value of those apartments. Kirfield says it does not understand how that came about, particularly when the other apartments held by First Trade did not end up mortgaged to anywhere near the same extent. The explanation proffered by First Trade on this application is not easy to follow and, in my view, falls well short of a complete or satisfactory explanation.

61 So far as can be elicited from the material in evidence, it seems that within months of the Heads of Agreement being entered into, First Trade entered into an arrangement with various entities associated with the directors of First Trade by which those entities borrowed funds against the security of the apartments in the development which were not the subject of the original caveats and investors in the project acquired the right either to have the apartments transferred to them or the proceeds of sale of the apartments paid to them, using their initial investment as a deposit. The borrowed funds were used by First Trade to reduce its indebtedness to the project financier, St George Bank.

62 I should say that although First Trade says it was under pressure from St George Bank to reduce its indebtedness, when St George Bank brought that pressure to bear, in particular whether before or after the Heads of Agreement was entered into, and what was sought by St George Bank, does not appear with any clarity from the affidavit material. It is not, however, suggested that St George Bank required the debt to be discharged in full. It seems it was simply concerned that the loan be kept within prudent lending limits.

63 In any event, it seems that somewhere in the midst of, or shortly following, that process, the mortgage to St George Bank over the apartments secured by the Heads of Agreement was discharged and replaced by the mortgage to Ben Vorlich Investments Pty Ltd. The amount owing under the mortgage to Ben Vorlich Investments Pty Ltd ultimately exceeded the value of the apartments. It was on the basis of that indebtedness that Blaxell J declined to extend the operation of the original caveats.

64 It was not in issue that Kirfield has carried out substantial work both on the apartments the subject of the original caveats and those the subject of the current caveat. It is also clear that the parties had intended Kirfield would have security, in the form of a second mortgage over the penthouse apartment, for any amounts owing by First Trade under the building contract, and that that was one of the bases upon which Kirfield agreed to resume work in the middle of 2002.

65 The result, however, is that, for reasons which are currently far from clear, the security which Kirfield was given in relation to the building contract to persuade it to resume work in July 2002 was rendered worthless because First Trade subsequently mortgaged it for more than its value, while at the same time there remained substantial equity in the balance of the apartments in the development. On the basis of the material before me it appears that the way in which First Trade arranged its affairs was not inevitable or necessary. How and why First Trade came to arrange its affairs in that way is a matter that can only be determined when the facts are fully explored at a trial. It may be, of course, that when the full facts are known it will be evident that all of the steps First Trade took were entirely proper and appropriate, and even inevitable on the facts as they then existed. But on the basis of the evidence adduced on this application, the inference is arguably open that First Trade deliberately chose to take that course in the knowledge that Kirfield would thereby lose the benefit of the security it had taken over the penthouse apartment.

66 Whether, or what, interest First Trade now has in the apartments the subject of the current caveat seems to me to be a matter of considerable uncertainty. First Trade contends that it has transferred the beneficial interest in those apartments to third parties and that is a further reason why no equitable lien is capable of arising. But the precise nature and effect of the transactions entered into by First Trade in respect of the apartments is by no means clear on the evidence. Consistent with the paucity in the affidavits on behalf of First Trade of documents evidencing and explaining those transactions, no contract documents or documents containing the terms of those sales of the apartments were produced in evidence. The explanations of the transactions offered by Mr Alessandrino are, with respect, confusing and appear incomplete.

67 The question of whether First Trade retains a beneficial interest in the remaining apartments is a matter that can only be determined on a proper examination of the nature and circumstances of the alleged transfers of such interests in 2002 and 2003, and that again is properly a matter for a trial.

68 On the material which is now before me I am satisfied that Kirfield has established that there is a serious question to be tried as to whether it has a caveatable interest in the apartments, arising by way of an equitable lien. In the circumstances, it is arguable First Trade would be acting unconscientiously or unfairly if it were to dispose of the apartments the subject of the current caveat without the consent of Kirfield or the liability of First Trade to Kirfield having been discharged.

69 I do not consider that there are any exceptional grounds upon which in the exercise of the Court's discretion an extension of the operation of the caveat should be refused. The parties who, on First Trade's case, have acquired the beneficial interests in the apartments concerned did not seek to be heard on this application. It is, I think, inconceivable given their relationship with First Trade that Supreme Asset Pty Ltd, Atlanta Pty Ltd, C & V Nominees Pty Ltd and Messrs Neil Alessandrino and Giglia were unaware of the application. Nor was there any evidence of the prejudice which it was said the purchasers would be caused if the operation of the caveats was extended. They have held whatever interest they may have acquired in the apartments on the same basis since late 2002 or early 2003. It is not evident that they would suffer any hardship if the operation of the current caveat was extended.

70 There is, on the other hand, evidence from which it can reasonably be inferred that it is likely First Trade would otherwise be unable to meet any indebtedness to Kirfield from its own resources. There is therefore a real risk that if the caveats lapse Kirfield will be substantially prejudiced in recovering, if not precluded from recovering, any money owing to it. As I have mentioned, the amount which Kirfield contends is owing to it is in the order of $500,000 or more.

71 I would therefore order that the operation of the caveats be extended until further order of the Court. I will hear the parties on the precise terms of the order and on costs.

Kirfield Limited v First Trade Consulting Pty Ltd & Anor [2005] WASC 277

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (115 paragraphs)

Kirfield Limited v First Trade Consulting Pty Ltd & Anor [2005] WASC 277 (21 December 2005)

The sale of the apartments not subject to the current caveat

The replacement of the St George Bank mortgage

The law applicable to the extension of a caveat

Parties

Legislation Cited (1)

Cases Cited (7)