Lai V Gong [1997] NSWSC 100 (30 March 1997)

It is common ground that in early 1986, Mr Davis, who was then in his mid-eighties, was being looked after by the defendant at her home at 3 MacDonald Street, Paddington. The plaintiff used to visit Mr Davis at the defendant's home. The plaintiff says that on one of his visits, Mr Davis said to him, "I'm going to change the mortgage to a seven year interest free loan to you so you won't be in trouble if anything happens to me and I'll also give you back $1,000 out of the $1,200 you paid in interest. That will reduce the loan to $19,000 and the other $200 will cover the expenses of the new mortgage". The plaintiff says he thanked Mr Davis for his generosity.

It is clear that Mr Davis, or the defendant, got in touch with Mr Crossley, solicitor, and instructed him to draw up the new mortgage. I suspect that Mr Davis had been a good client and that Mr Crossley, who had prepared mortgage A, was doing his work without charge and so he did not employ his usual close attention to the documents that were being prepared. He sent to the defendant two copies of a new mortgage which was the same as the previous mortgage save that the principal was $19,000, not $20,000, and the mortgagee was the defendant and not Mr Davis. Mr Crossley gave evidence. He could not remember anything about the transaction except what was on his file. His file disclosed the copy letter sending the forms of mortgages to the defendant dated 20 March 1986 and the original letter is also on his file. An inference that could be made is that the executed mortgages were returned to Mr Crossley with the original letter without any further covering note.

The plaintiff says that the defendant telephoned him in March 1986 and said, "Can you come and see Abe about 6 o'clock to sign the new mortgage. The solicitor will be here." The plaintiff then duly attended 3 MacDonald Street Paddington where Mr Davis, the defendant and a male solicitor, who was not Mr Crossley, were present. He says the solicitor said, "This is the new mortgage with a seven year interest free loan. Would you sign here?" The plaintiff says he did not read the document, nor was it read to him, but he signed it in the places which the solicitor pointed out. He did not write anything on the mortgage other than his signature. Indeed he did not notice that the defendant was now named as the mortgagee. The solicitor then left, but the plaintiff cannot remember whether he took the mortgage with him or not.

After the solicitor had left, Mr Davis said, "The money will go to Dolly (meaning the defendant). Just keep paying the $600 to her and then deduct it from the principal when the time's up." The defendant did not say anything but as the plaintiff was about to leave, she said to him "You better go and thank Mr Davis again for the interest free loan" and the plaintiff returned to the dining room and said to Mr Davis "Thank you for everything Mr Davis".

Thereafter the plaintiff paid $600 to the defendant each March and September. He says it was his belief that he was making these payments in reduction of principal. He says he never received a copy of the later mortgage (which I will call mortgage "B") nor even an epitome of it. It was not until late 1989 that the parties discussed the mortgage and the present dispute, that is, as to whether mortgage B was at interest or interest free, was thrown up. The parties asked Mr Crossley his view, he sided with the plaintiff and the defendant then saw another solicitor, Mr Ringrose, who advised her that she was in the right. Mr Ringrose had mortgage B registered as Y268095.

One other fact should be mentioned here. Mrs Gong filed income tax returns each year including the $1200 paid by the plaintiff as income. This fact shows that the defendant always believed that she was being paid interest not capital.

The plaintiff continued to make payments of $600 each March and September through to 28 September 1992. The principal was not repaid on 30 March 1992 as mortgage B required, but there was some correspondence between the parties where the plaintiff offered to redeem the mortgage by paying the balance he claimed was owing, namely $19,000 less 13 payments of $600 totalling $7,800 leaving a balance of $11,200. The defendant demanded the full principal of $19,000 plus interest from the time when payments ceased to be made. When nothing happened to resolve the dispute, the plaintiff issued a summons for a declaration as to the amount owing on 3 September 1993. There was no return date on the summons and the matter was not activated until 1996, the defendant filing a cross claim on 14 November 1996 for a declaration as to what was owing under the mortgage and rectification from clause secondly of mortgage B of the word "no", a matter I will get to in a moment. The matter was placed in the short notice list on 28 November 1996 and came on for hearing before me on 4 March 1997. Thus, once the parties actually set the matter down it was heard within three months even though it has taken four years from the start of the proceedings to get this far.

Mortgage B was signed in duplicate and the copy that was with the Registrar General has been microfilmed and put in his records. The duplicate original is in evidence as DX02. It is in the same form as mortgage A, but clause secondly has two crossings out, one in black and one in blue, the one in blue being exactly the same crossings out as in mortgage A. Clause fourthly is exactly the same as clause fourthly in mortgage A and is typewritten. On the face of the document, clauses firstly and secondly read as follows:-

the principal sum, or so much thereof as shall remain

Secondly - The mortgagor will pay no interest on the

principal sum or on so much thereof as for the time

After the word "unpaid" the words in mortgage A have been typed in and then crossed out in black. There are two sets of initials "AD" on the Exhibit DX02. One set is in blue and then there is a curved bracket with an "AD" in black ink at the top of the curved bracket. The copy of the document which was registered is also in evidence. It is in identical words, but there is no bracket at the righthand side of clause secondly, and the two ADs are in the righthand margin against clause secondly.

The defendant says that she agrees that the plaintiff called at her home and visited Mr Davis and that there was a conversation about the mortgage. She says she was sure that no mention was made of increasing the loan, and no mention was made of the new loan being interest free, but she can remember Mr Davis saying that he would give Mr Lai back $1,000 out of the $1,200 he had paid in interest which would reduce the loan to $19,000. She thought that he said, "The other $200 will go off my income tax bill" but she cannot be sure.

Mrs Gong says that the mortgage B was not signed at MacDonald Street Paddington, but rather it was signed in Mr Crossley's office. She said that Mr Crossley conducted herself, together with Messrs Davis and Lai behind the reception area into his office, explained the mortgage and told the assembled company that the principal sum was $19,000 but interest still had to be paid in the sum of $600 each half year. Mrs Gong says that at that meeting she offered to extend the term until 1993. She says that matter had not previously been discussed, and Mr Crossley, with everyone's permission, altered the redemption date by hand to 1993 instead of 1989 and Mr Davis initialled the line in the margin next to it. She says that Mr Davis made a "facetious interjection" to the effect "I suppose you want to make it interest free as well" to which Mrs Gong replied "Definitely not" and Mr Lai said "I know that I have to pay interest".

Both Mr Lai and Mrs Gong were cross examined. I must confess that I preferred Mr Lai as a witness to Mrs Gong from their demeanour. However, I was convinced in my preference for Mr Lai's evidence by my conviction that mortgage B must have been signed at 3 MacDonald Street Paddington rather than Mr Crossley's office. I believe that Mrs Gong is getting mixed up between mortgage A which was signed in Mr Crossley's office and mortgage B. If her recollection is so faulty as to this major matter, it is hard to accept her on subsidiary matters where she differs from Mr Lai.

Mr Crossley gave evidence that it was his practice personally to witness signatures of persons signing mortgages if he was present when the mortgage was being signed. He did not do so with mortgage B. In fact Mr Davis was the witness. The original letter which accompanied the draft mortgage from Mr Crossley to Mrs Gong has been returned to his office and the most likely scenario is that it was returned with the completed mortgage. There is no other reasonable explanation put forward as to how the original letter got back into Mr Crossley's office. Further, it is strange that Mr Davis would have initialled the mortgage at all if it had been done in Mr Crossley's office as he was not a party to it. I was also affected by the different inks that were used on the document. This is not usually the way in which a solicitor would prepare a document. Most use black non-copying ink for the Registrar General, though Mr Crossley gave evidence that he would use either blue or black.

In my view, the balance of probabilities are that the mortgage was signed at 3 MacDonald Street Paddington. I also, accordingly, prefer the evidence of Mr Lai generally as to what happened to it.

Mrs Gong wishes the mortgage to be rectified by removing the word "no" in clause secondly. It is extremely odd how this word found its way into the document. Mr Lai said he never read it or added any words to it. Mrs Gong certainly was not interested in adding any words to the mortgage and said she did not do so. There was no opportunity for Mr Lai to have added the word after the mortgage was executed because at all material times the mortgage was in the custody of Mrs Gong or Mr Crossley, or Mr Ringrose, none of whom had any motive at all for inserting the word. The only scenario which reasonably presents itself is that either Mr Davis inserted the word before execution or that Mr Lai is wrong and in fact he did insert the word before execution and it was missed by Mrs Gong. Accordingly, I do not see how under either of these scenarios I can hold that the word "no" was inserted as a material alteration after execution. The probabilities are that it was inserted before execution. Accordingly, the line of cases cited to me including the decisions of the Court of Appeal in Warburton v National Westminster Finance Australia Ltd (1988) 15 NSWLR 238; Farrow Mortgage Services Pty Ltd v Slade (1996) 38 NSWLR 636 and Ryde Joinery Pty Ltd v Zisti (4 March 1997 unreported) and my decision in Dahlenburg v Dahlenburg ( 24 July 1996 unreported), though discussed by counsel in their submissions, cannot assist in the solution to the current problem.

Assuming (which to my mind is the correct assumption) that the document as registered was the document as signed, there is a patent contradiction between clause secondly and clause fourthly. In essence, the plaintiff is seeking to construe the document so that clause secondly has priority, or alternatively, rectify the document by excluding clause fourthly, and the defendant is trying to do the reverse. I have not been too particular about the actual claims that are in the summons and cross claim because, as I pointed out during argument, without a prayer for redemption and an offer to do equity on the part of the mortgagor, there is little reason why this court should entertain the suit at all, but the parties, having come before the court and put their cases in a matter which involves a relatively small amount of money, should have their dispute determined without undue regards to technicalities.

Miss Sofroniou for the defendant, says that clause fourthly is typed and clause secondly is mainly printed though the word "no" has been inserted in handwriting and one prefers a typewritten clause to a printed clause. Such an approach is in accordance with the authorities as to when one of two inconsistent provisions may be disregarded including Forbes v Git [1922] 1 AC 256, 259 and Cameron v Lewis (1975) 1 BPR 9137, 9138-9. The rule is that a typed amendment is to be given preference over a printed clause, but where there are two inconsistent clauses in a deed which are impossible to harmonise, one applies the earlier rather than the latter. These are very artificial rules. It is true that there is here a typewritten clause (fourthly) and a printed clause with a handwritten insertion of the word "no". However, one must also consider in my view that the typewritten clause has been amended by deletions in pen. This shows that the parties directed their minds to the printed clause and weakens the presumption that a typed amendment is to be given preference over a printed clause. The other rule of construction which would otherwise work against the first rule of construction therefore comes into play, that is, that one prefers the first of two inconsistent clauses to the second.

These artificial rules are rules of last resort: I outlined their limitations in Alcan Australia Ltd v Geraghty (8 October 1993, unreported).

I do not find any satisfaction in deciding the case on such an artificial basis especially when it is possible to deal with it on the merits by applying the principles of the law of rectification.

If this case only involved construing the document, I would have to say that one would need to look at the second page of the document as a whole. One would then have to look at the factual matrix and note that mortgage A contained clause fourthly and also contained clause secondly in the same words that were employed in clause secondly, and crossed out in black, as in mortgage B. As I have already said, there are other words in clause secondly crossed out in blue which were the same words crossed out in the corresponding clause in mortgage A. The words crossed out in clause secondly, namely 6% interest, were inconsistent with clause fourthly. This is because as the capital was reduced from $20,000 to $19,000, $600 by way of interest every six months means that the effective rate was something like 6.3%.

There has been considerable recent discussion as to how far one can look to parts of a document which have been crossed out in order to construe it. I referred to these cases in notes in (1993) 67 ALJ 228 and 566. It seems to me that whilst there has not been any case precisely like the present where one asks whether it is permissible to look at words that are struck out to see the schema which the parties have adopted, the attitude of Rogers, CJ Comm D in NZI Capital Corp Pty Ltd v Child (1991) 23 NSWLR 481, 494, would give a positive answer to that question. His Honour seemed to have considered that there was no logical reason why a deleted passage should not be treated as a surrounding circumstance like any other. If one looks at the schema of the document, one can see that as originally drafted with clause fourthly and the typewritten words in clause secondly which have been crossed out in black, the two were inconsistent because the rate of interest was different. The probabilities are that the inconsistent words in clause secondly were crossed out at the same time as the word "no" was inserted, but no-one thought to adjust clause fourthly.

One can go straight to the question of rectification without construing a document if one can see that the question of construction is fairly arguable: Bacchus Marsh Concentrated Milk Co Ltd v Joseph Nathan & Co Ltd [1919] HCA 18; (1919) 26 CLR 410 and Alcan Australia Ltd v Geraghty (Young, J 8 October 1993, unreported). Even if one cannot construe the document so as to prefer clause secondly over clause fourthly, one can use the observations I have already made on the matter of rectification.

The law of rectification seeks to avoid mistakes that are made in recording a party's agreement and for equity to rectify a document so as to set out what the parties intended to write down. It is clear in the instant case that both clause secondly and clause fourthly in their current forms cannot stand together. Which should be preferred?

Having found the facts the way I have, it would appear that clause fourthly must be the one to be discarded. However, Miss Sofroniou says that it would not be right to do this. She says the evidence clearly shows that Mrs Gong at all times believed that she was receiving the $600 per half year as interest, and indeed, so declared the money as income to the Commissioner for Taxation. Thus if there was a mistake, it was not a mistake in which the defendant shared. Furthermore, the case cannot be one of operative unilateral mistake because at no time did she realize prior to 1989 at least, that Mr Lai had made a mistake. Accordingly, as there was no operative common mutual or unilateral mistake, there can be no rectification.

Whilst this is all very logical, it does not seem to me that it assists in the solution. Both parties seek rectification because both parties recognize that the document with two inconsistent clauses could not represent their agreement. It is a matter, accordingly, of working out what is the agreement and on the evidence as I have evaluated it, the agreement is in accordance with the plaintiff's version and not the defendant's version.

The next point to consider is the effect of the registration of the mortgage under the Real Property Act. The Act gives indefeasibility in the absence of fraud (and there is no fraud proved in the present case) to any estate or interest in the land which is registered under the Act. An option in a lease is protected in this way; see Tenstat Pty Ltd v Permanent Trustee Australia Ltd (1992) 28 NSWLR 625, though not a mere personal covenant: Corozo Pty Ltd v Total Australia Ltd [1988] 2 Qd R 366, 376. The position of a person who has the right to receive interest under a mortgage may be a borderline case because such a right may not be a separate interest in the land. Whatever be the situation with a covenant to pay interest, a covenant which, if it can be called such, that no interest will be payable, could not be an interest in the land and would not be particularly protected by the Real Property Act.

The next question is whether there can be rectification after an instrument has been registered. There would not seem to me to be any reason why the equity that is created by a right to rectification should not be recognized as a personal equity which would be able to be enforced against the registered proprietor of an interest notwithstanding the operation of the Torrens System; see State Bank of NSW v Berowra Waters Holdings Pty Ltd (1986) 4 NSWLR 398, 403.

Accordingly, it is appropriate to grant rectification to strike out clause fourthly.

The situation then is that Mr Lai has made payments, totalling $7,800, off the principal which reduces it to $11,200. Mr Lai's only real right, apart from rectification, is to redeem the mortgage. In the ordinary course of events, the Master would work out what sum is required to redeem the mortgage, but in view of the small amounts involved and the questions of principle which arise, it is more convenient to do it now.

The mortgage required repayment of principal on 30 March 1993. This did not occur. It is clear that at least the principal must now be repaid and then there is the question of interest.

As to interest, Mr Lai says that he was always ready, willing and able to pay the $11,200 necessary to discharge the mortgage, but the money was not accepted. However, he did not actually tender the money nor pay it into court, and the practicality of the matter is that he has had the use of that money since 1993. Should he have to pay interest on the principal sum from the date when it should have been repaid?

There is no covenant to pay interest in the mortgage. Without a covenant to pay interest, no interest is ordinarily payable: "President of India" v La Pintada Compania Navigacion SA [1985] AC 104. Fisher & Lightwood on Mortgages Australian edition para [39.39], says, "Despite the general rule, interest is payable on mortgage debts, even though it is not expressly reserved." However, all the cases which are listed to support the proposition, with one exception, involve equitable mortgages. A similar statement appears in Cousins, Law of Mortgages (Sweet & Maxwell, London 1989 p 443). Again, the cases cited with one exception involve either equitable mortgages or breach of fiduciary obligations. The one exception is Mendl v Smith (1943) 112 LJ Ch 279; 169 LT 153. Simonds, J said that the corresponding passage in the 7th English edition of Fisher & Lightwood still remained the law, and that whenever equity had to consider accounts between mortgagor and mortgagee it could allow interest even though interest was not specified in the mortgage.

However, it seems to me that one need not dally with this proposition because the present was a mortgage which specifically stated that there was no interest payable, and I can see no reason why, in the special circumstances of this case, equity should import a rate of interest to bind the mortgagor prior to date of repayment. After repayment, the position is quite different.

One starts with the statement of Lord Selborne in Cook v Fowler (1874) LR 7 HL 27, 37, that there is no general rule that a covenant to pay or not to pay interest at a certain rate bound to the day for repayment implies a contract to pay or not pay the same rate after the date of repayment. This was followed by McLelland, CJ in Eq in Hawkesbury Valley Developments Pty Ltd v Custom Credit Corp Ltd which is partially reported as to one aspect in (1994) NSW ConvR 55-731 and partially reported in (1994) 6 BPR 14053, though neither report contains his Honour's judgment on this particular point.

Fisher & Lightwood (Australian edition) at [39.40] says, "Where the security does not expressly provide for payment of interest after the time fixed for redemption, interest will still be recoverable, not on the contract, but as damages for the detention of the debt, and therefore only to the extent of the damages claimed." The most recent case to illustrate that proposition is the Hawkesbury Valley case and the report on this aspect of it is fully dealt with in 6 BPR 14053. The contractual rate of interest was 21% but there was no provision in the mortgage to apply that rate after the due date. The Chief Judge held that the appropriate rate was the rate set in Schedule J to the Supreme Court Rules.

No submissions were directed to me on this particular point. The court rate is not always the rate to be adopted in this sort of case, though it is a very good general guide. Usually (but not always) the court rate is fixed about 1% above the commercial rate of interest so that people pay their judgment debts ahead of other obligations. In a case where the parties were not in a commercial context, but were former friends who were doing each other a favour (or at least were both beneficiaries of Mr Davis' beneficence), the commercial rate will usually be inappropriate. However, had Mrs Gong been paid the money in 1993, she could have invested it on first mortgage and obtained more than 6% which, on her case, was the contractual rate. Doing the best I can, I think it is appropriate to find the damages at 9%, being roughly 2% less than the Schedule J interest rate for the period of four years. Accordingly, adding 9% interest at yearly rests over four years commencing with the principal of $11,200 means that the redemption amount which the plaintiff must pay is $15,809 as at 30 March 1997.

The usual order would be that Mr Lai have six months to pay that sum together with interest at 9% from 30 March 1997, failing which, Mrs Gong can apply to the court to have the property sold.

As to costs, I found for Mr Lai on the principal matter involved in the case, though his suit was defective in that he did not offer to do equity as such nor did he offer to pay interest from the date of redemption. Indeed, he resisted this on the basis that he had made an offer to pay the $11,200, which offer had been refused, so that had he made a tender, then the tender would have been refused. A mortgagor must actually tender the sum to pay out the mortgagee if interest is to stop running: McPherson v Summerville [1905] NSWStRp 54; (1905) 6 SR (NSW) 1; Gardener v Fitzgerald [1962] Qd R 29. I do not consider that the facts are sufficiently strong for me to find that Mrs Gong dispensed with tender. As accordingly no moneys were paid to Mrs Gong or into court and Mr Lai has had the use of the moneys, he must fail on that point.

However, Mr Lai has been generally successful in the proceedings and I think that Mrs Gong should pay his costs, though I can see arguments the other way.

I will publish these reasons and then list the matter for mention on 7 April 1997 at 9.50 am so that formal short minutes can be brought in and at that time counsel may argue questions of interest and costs and seek to have me change my views. If this date is unsuitable then counsel can, by consent, arrange with my Associate an alternative convenient day, provided that my Associate is contacted at least seven days before the nominated day.