Moffett v Dillon & Ors [1999] VSCA 32

Moffett v Dillon & Ors [1999] VSCA 32 - VSCA 1999 case summary — Zoe

[52]

The best known doctrine of equity regarding the effect of notice on priorities concerns the bona fide purchaser for value of the legal estate. It is often said that the doctrine of notice does not apply as between purchasers of equitable interests. See, for example, Garrow's Law of Real Property, 5th ed., p.172; Helmore, The Law of Real Property in New South Wales, 2nd ed., p.507; Leake on Property in Land, 2nd ed., p.354; Ashburner's Principles of Equity, 2nd ed., pp.55-56; Underhill & Hayton, Law Relating to Trusts and Trustees, 15th ed., p.931. But this means only that the rule that a bona fide purchaser for value without notice of a prior equity takes free from it is confined to purchasers of the legal estate and does not extend to purchasers of an equity. As Professor Butt points out (Land Law, 3rd ed., para.1936), the absence of a "purchaser for value without notice" doctrine for competing equitable interests does not mean that the fact of notice cannot be fatal where the competition is not between prior equity and subsequent legal estate but between two equities. The decisions and judicial dicta referred to above recognise the deeply rooted rule or principle that a person taking with notice of an equity takes subject to it, since his conscience is affected by the equity of which he had notice: Pilcher v. Rawlins (1872) L.R. 7 Ch.App. 259; Midland Bank Trust Co. Ltd. v. Green [1980] UKHL 7; [1981] A.C. 513 at 528 per Lord Wilberforce. The rule applies whether the estate or interest taken by the purchaser is legal or equitable and whether the equity held by a third person in relation to the same subject matter does or does not amount to an equitable interest according to the distinction that has been drawn between "mere equities" and equitable interests. The rule is illustrated, as regards the taking of an equitable interest with notice of a pre-existing one, by the early case of Willoughby v. Willoughby [1787] EngR 12; (1787) 1 T.R. 763; 99 E.R. 1366. There Lord Hardwicke, L.C. said that it was against conscience that an equitable mortgagee who had taken with notice of a prior equitable interest should assert that his mortgage was entitled to priority. Lord Eldon determined without hesitation that a purchaser with notice of a vendor's lien was affected by it: Mackreth v. Symmons [1808] EngR 393; (1808) 15 Ves. Jun. 329 at 341; [1808] EngR 393; 33 E.R. 778. The decision is cited in Dart, Vendors and Purchasers, 6th ed., p.825. The rule operates to prevent the overreaching of what has been described as a "mere equity": such an equity will prevail against a subsequent purchaser of an equitable interest who had notice of the equity: Phillips v. Phillips [1861] EngR 1044; (1861) 4 De G.F.&J. 208 at 217; [1861] EngR 1044; 45 E.R. 1164; Cave v. Cave (1880) 15 Ch.D. 639 at 646-7; Westminster Bank Ltd. v. Lee [1956] Ch. 7 at 18-20; National Provincial Bank Ltd. v. Ainsworth [1965] UKHL 1; [1965] A.C. 1175 at 1237-8 per Lord Upjohn (compare what Lord Wilberforce said at 1254); Megarry & Wade, Law of Real Property, 5th ed., pp.146-7; Megarry (1955) 71 L.Q.R. 480 at 481-2; Lewin on Trusts, 16th ed., p.598; Pomeroy's Equity Jurisprudence, 5th ed., para.688 ("with notice of any existing equitable estate, interest, claim, or right, in or to the same subject-matter, held by a third person"; at the end of the paragraph the example is given of an equity to have a mistake in an instrument corrected).

[59]

"When a person is acquiring rights with respect to any subject-matter, the fact whether he is so acting with or without notice of the interests or claims of others in or upon the same subject-matter is regarded throughout the whole range of equity jurisprudence as a most material circumstance in determining the extent and even the existence of the rights which he actually requires. In conformity with this view, the general rule has been most clearly established, that a purchaser with notice of the right of another is in equity liable to the same extent and in the same manner as the person from whom he made the purchase. The same rule may be thus expressed in somewhat different language; a person who acquires a legal title or an equitable title or interest in a given subject-matter, even for a valuable consideration, but with notice that the subject-matter is already affected by an equity or equitable claim in favour of another, takes it subject to that equity or equitable claim. On the other hand, a person who has acquired a title, and paid a valuable consideration, without any notice of an equity actually existing in favour of another, may by that means obtain a perfect title, and hold the property freed from the prior outstanding equity." "The third, and in its practical effects by far the most important, rule is that a party taking with notice of an equity takes subject to that equity. The full meaning of this most just rule is that the purchaser of an estate or interest, legal or equitable, even for a valuable consideration, with notice of any existing equitable estate, interest, claim, or right, in or to the same subject-matter, held by a third person, is liable in equity to the same extent and in the same manner as the person from whom he made the purchase; his conscience is equally bound with that of his vendor, and he acquires only what his vendor can honestly transfer. The applications of this rule are as numerous as are the various kinds of equitable interests. The following are some of the most important: A purchaser with notice of a trust, either express or implied, becomes himself a trustee for the beneficiary with respect to the property, and is bound in the same manner as the original trustee from whom he purchased. A purchaser or mortgagee with notice of the equitable lien of a vendor for unpaid purchase price takes the land subject to that lien. A purchaser or mortgagee of the legal estate, with notice of an equitable lien created by a deposit of title deeds, or by a prior defective mortgage, or by any other means from which an equitable lien can arise, is bound by the lien. A purchaser with notice of a prior contract to sell or to lease takes subject to such contract, and is bound in the same manner as his vendor to carry it into execution. These examples are of ordinary occurrence." (Footnotes omitted.)

[80]

In my opinion the evidence does not establish that the parties intended that the promissory note should be taken in absolute satisfaction as opposed to conditional payment and accordingly the presumption of fact required by the law is that the remedy for the original debt was suspended until the dishonour of the promissory note and thereupon revived. There is no evidence whatever concerning any oral or written negotiations that may have preceded the giving and taking of the promissory note; all we have is the statement in Moffett's affidavits that Dillon gave him the note "in or in lieu of payment of the deposit". Those words are the construction placed by the deponent on what occurred. They do not even profess to be the deponent's interpretation of a conversation. They may be; on the other hand, they may be only his interpretation of the consequences of the bare fact of the making of the contract followed by the bare fact that the deposit is not paid in cash and the note is given and taken. Moreover the words "in or in lieu of payment" are of uncertain import. Even if they could - and they certainly cannot - be treated as an accurate statement of words which were spoken between the parties they would not warrant, or give any support to, the conclusion that the parties intended the note to be taken in absolute satisfaction. It has been said that an intention to take a negotiable instrument in absolute payment must be strictly shown and will not be deduced from ambiguous expressions like "in payment": Saffron v. Société Minière Cafrika [1958] HCA 50; (1958) 100 C.L.R. 231 at 244. Compare Cruickshank & Co. Ltd. v. Ewington (1905) 24 N.Z.L.R. 957. Counsel for the bank did not, as I understood his submission to us, contend that the fact that the note was taken for a somewhat larger sum than the deposit either warranted or gave any support to the absolute acceptance view of the parties' intentions. In any event, I do not think it does. As regards the discrepancy between the amount of the deposit and the amount of the note, it is also worth mentioning that the general rule - that a bill is taken as conditional payment only - applies even where the creditor, at the debtor's request, takes a bill from a third person: Byles, p.439. The circumstance that the note was not payable until one month had passed was not relied on by counsel for the bank, and this is understandable, since the negotiable instrument will often not be payable for some time and the cases do not treat that mere giving of time as showing or helping to show that the bill or note was taken in absolute payment.

[81]

I would respectfully differ from the judge and hold that the general rule is not displaced in this case and that the note was taken as conditional payment only. But what was the effect of the bringing of an action, and the recovery of judgment, on the note? In my opinion this did not have the effect of disabling Moffett from suing to recover the deposit. The authorities show that, where a negotiable instrument has been taken as conditional payment only, the bringing of an action and the recovery of judgment on the instrument do not, unless the judgment is satisfied, extinguish the cause of action by the operation of the doctrine of merger. This was laid down by the Court of King's Bench in Drake v. Mitchell [1803] EngR 463; (1803) 3 East 251, 102 E.R. 594 and by the Court of Appeal in Wegg Prosser v. Evans [1894] 1 Q.B. 108. There is an intervening decision of the Court of King's Bench to the same effect in Tarleton v. Allhusen [1834] EngR 999; (1834) 2 A & E. 32; 111 E.R. 13. The principle laid down is that the cause of action for the original debt will not merge in a judgment obtained on a negotiable instrument which was taken in conditional payment only unless the judgment has been satisfied. It does not depend - as the bank argued before us - upon the adventitious circumstance that in some of the cases the judgment recovered was against one only of a number of joint debtors on a bill given by him alone. See further Seddon v. Tutop [1796] EngR 2362; (1796) 6 T.R. 607, 101 E.R. 729; Roycroft v. Uglum [1922] 1 W.W.R. 78; Douglas Properties Ltd. v. Olde World Antiques etc. Ltd. (1980) 28 A.R. 108. In the last-mentioned decision - of the Alberta Court of Queen's Bench - there was a single debtor liable for rent. The case is not one of the giving of a negotiable instrument as conditional payment of a pre-existing debt. It accepts, in reliance upon Drake v. Mitchell and Wegg Prosser v. Evans, that where a plaintiff possesses two rights of action the pursuit of one to judgment does not extinguish the other unless the judgment is satisfied. Two further decisions of the Alberta Court of Queen's Bench support the view that in the present case the obtaining of the judgment did not extinguish the obligation to pay the deposit: Rafael v. Allison [1988] 1 W.W.R. 570 and First City Capital Ltd. v. Ampex Canada Inc. (1989) 75 C.B.R. 109.

[108]

In my opinion the learned judge was correct in concluding that the appellant's charge had priority over the bank's equitable mortgage inasmuch as it was the security and interest first created. It was not contended in argument before this Court, though it had been earlier argued and was in the appellant's original written submission, that the charge was a document capable of being registered under the Transfer of Land Act 1958. However, the bank's argument that it had priority, because its equitable mortgage was capable of registration and the appellant's charge was not, seems on analysis to be unsustainable. The bank contended that the question could be answered by ascertaining which was the better instrument, security or "bundle of rights". But this approach is misconceived. The issue is not which document is easier to enforce or which creates the better or more effective security, but which party has the better equity. In other words, which of the parties should be entitled first to enforce their securities or other interests, which in the ordinary course of events will be the security or interest first created unless there be some act or default which, having regard to "broad principles of right and justice" would make it inequitable as between the parties that the holder of the first interest should retain its initial priority? See Heid v. Reliance Finance Corp. Pty. Ltd. [1983] HCA 30; (1983) 154 C.L.R. 326 at 336 and esp. 339-342 and cf. Lapin v. Abigail [1930] HCA 6; (1931) 44 C.L.R. 166 at 204; AVCO Financial Services Ltd. v. White [1977] VicRp 62; [1977] V.R. 561 at 567; Cash Resources (Australia) Pty. Ltd. v. B.T. Securities Ltd. [1990] VicRp 51; [1990] V.R. 576 at 586; and Jacobs v. Platt Nominees Pty. Ltd. [1990] VicRp 14; [1990] V.R. 146 at 149-152 and 159-160 (F.C.). Expressions such as "the merits" and "the better equity" unfortunately connote, even though they have not been intended to express, some enquiry as to which security is objectively the more effective and it also connotes, which perhaps is more objectionable, that in some way ordinarily one can ascertain the "better" equity as a matter of determining comparative strength or enforceability, an enquiry which, apart from asking which is first in point of time, is one to be avoided. Merits, in equity, are those matters which impinge, broadly speaking, on the conscience of those who seek its aid or are otherwise subject to its jurisdiction. So priority is to be resolved against the holder of the prior equity only if the other party can establish the first holder's want of "merits" or comparative lack of "merit". That is essentially a negative enquiry into behaviour on the part of the holders of each of the equitable interests as to whether they can be shown to have been obtained or enforced in a manner which is so unconscionable or otherwise inequitable so as to deprive the holder of the earlier interest of the priority to which it is otherwise entitled, whether that behaviour be evidenced by fraud, unfairness, negligence, the wrongful creation of particular assumptions by representations or the like or in a number of other ways which reflect on the behaviour of the holders of each of the interests: see Heid at 340-342. Many of these matters are set out in Chapter 8 of Meagher, Gummow and Lehane, Equity Doctrines & Remedies, 3rd ed., paras.803-860, but see especially the ten categories of exception from the general rule referred to in paras.807-818.

[109]

The question which party could, or could more easily, obtain registration of or enforce its security must thus be seen as irrelevant. The contest before registration of any interest under the Transfer of Land Act is between two (or more) holders of equitable (or possibly legal) interests (whether registrable or not) and indefeasibility can only become relevant after registration. Indefeasibility must be seen as a principal reason for allowing the lodging of caveats, a form of statutory injunction which enables the true merits in law and equity to be determined before the consequences of registration intervene: cf. Abigail v. Lapin [1934] UKPCHCA 1; 51 C.L.R. 58 at 64-65 (P.C.). The parties' merits are resolved so that registration can proceed only if the lodging party has acquired legal or equitable priority of interest. Here the chargee was first in time. The bank was well aware of his claim before it obtained or sought to register its equitable mortgage, and, unless he had acted so as to lose or abandon his priority, he should be preferred, even to the extent of perpetually restraining the registration of the equitable mortgage without the consent of the appellant. The bank has shown no basis for this Court to hold that its rights should be afforded priority, so as to defeat the rights of the appellant under his charge, albeit that the appellant's interest is not in fact capable of registration. No authority was cited to us whereby a party was held incapable of obtaining equitable relief in circumstances where that party had no registrable interest but in equity had priority over the holder of a registrable interest. Until registration the right to registration is therefore irrelevant, at least as a general rule. It would be unfortunate if the principles of indefeasibility could in equity indirectly affect the parties' rights before any indefeasible right had arisen by registration. The warnings given by the caveat procedure are designed to avoid injustices of that kind.

At a glance

Court

Decision date

Before

Source

Judgment (137 paragraphs)

Parties