Perpetual Limited (formerly known as Perpetual Trustees Australia Limited) v Marwa Dilati and Khalid Ali Khalid

Judgment 1This is an appeal pursuant to r 49.4 of the Uniform Civil Procedure Rules against a decision of Associate Justice Harrison ordering that Khalid Ali Khalid ("Mr Khalid") be joined as the second defendant in proceedings for possession of land brought by Perpetual Limited ("Perpetual") against Marwa Dilati ("Mrs Dilati") and that a default judgment obtained by Perpetual against Mrs Dilati for possession of land be set aside. Background facts 2For the purposes of the proceedings before the primary judge and this appeal against the decision of the primary judge there was no dispute about any of the following background facts. 3Mrs Dilati is the wife of Mohammed Dilati and Ahmed Dilati is their son. Mrs Dilati has been at all material times the registered proprietor of the subject land ("the property"). 4In October 2003 Mrs Dilati entered into a loan contract with Perpetual, to which certain General Conditions applied, and a mortgage of the property to Perpetual, which incorporated a memorandum filed at Land and Property Information New South Wales. The mortgage was registered. 5In 2004 discussions about the property took place between Mr Khalid and Mohamed Dilati and Ahmed Dilati. Discussions took place with Mohammed Dilati and Ahmed Dilati, and not Mrs Dilati, because Mr Khalid as an Arab observed what was said to be an Arab custom, that a man should not deal directly with a woman who is not a member of his family. 6During these discussions Mr Khalid had a conversation with Mohammed Dilati and Ahmed Dilati to the following effect:- "Mohammed: We are going to sell our house in Greenacre. Mr Khalid: I'm interested in buying it. Ahmed: Our real estate agent says he had found a purchaser for $840,000. Mr Khalid: I can buy it for that but I would have to pay the money off over time. Mohammed: I agree. When you have paid the price then we will transfer the property to you, but you can live in the house in the meantime." 7In 2004 Mr Khalid believed that, as a Moslem, he was prohibited by his religion from borrowing money at interest to pay the purchase price for the property and accordingly would have to pay the purchase price by instalments. 8There were other conversations between Mr Khalid and Mr Mohammed Dilati to a similar effect and Mr Khalid's wife had a similar conversation with Mrs Dilati. 9On 18 April 2005 Mr Khalid paid $280,000 to Ahmed Dilati as a part payment of the purchase price of the property. 10On or about 20 May 2005 Ahmed Dilati prepared notes of the agreement with Mr Khalid. The notes were as follows (retaining the original spelling):- "1) Wich Amount where Going to regestier The Sale For (check with Accountant) 2) $840,000.00 - $340,000 3) Received $430,000.00 4) Balance $415,000.00 5) 1 Year - To 3 Year 6) The/when The house has been paid off in full (That means there should be no money owing on the House) (The CAVE) MUST be Paid Off by Ahmed in four month) Then We would Transfer the house under Rhalad's name. 7) Every Thing has to be paid by both parties According to the LAW. 8) Moving Discussion with Both Parties 9) Ahmed will fix Kitchen His way 10) If ANY CONFLICT WE JUDGE OUR SELF TO ISLAMIC RULES. Moving in Four Mounth [signed] 20-5-05" 11Towards the end of 2005 Mr and Mrs Dilati gave Mr Khalid the keys to the property. Mr Khalid permitted Mr Ahmed Dilati and his wife to continue living in the property. 12On 31 July 2008 there was a serious fire and the property remained unoccupied for about a year, while repairs and renovations were being carried out. 13In about 2009 Mr Khalid's wife entered into occupation of the property with their daughter and Mr Khalid soon afterwards joined them. Since about August 2009 Mr Khalid and his family have continuously occupied the property. 14Between April 2008 and June 1010 Mr Khalid paid a total amount of $760,000 to the Dilatis or Perpetual. Almost all of this money was paid to the Dilatis. The proceedings 15In August and September 2009 Mrs Dilati failed to make monthly payments to Perpetual which Perpetual claimed were due under the mortgage documents. Perpetual gave Mrs Dilati a default notice dated 17 September 2009. No further payment was received by Perpetual from Mrs Dilati prior to the commencement of the present proceedings. 16On 12 November 2009 Perpetual commenced the present proceedings against one defendant only, Mrs Dilati, claiming possession of the property and judgment for the sum of $551,529.33 being the full amount alleged to be due from Mrs Dilati as at 4 November 2009 under the loan agreement between Perpetual and Mrs Dilati. In the statement of claim Perpetual's claim for possession of the property was based on Mrs Dilati's alleged default under the mortgage in not paying money due to Perpetual the payment of which was secured by the mortgage. 17No defence was filed on behalf of Mrs Dilati. In February 2010 Mrs Dilati and Perpetual through their solicitors entered into an agreement pursuant to which Mrs Dilati agreed to pay all arrears and to make all future payments on time. It was provided that, if Mrs Dilati complied with this arrangement up to 12 August 2010, Perpetual would allow the court proceedings to be dismissed. If Mrs Dilati failed to comply with this arrangement, Perpetual would be permitted to file consent orders providing for Perpetual to have judgment for possession of the property and judgment for the amount alleged in the statement of claim to be owing by Mrs Dilati. 18Mrs Dilati failed to comply with the arrangement and Perpetual obtained a default judgment against Mrs Dilati for possession of the property and for the amount alleged to be due. Leave was given to Perpetual to issue a writ of possession. 19By notice of motion dated 6 May 2011 Mr Khalid sought a stay of the writ of possession and an order that he be joined in the proceedings as a second defendant. The application was supported by an affidavit by Mr Khalid of 5 May 2011 in which he deposed to, inter alia, the background facts I have already stated. 20On 6 May 2011 Johnson J, before whom the application had come, stayed the execution of the writ of possession, declined to make an immediate order that Mr Khalid be joined as a party to the proceedings and made an order intended to assist Mr Khalid to obtain copies of the loan documents between Perpetual and Mrs Dilati, so that they could be assessed by Mr Khalid. 21On 22 May 2011 Mr Khalid made a further affidavit. In this affidavit he said that he would be able to obtain funds with which to discharge the mortgage. He said that he had been unable to locate Mrs Dilati and, although he had been able to locate Ahmed Dilati, he no longer trusted Ahmed Dilati. He said that, in the event of it appearing from his enquiries that there was no good defence to Perpetual's claim, he would pay out Perpetual's mortgage, obtain a transfer of the mortgage and compel Mrs Dilati to transfer title to the property, in accordance with the agreement between them. 22On 23 May 2011 the matter came before McCallum J. Mr Khalid was seeking a further stay of execution of the writ of possession and an order that he be joined as a defendant in the proceedings. On the following day her Honour delivered a reserved judgment. Her Honour made certain orders, including an order for a further stay of execution and an order directing Perpetual to produce certain documents to Mr Khalid. 23On 15 July 2011 a notice of motion was filed on behalf of Mr Khalid seeking an order that he be joined as a second defendant, an order that the default judgment for possession of the property be set aside and that there be a stay of execution of the writ of possession until further order. It was this application which came before Associate Justice Harrison. 24On 15 July 2011 a further affidavit by Mr Khalid was filed. In this affidavit Mr Khalid set out a conversation he said he had had with Mr Mohammed Dilati. He said this conversation was in the following terms:- "Me: The lawyers for Perpetual say that your family owes them nearly $600,000? Mohammed: We are not going to cheat you. They are cheating. There is no more than $160,000, maybe $165,000 owing on the loan. Me: The lawyers for Perpetual would not lie in the court. Mohammed: No, there is no way that we owe as much as that to Perpetual. Even more there is there is $20,000 which must be refunded by Ausstar. Me: That is not what the court was told. Mohammed: There is something very wrong with their figures. What happened was that after the initial loan, a couple of times our son drew out large amounts of money without our knowledge. This was not authorised and so is not part of what we owe under the mortgage. So Perpetual's figures are wrong. Me: Can you give me any more details? Mohammed: No. We are not going to help you with the court." 25Mr Khalid said in his affidavit of 15 July 2011 that he wanted to see the documents relating to the redraws under Mrs Dilati's loan on 12 June 2007 and 23 January 2009, which appeared to him to be the further drawings alleged to be without authority. 26On 15 July 2011 Mr Khalid made a fourth affidavit. To this affidavit he annexed copies of the mortgage and the loan agreement between Perpetual and Mrs Dilati and two redraw requests dated 8 June 2007 and 23 January 2009. He asserted that signatures on the redraw requests purporting to be signatures of Mrs Dilati looked different from signatures purporting to be hers on the mortgage documents. 27Also annexed to the affidavit was a draft defence which Mr Khalid would rely on, if the default judgment was set aside and he was joined as a second defendant. 28The draft defence was a fairly lengthy document. The principal assertions made in the defence appear to be that Perpetual's claim to possession of the property depended, not only on default by Mrs Dilati occurring, but on the issuing and expiry of a valid default notice and that the default notice given by Perpetual dated 17 September 2009 was not a valid default notice, because it overstated the amounts of interest due and the account balance, in that the amounts of the redraws which, it was alleged, had not been made at the request of Mrs Dilati or with her authority, had been taken into account in the calculation of the amounts. 29It was also alleged that because Perpetual, not having given a valid default notice, had no claim to possession of the property, Mr Khalid as the purchaser of the property under an uncompleted contract and as the occupier of the property had a right to possession which was superior to Perpetual's (Perpetual, indeed, having no right to possession). 30In the draft defence Mr Khalid also disputed that a notice to occupier had been served on him by Perpetual, as required by the Uniform Civil Procedure Rules. The hearing before the primary judge 31As I have already indicated, it was Mr Khalid's notice of motion of 15 July 2011 which came on for hearing before Associate Justice Harrison. In support of the motion Mr Khalid relied on the four affidavits he had sworn. 32Associate Justice Harrison delivered a reserved judgment dated 18 August 2011. Her Honour made orders that Mr Khalid be joined as a second defendant, that the default judgment for possession be set aside and that Mr Khalid file and serve a defence within 14 days. 33In her judgment Associate Justice Harrison summarised the background facts, referred to Uniform Civil Procedure Rules 6.24 and 6.27, referred to Uniform Civil Procedure Rule 36.16 (setting aside default judgments) and summarised or quoted parts of the proposed defence. 34Her Honour noted in her judgment that it was common ground that, if Mr Khalid did not have an arguable defence, the default judgment should not be set aside and Mr Khalid should not be joined as a second defendant in the proceedings. 35Paragraphs 26 to 32 of her Honour's judgment appear under the heading "The proposed defence". 36Paragraph 26 was in the following terms:- " The proposed defence raises four main issues. They are, firstly, past performance of a contract of sale between himself and Mrs Dilati; two redraws were not authorised by Mrs Dilati, service of notice as to occupier; and the validity of the s 57(2)(b) notice . " 37In para 27 her Honour quoted parts of the draft defence. In para 28 her Honour referred to Mr Khalid's allegations that the two redraws were not made at the request of Mrs Dilati or with her authority. 38In para 29 her Honour said that there was evidence of a contract between Mrs Dilati and Mr Khalid, which had been part performed. Her Honour noted that by entering into the agreement with Mr Khalid Mrs Dilati had breached obligations under her mortgage to Perpetual. 39Paragraphs 30 to 32 of her Honour's judgment were in the following terms: " [30] Perpetual also holds a registered first mortgage over the property and in the absence of fraud, with that comes indefeasibility of title. Perpetual argued that it has a superior legal right to possession, whereas at best Mr Khalid has an equitable interest in the land since Perpetual possibly had constructive notice of Mr Khalid's possession of the property. There can be competing interests in the land and it may be that Perpetual is entitled to legal possession but not so as to disturb the occupation of Mr Khalid. [31] Mr Khalid also argued that the s 57(2) notice issued by Perpetual is invalid and it is not entitled to possession. It is not necessary on this application for this court to determine these issues other than to find that they are arguable. [32] It is my view that Mr Khalid has an arguable defence that he may be entitled to remain in possession of the property. He should be given the opportunity to argue this matter at trial." 40In succeeding parts of her judgment her Honour held that Mr Khalid was an "occupier" of the property within the meaning of that expression in the Uniform Civil Procedure Rules and that, contrary to Mr Khalid's assertion, a notice to occupier had been served on behalf of Perpetual. This appeal 41The present appeal was instituted by a notice of motion dated 15 September 2011. In the notice of motion it was asserted that the primary judge had erred in what she had held in paras 30 and 32 of her judgment; that Perpetual's mortgage pre-dated any interest Mr Khalid might have acquired in the property; that Perpetual's mortgage had been registered before Mr Khalid had acquired any interest in the property; that there was no evidence that Perpetual had consented to Mr Khalid acquiring any interest in the property; and that it was not arguable that any interest Mr Khalid might have in the property was superior to Perpetual's interest under its registered mortgage. 42It was also asserted in the notice of motion that the primary judge had erred in holding that Mr Khalid had an arguable defence on the basis that the default notice was invalid, because Mr Khalid had no standing to make such a claim and Mrs Dilati, by consenting to Perpetual obtaining a judgment against her for the entire balance claimed by Perpetual, had admitted that she was in default and that, in any event, the amount claimed in the default notice was correct. Nature of the appeal 43The present appeal is brought pursuant to r 49.4 of the Uniform Civil Procedure Rules which provides that an appeal lies to the Supreme Court from any decision of an Associate Judge of the Supreme Court, except in any case where an appeal lies to the Court of Appeal. It was not suggested by either party that an appeal lay to the Court of Appeal from Associate Justice Harrison's decision. 44It was common ground on the appeal that the power which Associate Justice Harrison had exercised under Pt 36 r 16 of the Uniform Civil Procedure Rules to set aside a default judgment was a discretionary power and, as such, an appeal from the exercise of the power was governed by the well known principles in House v The King (1936) 55 CLR 499 at 504-505. At 504-505 Dixon, Evatt and McTiernan JJ said:- "The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, it if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistake the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred." 45At the hearing of the appeal it was submitted by counsel for Mr Khalid that the nature of the proceedings (an appeal against a discretionary decision) and the principles governing an appeal against a discretionary decision of a primary judge had been lost sight of, in the written and oral submissions of counsel for Perpetual. It was pointed out that a number of submissions had been made on the appeal on behalf of Perpetual, which had not been made or had not fully been made before the primary judge. It was submitted that it could not be an error within House v The King for the primary judge not to have addressed in her judgment submissions which had never been made to her. I accept that it is the case that a number of submissions were made to me on behalf of Perpetual which had not been made to Associate Justice Harrison. 46It was submitted by counsel for Perpetual that the primary judge had made errors within House v The King in exercising her discretion and, according, I could exercise my own discretion in substitution for the primary judge's discretion and for the purpose of exercising my own discretion I could entertain submissions which had not been made to the primary judge. 47It is important that I resolve this issue immediately, because the approach I should adopt in determining the appeal depends on how I resolve this issue. 48In my opinion, the primary judge did make at least one error within House v The King in the exercise of her discretion. 49I have already quoted paras 30 to 32 of her Honour's judgment, which contain a large part of her Honour's reasoning in finding for Mr Khalid. In the second sentence of para 30 her Honour set out as being Perpetual's argument, that "it has a superior legal right to possession, whereas at best Mr Khalid has an equitable interest in the land, since Perpetual possibly had constructive notice of Mr Khalid's possession of the property". The final sentence in para 30 of her Honour's judgment appears to be a rejection of this argument, which had been attributed by her Honour to Perpetual. 50However, it was accepted on the hearing of this appeal that neither party had submitted before her Honour that Mr Khalid might have an equitable interest in the property on the basis that Perpetual had constructive notice of Mr Khalid's possession of the property. It was accepted by both parties that Perpetual had obtained a registered mortgage giving it indefeasibility, before Mr Khalid had entered into possession of the property or had any connection with the property. 51In attributing to Perpetual a submission it had never made and then using a rejection of that submission as a principal reason for holding that Mr Khalid should succeed, I consider that the primary judge allowed an extraneous or irrelevant matter to guide or affect her and thereby her Honour erred in the exercise of her discretion. Accordingly, I should exercise my own discretion in substitution for the primary judge's exercise of discretion and, for the purpose of exercising my discretion, I can entertain submissions which were not made or not fully made before the primary judge. 52A number of issues were raised on the appeal, including whether Mr Khalid had an arguable defence on the basis that a valid notice of default had not been given, whether there was a basis on which Perpetual would be entitled to possession without any need to serve a notice of default, whether Mr Khalid as an occupier of the property had standing to assert rights of Mrs Dilati against Perpetual which Mrs Dilati herself had not asserted or was prevented by the principles relating to privity of contract from asserting such rights; and whether Mr Khalid would have standing under s 65 of the Supreme Court Act as being a person personally interested in the fulfilment of a duty on the part of Perpetual. 53I do not consider that it is necessary to deal with all of the various issues which were raised on the hearing of the appeal. I propose to address only the first two issues I have mentioned, the determination of which will, in my opinion, be sufficient to determine the appeal. Whether there was an invalid notice of default 54The loan documents, that is the loan agreement and the General Conditions applicable to it and the mortgage with the memorandum incorporated in it contain many provisions of the kind usually found in such documents, to which it is unnecessary expressly to refer. However, it is necessary to refer to parts of clause 5 of the memorandum incorporated in the mortgage, which is headed "Default". 55Clause 5.1 of the memorandum provides that "default generally occurs if you fail to do something you are obliged to do, if you do something you are obliged not to do..." and then provides that if any one or more of a number of specified events occur, the mortgagee may decide that default has occurred. 56Clause 5.2, which is headed "the mortgagee's rights on default" provides in part as follows:- "At any time after default occurs, the mortgagee can take any of the actions listed below provided notice has been given in accordance with laws governing the exercise of power of sale as mortgagee..." 57The actions listed below in clause 5.2 of the memorandum include the actions in clause 5.2(b) (i), which provides:- "Deal in any way the Mortgagee considers fit with the Land....For example, the Mortgagee may:- (i) eject You or any other occupants from the Land and take possession of the Land..." 58It was accepted by counsel for Perpetual that clause 5.2 required Perpetual to give notice "in accordance with laws governing the exercise of power of sale as mortgagee", before it could eject Mrs Dilati or any other occupant from the property. 59The laws governing the exercise of a power of sale by a mortgagee requiring the giving of a notice are to be found in s 57(2) of the Real Property Act. Section 57(2) provides in part as follows:- " A registered mortgagee, chargee or covenant chargee may, subject to this Act, exercise the powers conferred by section 58 if: (a) in the case of a mortgage or charge, default has been made in the observance of any covenant, agreement or condition expressed or implied in the mortgage or charge or in the payment, in accordance with the terms of the mortgage or charge, of the principal, interest, annuity, rent-charge or other money the payment of which is secured by the mortgage or charge or of any part of that principal, interest, annuity, rent-charge or other money, .... (b) where: (i) the default relates to that payment, or (ii) in the case of a mortgage, the default does not relate to that payment and notice or lapse of time has not been dispensed with under section 58A, a written notice that complies with subsection (3) has been served on the mortgagor, charger or covenant charger in the manner authorised by section 170 of the Conveyancing Act 1919 , ... (c) where such a notice is so served, the requirements of the notice are not complied with within the time notified pursuant to subsection (3) (d)." 60Section 57(3) of the Real Property Act sets out requirements a notice given under s 57(2) must comply with. It was not suggested that the notice given by Perpetual failed to comply with any of these requirements. 61In determining the present issue it is unnecessary to refer to s 58A of the Real Property Act but that section will play an important part in the determination of another, separate, issue between the parties. 62The notice which was given by Perpetual to Mrs Dilati on 17 September 2009 pursuant to s 57(2)(b) of the Real Property Act was in the following terms:- "DEFAULT NOTICE Notice pursuant to section 80 of the Consumer Credit Code and section 57(2)(b) of the Real Property Act 1900 To: Marwa Dilati 42 Banksia Road Greenacre NSW 2190 Facility Perpetual Limited ACN 000 431 827 (formerly Perpetual Trustee Australia Limited) loan agreement Account Number 37101621 Borrower/s Marwa Dilati of 42 Banksia Road, Greenacre NSW 2190 Security Property 42 Banksia Road, Greenacre NSW 2190 Mortgage AA442117J dated 1 October 2003 Mortgagor/s Marwa Dilati of 42 Banksia Road, Greenacre NSW 2190 Overdue Amount $7,506.68 Enforcement expenses $ 450.00 Account balance $546,500.19 (as at 16 September 2009) including Enforcement Expenses