Supreme Court of WA|2004-06-10|Before: Mr J, Pullin J

Pourzand v Home Building Society Ltd [2004] WASC 127 (10 June 2004)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : POURZAND -v- HOME BUILDING SOCIETY LTD [2004] WASC 127

Contract - Construction and interpretation of deed of priority

ACCC v CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99

Commonwealth v Verwayen (1990) 170 CLR 294

Craine v The Colonial Mutual Fire Insurance Company Ltd [1920] HCA 64; (1920) 28 CLR 305

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

Hamilton v Whithead [1988] HCA 65; (1988) 166 CLR 121

Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 707

Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India [1990] 1 Lloyd's Rep 391

National Vulcan v Transfield [2003] NSWSC 327

Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634

Spira v Commonwealth Bank of Australia [2003] NSWCA 180; (2003) 57 NSWLR 544

Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 201 ALR 359

Tesco Supermarkets Ltd v Nattrass [1971] UKHL 1; [1972] AC 153

The Club Cape Shanck Resort Co Ltd v Cape Country Club Pty Ltd [2001] VSCA 2; (2001) 3 VR 526

Western Australia v Watson [1990] WAR 248

1 PULLIN J: The plaintiff and the defendant were, in 1998, the first and second mortgagees respectively, in relation to land owned by a Mr Oteri. The plaintiff, the defendant and Mr Oteri executed a deed of priority on 16 December 1998 which contained provisions giving the defendant priority for payment of the sum of $531,000. The plaintiff ranked second for his debt. The defendant ranked third for payment for any amount it was owed by Mr Oteri in excess of $531,000. The deed of priority also contained a covenant which, if the deed is interpreted as the plaintiff contends, obliged the defendant not to transfer its mortgage over the property without causing the transferee to undertake to be bound by the provisions of the deed of priority mutatis mutandis.

2 The defendant did transfer its mortgage to the St George Bank. The defendant did not require the St George Bank to undertake to be bound by the terms of the deed of priority mutatis mutandis.

3 Mr Oteri is now bankrupt. He defaulted in relation to the moneys advanced to him by the St George Bank. St George Bank exercised its power of sale under the transferred mortgage or under a subsequent mortgage it held, and sold the property for $900,000. It kept all of the proceeds to discharge loans and other liabilities exceeding $900,000 which Mr Oteri was obliged to pay to the St George Bank. The plaintiff was paid nothing out of the proceeds of sale. The plaintiff accepts that St George Bank was entitled to retain all of the proceeds. It is the plaintiff's case that if the defendant had caused the St George Bank to sign a deed of priority, the plaintiff would have recovered his $300,000.

4 The plaintiff's case therefore, is that the defendant breached the covenant in the deed of priority, as a result of which the plaintiff has suffered damage. The defendant denies that the deed of priority should be interpreted as contended for by the plaintiff. The defendant contends for an interpretation and construction which, if accepted, would mean that it did not breach the deed of priority.

5 In the alternative, the defendant alleges that if the interpretation contended for by the plaintiff is correct, then the deed of priority does not reflect the common intention of the parties to the deed, and that the deed should be rectified in a way which would mean that the defendant was not then in breach of its terms. In the further alternative, the defendant pleads that if the deed of priority should be interpreted as the plaintiff contends, then the plaintiff waived reliance, or elected not to rely upon, the deed and therefore the defendant is not liable.

6 It will be necessary to interpret clauses in the deed of priority, and so it is necessary for me to make findings about the background leading up to the execution of the deed. This is because the ascertainment of the meaning of a contract involves deciding the meaning the document would convey to a reasonable person, having all the background knowledge which would reasonably have been available to the parties in the situation they were in at the time of the contract: see Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 at [11]. I record under the next heading the background knowledge available to the parties relevant to the construction of the deed. Before that I will record some other facts, most of which are not in dispute.

7 The plaintiff, Mr Pourzand, was born in 1953 in Iran. He migrated to Australia in 1974/75. He is fluent in English and he can read English well, although he says his writing is "not as good". He has invested in real estate on many occasions, and has a good non-lawyer's understanding of the purpose of a mortgage and of the fact that a first mortgage ranks as a security above a second mortgage in terms of priority.

8 The defendant is a building society which lends out money on security and employs solicitors to assist it in the preparation of security documents, and, in this case, employed Phillips Fox to assist it.

9 Mr Maurice Oteri was, in the 1990's, a businessman and a friend and a business associate of Mr Pourzand. They have known each other since about 1989. Mr Pourzand lent Mr Oteri money from time to time and charged interest for the moneys lent. By 1997 Mr Oteri owed Mr Pourzand about $150,000. Mr Pourzand asked Mr Oteri for security for the money owing. Mr Oteri agreed to give Mr Pourzand a mortgage over Mr Oteri's house at 4a Alness Street, Applecross ("the Alness Street property"). The defendant already had a registered mortgage No G54917 dated 31 July 1997 over the Alness Street property, so Mr Pourzand's mortgage was to be, as Mr Pourzand knew, a second mortgage. In November 1997 the defendant's mortgage secured an advance of $491,000 to Mr Oteri and secured also "all money" owed by Mr Oteri to the defendant.

10 Mr Pourzand's mortgage was signed by Mr Oteri on or about 24 November 1997. When it was registered it was given the number G647605 by the Titles Office. The principal sum secured by this mortgage was $150,000 and "all money" which then or in the future became payable to Mr Pourzand by Mr Oteri. (I should mention here - out of chronological sequence - that in 1999 the sum advanced by Mr Pourzand to Mr Oteri grew to a total of $300,000).

11 Late in 1998 Mr Oteri decided to purchase a property at Duncraig Road, Applecross ("Duncraig Road property"). It was a more expensive house and better located than the Alness Street property. The Duncraig Road property was to cost $880,000 and Mr Oteri told Mr Pourzand that he needed to borrow some more money from the defendant to enable him to pay the deposit. Mr Oteri approached the defendant to ask for a further advance of $40,000. Mr Oteri also applied for an advance to pay the balance of funds necessary to pay the vendor of the Duncraig Road property at settlement; the balance that is in addition to the total of the $491,000 which had already been advanced and which would be re-advanced, (or "swapped" as Mr Stevens, the defendant's solicitor, said) and the $40,000.

12 As a result, on 9 December 1998, one of the defendant's employees, Mr Stannard, wrote two letters containing two proposals for finance. The first was an offer to advance $40,000 for the purpose of paying the deposit on the Duncraig Road property. Although it was for that purpose, the offer provided that the $40,000 loan was to be repaid in three years time and was to be a come and go facility, meaning that Mr Oteri could repay the $40,000 and redraw it. A condition of this offer was that Mr Pourzand must sign a deed of priority in relation to this advance.

13 The second letter dated 9 December 1998 contained an offer of $136,500 which was also to be a come and go facility for three years. This advance was stated to be for the purpose of helping Mr Oteri with the purchase of the Duncraig Road property. There was no condition in this letter requiring Mr Pourzand sign a deed of priority.

14 Mr Oteri told Mr Pourzand that he was going to borrow the additional $40,000 from the defendant. I find that Mr Oteri did not tell Mr Pourzand that he wanted to borrow a further $136,500. Mr Pourzand knew that the Duncraig Road property was more valuable than the Alness Street property and was agreeable to the defendant having priority ahead of him for the $40,000 as well as the existing debt which was then $491,000. The defendant knew that it must gain Mr Pourzand's consent to this advance being secured under its first mortgage in priority to Mr Pourzand's loan because, if no arrangement were made between the two mortgagees, the advance of $40,000, secured under the defendant's mortgage would, under the rule in Hopkinson v Rolt ((1861) [1861] EngR 641; 9 HL Cas 514), rank in priority after payment of Mr Pourzand's loan.

15 The defendant had another concern. This was that the $40,000 facility was to be a come and go facility. The defendant's employees knew that if Mr Oteri did draw the $40,000, repay the $40,000, and then redraw it, this redraw would amount to a new advance and, again by reason of the rule in Hopkinson v Rolt, it would rank in priority behind the second mortgage. These were the reasons for the condition in the $40,000 facility offer that there be a deed of priority executed by Mr Pourzand, whereby he acknowledged that the first mortgage would be security for the existing advance of $491,000 and an additional $40,000, thus giving the defendant priority in the amount of $531,000.

16 The deed of priority was prepared by Phillips Fox on behalf of the defendant. Mr Oteri was sent the deed of priority and he was asked to arrange for Mr Pourzand to execute it. Mr Pourzand executed the deed as did Mr Oteri and the defendant. The deed of priority is dated 16 December 1998.

17 On 3 February 1999 the two mortgages over the Alness Street property were discharged. Mr Oteri transferred that property, free of encumbrances, to the new owner. The sale proceeds were then applied to pay the vendor of the Duncraig Road property (along with the extra money advanced by the defendant) and Mr Oteri then received a transfer of the Duncraig Road property. On 4 February 1999 the defendant registered a first mortgage No H18715 and Mr Pourzand registered immediately after it, his mortgage No H18716 over the Duncraig Road property.

Background facts available to all parties to the deed of priority

18 I now record the relevant facts known to the parties at the time they executed the deed of priority.

19 All three parties, that is the plaintiff, defendant and Mr Oteri, knew that the defendant held a first mortgage G545917 over the Alness Street property, that it secured the repayment of $491,000, that Mr Oteri had purchased the Duncraig Road property and that the first defendant was to advance a further $40,000 to assist Mr Oteri pay the deposit on the Duncraig Road property. All three parties knew that Mr Pourzand had a second mortgage G647605 registered over the Alness Street property. All parties knew that Mr Oteri intended to sell, and did sell, the Alness Street property; they knew that as a result, when the Alness Street property was sold, both the defendant's first mortgage and the plaintiff's second mortgage were to be discharged, that a new first mortgage was to be taken by the defendant over the Duncraig Road property and that Mr Pourzand was to take a new second mortgage over the Duncraig Road property. All parties knew that as a condition of the $40,000 advance, the defendant required Mr Pourzand execute a deed of priority. All parties knew that the loan of $491,000 was to be "swapped", meaning that Mr Oteri would remain indebted for that amount as well as the extra $40,000 after the settlement regarding the Duncraig Road property. The deed of priority, when prepared, referred to the rule in Hopkinson v Rolt so all three parties can be taken to understand, in general terms at least, the effect of the rule.

20 The rule in Hopkinson v Rolt has the effect that a first mortgagee whose mortgage is taken to cover what is then due and also future advances, cannot rely on the first mortgage to recover the future advances in priority over a second mortgagee if the first mortgagee had notice of the second mortgagee before it made the new advances. Neither of the parties to the litigation deny that the rule in Hopkinson v Rolt applies to mortgages under the Transfer of Land Act. As to which, see Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293 and Mercantile Credits Ltd v Australian & New Zealand Banking Group (1988) 46 SASR 407. All parties knew that the defendant knew about Mr Pourzand's mortgage, and that this meant that the defendant could not advance further moneys and treat the first mortgage as security for that further advance, unless Mr Pourzand agreed that the defendant had priority for such an advance. If Mr Pourzand did not agree and moneys were advanced by the defendant, then although the first mortgage was a first mortgage, and although it was an "all money" security, the defendant would rank in priority after Mr Pourzand, and the additional moneys advanced would only be recoverable under the first mortgage after Mr Pourzand had been paid out the money due under his mortgage.

21 The parties therefore all understood that the deed of priority was to order the affairs of the first and second mortgagees, so that the defendant ranked first for payment of a sum not exceeding $531,000, which was the original debt plus the additional $40,000.

22 All the parties knew, or reasonable parties in their position would have known, that the mortgages over the Duncraig Road property, upon registration, were given a number by the Land Titles Office which would be different from the number on the mortgages over the Alness Street property.

23 I find that Mr Pourzand did not know that the defendant had agreed with Mr Oteri to advance a further $136,500 after settlement on the Duncraig Road property.

24 As I have already mentioned, the plaintiff, the defendant and Mr Oteri were parties to the deed.

25 The defendant was the first party and was defined as "Home Building Society". Mr Pourzand was the second-party and was defined as the "Second Security Holder" and Mr Oteri was the third-party and described as the "Mortgagor".

"Home Building Society and the Second Security Holder wish to regulate the ranking of their securities from the Mortgagor."

27 The deed contained a definition clause which contained the following:

"4.1.2 'Home Building Society Security' means Mortgage G545917 and any other security held at any time by Home Building Society over any of the Mortgagor's assets charged by that security and by the Second Security (to the extent only that that other security secures the same assets);

4.1.3 'Security' means Home Building Society's Security or the Second Security;

...

4.1.5 'Second Security' means Mortgage G647605 and any other security held at any time by the Second Security Holder over any of the Mortgagor's assets charged by that security and by Home Building Society (to the extent only that the other security secures the same assets);"

28 The operative provisions of the deed of priority contained the following covenants:

"5.1 Home Building Society and the Second Security Holder agree that the Securities rank for payment as follows:

5.1.1 Home Building Society Security ranks first for payment of Home Building Society's Debt to the extent that it is:

5.1.1.1 principal and other money owing actually or contingently at any time not exceeding in aggregate $531,000.00;

5.1.1.2 interest at the highest rate payable (including capitalised interest) and fees owing actually or contingently at any time in connection with the money referred to in clause 5.1.1.1;

5.1.1.3 any amount owing by way of indemnity or other provision; and

5.1.1.4 costs of exercising any power or right in connection with Home Building Society Security pursuant to a default by the Mortgagor;

5.1.2 the Second Security ranks second for payment of the Second Security Holder's Debt to the extent that it is:

5.1.2.1 principal and other money owing actually or contingently at any time;

5.1.2.2 interest (including capitalised interest) and fees owing actually or contingently at any time in connection with the money referred to in clause 5.1.2.1;

5.1.2.3 an amount owing by way of indemnity or other provision; and

5.1.2.4 the costs of exercising any power or right in connection with the Second Security pursuant to a default by the Mortgagor;

5.1.3 the Home Building Society's Security ranks third for payment of any remaining Home Building Society's Debt.

5.2 The priorities in this agreement take effect notwithstanding:

5.2.1 any payment or credit which may be received or allowed by a Security Holder from the Mortgagor or any other person in respect of its Debt;

5.2.2 any fluctuation in the amount or amounts secured by the Securities from time to time;

5.2.3 the rule in Clayton's Case or the rule in Hopkinson v Rolt or any other rule of law or equity;

...

5.2.7 the time or order in which moneys are advanced or readvanced or indebtedness or liabilities (whether actual or contingent) incurred;

...

5.2.9 any other fact or circumstance whatsoever which might otherwise alter or postpone those priorities."

29 Clause 7.1 is the covenant which the plaintiff says the defendant breached. It reads:

"7.1 Each Security Holder agrees with the other that (except in cases where the relevant transfer, assignment or dealing results from or is in pursuance of the enforcement of its Security or the exercise of rights of subrogation) it will not transfer, assign or otherwise deal with its Security without first causing any transferee, assignee or other party thereby obtaining an interest in that Security to enter into a deed by which it undertakes to be bound by the provisions of this agreement mutatis mutandis insofar as they relate to the assigning Security Holder and to the extent of that interest."

Events after the execution of the deed of priority

30 On 3 February 1999, the defendant discharged its mortgage No G545917 over the Alness Street property and the plaintiff discharged his mortgage No G647605 over the same property. This was on the same day that Mr Oteri transferred the Alness Street property to the purchaser of that property free of encumbrances.

31 Settlement on the Duncraig Road property then took place, but registration at the Titles Office of the dealings in relation to that settlement did not occur until the next day. Nothing turns on that fact. On 4 February Mr Oteri became the registered proprietor of the Duncraig Road property by a transfer from the vendor. On the same day the defendant registered a first mortgage over the Duncraig Road property, which was given the number H18715. On the same day Mr Pourzand registered his second mortgage. Upon registration it was given the number H18716 by the Titles Office.

32 Several months later, in July 1999, Mr Oteri decided to refinance with the St George Bank. He approached St George Bank and they agreed to provide funds to pay out the Home Building Society and to advance further funds to a company associated with Mr Oteri which he would guarantee. Mr Pourzand knew about this and was prepared to let St George Bank take a first mortgage as its security. On 30 July 1999, Mr Pourzand's mortgage No H18716 was discharged. The title then reveals that the defendant transferred its mortgage H18715 to St George Bank and that transfer was registered on that day (30 July 1999) and was allocated the number H182715.

33 The defendant did not cause the St George Bank to enter into a deed of priority before this happened.

34 If the deed of priority is interpreted as the plaintiff contends, then the defendant undoubtedly breached its obligation to cause the St George Bank to enter into a deed of priority binding that Bank to the same arrangement as to priorities as had prevailed under the deed of priority executed by the defendant, Mr Pourzand, and Mr Oteri.

35 The defendant points out that Mr Pourzand did not know on 30 July 1999 that the defendant's mortgage H18715 was transferred to the St George Bank. Mr Pourzand thought that he would withdraw his mortgage and re-register it after the St George Bank registered a first mortgage. However, for the purposes of the cause of action for breach of contract, what Mr Pourzand thought was going to happen is irrelevant. All that is relevant in relation to the breach of contract claim is that there was a transfer of the defendant's mortgage H18715 to the St George Bank without the defendant causing the St George Bank to execute a deed of priority.

36 Later, Mr Oteri defaulted in repayment of his loan. St George Bank sold the Duncraig Road property and kept the proceed to partly discharge moneys owing to it by Mr Oteri and secured by the mortgages (including the transferred mortgage) it held over the Duncraig Road property.

Interpretation and construction of the deed of priority

37 I now turn to the first issue, that is whether the deed of priority should be interpreted as the plaintiff contends. If so, the defendant did commit a breach of the terms of the deed. If the deed of priority is construed and interpreted as the defendant contends, there was no breach of the deed.

38 I will begin by considering the defendant's submissions. The defendant submits that that in relation to cl 4.1.2, the word "and" in the phrase "mortgage G545917 and any other security" is conjunctive in effect. The defendant makes a similar submission in relation to the phrase "mortgage G647605 and any other security" in cl 4.1.5.

39 The plaintiff's primary submission is that the definition of "Home Building Society Security" in cl 4.1.2, is to be read as meaning mortgage G545917, and also as meaning the "other securities" of the type described. Alternatively, the plaintiff submits that the word "and" where it first appears in cl 4.1.2 is to be read disjunctively. In other words, in relation to cl 4.1.2 the plaintiff submits that the definition of "Home Building Society Security" means "mortgage G545917" or the "other security".

40 The defendant has on its side in relation to its submission that in ordinary parlance "and" is used conjunctively: see Victims Compensation Fund v Brown [2003] HCA 54; (2003) 77 ALJR 1797. However, if the word carries its ordinary meaning in this case, the outcome would be absurd. I say this because at the time the deed of priority was prepared, and when it was executed, the defendant was the registered proprietor of a first mortgage G545917 over the Alness Street property, and the plaintiff was the registered proprietor of a second mortgage G647605 over the same property. Neither party held any other security. The parties intended that the deed of priority should govern priorities in relation to certain advances secured by the two registered mortgages. If the word "and" where it is first used in cl 4.1.2 meant that there was no "Home Building Society Security" as defined in cl 4.1.2, unless the defendant held both the numbered mortgage and, in addition, another security fitting the description of "other security", then the deed of priority did not have any effect when it was executed. Indeed, it would never have had any effect on the facts in this case. That interpretation would therefore defeat what the parties were trying to achieve. Such an interpretation would be contrary to the defendant's submission that the deed of priority did apply and did govern priorities until mortgages G545917 and G647605 were discharged when the Alness Street property was sold.

41 In my opinion, the word "and" where it appears in cl 4.1.2 and cl 4.1.5 should be read as the plaintiff contends, so that the numbered mortgage alone will be a "Home Building Society Security", and that any "other security" alone will also be a "Home Building Society Security". The same applies in relation to the definition of "Second Security".

42 If it is necessary to explain this further, the explanation is that the word "and" can be read conjunctively or disjunctively, depending on the circumstances, so that the word means "and/or" ("to save the trouble of writing x or y or both of them": "Fowler's Modern English Usage", 2nd Ed). For an example of a court reading "and" as "and/or" see Herald & Weekly Times Ltd v DPP [2003] SASC 234; (2003) 86 SASR 70.

43 The word "and" can be read as "or" if the context requires it: see Gillespie v Ford (1978) 46 FLR 297 and Herald & Weekly Times Ltd v DPP (supra). See also the discussion on the point in Victims Compensation Fund v Brown [2002] NSWCA 155; (2002) 54 NSWLR 668 per Mason P at [73] which was agreed with by Spigelman CJ [37]. Spigelman CJ's dissenting judgment on the outcome of the facts was approved by the High Court on appeal.

44 The defendant, in effect, ran an alternative argument contending that if the word "and" can be read disjunctively, then the phrase "any other security held at any time" in cl 4.1.2 should be read as though it was followed by the words "while mortgage G545917 remains undischarged" so that the definition in cl 4.1.2 would then read:

"'Home Building Society Security' means mortgage G545917 and any other security held at any time [while mortgage G545917 remains undischarged] by Home Building Society over any of the mortgagor's assets charged by that security and by the Second Security (to the extent only that that other security secures the same assets)."

The defendant submitted that the definition of "Second Security" should be read in the same way but with a reference to mortgage G647605.

45 I see no foundation at all for reading in the proposed additional words. The proposed additional words attempt to limit or rather contradict the generality of the express words "at any time". The defendant's submission is explicable by reference to the defendant's ex post facto desire to avoid liability, but it is not, in my opinion, a submission which can be supported by the context. The parties knew that after the deed of priority was executed, $40,000 was to be advanced by the defendant to Mr Oteri on security of mortgage G545917, but they also knew that mortgage (and Mr Pourzand's second mortgage) were shortly to be discharged and replaced with new, and therefore different, numbered mortgages over the Duncraig Road property. There was nothing in the background which supports any conclusion that the operation of the deed of priority should be limited in the manner suggested. Recital 2.2 in the deed records that the defendant and Mr Pourzand wished to regulate the ranking of "their securities". This recital does not suggest that any such limit should be imposed on the operation of the deed.

46 The defendant seeks to support its argument by pointing to the fact that in relation to the further advance of $136,500, there was no requirement that this advance was subject to a deed of priority being executed. The defendant submits that this shows that the defendant thought the deed of priority would have no effect after the discharge of the mortgages over the Alness Street property. In my view the lack of any such requirement by the defendant may be explained because the issue was not considered at all by those, within the defendant, who should have considered the situation. However, it is pointless to consider the reason why there was no deed of priority for this further advance because the point is not relevant to the issue about the construction and interpretation. It is not relevant on this issue because Mr Pourzand knew nothing about the additional advance, and so the circumstances in relation to it are not circumstances which form part of the context known to all the parties when the deed of priority was executed.

47 The defendant also seeks to support its argument about construction of the deed by arguing that there was "no practical need at all" for the "use of a deed of priority" after the sale of the Alness Street property. The defendant's written submissions read:

"... once the two original registered Mortgages over 4A Alness Street property are discharged ... both mortgagees at that point have a fresh opportunity to be repaid their loans at settlement, and to negotiate again with the borrower (and each other) in regard to whether they will re-lend again and if so, on what terms in respect of security will apply over a new property. They can then decide upon what terms and upon what priorities then apply to a new environment. The operative effect of a Deed of Priority therefore does not logically need to extend beyond the point of discharge of the original registered Mortgages."

48 That argument can be matched by an argument that the deed of priority, in its present form, has the practical benefit of saving the parties from having to re-document every time property over which security is held is sold. If, as here, the loan secured by the numbered mortgages are to be "swapped" - that is, the loans will remain and only the securities will change - the present deed saves the parties from the expense and inconvenience of executing a new deed of priority every time there was a substitution of property over which security was to be held. However, it is not necessary to weigh up the alternative arguments. The arguments are irrelevant. It is true that transactions can always be structured in different ways, but that mere fact does not bear upon the proper construction or interpretation of the deed of priority entered into by the parties.

49 The defendant also sought to support its argument about the construction and interpretation of the deed of priority by submitting that:

"... the illogicality of what is contended for as the construction by the plaintiff, is pointed out by what it would presumably contend for, if say, Oteri had discharged both mortgages and repaid his debt to both mortgagees on 3 February 1999, but Oteri had then waited two or more years, then proceeded to acquire by secured borrowing from [the defendant] and from Pourzand, say the same Duncraig Road property in like fashion."

"Would it seriously be contended for that after such a hiatus, that the [deed of priority] would revive itself once again to regulate that new scenario?"

50 The answer is that the deed of priority would govern the situation in those circumstances, but if the parties wished to do so, they could of course enter into a new deed of priority with a clause like cl 11.1 in the deed of priority in issue here, which provides that, notwithstanding any previous agreement between the parties, their relationship was governed exclusively by the deed of priority. I therefore see nothing in the defendant's argument on this point which supports the argument it advances about the interpretation and construction of the deed.

51 In my opinion, the commercial objective involved in the transaction as manifested by the words in the deed of priority, was to order priority between the two mortgagees while they continued to both hold security over the same property, whether it was for a short time or a long time, whether the securities were held in relation to the Alness Street property or any other, and whether the securities were the original numbered mortgages or some others.

52 So while the defendant held mortgage G545917, that mortgage was a "Home Building Society Security". Mr Pourzand's mortgage G647605 was a "Second Security". When mortgage G545917 was discharged and the defendant took the first mortgage H18715 over the Duncraig Road property, the latter mortgage was also a "Home Building Society Security" because it was a "... security held at any time by [the defendant] over ... [Mr Oteri's] assets [ie the Duncraig Road property]" and at the same time Mr Pourzand's mortgage H18716 also charged that property. I would construe "Second Security" as defined in cl 4.1.5 in similar fashion, so that Mr Pourzand's second mortgage H18716 over the Duncraig Road property was in the circumstances a "Second Security".

53 The result is that when the defendant transferred mortgage No H18715 to the St George Bank, it was transferring a "Security" and by failing to cause the St George Bank to enter into a deed of priority before the transfer, the defendant breached its covenant in the deed of priority.

54 The plaintiff pleads that the amount secured by Mr Pourzand's second mortgage over the Duncraig Road property was $300,000. This was not admitted by the defendant. The defendant advanced no positive case but put Mr Pourzand to proof. There seemed to be no dispute by the end of the trial that $200,000 had been advanced. Mr Pourzand was recalled to be cross-examined about two other advances of $50,000, one in November 1999 and one in December 1999. Mr Pourzand confirmed that these advances were made to Mr Oteri, which means that these advances were secured by Mr Pourzand's mortgage. I therefore find that $300,000 was advanced as pleaded in the statement of claim.

55 If the defendant had complied with the obligations imposed on it under cl 7.3 of the deed of priority, it would have caused St George Bank to enter into a deed of priority before receiving the transfer of the mortgage from the defendant. That deed of priority would have contained terms mutatis mutandis, the same as the deed of priority dated 16 December 1998. If so, St George Bank would have been limited to recovering $531,000 plus interest and costs on the sale of the Duncraig Road property and then Mr Pourzand would have been entitled to payment of his $300,000.

56 I find that when the Duncraig Road property was sold, it produced net proceeds after agent's commission and other costs, disbursements and rates, of $886,429.55. The total of interest and costs payable by Mr Oteri to St George Bank was $23,912.40. The costs and interest recoverable on a debt of $531,000 would have been somewhat less. The total amount which would have been recoverable by St George Bank under a deed of priority executed by it would therefore have been somewhat less than $554,912.40. That means that the sale of Duncraig Road produced net funds sufficient to pay out the full amount of $300,000 owing to Mr Pourzand.

57 In fact, Mr Pourzand recovered nothing because the St George Bank advanced over $1 million to Mr Oteri and his company at the time of the registration of the transfer of the mortgage from the defendant and the registration of the St George Bank mortgage on 30 July 1999. Thus, when the St George Bank was registered as transferee, it had priority for repayment of a sum in excess of $1 million.

58 The defendant argued that the plaintiff's loss was caused because Mr Pourzand withdrew his mortgage H18716, permitted the St George Bank to register a mortgage, and then registered what he thought was a second mortgage, after the bank's mortgage. If St George Bank had signed a deed of priority, it would have limited the St George Bank to recovery of $531,000 and interest and costs no matter which mortgage it relied on.

59 The result is that the breach by the defendant of its covenant in cl 7.3 of the deed of priority caused the plaintiff to lose $300,000.

60 The defendant claims that if the terms of the deed of priority should be interpreted as I have concluded, then the Court should decree that the deed of priority should be rectified more or less in line with its submissions on the interpretation issue.

61 To be more precise, the defendant filed a minute of "Proposed Order for the Rectification of the Deed of Priority" which stated that the deed of priority should be rectified by amending:

(a) "Paragraph 2.2 by the addition after the last word of this paragraph of the words '... in the period that they both hold security over the mortgagor's property at 4a Alness Street, Applecross.';"

(b) "Definition 4.1.2 by inserting after the words in the second line '... other security held at any time ...' the words '... before the discharge of mortgage G545917 ...';"

(c) "[D]efinition 4.1.5 by inserting after the words in the second line '... held at any time ...' the words '... before the discharge of mortgage G'".

The principles of law relevant to a claim for rectification are as follows:

(a) The court starts from the hypothesis that the written agreement is the true agreement of the parties: Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23; (1973) 128 CLR 336 at 351; Pukallus v Cameron [1982] HCA 63; (1982) 180 CLR 447 at 456;

(b) It is open to the court to rectify an agreement if, by mistake, its terms do not reflect the true intention of the parties. Evidence of subjective intention is admissible for the purposes of seeking rectification: Maralinga Pty Ltd v Major Enterprises Pty Ltd (supra) at 350 ff; Mincode Pty Ltd & Ors v Isa Pty Ltd (1996) 17 WAR 245 at 248 and 254;

(c) The subjective intention of a corporation will be proved by proving the intention of the person or persons who were relevantly its directing mind and will in the transaction: Anfrank Nominees Pty Ltd v Connell (1989) 1 ACSR 365 at 387-9;

(d) While it is not necessary for a party seeking rectification to prove the existence of an antecedent agreement, "The ... common intention ... must be ... manifested in the words or conduct of the parties, and not merely ... [remain] ... undisclosed.": Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd [1987] FCA 332; (1987) 78 ALR 193 at 254 per Gummow J; Commissioner of Stamp Duties (NSW) v Carlenka Pty Ltd (1995) 41 NSWLR 329 at 332; Bishopsgate Insurance Australia Ltd v Commonwealth Engineering (NSW) Pty Ltd [1981] 1 NSWLR 429 at 431.

62 I find that there was no common intention that the agreement should have the meaning it would have if it were amended in accordance with the minute which has been filed by the defendant.

63 I find that Mr Oteri, without seeking any legal advice, and without any discussion with other parties, thought, or intended, that the deed of priority only apply while he owned the Alness Street property. However, this intention remained undisclosed until he signed his statement of evidence for the purpose of these proceedings.

64 The defendant called as witnesses two employees and a solicitor at Phillips Fox who had been retained to prepare documents in relation to the transaction. I find that none of them had the intention contended for. The witnesses were Mr Stannard and Ms Morris who were employees involved in the transaction and involved in communicating the offer concerning the $40,000 loan which required, as one of its conditions, that the deed of priority be executed. However, the person with the authority and who had decided the terms on which the $40,000 loan and the $136,500 loan was made was a Mr Davis. He was the person with that authority because the total loan exceeded $500,000 and neither Mr Stannard, nor Ms Morris, could therefore approve the loan or set the terms for either of these loans. Mr Davis was not called. It was his state of mind which would have been relevant. Even if I were wrong in this regard and out of the evidence some subjective intention of the part of the defendant could be drawn, it was never manifested.

65 However, the fact that Mr Davis was not called does not matter, because I find that Mr Pourzand did not have the intention contended for by the defendant.

66 The only communication between the parties about the deed of priority was as follows. First, there was a letter from the defendant to Mr Oteri asking him to have Mr Pourzand sign the deed. Mr Oteri then met with Mr Pourzand and asked him to sign it. There was no discussion between those two parties about what they intended the deed to achieve. There was no communication at all between Mr Pourzand and the defendant. That is not productive ground for a claim of rectification. I find that there was no common intention of the kind contended for by the defendant manifested by the parties. The rectification claim must be dismissed.

67 The defendant contended by its pleadings that the plaintiff waived his right to rely upon the provisions of the deed of priority. The waiver was said to be based upon the events which occurred on 30 July 1999 when St George Bank took the transfer of the defendant's mortgage. As the evidence unfolded, it became clear that neither Mr Pourzand, nor his solicitor Mr Murie, knew anything about the transfer of the defendant's mortgage to St George Bank on 30 July 1999. As a result, counsel for the defendant conceded that waiver based on the pleaded facts could not succeed. He did, however, seek to claim on behalf of the defendant that there was a waiver at a later date (in August 1999) based on the fact that after 30 July 1999, Mr Murie became aware of the transfer of the defendant's mortgage to St George Bank and then arranged for the re-execution of Mr Pourzand's mortgage, showing the transferred mortgage as a prior encumbrance. In my opinion, the mere fact that Mr Pourzand acknowledged the existence of the transferred mortgage in August 1999 would not support a plea of waiver of Mr Pourzand's rights under the deed of priority. The breach of the deed of priority occurred on 30 July 1999 when the defendant transferred its mortgage to St George Bank.

68 Further, no attempt was made to amend the pleadings and the counsel for the plaintiff, with justification, objected to any decision being made about waiver based upon unpleaded facts. I agree that the defence of waiver previously unpleaded and only announced in closing submissions, could not succeed. I therefore dismiss the defence of waiver. Counsel for the defendant submitted that in any event there was now no freestanding doctrine of waiver separate from estoppel or election recognised in Australia. Reference was made to Freshmark Ltd v Mercantile Mutual Insurance (Australia) Ltd [1994] 2 Qd R 390 at 404. It is not necessary to consider that submission because of the concession made by counsel for the plaintiff abandoning the pleaded case of waiver and election and my decision that even the unpleaded case could not succeed.

69 Counsel for the plaintiff conceded that the pleaded defence of election could not succeed, so that I will not consider it further. Counsel for the plaintiff also conceded that there was no separate defence of unconscionable conduct.

70 The result is that I find that the plaintiff has made out its case for damages for breach of contract. The plaintiff is therefore entitled to judgment in the sum of $300,000 plus an appropriate award of interest as to which I will hear the parties.

Pourzand v Home Building Society Ltd [2004] WASC 127

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (116 paragraphs)

Pourzand v Home Building Society Ltd [2004] WASC 127 (10 June 2004)

Parties

Cases Cited (22)