FEDERAL COURT OF AUSTRALIA

Gunns Limited v Balani Pty Ltd [2011] FCA 431

THE COURT ORDERS THAT:

On the cross-claim:

1.    There be no order on the cross-claim, save as to costs.

2.    The applicant pay the respondents’ costs of the cross-claim, to be taxed in default of agreement.

On the substantive application:

1.    The parties file and serve proposed orders to give effect to these reasons for judgment on or before 18 May 2011. Such proposed orders are to be accompanied, if necessary, by brief outlines of argument in support of the making of such proposed orders.

2.    The proceeding is adjourned to a directions hearing at 11:00 am on 20 May 2011 in Hobart.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    The applicant, Gunns Limited (“Gunns”), paid $400,000 to Dingemanse Management Pty Ltd (“Dingemanse”) to purchase part of the property owned by Dingemanse at Forest Lodge Road in Pyengana (“the Forest Lodge property”). The contract of sale was unusual. Notwithstanding the payment of the entire purchase price by Gunns to Dingemanse, title in the property was not to pass to Gunns until the completion of various conditions precedent to the completion of the contract. Gunns signalled its interest in the land after payment of the purchase price by applying to have a caveat registered on the title of the subject land. Subsequently the respondents Balani Pty Ltd (“Balani”) and PSAL Limited (“PSAL”) advanced funds to Dingemanse. In order to be in a commercial position to advance those funds, Balani and PSAL sought the agreement of Gunns for each of them to be registered as mortgagees on the title of the subject property. In return Gunns sought certain assurances from Balani and PSAL. The terms of those assurances and the circumstances which led to them being given to Gunns have given rise to this proceeding.

2    The primary issue for determination in the proceeding is whether the agreement between Gunns on the one hand and Balani and PSAL on the other hand gave rise, in all the circumstances, to an equitable lien in Gunns of such a nature so as to have Gunns’ interest in the land it purchased survive notwithstanding the registration of Balani and PSAL as mortgagees on the relevant land title. Other issues raised concern whether a term should be implied into the agreement to give effect to recognition of Gunns’ interest in the land and whether Balani and PSAL have engaged in unconscionable conduct in their dealings with Gunns about the land.

FACTUAL BACKGROUND (by reference to documentary evidence)

3    On 27 October 2008, Dingemanse and Gunns entered into a contract whereby Dingemanse agreed to sell and Gunns agreed to buy about 136 hectares of Dingemanse’s Forest Lodge property comprising, Lots 1 and 2 on a proposed plan of subdivision. The purchase price of $400,000 was payable and paid on the exchange of the contract. Clause 3 of the contract provided that the contract was to be completed 14 days after the fulfilment of the last of the conditions precedent to completion (set out in cl 4(1) of the contract).

4    Clause 4(1)(d) of the contract referred to the relevant municipal authority (“Break O’Day Council”) granting Dingemanse a permit to sub-divide the Forest Lodge property. Clause 4(1)(f) provided that if within 6 months of the date of the contract a separate title did not issue for Lots 1 and 2, either party had the right to cancel the agreement with Gunns being entitled to recover the full purchase price paid by it to Dingemanse.

5    Clause 24.1 of the agreement provided that:

The Vendor agrees that if this Contract does not complete for any reason, other than the Purchaser’s wilful default, that the Vendor will return the purchase price to the Purchaser.

6    At the time Gunns purchased the property the land was subject to registered mortgages in favour of the Bank of Western Australia and two individuals. On 26 March 2009, a mortgage in favour of National Australia Bank (“NAB”) was lodged but not registered under the Land Titles Act 1980 (Tas) (“the State Act”).

7    On 27 May 2009, Gunns filed a caveat with the Tasmanian Land Titles Office (“the Titles Office”) on the land it purchased. However, the Titles Office could not register the caveat until 19 October 2009, after the time in which NAB could have registered its interest as a mortgagee had expired. When NAB failed to register its interest in the permitted time Gunns’ caveat became registerable.

8    By email dated 17 September 2009, solicitors acting for Dingemanse advised Gunns’ then solicitors, Shields Heritage, that Mr Dingemanse (a director of Dingemanse) was re-financing some of his properties. The email said that the new financiers (the respondents) wanted Gunns’ consent for the registration of second and third mortgages on the Forest Lodge properties. The reference to the second and third mortgages pre-supposed that NAB would register its first mortgage interest. The email observed that Gunns’ caveat was, at that stage, still not registered.

9    The 17 September email was followed by a letter dated 21 September 2009 from Dingemanse’s solicitors, Rae and Partners, to Ms Jacinta French at Shields Heritage. The letter referred to the email and confirmed that Dingemanse was obtaining finance over the land subject to its agreement with Gunns. The letter concluded as follows (omitting formal parts):

Accordingly our client’s financiers Balani Pty Limited and PSAL Limited would be pleased if Gunns Ltd would consent to the registration of our client’s financiers second and third mortgages. Settlement is imminent, we look forward to hearing from you with your client’s instructions.

10    Later on 21 September 2009, Ms French responded to Rae and Partners that Gunns would consent “as caveator” to the registration of a second and third mortgage to Balani and PSAL provided that a three part written acknowledgement was given by them to Gunns.

11    On 6 October 2009, each of Balani and PSAL provided Gunns with a three part acknowledgement consistent with Gunns’ request of 21 September 2009. The three paragraph acknowledgement said:

1.    We are aware of the terms of the contract between Dingemanse Pty Ltd and Gunns Ltd dated 27 October 2008 (“the contract”);

2.    We are aware that the purchaser has paid the purchase price under the contract in full to the Vendor; and

3.    We will do all acts that are necessary (as expeditiously as possible) to give effect to the Contract including but not limited to consenting to the schedule of easements and plan of survey and executing a partial discharge of mortgage to enable the transfer of land in the contract to Gunns Ltd to be registered.

12    On 5 October 2009 (the day immediately preceding the giving of the written acknowledgement by the respondents), Mr John Dingemanse sent an email to Ms Melanie Kerrison at Rae and Partners which Ms Kerrison forwarded to the solicitor for the respondents, Ms Dineen of Galilee solicitors. Omitting formal parts the email said:

As requested, please find attached the Final Subdivision plan that has been approved and surveyed. This process involved the amalgamation of 6 property Titles and then a new subdivision of the amalgamated property into 4 new lots.

The purpose of the subdivision was to facilitate access to 2 new titles which incorporated the land, including the forested area and lake, which was most suitable for the proposed eco-tourism developments. The balance 2 titles (lots 1 and 2) covers marginal land that is unsuitable for eco-tourism and that has been sold to the adjacent land owner Gunns Limited for eucalyptus plantation. Lots 1 and 2, being marginal land, have been contracted for sale at the going rate for plantation property.

Lots 3 and 4, the high value eco-tourism land, both now have road access and Development Approval and can be developed and/or sold separately.

The attached Real Estate Appraisal indicates that Lot 3 is valued at $1,350,000 (including the water licence) and Lot 4 is valued at $900,000.

As a result of the subdivision approval, the overall land is valued significantly higher than it was previously and with a 1st mortgage of $1,162,500 on the property, there remains more than adequate equity for the 2nd mortgage required by PSAL, even taking into consideration the Gunns contract for sale of $400,000.

13    The reference to a first mortgage of $1,162,500 related to the unregistered interest of NAB. The email to Ms Dineen also attached the Forest Lodge Subdivision Plan and a real estate appraisal from A1 Real Estate Tasmania. It is also apparent from emails passing between Mr Peter Flanders of PSAL and Ms Dineen that the re-financing of Dingemanse extended to other properties at Mole Creek and Launceston as well as to the Forest Lodge property.

14    By letter dated 7 October 2009 from Ms French, on behalf of Gunns, to the Recorder of Titles at the Land Titles Office, Gunns consented to the registration of second and third mortgages to Balani and PSAL respectively over the relevant property. Counsel for Gunns, Mr S McElwaine, referred to this letter as constituting the consideration for the contract between Gunns and the respondents, as evidenced by the three part acknowledgement referred to at [11] above.

15    Subsequently, on 10 December 2009, Ms Kerrison, on behalf of Dingemanse, advised Ms French that NAB had mistakenly not registered its first mortgage and required Gunns’ consent to a registration of a new mortgage to NAB. It is common ground that NAB’s position does not affect any issue between the parties in the determination of this proceeding. See also the discussion at [35] below.

16    On 23 March 2010, Gunns (through Mr Ian Blanden) wrote to Mr Dingemanse terminating the contract and requiring repayment of the purchase price within 14 days. No re-payment has occurred or is likely to occur in the future.

17    In the 23 March 2010 letter from Mr Blanden to Mr Dingemanse, Mr Blanden referred to Gunns’ agreement to assist Mr Dingemanse financially by paying the purchase price at the time of the agreement. Mr Blanden referred to Mr Dingemanse not making reasonable endeavours to fulfil the conditions precedent to completion of the contract.

18    There is no dispute that the 23 March 2010 letter from Mr Blanden operated to terminate the contract between Gunns and Dingemanse.

19    By letter dated 4 November 2010, Ms French wrote to Ms Dineen seeking a conference to discuss their clients’ respective interests in the subject land. The letter ended by Ms French requesting such a conference as soon as possible, “given we understand your client has placed or intends placing the whole of the property on the market for sale.” A response “by return” was requested.

20    In the absence of a response, Ms French sent an email to Ms Dineen on 14 November 2010 in the following terms:

I would appreciate you letting me know if you have received any instructions from your client in relation to the matters we detailed to you in our discussion 4th November 2010. If you have not been able to make contact with your client I would appreciate an indication as to when you anticipate you may be in a position to obtain instructions.

21    Ms Dineen responded the next day saying that she has been unable to have direct contact with her clients but expected to obtain instructions by the end of the following week (that is, by 24 November 2010).

22    Ms French replied, also on 15 November 2010, saying that she trusted Ms Dineen’s clients would take no action while they are away which would adversely affect Gunns. Ms French said that she looked forward to hearing from Ms Dineen on the return to Australia of the relevant officers of her clients.

23    On the previous day, 14 November 2010, Gunns had applied to the Land Titles Office for the lodgement of a priority notice reserving priority for 60 days. Mr McElwaine concedes that there was no legal basis for that lodgement. That matter is the subject of the respondents’ cross-claim. When the existence of the notice came to the attention of Gunns’ current solicitors, on 24 December 2010, immediate steps were taken to withdraw it.

24    Gunns filed its application in this Court on 17 December 2010. It sought interlocutory relief requiring the respondents to pay into Court the sum of $400,000 from the proceeds of any sale of the relevant land.

25    On 24 December 2010, the Court ordered that:

In the event that either respondent exercises a power of sale over [the relevant land], then in respect of any consideration received, the respondents must pay into Court the sum of $400,000.

(a)    after deduction of the costs of sale in accordance with s 78(7)(a) of the [State     Act];

(b)    before the payment of money due and owing on any mortgage in accordance with s 78(7)(b) of the [State Act];

And in the event that the proceeds of sale received are less than $400,000 then the entire sum, after the deduction of the costs of the sale, must be paid into Court.

26    Counsel advised the Court at the hearing of the substantive application that the property has not been sold. For avoidance of doubt, the interlocutory order was extended until the determination of the proceeding or further order.

27    The above factual background is sourced chiefly from documentary material tendered at trial and from the Court file. Three witnesses were called to give evidence in the matter. Two were called by Gunns, being Mr Blanden and Mr Ian Clifford. Mr Flanders gave evidence on behalf of the respondents. What follows in the remaining portion of the discussion of the critical facts in the matter is an analysis of the effect of that evidence where relevant and probative.

FACTUAL BACKGROUND (by reference to witness evidence)

(a)    Mr Blanden

28    Mr Blanden is the Chief Executive Officer of Gunns Plantations Ltd, a wholly owned subsidiary of Gunns. He had the senior management responsibility for the contract between Gunns and Dingemanse. He reported to the then Executive Chairman of Gunns, Mr Gay. Mr Blanden was not responsible for the decision by Gunns to sign the contract. The terms of the contract were negotiated by Mr Gay and Mr Dingemanse. Mr Anthony Clifford, the Land Administrator of Gunns, had day to day responsibility for the contract. Mr Blanden took over that responsibility from 8 February 2010.

29    Mr Blanden gave evidence in his witness statement that he did not instruct Ms French to lodge the priority notice with the Lands Titles Office in November 2010. He said the first he knew of the priority notice was after the service of the cross-claim. Under cross-examination, Mr Blanden said that he had no knowledge at all about the lodging of the priority notice. Nonetheless the notice was lodged by Gunns’ regular conveyancing solicitor and should be treated as Gunns’ act.

30    Mr Blanden accepted that the contract with Dingemanse carried risks, outside ordinary conveyancing purchase risks. Mr Blanden said that he was concerned that a sub-division of the property might not be approved on acceptable terms, or at all. There was also the potential risk that in the event of a default by Dingemanse the then current mortgagees could exercise powers under their mortgages before the two lots were conveyed to Gunns. It was also a concern that those mortgagees would be required to provide a partial discharge of mortgage to permit the transfer to Gunns to be completed. Mr Blanden was also concerned that if Gunns sought repayment of the purchase price, Dingemanse may not have the capacity to re-pay the $400,000. Mr Blanden expressed those concerns to Mr Clifford but accepted that the decision to enter the contract in the terms provided was that of Mr Gay and the Gunns board.

31    Mr Blanden gave evidence of his involvement in discussions with Mr Clifford and Ms French concerning a request by Balani and PSAL to have their proposed mortgages registered. The purpose of the discussions was to ensure that the interests of Gunns were protected. One of Mr Blanden’s concerns was the capacity of Balani and PSAL to hamper the subdivision occurring and the consequent transfer to Gunns of Lots 1 and 2. This may have occurred by Balani or PSAL refusing to consent to a plan of survey being lodged.

32    Mr Blanden said that as at late September 2010, Gunns was still confident that Dingemanse would complete the contract, although it was frustrated by the time it was taking to arrive at completion.

33    Mr Blanden agreed with Mr C Gunson, counsel for the respondents, that in drafting the terms of the acknowledgement requested from the respondents on 21 September 2010 and provided by them on 6 October 2010, he did not give instructions to Ms French to include requests such as:

    “In the event of a mortgagee sale we [Gunns] require priority to Balani and PSAL”; or

    “Gunns gets the first $400,000 in the event of a mortgagee sale.”

34    Mr Blanden agreed with Mr Gunson that Gunns did not advise Balani or PSAL on 23 March 2010 that it had terminated the contract with Dingemanse. Mr Blanden also agreed that in an affidavit prepared for the interlocutory hearing he referred to the preparation of a plan of survey for the relevant property. He said that it was a reference to a final plan of survey. Mr Blanden said it was his understanding that a final plan of survey had been sent to previous mortgagees for their consent. He did add, however, that it was not a day to day matter which he was handling and that Mr Clifford in conjunction with Ms French would have had carriage of matters of that kind.

35    Mr Blanden gave evidence that he gave instructions to Ms French to consent to NAB being registered as a mortgagee after becoming aware of that issue on 10 December 2009. The rationale was that as NAB had a mortgage on all the other Dingemanse titles and there were second mortgages, there was little to be gained from objecting to one more mortgage. See also the discussion at [15] above.

36    Under further cross-examination, after a call for production of documents requesting consent of mortgages for a final plan of survey provided fruitless, Mr Blanden conceded that a final plan of survey had not been completed. Mr Blanden appeared confused about what stage work on preparation of a plan of survey had reached. I reject, however, the submission of Mr Gunson that Mr Blanden deliberately sought to mislead the Court. I accept that he was mistaken about this issue and did not specifically recall “where that process got to in the chain of events required”. He conceded that a plan of survey had not been submitted to Break O’Day Council for sealing. Mr Blanden conceded that no final plan of survey had been lodged and his interpretation of his reference to a plan of survey in his affidavit was incorrect. This exchange confirms rather than detracts from Mr Blanden’s credibility. He was prepared to admit error and had no intention to mislead the Court. It must also be recalled that as at the making of his affidavit in the interlocutory proceeding, Mr Blanden did not have day to day carriage of issues arising out of the contract with Dingemanse. I consider that all three witnesses who gave evidence in the proceeding did their best to assist the Court rather than mislead it.

(b)    Mr Clifford

37    Mr Clifford was, at all material times, the Land Administrator for Gunns. He held that position for about 12 years and had 35 years experience in land dealings, mortgages and securities in Tasmania. Mr Clifford administered the agreement with Dingemanse, being the contract dated 27 October 2008. He did so until about 8 February 2010, when Mr Blanden took carriage of Gunns’ file regarding the contract.

38    Mr Clifford shared Mr Blanden’s concerns about “a number of inherent dangers” or risks associated with the Dingemanse contract. Mr Blanden explained that although Gunns’ caveat was lodged in May 2009, it was not registered until October 2009 because the Recorder of Titles took until 19 October 2009 to refuse to register the mortgage to NAB, being the mortgage in respect of which NAB overlooked seeking registration. On 19 October 2009 the caveat of Gunns was transformed from an unregistered dealing to a registered one.

39    Mr Clifford was aware as at 17 September 2009 that Mr Dingemanse was seeking to re-finance his business operations. Mr Clifford gave evidence about his state of mind on 21 September 2009 when the three part acknowledgement sought from Balani and PSAL was drafted. He said that he believed that despite the delays, the contract with Dingemanse “would ultimately complete, albeit slowly”. Mr Clifford also said that Dingemanse had said that a reason for delaying the completion of the subdivision was that NAB was waiting on re-capitalisation or re-financing of Mr Dingemanse’s business. Mr Clifford considered that the payment by Gunns of the purchase price for Lots 1 and 2 gave it an interest in the land.

40    Mr Clifford knew that consent to the registration of the mortgages of Balani and PSAL would affect Gunns’ position regarding the land, “absent some other agreement between it and the proposed mortgagees.” That is why Mr Clifford was only prepared, after discussing the matter with senior management, to instruct Ms French to grant consent on the conditions proposed by her. Mr Clifford “believed those conditions would be sufficient to protect the interests of Gunns Ltd under the yet to be completed contract.”

41    At the time of consenting to the registration of the respondents’ mortgages subject to the requested acknowledgements, Mr Clifford was concerned about matters which were outstanding under the contract. The final survey plan had been completed by the surveyor but not endorsed by Break O’Day Council or registered. A schedule of easements had to be approved. A final plan of subdivision had to be approved. A partial discharge of mortgage was then required to enable Gunns to obtain title over the property it had purchased.

42    Mr Clifford said that he relied on the acknowledgements as meaning that Balani and PSAL “would not obstruct or prevent the completion of the contract and would do that which was reasonably necessary to enable a transfer of an unencumbered separate title to Gunns Ltd”.

43    Under cross-examination Mr Clifford said that he understood the concept of “priority agreements” and agreed that “mortgagees may agree to vary priority as between themselves.” Mr Clifford said that as he saw it, Gunns had a priority agreement with Balani. However, Mr Clifford also said that he understood that if the mortgagees exercised their power of sale the caveat would be extinguished. Mr Clifford went on to say that:

…in this particular instance, it was my understanding that given that we had an arrangement with the mortgagees, we had established that we had paid the $400,000 and we had established that we had a contract that would need to be taken into account if there was a mortgagee sale.

44    Mr Clifford agreed with Mr Gunson that he did not say to Ms French words to this effect:

Please make sure that if the mortgagees exercise their power of sale, we will be refunded out of the proceeds the first $400,000.

45    Mr Clifford also conceded that the terms of the acknowledgement did not constitute a priority agreement between Gunns and the respondents.

46    Mr Clifford considered the acknowledgement was sought to protect Gunns’ position, whether considered as a priority or other form of agreement and that the acknowledgement gave Gunns a priority over that land and the money it had paid for that particular land. He saw the acknowledgement as respecting the terms of the Dingemanse contract.

47    Mr Clifford said that he did not recall giving instructions to Ms French to lodge a priority notice in respect of one title at Forest Lodge Road. He said that he was not handling the file at the time.

(c)    Mr Flanders

48    Mr Flanders was the sole witness for the respondents. He is a director of PSAL. PSAL acted on its own behalf and as agent for Balani in relation to the settlement of the loan advances to Dingemanse.

49    Mr Flanders gave evidence that PSAL issued letters of offer on or about 11 September 2009 on behalf of it and Balani for loan advances to Dingemanse. The security for the loan advances included mortgages over properties owned by the borrowers. These included six titles held by Dingemanse at Forest Lodge Road.

50    Mr Flanders said that during the course of the loan transactions he became aware that the Forest Lodge property was affected by a caveat lodged by Gunns. In early October 2009, Mr Flanders became aware of the details of the caveat and the acknowledgement requested by Gunns in exchange for consent to the registration of the PSAL and Balani mortgages.

51    PSAL knew that Lots 1 and 2 of the proposed subdivision were to be released to Gunns on the completion of the contract between Gunns and Dingemanse. At paragraph 12 of his witness statement Mr Flanders said:

I discussed this issue with the other directors of PSAL, and we were of the view that, based on the sale price of the two lots being sold to Gunns, the remaining part of the property, together with the remaining securities, would have sufficient value to secure PSAL and Balani’s position.

52    Mr Flanders said that the Forest Lodge property was only one of a number of securities for the loans and was expected to be a second mortgage security (behind NAB). He said he did not place any ‘value’ on Gunns’ interest, but understood that the two lots may have to be returned and assessed the value of the total of the securities accordingly. Taking all those matters into consideration, Mr Flanders decided it was acceptable to PSAL for the loans to proceed and to give instructions to provide the acknowledgement requested by Gunns.

53    In his witness statement Mr Flanders said:

I considered that, by signing the acknowledgement to Gunns, PSAL and Balani would only be acknowledging the existence of the contract and allowing the release of the two lots on completion of the sale. I did not believe that PSAL and Balani were making any other agreement about the sale contract, as there was nothing mentioned in the acknowledgment except steps required to allow the subdivision and provide partial discharges of mortgage.

54    Mr Flanders also said:

As there was nothing specific mentioned in the acknowledgment about priorities I understood that PSAL and Balani’s mortgage would have priority over Gunns, and that if the sale did not complete, Gunns would have to recover their money from the borrower.

55    Mr Flanders gave evidence that in December 2010, PSAL decided to sell the Forest Lodge property as mortgagee in possession. In his witness statement he said:

PSAL considered that, as Gunns had not been in contact regarding the completion of the subdivision and the partial discharge of the mortgage, the contract had probably been terminated and it therefore had no further obligations to Gunns.

56    Under cross-examination, Mr Flanders agreed that it is an aspect of the business of PSAL that it takes risks and in return charges high rates of interest. PSAL, in deciding to advance loan monies, was guided by the concept of loan to value ratio (“LVR”). Mr Flanders agreed that he conducted an LVR in determining to make an advance to Dingemanse. The acceptable LVR was 70% which meant that PSAL would lend up to 70% of the assessed value of property. The valuations provided to PSAL by AI Real Estate Tasmania excluded any valuation for Lots 1 and 2, of the land component to be transferred to Gunns. Mr Flanders agreed that in determining the LVR in the letter of offer to Dingemanse on 11 September 2009, PSAL did not factor into its calculations that portion of land which would have become Lots 1 and 2 as part of a proposed subdivision.

57    Mr Flanders understood that the security offered by Dingemanse excluded proposed Lots 1 and 2. Mr Flanders accepted that PSAL assumed that if the lots were subdivided it would not have security over Lots 1 and 2. Mr Flanders agreed with Mr McElwaine that he had no expectation, as at 11 September 2009, that PSAL would have an enforceable security over those lots if the subdivision was created and that he did not factor those lots into account in assessing PSAL’s risk and its decision to lend money to Dingemanse.

58    PSAL and Balani considered they had adequate security from Dingemanse for second and third mortgages, even excluding any value for the lots at Forest Lodge Road purchased by Gunns. Mr Flanders said that, in September 2009, PSAL was comfortable to exclude any value for Lots 1 and 2 and be adequately covered for security purposes in respect of the loans to Dingemanse.

59    Mr Flanders confirmed that unless restrained by any order of this Court, PSAL and Balani intend to exercise a mortgagee power of sale in a way whereby $400,000 is not first paid to Gunns.

60    According to Mr Flanders, absent Gunn’s consent to the registration of PSAL and Balani’s mortgages no loan monies would have been advanced by the respondents to Dingemanse.

the contract claim – competing submissions

61    Mr McElwaine submits that upon the payment by Gunns of the purchase price under its contract with Dingemanse, Gunns became entitled to the benefit of an equitable lien which survived the termination of the contract by Gunns. Mr McElwaine accepts that an equitable lien can be defeated by the registration of a subsequent interest in land under the State Act. However, he submits that the enforceability of the lien in the current circumstances rests upon a personal equity which binds the respondents.

62    Mr McElwaine develops his submission as follows:

    PSAL and Balani were aware of the terms of the contract between Gunns and Dingmanse before making a decision to advance funds to Dingemanse;

    PSAL and Balani excluded from their valuation of the land the value of the portion to be transferred to Gunns;

    absent the consent of Gunns, PSAL and Balani would not have been able to register their mortgages, thereby permitting them to exercise a power of sale to enforce their security.

63    In its fast track statement Gunns relies on “a consent agreement” between the parties which is constituted by the acknowledgement of 6 October 2009, the preceding correspondence of 21 September 2009 and the consequent consent of Gunns (by notice in writing to the Recorder of Titles dated 7 October 2009) to the registration of mortgages in favour of each respondent over the relevant titles.

64    Gunns contends that on a proper construction of the consent agreement (or that part of it constituted by the acknowledgement) Balani and PSAL were:

    obliged to recognise and give effect to the equitable lien of Gunns; and

    obliged not to act in a way inconsistent with the equitable lien of Gunns; and

    not to have priority as mortgagees over the rights of Gunns pursuant to its equitable lien.

65    Gunns also submits that the conduct of the respondents in seeking a mortgagee’s sale of the titles in respect of which Gunns has an equitable lien and refusing to guarantee the first $400,000 from any such sale to Gunns, means that PSAL and Balani have breached the consent agreement.

66    Mr McElwaine submits that in determining the meaning of the consent agreement it is appropriate to take into account the surrounding circumstances or factual matrix.

67    In particular, Gunns relies on the third part of the acknowledgement, stressing the italicised words below:

We will do all acts that are necessary (as expeditiously as possible) to give effect to the Contract including but not limited to consenting to the schedule of easements and plan of survey and executing a partial discharge of mortgage to enable the transfer of the land in the contract to Gunns Ltd to be registered.

68    Mr McElwaine observes that had the contract been completed the respondents would not have been able to assert a mortgage over the land as against Gunns.

69    Gunns stresses the importance of the words “to give effect to” as being of broad impact. To give effect to the contract, Gunns submits, includes giving effect to all applicable terms, including cl 24.1, set out at [5] above.

70    Mr McElwaine contends that the submission of the respondents that they ceased to be bound to give effect to the contract between Gunns and Dingemanse (in accordance with the acknowledgement) after it was no longer on foot is not a construction which is reasonably open.

71    Mr Gunson submits that upon the registration of the respondents’ mortgages, the legal interest of the respondents in the land became paramount to any interest Gunns might have had, notwithstanding Gunns’ equitable lien. Mr Gunson submits that the respondents are entitled to exercise their powers of sale.

72    Mr Gunson argues that to defeat the respondents’ legal interests as mortgagees, Gunns must establish that there is some personal equity between it and the respondents. He contends that the text of the acknowledgement does not support the construction urged by Gunns.

73    Mr Gunson submits that the proper interpretation of the acknowledgement is that the respondents agreed not to frustrate the contract and in so doing would do such things as provide consent to the registration of a plan of survey and give a partial discharge of mortgage. He relies on text of the acknowledgement and, like Mr McElwaine, also on the factual matrix.

74    Mr Gunson contends that if the parties intended to guarantee the performance of Dingemanse’s obligations under the contract by the respondents including the refund of the purchase price, specific wording to that effect would have been expected. The same applies to a lack of express agreement that Gunns would have priority over the respondents in the event that the respondents exercised their powers of sale.

the contract claim - consideration

75    It appears not to be in contest that in construing commercial contracts the Court is entitled to take into account the “surrounding circumstances” or the “factual matrix”; see Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1, [2006] FCAFC 144, at [46] per Weinberg J, at [98] per Kenny J and at [251], per Lander J.

76    As Weinberg J said in Lion Nathan at [46], the requirement to take into account the surrounding circumstances “is so in all cases, even if the words at issue are not ambiguous, or susceptible of more than one meaning”. At [51] his Honour considered that regard should be had “to context ahead of ambiguity”, consistently with the views expressed by the High Court in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 and previously in Codelfa Constructions Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337.

77    At [53], Weinberg J referred to the “fundamental principle that the rights and liabilities of the parties to a contract are to be determined objectivity”. His Honour continued:

It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe.

78    Importantly, Lander J said at [251]:

It is not clear and settled law that the meaning of commercial contracts and documents is to be determined objectively. To determine the objective intention of the parties regard must be had, of course, to the words in the document themselves, but regard should also be had to all of the surrounding circumstances which were known to the contracting parties at the time the document was created including the underlying purpose and object of the commercial transaction. (Emphasis added.)

79    What were all the surrounding circumstances known to the parties as at 6 October 2009, including the underlying purpose of their agreement?

80    The critical surrounding circumstances were:

    The respondents wished to do business with Dingemanse by offering it loans.

    The respondents knew at the time of offering to advance loans to Dingemanse that NAB was likely to have a first mortgage interest over the subject land.

    The respondents knew about Gunns’ interest in two lots of a proposed subdivision of land held by Dingemanse at Forest Lodge Road.

    The respondents knew that Gunns had contracted with Dingemanse to purchase Lots 1 and 2 and that it had paid Dingemanse the purchase price upon the signing of the uncompleted contract.

    In assessing whether to advance loan funds to Dingemanse, the respondents excluded Lots 1 and 2 of the Forest Lodge Road land from their valuation of the land Dingemanse offered as security for the loan.

    The respondents would not have advanced loans to Dingemanse if Gunns did not consent to the respondents’ interests as mortgagees being registered under the State Act.

    In assessing their risk in advancing the loans to Dingemanse the respondents excised from their concern or interest the two lots which they understood would revert in title to Gunns upon the completion of its contract with Dingemanse.

    Neither Gunns nor the respondents contemplated that Dingemanse would not eventually complete the contract it had with Gunns.

    Gunns would not have consented to have the respondents recognised as registered mortgagees if the consequence would be that it lost its right to recover the purchase price for Lots 1 and 2.

    It may reasonably be inferred that when Gunns consented to the respondents being registered mortgagees and the respondents gave their acknowledgements to Gunns, it was not in the contemplation of any party that Gunns was at risk (in the event of a default by Dingemanse) of not securing the repayment of the purchase price for Lots 1 and 2, or so much of that purchase price that may be realised by a sale of those lots.

81    It does not matter that Gunns did not seek to have precise words included in the acknowledgements which would have protected its position, in the event that has now transpired where the respondents assert an untrammelled right to sell Lots 1 and 2 without any reference to Gunns or compensation for Gunns. The surrounding circumstances support the view that the acknowledgement “to give effect to the contract” was one to give effect to the intention of the contract and not merely to its strict, literal text or to the obligations contained in it for only so long as it remained on foot.

82    I reject the contention that the third limb of the acknowledgement merely indicated a desire not to frustrate the filing of a schedule of easements and a plan of survey leading to a partial discharge of mortgage. If nothing else, the words “including but not limited to” support rejection of that submission advanced by Mr Gunson.

83    Having regard to the foregoing I consider that the contract between Gunns and the respondents imposed a duty on the respondents to do all things possible to protect Gunns’ rights under its contract with Dingemanse and to recognise the rights of Gunns under that contract, including its rights in Lots 1 and 2 in the event of default by Dingemanse.

84    What then was the effect of the agreement between Gunns and the respondents construed in accordance with the above reasoning?

85    The legal consequence of construing the contract between Gunns and the respondents, in the context of the particular surrounding circumstances, is that it established a personal equity as between Gunns and the respondents, such that the respondents would ensure that Gunns received the first $400,000 arising from any mortgagee sale of Lots 1 and 2. In the absence of the establishing of such a personal equity the prior interest of the respondents as registered mortgagees would have trumped the interest of Gunns as the holder of an equitable lien; see s 40 of the State Act and Perpetual Trust Co Limited v Smith (2010) 186 FCR 566 at [78], per Moore and Stone JJ.

86    As French J recognised in Kimberley NZI Finance Ltd v AR Barr Investments Pty Ltd [1990] FCA 54, 2 March 1990, at [23], a proprietor of a registered interest in land may have its interests affected “by personal obligations at law or equity”. So much was recognised by the High Court as long ago as in Barry v Heider (1914) 19 CLR 197. At 213, Isaac J referred to State land title legislation as:

…giving greater certainty to titles of registered proprietors, but not in any way destroying the fundamental doctrines by which Courts of Equity have enforced, as against registered proprietors, conscientious obligations entered into by them.

87    In Bahr v Nicolay (No 2) (1988) 164 CLR 604, the High Court reaffirmed the proposition that in certain circumstances the equitable interests of one party may defeat the registered interests of another. At 613 in Bahr, after discussing the relevant Western Australia land titles legislation, Mason CJ and Dawson J said:

Neither the two sections nor the principle of indefeasibility precludes a claim to an estate or interest in land against a registered proprietor arising out of the acts of the registered proprietor himself: Breskvar v Wall. Thus, an equity against a registered proprietor arising out of a transaction taking place after he became registered as proprietor may be enforced against him: Barry v Heider. So with an equity arising from the conduct of the registered proprietor before registration (Logue v Shoalhaven Shire Council) so long as the recognition and enforcement of that equity involves no conflict with ss 68 and 134. Provided that this qualification is observed, the recognition and enforcement of such an equity is consistent with the principle of indefeasibility and the protection which it gives to those who deal with the registered proprietor on the faith of the register.                     (Citation omitted.)

88    The relevant Western Australian provisions under discussion in Bahr are set out at 613 in the judgment of Mason CJ and Dawson J. Section 68 provided that, except where there is fraud, the registered proprietor holds title only subject to encumbrances notified on the Certificate of Title. Section 134 provided that, except where there is fraud, no one taking a transfer of land shall be affected by any unregistered interest.

89    Their Honours, Mason CJ and Dawson J, then discussed the effect of an agreement between certain parties to the litigation. At 618, their Honours considered that the agreement had given rise to “a trust relationship”. At 619, their Honours held that the effect of the trust was that the second respondents in the litigation held land subject to rights which were created in favour of the appellants by a prior written agreement. The subsequent registration of the interests of the second respondents was not held to destroy the rights of the appellants under that agreement.

90    At 637, Wilson and Toohey JJ referred to Frazer v Walker [1967] 1 AC 569, 585 where the Privy Council recognised that the general principle of indefeasibility of title does not deny the right to bring a claim against a registered proprietor, “in personam, founded in law or in equity, for such relief as the court acting in personam may grant.” At 638, their Honours said that the effect of Frazer was that indefeasibility provisions are not to be circumvented but they:

…do not protect a registered proprietor from the consequences of his own actions where these actions give rise to a personal equity in another. Such an equity may arise from conduct of the registered proprietor after the registration: Barry v Heider. And we agree with Mahoney JA in Logue v Shoalhaven Shire Council that it may arise from conduct of the registered proprietor before registration.

91    Adopting the language of Wilson and Toohey JJ to the current circumstances the evidence before the Court “leads irresistibly to the following conclusions”. The respondents understood that they were obtaining security from Dingemanse for their loans to it in circumstances where Lots 1 and 2 were not factored into determining whether Dingemanse had provided sufficient security. Gunns was prepared to let the respondents register their mortgages so long as the respondents did all they could do to give effect to the contract between Gunns and Dingemanse. Giving effect to the contract meant giving effect to all its terms including the term that Gunns recoup the purchase price it paid to Dingemanse, or so much of it as is possible to recoup. The respondents had no interest in securing title to Lots 1 and 2 until they sought opportunistically to take advantage of the fact that Dingemanse failed to perform its obligations under its contract with Gunns.

92    Again, adapting and modifying for present purposes the language of Wilson and Toohey JJ in Bahr at [39], in light of the conclusion that Gunns had, by reason of its contract with the respondents, an equitable estate in Lots 1 and 2 (and in any event had a prior equitable lien), as against the respondents Gunns has “such an estate or in any event a personal equity.”

93    The claim by Gunns to enforce its personal equity is one in rem. The contract between Gunns and the respondents, having regard to the surrounding circumstances, contained a commitment by the respondents to recognise and respect Gunns’ equitable lien and not engage in conduct inconsistent with that equitable lien being recognised and respected.

94    The action in rem, as distinct from one in personam, runs with the land. In this matter Gunns held an equitable lien which rested on a personal equity and bound the respondents as a consequence of the three part acknowledgement made on 6 October 2009.

the implied term claim

95    In the alternative Gunns submits that it was an implied term of the consent agreement with the respondents that each respondent, as mortgagee, would not have priority over the equitable lien of Gunns. As the Court has found that the proper construction of the contract, viewed in the context of the surrounding factual matrix, contemplates that the respondents would give effect to Gunns’ interest in the land it purchased from Dingemanse, (in the way identified above) it is unnecessary to determine whether the term contended by Mr McElwaine should be implied into the consent agreements. Each respondent was required, under its contract with Gunns, to give effect to Gunns’ equitable lien. The contract of each respondent with Gunns recognises that equitable lien and respects its right to be enforced. Consequently there is no need to imply a term to that effect.

unconscionable conduct

96    In the alternative, Gunns submits that each respondent is estopped from exercising any power of sale inconsistent with the terms of the consent agreement. It contends that the notice of 2 December 2010 and the letter from the respondents’ solicitors to Gunns’ solicitors of 13 December 2010 constitutes unconscionable conduct within the meaning of s 51AA of the Trade Practices Act 1974 (Cth) (“the Act”).

97    This aspect of the claim gives the Court jurisdiction to deal with the matter before it. Mr Gunson concedes that the submission based on what has been referred to by counsel as a Waltons Stores v Maher estoppel is not a colourable one. No issue is taken with the ability of the Court to deal with the issues raised on the aspect of the matter dealing with Gunns’ contractual and equitable rights, under the accrued jurisdiction of the Court.

98    The estoppel claim, allied with the claim under s 51AA of the Act, is founded in the judgment of the High Court in Watson Stores (Interstate) Limited v Maher (1988) 164 CLR 387, in particular at 404-408, per Mason CJ and Wilson J.

99    Given the views expressed by the Court on the contractual and equitable rights aspect of the proceeding it is not necessary to decide whether the respondents are estopped in the sense claimed by Gunns.

the cross-claim

100    The cross-claim is founded on ss 52 and 53A of the Act. It alleges that the lodging of a priority notice contravened those provisions in that it contained a representation which was false, misleading and deceptive.

101    Mr McElwaine concedes that the priority notice should not have been lodged but says that it was understandable that it was lodged given the frustration experienced by Gunns’ former solicitor when the solicitors for the respondents did not reply to her in a timely manner. That submission is rejected. The correspondence relevant to this issue shows that Ms French acted to lodge a priority notice at a time at which Ms Dineen had advised her that the officers of the respondents were not contactable by Ms Dineen. See [21] above.

102    Mr Gunson does not point to any loss occasioned by Gunns’ breach of s 52 or s 53A(1)(b) of the Act. However, he contends that the Court should make a declaration, in the public interest, recording the breach. Mr McElwaine submits that there is no utility in making a declaration. He also contends that loss is an essential element to a claim under s 52 of the Act and that given there is no monetary loss the cross-claim should be dismissed without further order, save as to costs.

103    Section 21 of the Federal Court of Australia Act 1976 (Cth) establishes that the Court may make binding declarations of right “whether or not any consequential relief is or could be claimed”. However the grant of declaratory relief must be directed “to resolving a legal controversy” and will not be ordered, if it “will produce no consequences for the parties”; see Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-582 per Mason CJ, Dawson, Toohey and Gaudron JJ.

104    There is no current legal controversy raised by the cross-claim which requires determination or which has continuing consequences for the parties. It is inappropriate to make a declaration of contravention in the circumstances. This judgment sufficiently records Gunns’ acknowledgement that in lodging the priority notice it breached the Act. No order should be made in the cross-claim, save as to costs.

ORDERS

105    On the cross-claim, the Court will order:

1.    There be no order on the cross-claim, save as to costs.

2.    The applicant pay the respondents’ costs of the cross-claim, to be taxed in default of agreement.

106    On the substantive application the Court will order as follows:

1.    The parties file and serve proposed orders to give effect to these reasons for judgment on or before 18 May 2011. Such proposed orders are to be accompanied, if necessary, by brief outlines of argument in support of the making of such proposed orders.

2.    The matter is adjourned to a directions hearing at 11:00 am on 20 May 2011, in Hobart.

Associate:

Dated:    4 May 2011