FEDERAL COURT OF AUSTRALIA Balani Pty Ltd v Gunns Limited [2011] FCAFC 153 Citation: Balani Pty Ltd v Gunns Limited [2011] FCAFC 153 Appeal from: Gunns Limited v Balani Pty Ltd [2011] FCA 431 Parties: BALANI PTY LTD (ACN 122 390 738) and PSAL LIMITED (ACN 118 825 120) v GUNNS LIMITED (ACN 009 478 148) File number: TAD 30 of 2011 Judges: KEANE CJ, FINN AND STONE JJ Date of judgment: 5 December 2011 Catchwords: CONTRACT – purchase of land - purchase price paid - right of termination by either party if conditions precedent not satisfied - contract validly terminated - purchase price not repaid - mortgage over land registered by vendor's creditors, with consent of purchaser, in exchange for mortgagees' acknowledgement to do all acts necessary to give effect to contract between vendor and purchaser - whether acknowledgement gave rise to a right of purchaser to recover purchase price from mortgagors in the event of sale of the land Legislation: Land Titles Act 1980 (Tas) Cases cited: Bahr v Nicolay (No 2) (1988) 164 CLR 604 referred to Breskvar v Wall (1971) 126 CLR 376 referred to Brown v Heffer (1967) 116 CLR 344 cited Chang v Registrar of Titles (1976) 137 CLR 177 cited Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 referred to Davies v Littlejohn (1923) 34 CLR 174 cited Hewett v Court (1983) 149 CLR 639 cited Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 referred to Loke Yew v Port Swettenham Rubber Co Ltd [1913] AC 491 referred to McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 referred to Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 referred to Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 referred to Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 referred to Date of hearing: 15 November 2011 Place: Brisbane (Heard in Hobart) Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 34 Counsel for the First and Second Appellants: Mr SP Estcourt with Mr CJ Gunson Solicitor for the First and Second Appellants: Galilee Solicitors Counsel for the Respondent: Mr SB McElwaine with Ms EM Judd Solicitor for the Respondent: Shaun McElwaine & Associates IN THE FEDERAL COURT OF AUSTRALIA tasmania DISTRICT REGISTRY GENERAL DIVISION TAD 30 of 2011 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: BALANI PTY LTD (ACN 122 390 738) First Appellant PSAL LIMITED (ACN 118 825 120) Second Appellant AND: GUNNS LIMITED (ACN 009 478 148) Respondent JUDGES: KEANE CJ, FINN AND STONE JJ DATE OF ORDER: 5 december 2011 WHERE MADE: BRISBANE (HEARD IN HOBART) the court orders that: 1. The appeal be allowed and the judgment below set aside to the following extent. THE COURT DECLARES THAT: 1. Each appellant is bound to give effect to the right of the respondent to the appeal to repayment of the purchase price paid by it pursuant to a contract of sale between it and Dingemanse Management Pty Ltd dated 27 October 2008 to secure the repayment to the respondent of the Repayment Amount, to the extent that such liability has not otherwise been discharged or satisfied. 2. The Repayment Amount is the sum of $400,000.00 together with interest thereon calculated at the rate of 10% per annum from 23 March 2010. THE COURT ORDERS THAT: 1. Neither appellant shall provide a registrable discharge of its mortgage without ensuring that the respondent is paid that part of the Repayment Amount which has not otherwise been discharged or satisfied. 2. The appellants' application for leave to amend their notice of appeal be dismissed. 3. The appellants pay the respondent's costs of the appeal to be taxed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA tasmania DISTRICT REGISTRY GENERAL DIVISION TAD 30 of 2011 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: BALANI PTY LTD (ACN 122 390 738) First Appellant PSAL LIMITED (ACN 118 825 120) Second Appellant AND: GUNNS LIMITED (ACN 009 478 148) Respondent JUDGES: KEANE CJ, FINN AND STONE JJ DATE: 5 DECEMBER 2011 PLACE: BRISBANE (HEARD IN HOBART) REASONS FOR JUDGMENT the court: 1 On 27 October 2008, Gunns Limited (Gunns) agreed with Dingemanse Management Pty Ltd (Dingemanse) to purchase land to be subdivided from a larger existing parcel of land registered under the Land Titles Act 1980 (Tas) (the LTA). The land to be acquired by Gunns was about 136 hectares comprising Lots 1 and 2 on a proposed plan of subdivision referred to in the contract. The price of $400,000 was payable, and was paid, by Gunns on the making of the contract. 2 The contract was conditional on the local authority granting Dingemanse permission to subdivide its land: if a separate title for the land to be conveyed to Gunns did not issue within six months of the date of the contract, either party was entitled to cancel the contract, in which event Gunns would be entitled under the contract to recover the purchase price in full. The separate title did not issue in due time, and on 23 March 2010 Gunns terminated the contract. It is common ground that Gunns was entitled to terminate the contract. 3 Dingemanse has not refunded the purchase price. 4 Earlier, on 27 May 2009, Gunns had filed a caveat with the Tasmanian Land Titles Office in respect of the existing parcel which included the land the subject of its contract with Dingemanse. Balani Pty Ltd and PSAL Limited (the lenders) subsequently agreed to provide financial accommodation to Dingemanse. The lenders asked Gunns to consent to the registration of a mortgage in their favour over Dingemanse's existing title. 5 Gunns, as caveator, agreed to consent to the registration of the lenders' interest as mortgagee in return for an acknowledgement in the following terms: 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. 6 It is necessary to note that cl 24.1 of the contract between Gunns and Dingemanse provided: 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. 7 The lenders, as registered mortgagees, have power to sell the land the subject of the mortgage in their favour and to appropriate the monies realised upon sale. They have denied any entitlement in Gunns to recover from the proceeds of sale the purchase price paid by it to Dingemanse. Gunns brought proceedings in the Federal Court of Australia to establish its entitlement. THE DECISION AT TRIAL 8 The primary judge declared that the lenders were bound by and must give effect to Gunns' equitable lien, ordering that, in the event that they exercised their power of sale as mortgagee, the first $400,000 realised by the lenders must be paid to Gunns. 9 Before the primary judge the case was complicated by the focus of the parties' arguments upon whether circumstances surrounding the lenders' acknowledgement could be relied upon as an aid to its interpretation. In particular, in this regard, the primary judge referred at [80] of his Reasons for Judgment (Reasons) to a number of surrounding circumstances as supporting his conclusion at [83] that the "intention of the contract" was that the lenders would "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". The case was also complicated by a focus upon equitable doctrines relating to the purchaser's lien. 10 His Honour held at [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. 11 The learned primary judge concluded that the contract created by Gunns' acceptance of the acknowledgement "imposed a duty on the [lenders] to do all things possible to protect Gunns' rights under its contract… including its rights in [the land the subject of Gunns' purchase] in the event of default by Dingemanse" (Reasons at [83]). His Honour took the view that this duty gave rise to an equity in Gunns which trumped the lenders' rights under their registered mortgages (Reasons at [91] – [94]). THE LENDERS' APPEAL 12 In their appeal against the decision of the primary judge, the lenders argue that the dealings between Gunns and the lenders did not give rise to an obligation in the lenders to ensure that Gunns received the first $400,000 from a mortgagees' sale of the land, the subject of their registered mortgage. The lenders argue that the acknowledgement obliged them only to consent to the registration of a plan of subdivision to excise the lots to be transferred to Gunns and to consent to a partial release of mortgage to enable that transfer to take place. The lenders contend that the primary judge's view of the effect of the acknowledgement impermissibly treated the lenders as guarantors of Dingemanse's obligations to Gunns. 13 The lenders argue that the primary judge erred in concluding the surrounding circumstances to support his conclusion that the lenders had agreed to be bound by Gunns' purchaser's lien. Indeed, the lenders seek leave to amend their notice of appeal to argue that the primary judge erred in having regard to surrounding circumstances at all in construing the acknowledgement. This last argument is contrary to the position they took at trial where this evidence was admitted without objection. 14 The lenders also argue that his Honour erred in fact in regarding as a relevant circumstance that it was not in Gunns' contemplation when it consented to the registration of the lenders' mortgage that Gunns was at risk of not securing repayment of the purchase price paid to Dingemanse. Further, they argue that the relief granted by the primary judge exceeded the minimum equity necessary to do justice. They argue that the minimum equity approach justifies only an order that the lenders pay to Gunns so much of the purchase price that it proves to be unable to recover from Dingemanse. 15 Allied to these contentions is a complaint by the lenders that the primary judge did not adequately expose the reasoning by which his Honour concluded that the "legal consequence" of construing the lenders' acknowledgment as his Honour did established a personal equity in Gunns to have the lenders "ensure that Gunns received the first $400,000 arising from any mortgagee sale of Lots 1 and 2" (Reasons at [85]). 16 Gunns argues, among other points, that the lenders' obligation under cl 3 of the acknowledgement to "do all acts that are necessary … to give effect to the contract" between Gunns and Dingemanse includes an obligation to facilitate Gunns' recovery of the purchase price on termination of the contract from the proceeds of a realisation of the land effected by the lenders as mortgagees of the land. In oral argument on the appeal, counsel for Gunns accepted that it was not necessary for it to rely upon an equitable lien or circumstances outside the contract constituted by the lenders' acknowledgement. CONSIDERATION ON APPEAL 17 At the outset, one may respectfully observe that the case presented before the primary judge was complicated, perhaps unduly, by the focus of the parties upon equitable liens and the significance of the factual circumstances surrounding the lenders' acknowledgement. As to this latter point, if, as we consider to be the case, the conclusion that the lenders' acknowledgement had the effect attributed to it by the primary judge is sufficiently supported by the text and subject matter of the acknowledgement, there is no need for Gunns to pray in aid surrounding circumstances such as the subjective appreciation of either Gunns or the lenders of the extent of Gunns' vulnerability upon consenting to the registration of the lenders' mortgage. 18 By the terms of the acknowledgement, the lenders expressly agreed to do what was necessary on their part to give effect to the contract between Gunns and Dingemanse. The lenders' obligations under cl 3 of the acknowledgement were unqualified and unconditional. Clause 3 of the acknowledgement imposed on the lenders an obligation which was expressly not limited to acts which were apt to enable a transfer to Gunns to occur. Facilitating the completion of the sale might have been a purpose, even the primary purpose of the acknowledgement, but stating that purpose did not exhaust the content of what was actually agreed in broader terms. The promise was to do acts necessary to "give effect to the contract", not merely to enable the contract to be completed or to give effect to part of the contract. Nor, so far as the lenders' minimum equity approach is concerned, was the acknowledgement limited to compensating Gunns for any loss suffered in relation to its contract with Dingemanse. 19 To say these things is simply to give effect to the express terms of cl 3 of the acknowledgement and cl 24.1 of the contract between Gunns and Dingemanse. It is not necessary to seek support for such an interpretation of cl 3 of the acknowledgement in the circumstances surrounding the acknowledgement. 20 It must be accepted that it is to read too much into the lenders' acknowledgement to treat the lenders as guarantors of Dingemanse's contractual obligations to Gunns. The lenders' promise "to do all acts that are necessary" is distinctly not apt to include a promise to pay money if Dingemanse failed to perform its obligations. Further, the acknowledgement cannot be read as if the lenders had promised to stand behind Dingemanse to the extent of making all their substance (and not merely their rights over the land) available to satisfy Dingemanse's obligations to Gunns. Having regard to the subject matter of the acknowledgement, it is apparent that the lenders' promise to "do all acts that are necessary … to give effect to the Contract" is necessarily concerned with acts which are within the lenders' power as mortgagees of the land. Accordingly, the expression "acts that are necessary … to give effect to the Contract" can only be understood as "acts which the lenders are empowered by their mortgage to undertake in respect of the land that are necessary to give effect to the Contract". 21 By virtue of cl 24.1 of Gunns' contract with Dingemanse, Gunns' contractual entitlements against the lenders included the repayment by Dingemanse of the purchase price under the contract with Gunns. The effect of the language of the acknowledgement is that funds realised from the sale of Dingemanse's property by the exercise by the lenders of their powers as mortgagees of the land are monies which the lenders must appropriate to Gunns' entitlement to repayment of the purchase price by Dingemanse. Any other appropriation would be contrary to the lenders' promise to Gunns that the lenders will do all things necessary in the exercise of their powers with respect to the land to give effect to Gunns' rights under its contract with Dingemanse. 22 For these reasons we have concluded that the true extent of the lenders' obligations to Gunns can be gleaned from the terms of the contractual promises made to Gunns by the lenders in the acknowledgement in return for Gunns' agreement to facilitate the lenders' acquisition of legal rights as mortgagees of the land. That being so, it is unnecessary to decide whether the challenged finding concerning Gunns' appreciation of this aspect of their situation should stand. 23 It was argued on behalf of the lenders that clear words would be required to achieve such a result. In our respectful opinion, the effect which we attribute to the terms of the acknowledgement is not surprising or uncommercial. On the contrary, the meaning which emerges from a consideration of the terms of the acknowledgement accords with the reasonable commercial expectation that Gunns' interests under its contract would not be adversely affected by its consent to the registration of the lenders' mortgage. 24 The view we have taken of the effect of the acknowledgement based on the text and subject matter of the acknowledgement reflects the reasonable commercial expectation that the lenders, in looking to the land the subject of their mortgage for the repayment of their advances to Dingemanse, should not impede the enforcement of Gunns' rights vis-à-vis Dingemanse so that Gunns' position under its contract with Dingemanse would not be prejudiced by Gunns' consent to the registration of the mortgage in favour of the lenders. 25 If Gunns had not consented to the registration of the lenders' mortgage in return for the acknowledgement, Gunns could have obtained an injunction prohibiting any disposition of the land, or any interest in it, inconsistent with its rights. It could also have obtained an order that Dingemanse transfer the portion to which Gunns was entitled once all necessary conditions had been satisfied. Such orders would have been made in order to protect Gunns' contractual rights, having regard to the important circumstance that Gunns had paid the purchase price: Brown v Heffer (1967) 116 CLR 344 at 349-350; Chang v Registrar of Titles (1976) 137 CLR 177 at 184-185. Furthermore, if Gunns lawfully terminated its contract with Dingemanse, and sought recovery of the purchase price from Dingemanse, a court would have made the repayment of the purchase price by Dingemanse a condition of releasing Dingemanse from the injunction prohibiting it from disposing of the land, or any interest in it, to any other person: Davies v Littlejohn (1923) 34 CLR 174 at 185-186; Hewett v Court (1983) 149 CLR 639 at 645. 26 It will also be apparent that there is no occasion to limit the relief available to Gunns by reference to the minimum equity necessary to protect Gunns from an ultimate shortfall in its recovery from Dingemanse. The relief to which Gunns was entitled is to be measured by reference to the lenders' promise, not proven loss suffered by Gunns. 27 The lenders do not dispute that the provisions of the LTA, which confer indefeasibility and paramountcy on registered mortgages, do not bring about a different conclusion. They are right to make this concession. It is well-established that the provisions of the LTA do not relieve registered proprietors or mortgagees of land under the Act of their own personal obligations: see Loke Yew v Port Swettenham Rubber Co Ltd [1913] AC 491 at 504-505; Breskvar v Wall (1971) 126 CLR 376 at 384 -385; Bahr v Nicolay (No 2) (1988) 164 CLR 604 at 613; 638; 653-654. Contractual obligations are, of course, a strong example of such personal obligations. Whatever the ramifications of the termination of the contract between Gunns and Dingemanse for any equitable lien which Gunns might otherwise have enjoyed in respect of the land, and whether or not that lien operated in respect of the whole of Dingemanse's land or only the proposed Lots 1 and 2, the contractual rights enjoyed by Gunns against the lenders by virtue of the acknowledgement continued to operate with respect to Gunns' accrued rights under cl 24 of its contract with Dingemanse. These rights remained enforceable (and to be given "effect" by the lenders) notwithstanding the termination of that contract: see McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477. 28 It will be apparent that we have concluded that the lenders' appeal is bound to fail even if the lenders' contention, that reference to the surrounding circumstances to construe the acknowledgement was not permissible, is accepted. Having regard to our conclusion that the scope of the expression can be understood without recourse to the controversial circumstances adverted to by the primary judge, there is no occasion for this Court to consider more closely the guidance afforded by the recent decision of the High Court in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45 and its earlier decisions in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22], Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40], and Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352, or the correctness of the decision in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1 esp at 53. 29 Accordingly, the lenders' application for leave to appeal should be dismissed on the basis that the issue sought to be raised thereby can have no material bearing on the merits of the appeal. 30 It should also be noted that counsel for Gunns accepted that orders sufficient to vindicate Gunns' rights under its contract with the lenders did not need to be based upon an equitable lien in Gunns. CONCLUSION AND ORDERS 31 The appeal should be allowed, but only to delete reference to Gunns' purchaser's lien and to ensure that Gunns is adequately protected against the lenders. 32 We do not consider that it is necessary or desirable to spell out in the orders of the Court the disposition of the proceeds of any sale. The order of disposition of the proceeds is provided for by law. 33 As to the costs of the appeal, the exiguous success on appeal which might be said to have been enjoyed by the lenders does not warrant any departure from the usual position that the costs should follow the event. Accordingly, the lenders should pay Gunns' costs of the appeal. 34 We would allow the appeal and make the following declarations and orders: 1. Each appellant is bound to give effect to the right of the respondent to the appeal to repayment of the purchase price paid by it pursuant to a contract of sale between it and Dingemanse Management Pty Ltd dated 27 October 2008 to secure the repayment to the respondent of the Repayment Amount, to the extent that such liability has not otherwise been discharged or satisfied. 2. The Repayment Amount is the sum of $400,000.00 together with interest thereon calculated at the rate of 10% per annum from 23 March 2010. 3. Neither appellant shall provide a registrable discharge of its mortgage without ensuring that the respondent is paid that part of the Repayment Amount which has not otherwise been discharged or satisfied. 4. The appellants' application for leave to amend their notice of appeal should be dismissed. 5. The appellants pay the respondent's costs of the appeal to be taxed if not agreed. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Keane and Justices Finn and Stone. Associate: Dated: 5 December 2011