JUDGMENT No, ...2 2.5... 74. }ecceesssvoroon: PRACTICE AND PROCEDURE - interlocutory injunctions - whether a serious question to be tried - balance of convenience. MORTGAGES - discussion of the duty of a mortgagee exercising its power of sale - whether any such duty is owed to a guarantor. ROBERT RAFEC OAYDA & ANOR v MERCANTILE MUTUAL LIFE INSURANCE COMPANY LIMITED No NG 779 of 1994 LINDGREN J SYDNEY 18 NOVEMBER 1994 IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No NG 779 of 1994 GENERAL DIVISION ) ROBERT RAFEC OAYDA First Applicant A & S$ OAYDA INVESTMENTS PTY LIMITED Second Applicant AND: MERCANTILE MUTUAL LIFE INSURANCE COMPANY LIMITED (ACN 009 657 176) Respondent CORAM: LINDGREN J PLACE: SYDNEY DATE: 18 NOVEMBER 1994 MINUTE OF ORDERS THE COURT: 1. ORDERS that the applicants' motion be dismissed. ' 2. ORDERS that the applicants pay the respondent's costs of the motion. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No NG 779 of 1994 GENERAL DIVISION ) BETWEEN: ROBERT RAFEC OAYDA First Applicant A & S OAYDA INVESTMENTS PTY LIMITED Second Applicant AND: MERCANTILE MUTUAL LIFE INSURANCE COMPANY LIMITED (ACN 009 657 176) Respondent CORAM: LINDGREN J PLACE: SYDNEY DATE: 18 NOVEMBER 1994 REASONS FOR JUDGMENT INTRODUCTION By their application filed on 11 November 1994 returnable for directions on 1 December 1994 the applicants have sought in relation to a development site known as ""Gardenside" at 1-23 Dixon Street Darling Harbour ("the Property"), the following relief: "1. That the Respondent be restrained until further order from entering into any Contract to sell the land referred to in the Schedule below [a reference to the Property]. 2. An Order that the Respondent be restrained from taking any step to complete or completing any sale of the land referred to in the Schedule below. 3. A declaration that a sale of land to a proper purchaser in the absence of any auction, advertising or marketing is not a bona fide exercise of the Mortgagee's power of sale. 4. A declaration, if required, as to service on any other party. 5. That the Applicants be excused from giving an Undertaking as to damages. 6. That the hearing of the matter be expedited. 7. 'That the time for service of this Application be abridged." By a notice of motion also filed on 11 November 1994 returnable on 9 December 1994, the applicants have sought relief expressed in terms which are identical to those of the application except for the fact that in paragraph 7 the word "Motion" is substituted for the word "Application" and there is added a paragraph numbered 8 reading "That leave be granted to serve notice of this Motion". On Friday 18 November 1994, when I was sitting as Duty Judge, the applicants moved for urgent relief in terms of paragraph 2 of the notice of motion on the basis that a contract dated 12 September 1994 by which the respondent had contracted to sell the site to Accord Pacific Properties Pty Ltd ("Accord") was due to be settled on the following Monday 21 November 1994. Following the conclusion of the inter partes hearing on that date, I indicated that I had formed a clear view as to what the result of the motion for interlocutory relief should be but that the pendency of other matters for hearing in the Duty Judge list would necessitate the publication of my reasons later. I ordered that the motion be dismissed and that the applicants pay the respondent's costs of the motion. These are the reasons for those orders. FACTS The first applicant ("Mr Oayda") is a director of the second applicant ("A & S"). He is also a director of, and holder of shares in, Gardenside Development Pty Ltd (in liquidation) ("Gardenside"). Mr Oayda, A & S, Gardenside and others are guarantors under a Deed of Guarantee dated 6 September 1988 in respect of financial accommodation provided by Burns Philp Trustee Company Limited ("Burns Philp") as lender to™ Continental Holdings Pty Limited ("Continental") as borrower. Like Gardenside, Continental is in liquidation. Gardenside mortgaged the property to Burns Philp as security for the financial accommodation provided by it to Continental, by a mortgage dated 6 September 1988 registered number X865654 ("the Mortgage"). Burns Philp assigned the Mortgage to the respondent ("Mercantile") by Transfer of Mortgage registered number I754013. It is convenient to set out further detail of the facts in the form of a chronology. 23 December 1993 (a) (b) David Barron, assistant general manager of Mercantile, wrote to the secretary of Addenbrooke Pty Limited ("Addenbrooke" ) referring to a meeting on 21 December 1993 and confirming that he would recommend to Mercantile's board acceptance of Addenbrooke's offer to purchase the property for $20,000,000.00. The letter asked that in order that Mercantile's solicitors could be instructed, Addenbrooke sign and return a copy of the letter confirming acceptance of the terms and conditions set out in it and advising Mercantile of the identity of the company which would be the purchaser. On the same date Mercantile wrote to Mr Oayda advising him that it had completed negotiations to sell the Property for $20,000,000.00. In the letter, Mercantile offered not to pursue legal action with respect to two residential units occupied by Mr Oayda and his mother if he would assist Mercantile to complete the sale by signing necessary documents, including appropriate "releases and an agreement not to proceed with any litigation. Mercantile's offer was expressed to be conditional upon Mr Oayda's signing and returning an attached copy of the letter by 29 December 1993 and upon exchange of contracts between Mercantile and Addenbrooke taking place by 31 January 1994. 24 December 1993 Addenbrooke returned the copy of Mercantile's letter signed by Denis O'Neil on its behalf with the inclusion of the words: "Subject to our acceptance of the term and conditions of the contract for sale we advise that in principal" [sic - there followed these words which were already typed in the letter: "The Terms and Conditions contained in this letter dated December 23, 1993 are as discussed and agreed."j Mr Oayda did not accept Mercantile's offer to him. Addenbrooke subsequently advised Mercantile that it would not be proceeding with the purchase. January 1994 According to Mr Oayda, Nick Lucas, then of Bailleau Knight Frank advised him that a sale price of $20,000,000.00 was too low. 1 February 1994 Mercantile obtained a valuation of the Property from Jones Lang Wootton in the sum of $6,900,000.00. 1 March 1994 Mercantile obtained a valuation of the Property from Richard Ellis in the sum of $7,000,000.00. 11 March 1994 Mr Oayda wrote to Mercantile, advising, inter alia: "We are aware that you are currently pursuing the enforcement of the sale of Gardenside. I have always indicated to you that we would oppose such action." 5 April 1994 Mr Oayda wrote to David Barron of Mercantile advising, inter alia, as follow: "... Mr Madden was appointed receiver and manager in March 1993 of the property 'Daking House' only. He was not appointed over any of the companies or Gardenside. This did not occur until October 93. Therefore we have not had over a year in which to act as stated by you, but rather five months." 1 May 1994 Mercantile obtained a valuation from Herron Todd White of the Property in a sum of $12,000,000.00. The valuation included the following important passage: "The majority of residential development sites which have sold in the Sydney CBD over the past 12 to 18 months have occurred by either the private treaty or tender process. The number of purchasers for a property of this type are relatively limited and readily identifiable, be they either a local or offshore developer. The auction process is not necessary to flush out a prospective purchaser with whom a sale may be concluded post auction. In addition they prefer not to compete in public for a site. I am aware of two written offers on the property for amounts in excess of $16 million. JI am of the view that this is in excess of its current market value and do not believe that a better price could be achieved at auction. Accordingly I recommend that an offer at this level be accepted." 30 June 1994 As at this date Jones Lang Wootton valued the property at $14,500,000.00. The valuation included the following: "We are aware that two offers of around $16,000,000 to $16,500,000 have been recently received, however we cannot 'justify this level of value based on the sales which have occurred to date. We recognise that there is every possibility that the determining authority may relax the current development guidelines and there is still strong demand for good development sites from residential developers. However, the level of risk with residential development (which is the only use currently viable) is increasing." Another valuation on this date by Richard Ellis valued the Property at $14,600,000.00. 25 July 1994 Williams Palmer Noss as solicitors for the applicants, wrote to Mallesons Stephen Jaques (""Mallesons") as solicitors for Mercantile advising that they had been informed that Mercantile was "seeking to exchange contracts for the sale of the Gardenside property" and referring to the pendency of Federal Court proceedings in which their clients had challenged the validity and effect of the purported assignment to Mercantile. They advised that if Mercantile intended to sell the property, their clients would seek orders restraining the sale until those Federal Court proceedings had been completed. Apparently the proceedings referred to were proceedings in which the validity of the assignment of the Mortgage from Burns Philp to Mercantile was challenged. Before me, nothing was made of those proceedings, and, in particular, it was not suggested that Mercantile had not become the registered mortgagee of the Property or was not entitled as such mortgagee to sell it. 29 July 1994 Mallesons wrote to Williams Palmer Noss. They advised that they were aware of the then currently pending Federal Court proceedings and were awaiting a "properly particularised Statement of Claim in order to ascertain precisely the basis on which your clients claim to be entitled to relief against our client." They advised that Mercantile's wish was that a sale of the property should proceed. The letter also included the following: "We note that your clients apparently intend to seek injunctive relief of an interlocutory kind to restrain any sale of the property pending completion of the Federal Court proceedings. Please give us reasonable notice of any such application. 'In addition, we note that your clients were apparently unable or unwilling to provide an acceptable undertaking as to damages in support of their last interlocutory application in these proceedings. ..." The injunction referred to was clearly an injunction to restrain any sale, apparently on the ground of the alleged defectiveness of the assignment, no particular sale having been made or been in contemplation at that time. 12 September 1994 Mercantile contract to sell the property to Accord for $16,500,000.00. 5 October 1994 Phillips Fox, solicitors for Accord, lodged a caveat against dealings in respect of the Property. 6 October 1994 Notice pursuant to s. 74P (6) of the Real Property Act 1900 (NSW) was dispatched by the Registrar General to Gardenside. This referred to a contract of sale dated 12 September 1994 between Mercantile and Accord but did not state the sale price. 8 October 1994 Notice of the caveat lodged by Phillips Fox was received. It was not contended that Mr Oayda did not receive or otherwise become aware of the notice at that time. 31 October 1994 (a) At the Federal Court, apparently in connection with the other proceedings referred to, Mr Noss, the solicitor for the applicants, inquired of Julie Ward, a solicitor from Mallesons, as to what was happening with the Property but she said that Mr Noss would need to speak to Mallesons' conveyancing section. - 10 - (b) Apparently on the same date, Mr Noss spoke with Virginia Charlton of Phillips Fox, the solicitors for the purchaser, Accord. He referred to the caveat and inquired as to when the contract between Mercantile and Accord was to be settled but Ms Charlton referred him to Kim Hennessey of her firm. Mr Noss then left a message for Mr Hennessey to contact him. (c) Mallesons wrote to Williams Palmer Noss advising that Julie Ward of Mallesons had instructions to accept service of proceedings on behalf of Mercantile. {d) According to Mr Oayda's affidavit, on this date David Barron of Mercantile told him that Mercantile had sold the Property for $16,500,000.00 but that he could not remember the settlement date, though this could be obtained from Mercantile's solicitors. 3 November 1994 Williams Palmer Noss wrote to Mallesons referring to the fact that 'on 31 October they had sought information regarding the Property when Ms Ward was not prepared to confirm one way or the other as to whether it had been sold. The letter also referred to the fact that Mr Brereton of counsel briefed by Mallesons in the pending Federal Court proceedings had informed Lockhart J that the Property had in fact been sold. The letter went on to say that in the light of this the -ili1- solicitors had carried out a title search against the Property and "found" the existence of the caveat (as noted earlier, Mr Oayda had been aware of the caveat since 8 October!). The letter complained that Mercantile had apparently not taken any steps "to put the property to the market for sale" in that it had not advertised the property, did not "market" the property, and did not offer the property for sale "by way of tender or public auction". The letter also referred to the fact that Mercantile had once had a purchaser for the property at $20,000,000.00. 4 November 1994 Mallesons replied to Williams Palmer Noss referring to the fact that Ms Ward had told Mr Noss that he should contact the conveyancing section of Mallesons. 8 November 1994 Mallesons wrote to Williams Palmer Noss advising that contracts had been exchanged on 12 September 1994 at a price of $16,500,000.00 and that the contract was due to be completed on Monday 21 November 1994, although arrangements for settlement had not at that stage been fixed. The letter continued by referring to the fact that David Barron of Mercantile had informed Mallesons that he had told Mr Oayda the preceding week that the property had been sold for $16,500,000.00 and confirming that settlement was due in November. As well, the letter attached a copy of an article - 12 - which had appeared in the "Australian Financial Review" on Friday 16 September 1994 disclosing the sale at that price. The letter also referred to the fact that Mercantile had obtained no less than five separate valuations in 1994. 9 November 1994 Mr Noss spoke to Mr Hennessey of Phillips Fox who said that he did not think that he was at liberty to tell Mr Noss what he wanted to know because it would be a breach of confidence with his client. He suggested that Mr Noss speak to Mallesons. 11 November 1994 On this date the present application and notice of motion were filed. "Recently" as at 11 November 1994 Mr Oayda deposed in his affidavit sworn 11 November 1994 that he "recently" spoke to Nick Lucas about the fact that his firm Knight Frank & Hooker (formerly ""Bailleau Knight Frank") had sold the Property for "$16,000,000.00 odd" and said that he (Mr "Oayda) was going to try to stop the sale in court. According to Mr Oayda he confronted Mr Lucas with the fact that he (Mr Lucas) had said back in January 1994 that $20,000,000.00 was too low a price, and Mr Lucas had replied that he was in a "difficult position" and was trying to have as little to do with the Property as possible. - 13- There was evidence that Gardenside had expended some $3,500,000.00 on excavation of the site and relocation of services as well as $3,000,000.00 on preparation of architectural and engineering documentation. Mr Oayda, in his affidavit, deposed to the fact that he was not in a position to give any undertaking as to damages and that A & S had no assets and was not in a position to give any undertaking as to damages. The submission made for the applicants was that Mercantile owed to them as guarantors a duty variously described as a duty to "get the best possible price", "to take reasonable ~ care to obtain the best possible price" and "to take reasonable care to obtain the market price". There was no debate before me about the precise formulation of the duty, although the respondent did not concede that it owed any duty to the applicants. I treat the applicants' submission as being to the effect that Mercantile was obliged "to take reasonable care to obtain the best price reasonably available". The essential point of the submission was that the only way in which Mercantile could discharge its duty to the applicants was to advertise and promote the Property and submit it to public auction so that the market could be - 14- tested. Indeed, it seemed to be inherent in the submission that every mortgagee must advertise, promote and put to public auction if its duty on the exercise of its power of sale is to be discharged. Paragraph 3 of the application (quoted at page 2 above) is consistent with this, in that it seems to accept that the duty propounded by the applicants is of universal application. But to say that a mortgagee must sell by public auction is inconsistent with a power to sell by private treaty, a power which (although the Mortgage was not in evidence) the applicants did not submit that Mercantile did not have! The applicants led no expert evidence (a) that advertising and promoting the Property and submitting it to public auction was the only way to achieve "the best price reasonably available", or (b) as to the price which would have resulted from~ implementation of that procedure. The submission was rather that the applicants were entitled to have that course followed so that it could be known whether the price of $16,500,000.00 was the best price reasonably available. . The two questions which the motion raised are: (1) Is there a serious question to be tried as to whether on a final hearing the applicants would obtain relief with which completion of Mercantile's sale to Accord would be inconsistent; and (2) if so, does the balance of convenience favour the granting or refusal of interlocutory relief? The two questions are interrelated: see, for example, Bullock vo i LE ishi i soci : lagi 1) (1985) 5 FCR 464 (FCA/Full Court) at 472 (per Woodward J with Smithers and Sweeney JJ agreeing); Trade Practices Commission v Santos Ltd (1992) 38 FCR 382 (FCA/Full Court) at 397-398 (per Hill J with whom Sweeney J agreed). In my opinion, for the reasons indicated below, the applicants fail on the first issue and would, if it arose, also fail on the second issue. (1) Serious question to be tried The two issues of (a) the nature of the duty of a mortgagee exercising its power of sale, and (b) to whom, in addition to the mortgagor, such duty is owed, have been canvassed in many cases. As to (a), the issue has usually been conceived of as involving a distinction between a duty of good faith or a duty not to act wilfully or recklessly thereby "sacrificing" the mortgagor's interest on the one hand (the formulation usually said to be favoured by the Australian authorities), and a higher duty to take reasonable care directed to obtaining what has been variously described as the "best possible price" or - 16- "the best price reasonably available" or "the true market value" or "a proper price" on the other hand (the higher duty is accepted in England and New Zealand). The leading Australian authorities are Barns v Queensland National Bank Ltd (1906) 3 CLR 925 at 942-943; Pendlebury v The Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676 at 679-680 (Griffith CJ), 694-5 (Barton J), 699-701 (Isaacs J); Forsyth v Blundell (1973) 129 CLR 477 at 493 (Walsh J), 506 (Mason J), 481 (Menzies J, dissenting); The Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195 at 222-225 (Aickin J); Westpac Banking Corporation Ltd v Kingsland (1991) 26 NSWLR 700 (NSW)/Cole J) at 707-709 and cases there cited. The lesser duty of "good faith" has been accepted as the one applicable in Australia by judges of this Court: Brutan Investments Pty Ltd v Underwriting & Insurance Ltd (1980) 58 FLR 289 (Sheppard J, sitting as a judge of the Supreme Court of The Australian Capital Territory) at 298; Bourke v Beneficial Finance Corporation Ltd, unreported, Hill J, 30 January 1991, (leave to appeal refused 8 December 1993 - see (1993) 47 FCR 264). For the position in England, see Cuckinere Brick Co Ltd v Mutual Finance Ltd [1971] Ch 949 (CA) and Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410 (CA) at 1415-1416 (Denning MR). For the position in New Zealand see Clark v UDC Finance Ltd [1985] 2 NZLR 636 (HC of NZ/Casey J) at 637-638. As to (b), the position of guarantors and subsequent -17- encumbrancers has been considered in Australian cases in the context of sales by mortgagees and by receivers; see Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654 (noted at 56 ALJ 672) (in which there was a sale by a receiver and the question arose as to the credits to which the guarantors were entitled as against the mortgagee); Johnson v Australian Guarantee Corporation Ltd (1992) 59 SASR 382 (SA/FC); Johnson v AGC (Advances) Ltd. unreported, FCA/Lockhart J, 21 May 1992; Westpac Banking Corporation Ltd v Kingsland (1991) 26 NSWLR 700 (NSW/Cole J); Clyde Industries Ltd v Dittes, unreported, NSW/Cole J, 5 June 1992 (in which the claim for damages was against a receiver, and through him against the chargee which appointed him). A duty of care in favour of the guarantor is recognised in England (Standard Chartered Bank Ltd v Walker [1982] 1 WLR 1410 (CA)) and in New Zealand (Clark v UDC Finance Ltd [1985] 2 NZLR 636 (HC of NZ/Casey J)), but in Australia it may be that the mortgagee's duty to the guarantor is, apart from the duty of good faith referred to earlier, limited to an equitable duty not to destroy the security or reduce its value. I am able to resolve the present application for interlocutory relief by assuming (without deciding), in favour of the applicants, that Mercantile owed to them as guarantors the duty which they propounded, namely a duty to take reasonable care to obtain the best price reasonably available. - 18 - It is clearly established that a mortgagee which is presently entitled to exercise its power of sale (it was not contended that Mercantile was not so entitled) is not obliged to exercise its power of sale at all or at any particular time in the interests of minimising the amount of the prospective liability of a guarantor: China and South Sea Bank Ltd v Tan [1990] 1 AC 536 (PC); Westpac Banking Corporation Ltd v Kingsland (1991) 26 NSWLR 700 (NSW/Cole J) at 705A, 706C, 709C (and see Mr Justice C W Pincus and J V Swinson, "The Idle Creditor" (1990) 18 ABLR 129). The applicants' case becomes this: that on the evidence it is seriously arguable that Mercantile has not exercised reasonable care to obtain the best price reasonably available by reason of the fact that it has not advertised and promoted the property and put it to public auction. In my opinion, however, on the evidence before me, this is not seriously arguable. The only relevant ~ evidence before me, acceptable for the present interlocutory purposes, is (a) that $16,500,000.00 exceeds the "true value" and (b) that the advertising, promotional and public auction procedures are not the only means of achieving a sale at the best 'price reasonably obtainable. A second reason why the applicants fail to establish a serious question to be tried 1s that there is no serious question about their being granted relief inconsistent with completion ef the sale because the remedy of damages is an adequate remedy. The only basis on which it was submitted that damages would be an inadequate remedy was that if the Property was not advertised, promoted and put to auction, a difficulty would confront the applicants in their claim for damages of establishing what price would have resulted from the implementation of that procedure. It is, of course, true that expert opinion of what would have happened if a certain course had been followed cannot be as persuasive as the occurrence in fact of that course of events and of its sequelae. But this discrepancy does not establish inadequacy of the remedy of damages for the purpose of the test of the availability of equitable remedies. Moreover, the applicants could not suggest any other basis for equitable intervention, such as that the applicants have a proprietary interest in the Property. (2) Balance of convenience It is not necessary for me to consider the balance of convenience in view of my conclusion in (1) above. But since this' question was fully argued, I think it appropriate to say that if I had found that there was a serious question to be tried, I would have concluded that on the balance of convenience the sale should be allowed to proceed to settlement and the applicants should be left to any remedy in damages to which they may be entitled. - 20 - In reaching this conclusion I have been influenced by the following considerations. (a) (b) (c) (a) The applicants proffer no undertaking as to damages. There is no suggestion that Mercantile would be unable to pay any award of damages against it. As at 11 March 1994 if not previously, the applicants knew that Mercantile was proceeding with a sale of the Property; in June 1994 their understanding was that Mercantile was "seeking to exchange contracts"; and from 8 October 1994 they knew that Mercantile had contracted on 12 September 1994 to sell to Accord for $16,500,000.00. The applicants' delay in seeking relief tells against them. The rights of Accord, an innocent purchaser not before the Court, would be interfered with by the granting of the interlocutory relief sought. On the assumption, contrary to my conclusion in (1) above, that the applicants had established a serious question to be tried, their case for final relief with which completion of Mercantile's sale to Accord would be inconsistent, has such poor prospects of success that a clear weighing of the balance of convenience in their favour would be called for. But the balance of convenience does not clearly favour them. CONCLUSION As I indicated at the outset, I ordered that the applicants' motion be dismissed and that the applicants pay the respondent's costs of the motion. I certify that this and the preceding 20 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lindgren. Associate: "My Ka Mik Sry Dated: 25 November 1994 Heard: 18 November 1994 Place: Sydney Decision: 18 November 1994 Appearances: Mr A M Gruzman of counsel instructed by Williams Palmer Noss appeared for the applicants. Mr M A Pembroke of counsel instructed by Mallesons Stephen Jaques appeared for the respondent.