ST CLAIR v NEWCASTLE PERMANENT BUILDING SOCIETY SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL PRIESTLEY, CLARKE JJA and Hope AJA 24 April 1991, 24 April 1991 [1991] NSWCA 257 REAL PROPERTY — MORTGAGE UNCERTAINTY — SEVERANCE CONSTRUCTION OF MORTGAGE Clarke JA This is an appeal from a judgment of Badgery-Parker J in which his Honour entered judgment for the respondent for the possession of the whole of the land comprised in Certificate of Title vol 10062 folio 101 beiNg the property known as 52 Yarranabbe Road, Darling Point. Before his Honour it was not in issue that the appellant had defaulted under two mortgages, to which I will shortly refer, between the parties but there were two matters of defence raised which were said to disentitle the respondent to the order for possession which his Honour ultimately made. The two issues which these defences raised can be shortly stated: first, whether the mortgages and each of them were so uncertain that the law would not recognise them as binding contracts between the parties. Secondly, whether, even if there was a measure of uncertainty arising from the specific clauses in the mortgage, that uncertainty did not, because of the principles of severability, affect the primary obligation or the primary security afforded by the mortgages. His Honour dealt only with the first of the two issues and because of his conclusions on that aspect of the case he did not come to deal with severability. Upon the appeal counsel for the appellant has submitted that his Honour was in error in his conclusion on what I would describe as the uncertainty point and submitted that there could be no question of severability in the event that his submissions on the first point were correct. In his argument he advanced reasons designed to demonstrate that the clauses with which his Honour was concerned were so unextricably bound up with the primary obligations under the mortgage as to destroy any suggestion that the principles of severability could apply. It seems to me that there is some force in the argument on severability but, like his Honour, I have come to the conclusion that it is unnecessary to determine it. Accordingly, I simply note that the argument was raised both at first instance and on the appeal by the respondent and then set it to one side. The two mortgages between the parties were dated 5 October 1988 and 13 June 1989 respectively. Under those mortgages the appellant encumbered her property known as 52 Yarranabbe Road, Darling Point which is, of course, the property in respect of which the order was made. Under the first mortgage the principal sum secured was $2,090,635 and under the second mortgage $87,000. The argument which took place before the trial Judge focused solely on the terms of the first mortgage, that is, the mortgage for the larger sum, and the same course has been followed on the appeal. Accordingly, it is unnecessary to turn attention to the terms of the second mortgage which it has been accepted were, in relevant respects, identical with the first mortgage. 2 UNREPORTED JUDGMENTS I do not think it is necessary to set out all the terms of the first mortgage but I should refer to those terms upon which argument focused. They are CL3 to CL8 which read as follows: "The mortgage further convenants that: 3. The mortgagor may repay the principal sum on a day (other than a Saturday, Sunday or public or bank holiday in Sydney) earlier than the final day at any time without penalty. 4. The mortgagor directs payment of a sum of $318,821.83 out of the principal sum into the investment account and acknowledges that such payment shall constitute part repayment of the principal sum. 5. The investment account shall be charged with repayment of the principal sum and performance by the mortgagor of her obligations under the mortgage, as well as the repayment of any further advances. 6. The mortgagor hereby irrevocably authorises the mortgagee to withdraw the monthly interest payments on the due dates set out in the memorandum from the investment account or any other accounts in the name of the mortgagor of any of them and to apply the same in or towards payment of the interest due and if the mortgagor defaults in any of her obligations to the mortgagee to apply the sum then standing in the investment account towards repayment of the principal sum. 7. The mortgagor hereby irrevocably grants to the mortgagee full rights to set off any amount otherwise payable by the mortgagee to the mortgagor and to combine any such accounts. 8. The mortgagor shall not otherwise create any interest in or assign or otherwise dispose her interest in the investment account (or any part thereof while any amount of the principal sum remains outstanding)." It is the submission of the appellant that there is both confusion and conflict to be found in and between the terms of these clauses. In his submission there are four views which are open and they are: (1) that the moneys directed to be paid are an immediate deduction of principle (CL4); (2) That the moneys of which payment is directed are to be a security for repayment of the principal sum and performance of other obligations (CL5 and CL6); (3) That the moneys are a fund to which recourse may be had to pay interest at the option of the mortgagee (CL6); (4) That the moneys are to go towards the principal in the event of any default in any obligation under the mortgage; such, for interest, as failure to insure. Having put forward those possible interpretations of these clauses counsel submits that it is impossible to choose between them and for this reason the search for the true meaning of the mortgage fails. The submissions were in essence identical with the submissions which were put to his Honour, considered by him and ultimately rejected. In my opinion his Honour was correct in rejecting those submissions and I am persuaded to this result by the reasons which he expressed for his conclusion. In those circumstances it would be sufficient for me merely to say that in my opinion the appeal should be dismissed and that I come to that conclusion upon the adoption of the reasons of the learned trial Judge. In deference, however, to the careful argument of senior counsel for the appellant, it seems to me that I should say something about the specific arguments put today which were slightly different in form, if not in substance, from those arguments considered by his Honour. Counsel directed attention to that portion of the reasons for judgment in which Badgery Parker J said: URJ ST CLAIR v NEWCASTLE PERMANENT BUILDING SOCIETY (Clarke JA) 3 "Tt seems to me tolerably clear, on a fair reading of the clauses as a whole, that the intention of the parties was that the mortgagor should set aside out of the principal sum and place under the control of the mortgagee a sum of money to which the mortgagee might resort in the event of a failure by the mortgagor to pay interest when due and to provide security for the due fulfilment by the mortgagor of her other obligations." This conclusion, the argument ran, flew in the face of the provisions of CL6. That clause, summarised, authorised the respondent to withdraw the monthly interest payments on the due dates set out in the memorandum from the investment account or any other accounts in the name of the mortgagor and to apply the same in or towards payment of the interest due. It then proceeded to authorise the respondent mortgagee to apply the sum then standing in the relevant account towards repayment of the principal sum in the event of default. The second authorisation was conditioned on default whereas there was no express provision conditioning the first authorisation upon the same event. In those circumstances counsel submitted it was erroneous to convert a right to deduct interest on the due date to a power to do so exercisable only on default, which is, according to the argument, what his Honour did. The same argument was put to his Honour who rejected it on the basis that one did not read CL6 in isolation but considered it in the context of a mortgage as a whole. During the hearing today counsel accepted that if, in fact the appellant had paid interest in or shortly before the due date the mortgagee would not be entitled to make a deduction from the fund in order to pay the interest which had been due. This acceptance was perfectly correct because the entitlement was simply to apply the moneys in the account towards payment of the interest due. If the interest had already been paid and was no longer due the entitlement disappeared. Accordingly, it seems to me to follow that the entitlement to withdraw the interest payment on the due date arises only if the interest was due and unpaid. That is in effect what his Honour said. For my part, I would read CL6 together with the other clauses and regard it as an authorisation which enabled the mortgagee to appropriate moneys from the fund to pay unpaid interest and by that I mean interest due and unpaid. I would not regard it as an authority to deduct moneys from the fund to pay interest which was not undue and unpaid. In this respect I do not think it matters whether the due date is regarded as the 25th of the month or the end of the month which was the end of the period of grace. If after the period of grace payment had not been made the right to appropriate the moneys for the interest then due arose. If the payment had been made by the 25th of the month or during the period of grace then on the proper construction of the mortgage that right did not arise. The second substantive argument focused on the final words in CL4 which read: "The mortgagor... acknowledges that such payment shall constitute part repayment of the principal sum." This it was said was a clear contractual provision to the effect that the moneys, that is the $318,821.83, were immediately appropriated in part repayment of the principal and had the effect of reducing the principal upon which interest was to run and provided the sole purpose for the setting up of the fund, that is as representing part repayment of principal. Such a view of CL4 would clearly be inconsistent with the notion that the fund remained under the control of the mortgagee but available for payment of interest which was due and unpaid or payment of other sums which may have fallen due as a consequence of default by the mortgagor in any of her obligations. It was 4 UNREPORTED JUDGMENTS also said in this context that the clear meaning of CL4, which was as I earlier set out, was quite inconsistent with the end words of CL6 which enabled the mortgagee to apply portion of the investment account towards repayment of the principal sum only upon default on the part of the mortgagor. The argument points up the drafting defects in the mortgage to which his Honour paid careful attention. I do not suggest for one moment that it is an eloquent document, nor do I suggest that the defects in the drafting have not created construction problems. What I do say, however, is that on reading the document as a whole, with particular regard to CL3 to CL8, there is, I think, a clear meaning and an intention to be drawn from the mortgage concerning the fund referred to in CL4 and the manner with which that fund may be dealt with in accordance with that and the other relevant clauses. That clear meaning was the one expressed by Badgery-Parker J and that is that the moneys remained as a fund available to be drawn upon to pay interest if due and unpaid and principal in the event of default. Although there is a clear inconsistency between the latter words of CL4 and the latter words of CL6 I am of the view that that inconsistency is capable of resolution and should be resolved in the way in which I have suggested. For these reasons, I would dismiss the appeal with costs. Priestley JA For the reasons given by Clarke JA I agree that the construction arrived at by the trial Judge, that the clauses said by the appellant to be void for uncertainty, should not be accepted; and because I have reached this opinion it is unnecessary to say anything about the severability argument which was the subject of submission by the appellant. On that argument upon which I expressly reserve my opinion, it seems to me there is a considerable deal to be said on either side. I agree with the order proposed by Clarke JA. Hope AJA I agree. The order of the court is that the appeal be dismissed with costs. The existing stay is extended for seven days from today with a view to the appellant making such application at first instance for continuance of the stay as she may be advised. Counsel for the Appellant: BW RAYMENT QC and D O'DOWD Counsel for the Respondent: FM DOUGLAS QC and N R BURNS Solicitors for the Appellant: PHILLIPS FOX Solicitors for the Respondent. GARLAND HAWTHORNE BRAHE