New South Wales Supreme Court CITATION : Rossfreight Holdings v Unipep Australia [2002] NSWSC 1074 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 2567/02 HEARING DATE(S) : 8 November 2002 JUDGMENT DATE : 8 November 2002 PARTIES : Rossfreight Holdings Pty Ltd (Plaintiff) Unipep Australia Pty Ltd (Defendant) JUDGMENT OF : Campbell J COUNSEL : P M Lane (Plaintiff) D G Charles (Defendant) SOLICITORS : Access Business Lawyers (Plaintiff) Gibson Owen Lawyer, Inc (Defendant) CATCHWORDS : GUARANTEE AND INDEMNITY - rights of surety - to mandatory quia timet order requiring principal debtor to pay the debt - basis of order - vailability when action for account on foot between surety and principal debtor - REAL PROPERTY - co-owners - co-owners have mortgaged land to secure debt of one of the co-owners - action for account on foot between co-owners - whether surety co-owner entitled to require principal debtor co-owner to discharge mortgage - EQUITY - surety's equity of exoneration - basis for - EQUITY - subrogation to mortgage when mortgage paid out - application between co-owners AWA Limited v Exicom Australia Pty Limited (1990) 19 NSWLR 705 Cochrane v Cochrane (1985) 3 NSWLR 403 CASES CITED : Ghana Commercial Bank v Chandiram [1960] AC 732 Watt v Mortlock (1964) 1 Ch 84 Woolmington v Bronze Lamp Restaurant [1984] 2 NSWLR 242 DECISION : Application refused IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J FRIDAY 8 NOVEMBER 2002 2567/02 ROSSFREIGHT HOLDINGS PTY LIMITED v UNIPEP AUSTRALIA PTY LIMITED JUDGMENT 1 HIS HONOUR: The plaintiff and the defendant are co-owners of land which has been used for industrial purposes. The plaintiff has a sixty-five per cent interest in the property, while the defendant has a thirty-five per cent interest in the property. It is common ground between the parties that that sixty-five per cent interest of the plaintiff was acquired in 1992, and that over a period in 1992 and 1993 a joint venture concerning chemical manufacturing was conducted between the plaintiff and the defendant on the land. It was for the purpose of carrying on that joint venture that the plaintiff acquired its interest in the land. I call the relationship between the parties a "joint venture" so as not to prejudge any question which may later arise of whether it was, or was not, a partnership. 2 At the time the plaintiff acquired its interest in the land it borrowed $250,000 on an interest-only loan from the Commonwealth Bank. In due course that loan was paid out, and Westpac refinanced it. When the refinancing took place Westpac was granted a mortgage, registered number I 576266, over the land. 3 The complete terms of the mortgage are not in evidence before me. The mortgage includes by reference the terms of a memorandum, and that memorandum is not in evidence. However, from the portion of the mortgage which is in evidence, one can say that both the plaintiff and the defendant have joined, as mortgagors, in granting the mortgage, but that the mortgage is one which was made at the request of the plaintiff, and that it is the plaintiff which is the debtor to the bank. It may be that the terms of the memorandum include a personal covenant on behalf of each mortgagor to pay the mortgage debt, but even if that were so it would not alter the situation that the mortgage is essentially one whereby the plaintiff and the defendant provide security for a guarantee of the debt of the plaintiff. 4 The joint venture between the parties failed. There have been disputes on foot since 1995 concerning the causes of the failure of the joint venture, who should pay outgoings connected with the property and, more recently, a dispute has arisen concerning a possible need for environmental remediation of the site. 5 Earlier this year, the plaintiff began proceedings seeking the appointment of trustees for sale of the land, and some consequential orders. On 23 July 2002 Master Macready, by consent, made orders appointing trustees for sale, and making provision for there to be an inquiry before a Master to ascertain which of the plaintiff and the defendant owed how much money to the other. By orders made on 20 August 2002 the parties agreed on some more precise orders for the conduct of that inquiry. One of the orders identified the topics into which inquiry was to be had. That order was: "1. That there be an inquiry into determination of the entitlement of the parties to an adjustment of the share of the amount realised on the sale of the land described in the order of Master Macready of 23 July 2002 (the property) in respect of the following matters: a. Whether either the Plaintiff or Defendant is entitled to contribution from the other party on account of: i. payment of Council rates on the property; ii. payment of Land Tax on the property; iii. the costs of removal of 51 x 400 litre drums of waste chemical from the property; iv. the costs of remediation of the property; v. any payment of outgoings in respect of the property; and if so, the amount of that entitlement; b. Whether the Plaintiff is entitled to receive from the Defendant an amount in respect of an occupation rent or fee in respect of the Defendant's occupation of the property from November 1996 to the date of sale and the amount of that entitlement; c. Whether either the Plaintiff or Defendant is required to pay to the other any amount in respect of the capital cost of acquisition of the property; d. Whether the amount required to discharge Mortgage No 1576266 on the property is to be borne wholly by the Plaintiff; e. The costs of such inquiry." 6 On that occasion the court also noted that the defendant might move the court for interim or other relief in respect of the discharge of the mortgage referred to in Order 1(d). 7 The application which is before me today is an application by the defendant, of the type foreshadowed on 20 August. The claim which the defendant makes today is put in the alternative. The first alternative seeks an order that the plaintiff within twenty-eight days obtain a discharge from Westpac of the mortgage over the land. The alternative relief sought is an order that the plaintiff, prior to the sale of the land by the trustees for sale and the discharge of the mortgage, pay to the trustees for sale the sum of $120,000 or such sum of money as the trustees estimate is likely to be the shortfall in the amount of net proceeds of sale of the land to which the defendant would otherwise be entitled after deduction of each party's contribution to the remuneration and expenses of the trustees for sale, and following an account of the matters between the parties referred to in paragraphs 1a to 1e inclusive of the orders made by the Registrar on 20 August 2002. 8 The reason why the defendant seeks that order was explained by Mr Charles, counsel for the defendant. The land appears to be worth, on one method of valuing it, somewhere between $400,000 and $460,000. The mortgage to Westpac is, it is common ground, one which continues to secure a principal sum of $250,000. Mr Charles submits that if the land were to be sold for a price in that range of $400,000 to $460,000, the plaintiff's sixty-five per cent share would result in it receiving $260,000 to $299,000, minus its share of expenses associated with the sale. By far the larger part of the plaintiff's share would, thus, be absorbed in paying out the Westpac debt. That would leave the defendant in a situation where, if there were to be a result favourable to it in the accounting, such that it was owed more than something in the range of $10,000 to $50,000, it would be in a position of having no property right against which it could seek to enforce that claim. 9 It, therefore, approaches the court for relief to require the payment out by the plaintiff of the mortgage, or at least that the plaintiff put the trustees for sale into funds in a sufficient sum to ensure that, when the outcome of the accounting before the Master is known, the defendant still has a proprietary right against which it is able to claim any sum which might be found due to it. 10 The defendant says that what would happen if the plaintiff were able to have the mortgage paid out from the proceeds of sale of the land would be that the plaintiff would, in effect, be obtaining access early, and in an uninhibited fashion, to its share of the fund, and possibly also to some of the defendant's share of the fund. 11 The defendant says that it is the plaintiff who has sought the appointment of the trustees for sale and the taking of accounts, and that when the plaintiff has sought equity in that fashion it should do equity by making sure that the defendant is not in any worse position than if the plaintiff had actually discharged its liability under the mortgage. 12 It is well enough established that someone who is a surety has a right of exoneration, whereby he is entitled to be indemnified by the principal debtor against any liability he incurs as a consequence of being called on to pay the debt. Further, equity recognises a more extensive right of exoneration which entitles the surety, in a situation where there is a practical likelihood that the surety will be called on to pay the debt, to a quia timet order, requiring the principal debtor to pay the debt before the surety is called on to do so: see O'Donovan and Phillips, The Modern Contract of Guarantee, 2nd ed, p.478-485. 13 The equity of exoneration is one which applies in a situation where the surety has made its property available to provide security for a debt of the principal debtor. In that situation, the surety can, in ordinary circumstances, obtain an order that the principal debtor pay out the debt which is so secured: Watt v Mortlock [1964] 1 Ch 84; Woolmington v Bronze Lamp Restaurant [1984] 2 NSWLR 242. 14 Those principles are ones which apply in a situation where the relations between the principal debtor and the surety consist just of the provision of security for the debt. 15 Here, the relations between the plaintiff and the defendant are more complicated. The plaintiff and the defendant have on foot an action for account. I am in a situation where the evidence discloses very little about the substance of the action for account, or its likely outcome. I do not know who has actually paid the rates and land tax. There is no material before me which casts any light on who it is, out of the plaintiff and the defendant, who might be liable for the costs of removal of the drums of waste chemical from the property, or any cost of remediation. Nor is there any material which gives me any idea of the quantum that might be involved in any costs of removal or of costs of remediation. The other items which are the subject of the account are, likewise, ones where the material before me does not enable me to know, or even make the beginnings of a prediction, who is likely to end up owing whom money, or even the approximate size of any amount of money which might become owing once the account is completed. Further, it is to be noted that one of the questions which is submitted for inquiry in the account is whether the amount required to discharge the mortgage is to be borne wholly by the plaintiff. 16 Concerning accounts between mortgagor and mortgagee Hutley JA has said: "A party cannot, as it were, have little bits of accounts. There is one account and one account only and the issue is what is owed and what is not owed. The declaratory procedure cannot be used to get declarations about little bits of account because the proceedings may become, in relation to a total account, otiose." ( Colin D Young Pty Limited v Commercial and General Acceptance Limited (1982) ConvR 55-097 at 56-573, also quoted in Adams v Bank of New South Wales [1984] 1 NSWLR 285 at 296.) Those remarks apply equally to accounts between co-owners of land. 17 What the defendant is seeking to do here is to assume the result of the inquiry, in one respect; namely, whether the amount required to discharge the mortgage is to be borne wholly by the plaintiff. 18 It is part of the justification for the equity of exoneration that, when the obligations between surety, creditor and principal debtor are worked out, one can say with confidence, at the time the court makes an order, that it is the principal debtor who will end up being liable to pay. Equity avoids multiplicity of actions, by ordering that the inevitable eventual outcome of two different actions, by creditor against surety, and then by surety against principal debtor, be achieved straight away, without going through those two different actions, and without the surety suffering any financial disruption involved in first paying the creditor and then seeking reimbursement from the principal debtor. That is not the situation here. One simply cannot tell who it is who will be liable, following the account, to pay the amount required to discharge the mortgage. 19 Another principle comes into play here arising from the fact that the inquiry relates to more than who will ultimately bear the burden of paying out the mortgage. It is the principle concerning equitable set-off. In AWA Limited v Exicom Australia Pty Limited (1990) 19 NSWLR 705 Giles J at 710 to 711, considered the principles on which equitable set-off operated. His Honour said at 711: "There must be something additional to the fact of a cross-demand to cause the court, in the exercise of its equitable jurisdiction, to require the plaintiff to set-off against his claim the claim of the defendant. That requirement has often been expressed in language to the effect that the equitable set-off must go to the root of or impeach the title of the plaintiff's claim. What is meant by such phrases, particularly in the light of the more recent cases, itself needs explanation. ...[namely]... '...so closely related as to subject matter that the claim sought to be set-off impeached the other in the sense that it made it positively unjust that there should be recovery without deduction.'" 20 If the outcome of the accounting were that the defendant was obliged to pay money to the plaintiff, in connection with topics other than the discharge of mortgage then, because the taking out of the mortgage was part of the transaction that the parties entered into concerning their use of this land, that claim could possibly, it seems to me, be able to be set off against the amount due under the mortgage. This provides a further reason why it is that one cannot be sure that, at the end of the day, as between the plaintiff and the defendant, the defendant will be entitled to have its share of the land free of any mortgage debt. 21 It is the effect of the mortgage that the defendant has granted to Westpac that, as between the defendant and Westpac, Westpac has every entitlement to be paid from the proceeds of sale. If Westpac were to be paid from the proceeds of sale, then the defendant would be in a situation where it does not have a property right against which to enforce any security interest that it might have. It is only if the defendant were able to bring into play an equity of exoneration, before Westpac satisfied itself, that this result would not arise. Yet, for the reasons which I have given, I cannot be satisfied, on the material which is now before me, that there is an equity of exoneration in the defendant's favour. 22 A second way in which Mr Charles sought to support the making of an order was by reference to the principles of subrogation. He says that if Westpac were to be paid out following the sale of the property, the defendant would then be subrogated to the mortgage, to the extent its interest in the land had been lessened by that payment out. It is well established that where a third party pays off a mortgage he is presumed, unless the contrary appears, to intend that the mortgage shall be kept alive for his own benefit: Ghana Commercial Bank v Chandiram [1960] AC 732 at 745. 23 It is to be observed that this principle is expressed in terms of a "third party" paying off the mortgage. In this context, a "third party" means someone besides the mortgagor and the mortgagee under the original mortgage. If it were to be the case that the debt owing to Westpac were to be satisfied from, in effect, the defendant's share of the mortgage property, in part, the defendant would not be a "third party" within this principle. 24 In Cochrane v Cochrane (1985) 3 NSWLR 403 Kearney J considered the situation where one of two co-mortgagors had paid off part of the mortgage debt. His Honour held that in that situation there was no equity to cause the mortgage to be kept alive. He said, at 405, that the principle whereby the third party can be subrogated to the mortgage it pays off: "...is based on equity's concern to prevent one party obtaining an advantage of another which in the circumstances of the case is unconscionable... As a corollary to this basis for the principle, there is no occasion for equity to intervene by way of subrogation where there is available to the third party a remedy at law or in equity sufficient to avoid an unconscionable result. In the light of these notions I am unable to accept that the doctrine of subrogation applies to the case of repayment of a mortgage debt by a co-mortgagor in the absence of a very clear reservation expressly or impliedly of such right. Each co-mortgagor being primarily liable for the whole debt, adequate justice is done between them if one has to pay the whole debt, by his entitlement to contribution." 25 Mr Charles distinguishes that case by saying that, here, while it may be that both plaintiff and defendant are liable for the mortgage debt, the liability of the defendant is a secondary liability. Even if it is the case that there is no personal liability on the defendant at all to pay the debt to Westpac, its liability is still a secondary liability, in the form of being at risk of having its property taken to satisfy the mortgage debt. 26 It seems to me that in this situation the law has already provided, by the principles concerning exoneration, and the availability, sometimes, of a quia timet injunction, to require the early payment out of a mortgage debt secured over the property of a surety, for an appropriate adjustment of the rights of the parties. Just as the availability, in Cochrane v Cochrane, of the equity of contribution was sufficient to make it unnecessary to resort to an equity of subrogation to enforce the rights of one co-mortgagor against another, so here the availability of a right of exoneration and, sometimes, of a quia timet injunction in support of it, is sufficient for an equity of subrogation not to need to arise, except, possibly, in a situation where a quia timet injunction would have been available but was not applied for. However, for the reasons which I have earlier given, it seems to me that this is not a case where I can be satisfied that it is appropriate for quia timet relief to be given. 27 Ms Lane, for the plaintiff, also opposed the granting of relief on other bases. The first is that, she submits, it is necessary for a guaranteed debt to be due before an equity of exoneration arises. The evidence discloses that the trustees for sale, and Westpac, each make no requirement for the repayment of the mortgage debt prior to sale of the property. 28 The trustees for sale are, I gather, setting about putting the property to auction, but no auction date has yet been set. 29 It is consistent with the attitude which the trustees for sale and Westpac have displayed that, once the sale is completed, they will pay the Westpac debt out of the proceeds of sale of the land. If an equity of exoneration were otherwise available, I would regard that as a situation where it was sufficiently imminent, that the property might be sold to answer the guaranteed debt, for a quia timet order to be made. However, for reasons which I have already given, I do not think that the order is available. 30 Ms Lane also submitted that an order ought not be made for reasons of hardship on the plaintiff. In the circumstances that have arisen, it is not necessary for me to consider that submission. She also pointed out, correctly, that the evidence about valuation of the property proceeded on a basis of there being no remediation costs associated with the land, and that the values were different depending on the use a purchaser intended to make of the property. Those evidentiary matters do not affect the principles which I have based this decision on. 31 As well, the second alternative order sought is one which has considerable uncertainty in it. I do not expect that the trustees for sale are likely to be in much, if any, better position than I am to estimate the likely financial outcome of the accounting exercise between the parties. Again, however, in the circumstances of the view I have come to, it is not necessary for me to consider that further. 32 The order of the court is that the application is refused. 33 I order the applicant to pay the costs of the respondent. ********** Last Modified: 11/14/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.