New South Wales Supreme Court CITATION : Perpetual Limited v Rocco Costa & Santina Costa [2007] NSWSC 1093 HEARING DATE(S) : 26/9/07, 27/9/07, 28/9/07, 2/10/07 JUDGMENT DATE : 2 October 2007 JUDGMENT OF : Bell J at 1 EX TEMPORE JUDGMENT DATE : 2 October 2007 DECISION : Verdict and judgment for the defendants CATCHWORDS : No case application - r 29.10 of the UCPR - loan advance paid to third party - no direction to pay - whether inference of actual/implied/ostensible authority open LEGISLATION CITED : Real Property Act 1900 Uniform Civil Procedure Rules 2005 Hunt v Watkins [2000] NSWCA 299; 49 NSWLR 508 CASES CITED : Perpetual Trustees Victoria Ltd v Tsai [2004] NSWSC 745 Prince v Clark (1823) 107 ER 70 Perpetual Limited ACN 000 431 827 (Plaintiff) PARTIES : Rocco Costa (Defendant) Santina Costa (Defendant) FILE NUMBER(S) : SC 14036/06 COUNSEL : R Francois (Plaintiff) J Whittle SC / B Burke (Defendants) SOLICITORS : Clayton Utz (Plaintiff) Populaw Legal Services (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION POSSESSION LIST BELL J Tuesday 2 October 2007 14036/06 PERPETUAL LIMITED v ROCCO COSTA & ANOR JUDGMENT 1 HER HONOUR: The defendants move for judgment pursuant to r 29.10 of the Uniform Civil Procedure Rules on the ground that on the evidence given a judgment for the plaintiff could not be supported. 2 The parties are agreed that the principles to be applied in dealing with the application are as stated in Hunt v Watkins [2000] NSWCA 299; 49 NSWLR 508. Stein JA (with whose judgment the other member of the Court concurred) held that the "jury test" is to be applied: a judgment by direction should be given in favour of an opposite party if the evidence adduced is such that a verdict by a jury in favour of the beginning party would if challenged necessarily be set aside. 3 By statement of claim filed on 16 August 2006, the plaintiff claims an order for possession of certain land being the whole of the land comprised in Certificate of Title, Folio Identifier 1/543860 and being Lot 1 in Deposited Plan 543860 together with the premises erected thereon known as 183B Alt Street, Haberfield (the property) and judgment for the principal sum of $700,000.00. 4 The plaintiff pleads its case as follows. By mortgage dated 18 June 2002 and registered on 14 February 2006 (bearing registered number 8728926F) the defendants mortgaged the property to the plaintiff upon the terms and conditions that are contained in registered memorandum 2477234. By a contract dated 18 June 2002 between the plaintiff as lender and the defendants as borrowers, the plaintiff agreed to advance moneys to the defendants and on or about 21 June 2002 advanced the sum of $700,000 (the principal sum) to the defendants. 5 The plaintiff particularises its claim as follows (paragraph 5): The monies were advanced by payment at the direction of the defendants as follows: Settlement Fee $50.00 Lenders Mortgage Insurance Fee $3,475.05 Land Titles Office $60.00 Owen Hodge Lawyers $93.80 Office of State Revenue $2,741.00 Streetwise $695.00 Berkshire Enterprises Pty Limited $692,903.15 Total $700,000.00 6 It is the plaintiff's case that the defendants are in default of their obligations by their failure to make payments in accordance with the loan contract since 1 June 2005. 7 By their defence, which was filed on 25 October 2006, the defendants admit that mortgage No. 8728926F in favour of the plaintiff was registered on 14 February 2006. In written submissions, Mr Whittle SC, who with Mr Burke appears for the defendants, acknowledges that the plaintiff has the benefit of the statutory protection conferred on its interest under the provisions of s 42 of the Real Property Act 1900. 8 The defendants' submit that the plaintiff has failed to establish that the principal sum was advanced to them or at their direction. 9 The memorandum incorporated into the mortgage defines a number of terms, these include (clause 1.1): "Debt" means all money owing by you to the mortgagee now or in the future under the mortgage or secured arrangement; "Mortgage" means the mortgage signed by you which incorporates this mortgage memorandum and includes the terms of this mortgage memorandum. If there is any inconsistency between the mortgage and this mortgage memorandum, then the provisions of the mortgage will prevail to the extent of the inconsistency; "Secured arrangement" means any agreement (including in the form of accepted letters of offer or loan contracts), deeds or arrangement, other than any collateral security, under which you incur or obligation to the mortgagee or under which the mortgagee has rights against you, including any such agreement, deed or arrangement which you agree in writing is to be secured by the mortgage after having received a copy of it. 10 Clause 2.1 provides, "you must pay the debt to the mortgagee on the date agreed between you and the mortgagee in a secured arrangement". 11 The mortgage, which is Annexure B to the affidavit of Grant Andrew Edwards, does not stipulate the sum that is secured under it and does not contain an acknowledgment of the receipt of any sum advanced by the plaintiff to the defendants. As Mr Whittle notes, the amount, if any, owed by the defendants to the plaintiff and secured by the mortgage is to be found in any agreement as defined in the mortgage memorandum, which I have set out above. 12 The plaintiff relies on the loan contract, Exhibit A, which purports to be made between it and the defendants, whose address is given as 183B Alt Street, Haberfield. The contract appears to bear the signatures of the defendants. 13 The defendants do not admit by their defence that they are bound by the loan contract. For the purposes of determining this application I proceed upon the basis that there is evidence that the loan contract was executed by the defendants. The loan contract incorporates general conditions, which are set out in Annexure E to the affidavit of Grant Edwards. The loan is described in the contract as a "Streetwise Equity Loan - Line of Credit". In the schedule, which forms part of the contract, the credit limit of the facility is specified as being $700,000.00. 14 The defendants deny the advance of the principal sum to them or at their direction. 15 The evidence is that the loan was settled on or about 21 June 2002 and that the principal sum was paid to Berkshire Enterprises Pty Ltd (Berkshire). There is no evidence that either of the defendants had any control of or connection with Berkshire. The instructions to Owen Hodge Lawyers, the solicitors acting for the plaintiff, to pay the principal sum to Berkshire appear to have been given by an entity, Streetwise Home & Investment Loans Pty Limited (Streetwise). 16 The plaintiff submits that there is evidence upon which it can establish the following: (a) the defendants gave Streetwise actual or implied authority to inform the plaintiff of the identity of the "specific payee" for the loan moneys; or, (b) the defendants gave Streetwise ostensible authority to inform the plaintiff of the identity of the "specific payee" for the loan moneys; or, (c) the defendants ratified the conduct of Streetwise in informing the plaintiff of the identity of the "specific payee" for the loan moneys. 17 In order to understand the submissions that were made, it is necessary to say something about the relations between Streetwise and the plaintiff. 18 The plaintiff is the trustee of moneys known as the PUMA fund. In July 1990, the plaintiff appointed Macquarie Securitisation Limited (MSL) to be the manager of the PUMA fund. In March 2000, MSL appointed Streetwise to manage and administer certain aspects of the fund. 19 Streetwise was a financial intermediary with experience placing moneys on mortgage and in the management of mortgages. Streetwise is a "mortgage originator", within the meaning of that expression, under the mortgage origination deed, Exhibit E. Streetwise was authorised to submit applications for funding to MSL for approval. Its relationship with the plaintiff is stated in clause 9.1 of the deed to be that of an independent contractor. Its remuneration is dealt with in clause 8 of the deed, which contains an acknowledgement in clause 8.1 that it intends primarily to seek its remuneration from borrowers by way of procuration fees. 20 Other features of the deed to note are that under clause 2.5.2, Streetwise, as an originator, was to instruct an approved solicitor to investigate the title to, and all other relevant aspects of, each property the subject of an approved application and to give the approved solicitor instructions on behalf of the plaintiff as may be necessary in the circumstances and to supervise the carrying out of those instructions. 21 Clause 2.12 provides: The Originator shall instruct the Approved Solicitor: 2.12.1 to attend settlement of the Approved Mortgage Loan or the purchase of the Approved Mortgage and to obtain the Documents of Title; 2.12.2 immediately after the issue of the copy of its Solicitor's Certificate, to forward the original thereof to the Manager for verification (to be received by the Manager no later than one Banking Day prior to settlement) and as soon as practical following verification the Manager shall forward such original to the Trustee; 2.12.3 immediately after settlement to lodge at the Land Titles Office the Mortgage and/or the Transfer of Mortgage and such other of the Documents of Title which may be necessary to enable the Mortgage and/or the Transfer of Mortgage to be registered without delay; and 2.12.4 to advise the Trustee in writing of the dealing number of the Mortgage or Transfer of Mortgage immediately after it has been lodged for registration. 22 Clause 2.18 deals with instructions to approved solicitors: The Originator undertakes and agrees that: 2.18.1 it will instruct all Approved Solicitors acting in respect of Approved Mortgage Loans or the purchase of Approved Mortgages that subject to the provisions of clause 2.18.2 all such instructions are given by the Originator on behalf of the Trustee and that at all material times those Approved Solicitors will be deemed to be acting on behalf of the Trustee who will be relying upon all advice opinions and certificates given by them; 2.18.2 notwithstanding the provisions of this Deed generally and clause 2.18.1 in particular or any Mortgage or any rule of law of equity to the contrary the Originator and not the Trustee shall be liable to bear the costs and disbursements (including without limitation duties and taxes of all kinds whether State or Federal) of Approved Solicitors and the Originator agrees to indemnify the Trustee and to keep the Trustee indemnified in respect of the same. 23 In June 2002, there is evidence that the defendants were seeking to borrow the sum of $700,000.00 from Streetwise for the purchase and development of a site in Panania. 24 By letter dated 13 June 2002, Susana Lau, on behalf of Streetwise, wrote to Owen Hodge Lawyers instructing that firm to act on behalf of Macquarie Bank Limited and/or the plaintiff on the settlement of certain property, being an application made on behalf of the defendants for a loan in an amount of $700,000.00. 25 Ms Lau wrote to Owen Hodge Lawyers on 18 June 2002 enclosing a number of documents, including documents executed by the defendants, which were forwarded in preparation for the settlement of the proposed loan advance and mortgage. The documents furnished to Owen Hodge Lawyers by Streetwise included the loan contract signed by the defendants; the mortgage; a document described as an "authority and undertaking"; a "direction to pay" and the certificate of title, which I infer is the defendants' certificate of title in respect of the premises at 183B Alt Street, Haberfield. It appears that these documents were received in the office of Owen Hodge Lawyers not later than 11.50am on 19 June. At that time, a handwritten file note on the letter records "L/contract not signed, left message". 26 The loan contract, a Streetwise Home & Investment Loans Pty Ltd "your loan contract" is in a standard form, Exhibit A. The contract has two copies of page 10 attached to it. One bears the signature of Rocco Costa but not the signature of Santina Costa. The other bears the signature of each of the defendants. 27 At 3.42pm on 19 June, Ms Lau communicated by facsimile with Owen Hodge Lawyers attaching a document described as "loan contract page executed by the above clients (original will be posted by express mail tonight)". 28 In the way the matter has been argued, it was common ground that the inference to be drawn is that the loan contract was signed by each of the defendants on 18 June and that the reference "L/contract not signed" is a reference to the absence of signature by Santina Costa to the declaration contained in page 10 of the document. It would seem that the document sent by facsimile at 3.42 pm was a further page 10 bearing the signature of each of the defendants. The original appears to have been sent by mail as contemplated by Ms Lau. 29 Page 10 of the pro forma Streetwise loan contract requires the borrower to complete Box A, in the event the borrower chooses to obtain legal advice in connection with the loan contract, or Box B in the event the borrower chooses not to obtain legal advice. Mr and Mrs Costa signed Box B, indicating, among other things, that they had been given the opportunity to obtain legal advice on the nature and effect of the documents and that they had chosen not to do so. 30 The direction to pay which was submitted to Owen Hodge by Streetwise and is signed by each of the defendants authorises the following bank cheques to be drawn for settlement: Land Titles Office $60.00 PMI $3,457.05 Office of State Revenue $2,741.00 Owen Hodge Lawyers $93.80 31 Provision is made in the direction to pay for the identification of the payee. No person is nominated in this respect. 32 The Authority which was signed by the defendants and which is addressed to the plaintiff and to Owen Hodge Lawyers, relevantly provides: "(1) The borrowers and guarantors hereby authorise and direct you, upon payment of the principal sum to the borrowers or their solicitors, to complete the mortgage, guarantee (if any) and any other associated documentation by the insertion of dates of documents and any other details as may be required to be completed or inserted. … (4) We authorise you to pay the mortgage advance in such manner as we shall direct or as our solicitors may direct." The document, while undated, appears to have been witnessed. 33 On 19 June, Streetwise sent certain further documents in connection with the settlement of the proposed loan to Owen Hodge Lawyers. This communication concluded with the instruction: "Please note that after deducting all fees and charges, balance is to be made payable to Berkshire Enterprises Pty Ltd (please call me after settlement. We will pick up the cheque) ." 34 Among the documents sent by facsimile with the above communication was a document titled "Settlement and Disbursement Instructions". The client name recorded in the document is "Costa". In the body of the document reference is made to "property details: 2B Roslyn Avenue, Panania". Cheque directions were given for payment to Streetwise of the sum of $695 and for the balance from settlement to be paid to Berkshire Enterprises Pty Ltd. The Settlement and Disbursement Instructions sheet is dated 19/06/02 and is signed by persons described as being the administration manager and company accountant. 35 On 20 June 2002, Owen Hodge Lawyers, in preparation for settlement the following day, prepared instructions for its law stationers, advising: "I already hold the title deed at the office. Streetwise are contacting you around 12.30pm to arrange for collection of cheque to Berkshire and Streetwise as per attached instructions." 36 I infer the reference to "attached instructions" is a reference to the settlement and disbursement instructions sent by facsimile by Streetwise. It would appear that Streetwise collected the settlement cheque. 37 There is no authority signed by the defendants authorising payment of the principal sum to Berkshire. The defendants did not have solicitors acting for them in connection with the matter and so no question of any direction given by their solicitors in accordance with the terms of their Authority, Exhibit "J", arises. 38 On 24 June 2002, Streetwise wrote to Mr Costa congratulating him on settlement of his loan and thanking him for choosing Streetwise. Certain details of the loan account are set out in the letter. There is nothing which discloses that the principal sum was paid to Berkshire. 39 In his affidavit, Mr Costa annexes a number of documents which he describes as "examples of loan statements issued to us each month by Streetwise in their own name". These documents on Streetwise letterhead refer to a Streetwise equity loan variable rate account no. 80896512 with a facility limit of $700,000.00 in the names of Mr and Mrs Costa.They show the principal sum of $700,000.00 being fully drawn as at 1 July 2002 and movements on the account thereafter. 40 In about June 2002 Mr Costa states a person named Bassili visited him and his wife at their home and said words to the effect: "Okay, I can confirm that Streetwise have agreed to lend all the money for the purchase and development of the Panania site. The loan conditions are that you and your son, John, will have to put down both your houses and the Panania property as collateral for the loan." Mr and Mrs Costa were given a letter on this occasion (Annexure "B" to Mr Costa's affidavit), dated 13 June 2002 informing them that their application for the sum of $700,000.00 had been approved. 41 In her affidavit, Santina Costa says that in about June or July 2002 her husband said words to the effect: "It's all done. Streetwise have lent us the money to buy the Panania property and the joint venture has started. I've received correspondence." 42 The parties are agreed the reference to correspondence appears to be to the letter of 24 June, to which I have referred. 43 The plaintiff relies on the following facts and circumstances as giving rise to an inference of actual or implied authority, alternatively ostensible authority, or in the further alternative, ratification of the conduct of Streetwise in informing it of the identity of the payee of the loan moneys: 1. The defendants furnished Streetwise with the loan contract; Exhibit 1; Exhibit J; and other loan documents together with their certificate of title; 2. Between signing Exhibit 1 and the date of settlement, the defendants did not give a direction as to the identity of the payee; 3. The defendants understood that they were involved in a joint venture with Streetwise relating to the development of the Panania site and consistent with this understanding are the instructions given by Streetwise on 19 June, which refer to "property details: 2B Roslyn Avenue, Panania"; 4. Loan funds were disbursed in accordance with the directions of Streetwise; 5. The defendants were aware that the loan had settled, the defendants received statements relating to the loan account for a period of nearly three years thereafter and made no inquiry of Owen Hodge relating to the identity of the payee of the principal sum. 44 In these circumstances, the plaintiff submits that it can be inferred that Streetwise had actual or implied authority to inform Owen Hodge of the identity of the payee for the balance of the loan moneys. 45 The plaintiff placed some reliance in support of the submission that the inference of actual or implied authority is open to the circumstance that in making an application for funds from the plaintiff pursuant to the Mortgage Origination Deed, Streetwise were not acting for the plaintiff but were an independent contractor who would primarily obtain its remuneration from the defendants in the form of a procuration fee. 46 Ms Francois, who appears for the plaintiff, noted that the defendants chose not to have solicitors act for them and gave documents, including their certificate of title, to Streetwise to return to Owen Hodge. 47 In written submissions, Ms Francois put it this way: "Any person who had intended that the bulk of their loan monies not be disbursed at all, would become active upon being seized with the knowledge that near to $700,000 of their moneys had been paid to some unknown and unauthorised person. Their failure to act in this way gives rise to the irresistible inference that the moneys were drawn down and disbursed in the general manner that they had intended." 48 The defendants' failure to act is said to constitute an admission that they gave Streetwise the authority to notify Owen Hodge of the specific payee. 49 In the alternative it was put that the defendants cloaked with Streetwise with ostensible authority by permitting it to correspond with Owen Hodge on their behalf. 50 On more than one occasion Ms Francois submitted that relevant to the inferences that she invites the court to draw, as to actual, implied and/or ostensible authority, was the handing over to Streetwise of an "incomplete" direction to pay. 51 I accept Mr Whittle's submission that it is not apt to characterise Exhibit 1 as an incomplete direction to pay, it is a direction authorising the payment of the disbursements set out therein. It is to be read with Exhibit J, the Authority which in clear terms directs the mortgage advance to be paid in such manner as Rocco and Santina Costa (or their solicitor) shall direct. 52 The plaintiff's submission that Rocco and Santina Costa conferred actual or implied authority on Streetwise to inform Owen Hodge Lawyers of the identity of the payee of the principal sum must carry with it that the authority was to direct payment of the principal sum entirely at Streetwise's discretion, including to a company that had no association with the defendants for purposes which have not be shown to have anything to do with the asserted subject of the "joint venture". 53 The defendants' failure to advise Owen Hodge of the identity of the payee prior to settlement of the loan (a line of credit facility) if it is capable of giving rise to an inference that Streetwise had actual or implied authority to nominate the payee, does not seem to me to be capable of sustaining an inference that the authority was to direct payment at Streetwise's sole discretion. At its highest it might imply authority to direct payment to an individual or entity in connection with the proposed joint venture. There is no evidence that Berkshire is connected with any such venture. 54 I am not persuaded that an inference is open that the defendants clothed Streetwise with ostensible authority to give directions as to the payee of the principal sum by giving Streetwise, the mortgage originator, the loan contract and other documents, including the certificate of title. As I have already noted, the documents furnished to Owen Hodge included the Authority signed by the defendants, Exhibit J, which by its express terms is contrary to the assertion of ostensible authority. 55 The submission that by permitting Streetwise to correspond with Owen Hodge Lawyers and deliver the documents in support of the application, the defendants clothed Streetwise with ostensible authority to direct payment of the principal sum to Berkshire is to my mind not open. 56 The final way in which the plaintiff resists the application is the contention that the defendants ratified Streetwise's act in directing the plaintiff to pay the principal sum to Berkshire by their conduct after settlement. 57 In written submissions, Ms Francois directs attention to the knowledge that is necessary for ratification: set out in Bowstead & Reynolds at paragraph 2- 067: "In order that a person may be held to have ratified an act done without his authority, it is necessary that, at the time of the ratification, he should have full knowledge of all the material circumstances in which the act was done, unless he intended to ratify the act and take the risk whatever the circumstances may have been." 58 Reliance was also placed on the decision in Prince v Clark (1823) 107 ER 70 and on a further passage in Bowstead at paragraph 20-070: conduct which amounts to clear evidence that the person concerned either adopts or recognises the act may be implied from mere acquiescence or inactivity. 59 It is argued that as the defendants did not convey the information concerning the purchase of the Panania property to Owen Hodge and that it can be inferred from the circumstances to which I have referred that they knew Streetwise must have conveyed the information. The defendants are said to have ratified Streetwise's conduct in nominating the payee by either paying (or permitting others to pay on their behalf) the loan repayments for nearly three years and/or remaining silent and seeking to take the benefit of the intended joint venture and choosing not to notify the plaintiff that the disbursement of the bulk of the loan moneys was unauthorised. 60 There is nothing beyond evidence of the defendants' understanding that they were to be a party to a joint venture with Streetwise involving the development of a site at Panania to establish their knowledge of material circumstances, in particular, that the principal sum had been paid to Berkshire. 61 The only direction to pay executed by the defendants authorised the payment of disbursements in an amount of $6,351.85. As Mr Whittle notes, the document annexed to Mr Edwards' affidavit Annexure "I" points to an amount well in excess of $6,351.85 as having been repaid to the plaintiff. The pleading is of the failure to repay the principal sum and the obligations under the loan contract on and from 1 June 2005. 62 In Perpetual Trustees Victoria Ltd v Tsai [2004] NSWSC 745 Young CJ in EQ said: [20] Under the old fashioned form of mortgage there was a statement of the principal sum lent and an acknowledgment that the money had been lent. The authorities show that the present type of problem was rarely likely to arise with that type of mortgage because the production of the security document was prima facie evidence of the existence of the debt (Piccock v Brown (1734) 3 P Wms 288; 24 ER 1069) and that, unless the fact was put in issue by the pleadings, the security itself was sufficient evidence of the payment (Minot v Eaton (1826) 4 LJ (OS) Ch 134, but see Wansworth Norton Solicitors Nominee Co Ltd v Edmonds [1992] 1 NZLR 596). This is set out in the Australian edition of Fisher and Lightwood on Mortgages at para [16.45] and [39.8]. The modern clause, however, does not go that far especially in a facility mortgage requiring drawn downs to be made later. It would thus not seem that any of the traditional protections to mortgagees apply to mortgagees who use this form of loan agreement and mortgage. [21] It is clear that if no monies are lent under a mortgage then the mortgage is just completely void: see Re GM Industries Pty Ltd and the Companies Act (1980) ACLC 40-665 per Needham J. His Honour was there dealing with a company charge rather than a registered mortgage so that the GM decision has to be read subject to the effect of indefeasibility of a registered mortgage. However, as Mr Walsh, who appeared for the Registrar General, so eloquently put it, there may be a registered mortgage, but it may be a registered mortgage which secures nothing. … [27] It is insufficient to put forward an affidavit which says that there is an agreement by which the plaintiff agreed to advance to the defendant a certain sum, pursuant to that agreement the defendant is under an obligation to repay, and that the amount owing is $X. What is required, where the issues joined on the pleadings are a denial of signing of the agreement, is evidence that the loan was made and it was made to the defendant. That was entirely absent. 63 It is necessary for the plaintiff to establish that it carried out its contract with the defendants by advancing the principal sum under the loan contract to them or at their direction. In my opinion the evidence is not capable of establishing that it did so. 64 For these reasons, I am satisfied that judgment for the plaintiff on its claim for possession and for the principal sum cannot be supported. There will be judgment for the defendants. oOo 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.