Westpac Banking Corporation v Fiji Forest Sawmilling Company Ltd [2003] FJSC 11; CBV0003.1999S (14 April 2003)

IN THE SUPREME COURT, FIJI ISLANDS
AT SUVA
CIVIL APPEAL NO. CBV0003 OF 1999S
(Fiji Court of Appeal Civil Action No. ABU0045 of 1996S)

BETWEEN:

WESTPAC BANKING CORPORATION
Appellant

AND:

FIJI FOREST SAWMILLING COMPANY LIMITED
Respondent

Coram: Hon. Justice Daniel V. Fatiaki, President of Supreme Court
Hon. Justice Jai Ram Reddy, Judge of Supreme Court
Hon. Justice John von Doussa, Judge of Supreme Court

Hearing: Monday, 14th April 2003, Suva

Counsel: Mr. B.C. Patel for the Appellant
Mr. S.R. Valenitabua for the Respondent

Date of Judgment: Thursday, 17th April 2003, Suva

JUDGMENT OF THE COURT

This appeal concerns the entitlement of a mortgagee after the sale of the mortgaged property to hold the proceeds of a fire insurance policy as security for anticipated costs of defending legal proceedings against the mortgagee brought by the mortgagor.

The appeal comes to this Court by way of leave to appeal granted by the Court of Appeal on 4^th May 1999 and 18^th November 1999 on questions certified by it under s.122(2)(a) of the Constitution Amendment Act 1997 to be of significant public importance, namely:

(i) whether a mortgagee by virtue of clause 6 of the Schedule of covenants and conditions implied in mortgages by Section 68 of the Property Law Act is entitled to retain insurance proceeds payable by an insurance company in respect of the mortgaged property where the mortgagee’s interest as mortgagee is noted.

(ii) What is the meaning of the word “security” in clause 6 of the Schedule of covenants and conditions implied in mortgages by Section 68 of the Property Law Act.

(iii) Whether a mortgagee, by virtue of clauses 5 and 25 of the mortgage, is entitled to retain all or part of the insurance proceeds payable by an insurance company in respect of the mortgaged property towards costs and expenses payable by the mortgagor under clause 23 of the mortgage."

In July 1979 the respondent (the company) granted a mortgage to the appellant (the Bank) over an hotel property owned by it to secure repayment on demand of advances and other accommodation. The mortgage was registered under the Land Transfer Act (Cap. 131). The hotel building, stock and business furniture were insured against fire and other perils under a Fire Insurance Policy (the policy) with the New India Assurance Company Limited (the Insurer). The policy named “The Insured” as the company “as (O) and Westpac Banking Corporation (Sigatoka) as (M)” and bore an endorsement that “Loss if any payable to Westpac Banking Corporation As Mortgagee whose discharge shall be sufficient and binding to the company.”

The hotel building was destroyed by fire in early 1993. Shortly afterwards the Bank made a demand for payment under the mortgage, and on 31^st October 1994 the Bank as mortgagee entered into a contract of sale to sell the hotel property. The sale was completed on 13th December 1994. After deducting from the proceeds of sale the expenses of sale and monies then owing for advances to the company and interest a balance of $13,143.91 remained.

Before completion under the contract of sale the company sued the Bank alleging misconduct by the Bank in the sale and its alleged failure to render proper accounts (Lautoka Action No. HBC0234 of 1994).

After completion the company also sued the Insurer, and that litigation resulted in a settlement under the policy of $125,000. On 12^th June 1996 an order was made in the High Court by consent that the insurance settlement money be paid to the company’s solicitors “upon release of the assignment” of the policy by the Bank.

The Bank refused to acknowledge the entitlement of the company to the release or to payment of either the surplus proceeds of sale or the insurance settlement (the disputed monies). The Bank contended that it was entitled to hold the disputed monies under the terms of the mortgage as security against the costs, including anticipated future costs, of defending the company’s action against the Bank. The Bank relied on clause 23 of the mortgage which provides:

“23(a) That the bank shall be at liberty from time to time without further authority than these presents to debit and charge the account of the Debtor or the account of the Mortgagor with all costs charges and expenses hereinafter mentioned and the same shall be covered by this security and shall be portion of the moneys hereby secured and the Mortgagor will indemnify the Bank against the same.

(b) That the expression “costs charge and expenses” shall for the purposes of this covenant include all costs charges expenses and payments legal or otherwise which the Bank or any attorney of the Mortgagor herein appointed may incur sustain make be put to pay or be liable to pay in connection with -

Than follow 8 sub-clauses of which the relevant two are as follows:

(vi) The preparation completion enforcement and protection of this security;

(vii) The exercise or attempted exercise of any right power authority or remedy conferred on the bank or any attorney of the Mortgagor under or by virtue of this security or by statute;

and in relation to any actions or proceedings arising out of or concerned with any of the above matters or any other matter connected with this security and whether or not the Debtor or the Mortgagor are parties thereto shall include not only all legal costs charges disbursements and expenses incurred by the Bank against which the Mortgagor or the Debtor may by any order of any court be liable to indemnify the Bank but also notwithstanding any such order or any order of any court under which the Bank would not otherwise be entitled to recover the same all legal costs charges disbursements and expenses which the Bank has paid or may pay to its solicitors or to any other person including the Debtor and the Mortgagor and in the case of payments to the Bank’s solicitors on a solicitor and own client basis.”

As the Court of Appeal observed, this clause by its terms authorizes the Bank to debit the mortgagor with costs charges and expenses of an unspecified amount over an indefinite period of time.

The Bank contended that it was entitled to retain the disputed monies, about $138,000.00, even though the Bank’s legal manager deposed that the costs of defending the company’s claim could amount to about $47,000.00 only even if the matter proceed as far as the Supreme Court.

The company, on the other hand, claimed immediate entitlement to all the disputed monies, arguing that the mortgage had been discharged by registration of the transfer of the hotel property under the mortgagee’s sale, and by payment with interest of the advances which the mortgage had secured.

On 18^th June 1996, to implement the consent order made in relation to the proceeds of the insurance policy on 12^th June 1996, the company issued an originating summons against the Bank for an order that the Bank “forthwith discharge and release assignment of Fire Policy.........” on the ground that the company’s debt to the Bank had been fully satisfied. On 30^th August 1996 Sadal J. ruled that as the Bank had been fully paid it should discharge the policy, and made orders that it “discharge and release assignment” thereof. Incidental orders were made for the payment of a portion of the disputed moneys into Court to abide the outcome of claims by two third parties, but the order in that respect is irrelevant to these proceedings. On 5^th September 1994 the trial Judge amended the order by adding a statement that the policy “is hereby deemed to be discharged.”

The Bank appealed to the Court of Appeal against the orders of 8^th August 1996 and 5^th September 1996. The appeal was dismissed. The Court of Appeal was critical of aspects of the orders which the company had sought at trial, and of the terms in which orders were made. Those criticisms are not material to the outcome of this appeal. The effect of the orders of the trial Judge, upheld by the Court of Appeal, is that the company had an immediate entitlement to payment of the whole of the disputed monies.

The Court of Appeal considered that the company’s entitlement to the disputed monies was resolved by the application of s.81 of the Property Law Act (Cap.130) which provides:

“81. The purchase money arising from the sale by the mortgagee of any mortgaged property shall be applied as follows:

(a) first, in payment of the expenses of and incidental to the sale and consequent on the default;

(b) secondly, in payment of the moneys which are due or owing under the mortgage;

(c) thirdly, in payment of subsequent mortgages or encumbrances, if any, in the order of their respective priorities; and

(d) fourthly, the surplus, if any, shall be paid to the mortgagor.”

The Court of Appeal held that the Bank’s contingent future costs of defending the proceedings against it were not monies due or owing under the mortgage within the meaning of s.81 (b) as the monies were not “presently due and owing.” Accordingly the company was entitled to payment of the surplus from the sale under s.81 (d). Similar considerations, the Court said, also applied in respect of the insurance settlement.

In respect of the insurance settlement, the Court of Appeal held that there was an additional reason for concluding that the money should be released forthwith to the company. The Bank relied on clause 6 of the Schedule of covenants and conditions implied in mortgages by s.68 of the Property Law Act. Clause 6 provides:

“(6) That in the event of the said buildings and erections or any of them being destroyed or damaged by fire, all moneys received by the mortgagee under any insurance in respect of any such destruction or damage shall be applied, at his sole option, either in or towards rebuilding or repairing the buildings and erections so destroyed or damaged, or in or towards payment of the principal, interest and other moneys for the time being covered by the security; notwithstanding that the same or any of them may not have accrued due under the terms of the mortgage:

Provided that, if the mortgagee applied the said moneys in or towards payment of the principal and other moneys as aforesaid, the mortgagor shall have the right to pay off the whole amount remaining due under the mortgage at any time within two months after the application of the said moneys has been made.”

It was common ground that in the circumstances which had occurred, the option of re-instatement was not available. Further, the option of applying the proceeds of the policy to the payment of principal and interest was not available as the principal and interest had already been repaid from the proceeds of the sale. The application of clause 6 of the Schedule, in the opinion of the Court of Appeal, therefore turned on whether the contingent future costs of defending the action against the Bank were within the words “other moneys for the time been covered by the security; notwithstanding that the same or any of them may not have accrued due under the terms of the mortgage.” The Court of Appeal rested its decision on the qualification in clause 6 that the moneys in payment of which the proceeds of the policy may be applied are qualified by the words “covered by the security.” The Court of Appeal considered that whilst clause 23 of the mortgage was wide enough to impose on the company an obligation to pay the Bank’s costs of defending the proceedings against it, that obligation was no longer “covered by the security”, because “security” in clause 6 of the Schedule means the mortgaged property for the time been charged. In the instant case the mortgaged property was no longer charged. It had been sold and released from the mortgage. In reaching this conclusion the Court of Appeal referred to the judgment of Isaacs J. (with whom Knox CJ and Starke J. concurred) in Royal Insurance Co. Ltd. v. Mylius [1926] 38 CLR 487 at p.489 as establishing that where the mortgagees insured tangible securities against the risk of fire “as mortgagees”, they insured, not their debt, but their security, and that they insured, not as mere creditors but as holders of the security. The Court of Appeal than expressed its conclusion as follows:

“The emphasis is on the property as tangible security for the debt, and we think that the word is used in this sense in clause 6, so that “moneys for the time being covered by the security” mean moneys in respect of which the mortgaged property is for the time being charged. But since that property has been sold, there is no money “covered by the security”, and therefore nothing under clause 6 towards which the Bank could apply the proceeds. All it has left covering the mortgagor’s obligations under clause 23 of the mortgage is the latter’s personal covenant, in respect of which it can sue for debt when the stated contingencies happen and the amount has been ascertained.

For these reasons we think Sadal J’s, orders regarding payment of the money should stand.”

Before this Court the Bank contends that the Court of Appeal erred in its interpretation of the phrase “covered by the security” in clause 6 of the Schedule, and should have held that the policy, and the proceeds thereof, were part of the mortgaged property, ie. part of the “security” constituted by the mortgage. This contention addresses the first two questions certified by the Court of Appeal.

The Bank also contends that on the proper construction of clauses 5 and 25 of the mortgage, the Bank is entitled to retain all the insurance proceeds (in addition to the sum $13,143.91 remaining from the proceeds of sale) towards the anticipated costs of defending the action against the Bank. This contention addresses the third question certified by the Court of Appeal.

The company opposes the appeal, contending that the reasons of the Court of Appeal are correct. Central to the company’s case is the submission that the mortgage was discharged by the transfer of the hotel premises to the purchasers under the mortgagee’s power of sale on 13^th December 1994. The company submits that clause 23 of the mortgage ceased to operate from that date. The company submits that to conclude otherwise would be unreasonable, and would give clause 23 a meaning which makes it a clog on the equity of redemption.

Part of the difficulty which arises in this case is that both the expression “security”, and “mortgage” are not terms of art which have a single precise legal meaning. They are expressions often used generally in ordinary speech to convey a variety of meanings. The intended meaning in a particular case must be ascertained from the context in which the expression is used. The expressions can be used in a way that gives to each of them a similar meaning, but this is not necessarily so. In “Sykes and Walker, The Law of Securities” (5^th Ed) at p.3 the authors say that the general concept of security involves a transaction whereby a person to whom an obligation is owed by another person called the “debtor” is afforded in addition to the personal promise of the debtor to discharge the obligation, rights exercisable against some property of the debtor in order to enforce the discharge of the obligation. They go on to observe, however, that whilst the general concept involves a transaction, strictly speaking the security is not the transaction; it is the interest or aggregation of rights which arise from the transaction. Such an interest involves rights available against property, real or personal, not merely against a person. However in a particular case, a security may involve no more than the acceptance of a personal obligation by a surety; see Redgrave v. Redgrave [1951] HCA 21; (1951) 82 CLR 521 at p.530, and Independent Television Authority and Associated Rediffusion Ltd. v. Inland Revenue Commissioners [1961] AC 427 at 439, 442.

The word “mortgage” is normally used to mean a conveyance of land or an assignment of chattels as security for the payment of a debt or the discharge of some other obligation for which it is given: see Santley v. Wilde [1899] 2 Ch.474, Bevham Investments Pty Ltd v. Belgot Pty Ltd. [1982] HCA 45; (1982) 149 CLR 494 at 499 and Downsview Nominees Ltd. v. First City Corporation Ltd. [1993] 1NZLR 513 at 521. In clause 6 of the Schedule the word refers to the deed or other instrument which creates the interest or aggregation of rights which constitute the security.

In Bevham Investments, the majority of the High Court of Australia, at 499 say:

“In the context of a mortgage or charge security is constituted by the specific appropriation of property to the satisfaction of a debt or obligation which becomes a primary charge on the property”

It will be noted that in this passage, the expression “mortgage or charge” is used to describe the instrument which constitutes the transaction, and ”security” is used to describe the rights thereby created and available against the property.

Against these general observations we turn to the terms of the memorandum of mortgage executed by the company. By the charging clause in the opening provisions, the company “DOTH HEREBY MORTGAGE TO THE BANK” all the estate and interest in the land on which the hotel was constructed, identified by certificate of title reference. The mortgage is “for the purposes of securing to the Bank the payment in the manner hereinafter mentioned of the moneys hereinafter described..........”

Then follow seven recitals which describe at length the moneys the payment of which is secured. Those moneys include past and future advances. They include all moneys which the Bank may have become liable to pay on behalf of the debtor by reason of the Bank having entered into any bond or indemnity or guarantee on behalf of the mortgagor. That the mortgage is for purposes that include future and contingent liabilities is made even clearer by recital (f) which expressly includes all moneys which the mortgagor “whether directly or indirectly or contingently or otherwise” hereafter may become liable to pay to the Bank under any document or negotiable or other instrument. Of direct importance to this case, the security is also for the purpose of (recital (e)):

“(e) also all moneys which the Bank is or shall be entitled to debit and charge to any account of the..................... Mortgagor.................. whether under any security or document now or hereafter held by the Bank from or relating to the .............Mortgagor.................... under the conditions or provisions herein contained or otherwise”

All of the moneys so described and interest thereon intended to be secured by the mortgage are defined as “the moneys hereby secured.” Then follow 41 numbered paragraphs which set out the terms and conditions of the mortgage. These terms and conditions are to be read in conjunction with the statutory provisions in the Property Law Act (Cap. 130) relating to mortgages. In this respect reference has already been made to s.68 of the Property Law Act which, subject to a limitation still to be mentioned, provides that in every mortgage of land there shall be implied the covenants powers and conditions as set forth in the Schedule. Clause 6 of the Schedule is set out earlier in these reasons and is critical to the decision of the Court of Appeal.

It is important to note that the implication of covenants powers and conditions in the Schedule under s.68 is subject to the limitation expressed in s.68 namely “except in so far as the same are varied or negatived in the mortgage.”

Clause 33 of the mortgage provides that the covenants powers and provisions implied in mortgages by virtue of any statute for the time being in force “shall for the purpose hereof be negatived or varied so far only as they are inconsistent with the terms and provisions hereof”. The effect of clause 33 is not addressed by the parties in their submissions. Importantly, it has the effect that the terms implied by the Schedule cannot operate to reduce the security interest otherwise granted to the Bank by the terms of the mortgage.

Reference has already been made to clause 23 of the mortgage which by its terms authorises the Bank to debit and charge the account of the mortgagor with the costs of defending the action against the Bank.

Clauses 5 and 25 of the mortgage, which are central to the questions now before this Court, deal with the question of insurance. They deal comprehensively with the obligation on the mortgagor to insure and with the settlement of insurance claims in the event of loss of damage. The submissions of the parties assume that there are no other relevant obligations or rights in respect of these matters arising under covenants and conditions and powers implied by s.68 and the Schedule of the Property Law Act, in particular under clauses 2 and 3 of the Schedule. We adopt that assumption which appears to be correct. Clause 5 and 25 relevantly provide:

“5. THAT the mortgagor will ensure and keep insured ................. the mortgage premises............... for the full insurable value in some insurance office approved by the Bank and in the name of the Bank and will punctually pay all premiums and sums necessary for effecting and keeping up every such insurance and will forthwith hand to the Bank every policy and receipt relating thereto and every such policy ...................... shall be held by the Bank as a further security for the payment of the moneys hereby secured.

“25. THAT in the event of loss or damage to the mortgage premises or any part thereof from any cause covered by Insurance.................... the Bank alone shall have full power to make enforce settle and compromise all claims in respect of Insurance or for compensation and to sue for recover receive and give discharges for all moneys payable by virtue thereof whether the Insurance be in the name of the Bank of the Mortgagor or both........ And if notwithstanding the foregoing provisions any moneys payable under any policy of insurance either any part of the mortgaged premises shall come into the hands of the Mortgagor before a final discharge of these presents shall have been given to the Mortgagor such moneys shall be held by the Mortgagor in trust for the Bank and shall be paid to the Bank upon demand.”

It is necessary to refer also to clause 27 which the company relies upon as supporting its argument that the mortgage was discharged on completion of the sale of the hotel property. Clause 27 provides:

“27. THAT these presence shall be a continuing security and shall not be considered wholly or partially discharged by the payment at any time hereafter of the moneys hereby secured or by any settlement of account or by any other matter or thing whatsoever and shall apply to the present or any future balance of the moneys hereby secured until a final discharge hereof has been given to the mortgagor.”

It is convenient to consider the first two questions certified by the Court of Appeal together. The terms of clauses 5 and 25 of the mortgage in essential respects are similar to the insurance provisions considered by the Privy Council in Colonial Mutual General Insurance Co. Ltd. v. ANZ Banking Group (New Zealand) Ltd. [1995] 3 NZLR 1(The CMG case). In that case the respondent bank was a second mortgagee. The mortgaged property was destroyed by fire. The fire insurance policy was in the name of the mortgagor and the first mortgagee. After discharging the liability to the first mortgagee, the insurer paid the balance for the proceeds of the policy to the mortgagor. The second mortgagee claimed that it had a charge on those moneys, and sued the insurer. Lord Hoffman, delivering the Opinion of the Judicial Committee, said at pages 4-5:

“The purpose of a covenant for insurance is to ensure that if the value of the security should be depreciated by the occurrence of a fire or other insurable risk, the proceeds of the policy will provide a fund to make up the shortfall. This purpose can be achieved only if the covenant gives the mortgagee an interest by way of charge, and no more than an interest by way of charge, in the proceeds. Standard insurance covenants contain various provisions designed to ensure that the mortgagee will be able to retain control of the insurance policy and its proceeds. Insisting that the mortgagee have the right to approve or nominate the insurer, take custody of the insurance policy, be shown receipts for premiums.......... are some of the cumulative techniques used for this purpose. So is the requirement that the insurance be effected in the name of the mortgagee. But all these provisions are, in Their Lordships’ view, intended to protect the mortgagee’s interest by way of charge over the proceeds of the policy rather than to create it. That such an interest exists is a fundamental assumption of the covenant. It cannot be destroyed by the mortgagor’s failure to comply with one or other of the protective terms.

If the policy is effected in the name of the mortgagee, he is entitled in law to payment of the proceeds. But his interest remains by way of charge to secure the mortgage debt and he will be accountable to subsequent mortgagees or the mortgagor for any surplus. If the policy is effected in the name of the mortgagor, the mortgagee still has an interest by way of charge in the proceeds. How as a matter of legal analysis does this interest take effect? Necessarily by way of assignment. A charge on a fund belonging at law to someone else operates as a partial equitable assignment...........”

In the present case the fire insurance policy was taken out in the names of the Company as owner and the Bank as mortgagee. The policy was therefore relevantly effected in the name of the mortgagee for the mortgagee’s insurable interest. Strictly, no question of assignment arose as the policy was already in the name of the Bank. In so far as the orders made in the High Court required the release of the assignment of the policy, the orders were in that respect misconceived. However nothing turns on the point. Further, as the Court of Appeal pointed out, there was no need in the circumstances for the High Court to direct that the Bank discharged the policy. Rights and obligations under the policy were at an end once the claim on the policy was settled.

In the present case, the provisions of clause 5 of the mortgage go further than the corresponding provisions of the mortgage under consideration in the CMG case. There, the implied covenants, and the expressed terms of the mortgage required the mortgaged property to be insured in the name of the Bank, for the policy to be held by the Bank, and for the Bank alone to have power to settle and recover a claim against the insurer. The combination of those provisions gave rise to a charge over the proceeds of the insurance. In the present case, clause 5 for the mortgage goes further and provides that the “policy............. shall be held by the Bank as a further security for the payment of the moneys hereby secured.” In short, by an express term in the mortgage, the policy was part of the property constituting the security created by the mortgage. The mortgage is not confined to the grant of an interest by way of security against the real property on which the hotel was built. Clause 32 of the mortgage extends the security to include besides buildings and fixtures “tanks ranges stoves, engines pumps plant and machinery now or hereafter on the land hereby mortgaged and they shall be considered part of the mortgaged premises” . Clause 5 is another instance were the security includes property that is not real property.

If clause 6 of the Schedule had the meaning ascribed to it by the Court of Appeal, the conclusion that the mortgage by its terms includes the policy as part of the security would lead to the further conclusion that the mortgage for that reason alone had varied or negatived the terms otherwise to be implied under clause 6 of the Schedule.

However, we do not think that, properly understood, clause 6 of the Schedule has the meaning given by the Court of Appeal. Clause 6 provides for the application of the insurance moneys “in or towards payment of the principal, interest and other moneys for the time been covered by the security, notwithstanding that the same or any of them may not have accrued due under the terms of the mortgage........... .” The Court of Appeal observed that “security” must mean something different from “mortgage” which is used elsewhere in the clause clearly as a reference to the mortgage contract itself. So far we agree. The reference to the “terms of the mortgage” in clause 6 is plainly a reference to the terms of the mortgage instrument itself. The reference to “security” on the other hand is a reference to the interest or aggregation of rights available to the mortgagee against the property described in mortgage. In the present case that property includes not only the real property comprising the land on which the hotel was built, but also the personal property described in clause 32, and the insurance policy. We do not think that the judgment of Isaacs J. in Royal Insurance Co. Ltd. v. Mylius to which the Court of Appeal made reference, leads to any different conclusion. The point made by Isaacs J. was that when mortgagees insured tangible securities against fire, they insure their security not the debt owed to them. That principle holds good whether the tangible securities are real property or personal property. The Court of Appeal reached the conclusion which it did on the premise that the mortgaged property for the time been charged was only the real property. That premise was not correct as the mortgage also created a security interest in the policy.

We have already observed that clauses 5 and 25 have an effect that would vary or negate the application of the words in clause 6 of the Schedule on which the decision of the Court of Appeal is based. In the course of oral argument we drew Counsels’ attention to clause 30 of the mortgage which provides for the manner of disposition of moneys, including insurance moneys, received by the Bank under various protective provisions of the mortgage. It is unnecessary to recite clause 30. It would appear to surplant the provisions of clause 6 on which the Court of Appeal relied relating to the option to apply moneys in reduction of the amount secured by the Mortgage. Counsel of the Bank accepted that clause 30 had this effect. Thus it seems that the point under clause 6 of the Schedule on which so much time has been spent was not actually raised by the terms of the Bank’s mortgage.

We return to the first and second questions certified by the Court of Appeal. For the reason just identified these questions are hypothetical. The questions posed about clause 6 of the Schedule would arise only in the absence of express terms and conditions of a mortgage which vary or negate the implied conditions. An answer to the first two questions certified should await such a case, although we have in the course of reaching our conclusion on the present case, addressed the meaning of the word “security” in clause 6.

We turn now to the third question which has been certified. That question is one concerning the construction of a mortgage instrument between the Bank and a customer. In the ordinary case the construction of an inter parties contract is unlikely to give rise to a question of significant public importance. However the mortgage used by the Bank is a standard one widely used throughout Fiji, and the construction of these clauses has importance well beyond the two parties to the litigation. For this reason we will address it.

The Company’s argument that the mortgage was discharged by the completion of the mortgagee sale of the hotel property, and that clause 23 thereafter became “inoperable,” and ceased to have application, cannot be accepted. The provisions of clause 27 of the mortgage do not support this conclusion. On the contrary, the clause indicates that the mortgage continues to remain in force until final discharge is given by the Bank. The Bank has not given a final discharge. On the contrary, the Bank maintains that the mortgage transaction is still on foot. The sale of the hotel premises had the effect of releasing that part of the property which comprised the security granted by the mortgage, but it did not discharge the mortgage in the sense that the rights and obligations of the parties under the various terms and conditions of mortgage came to an end.

Even if there had been a disposal by sale or otherwise by the Bank of all the property over which the security has been created, that would not bring the operation of a clause 23 to an end. A similar issue was considered by the Court of Appeal in Bristol & West plc v. Bartlett [2002] EWCA Civ 1181; [2002] 4 All ER 544. It was held that the sale after repossession of the mortgage property by the mortgagee did not have the effect that the balance of the money advanced by the mortgagee that remained after crediting the proceeds of sale were no longer money secured by the mortgage. The counsel for the mortgagees had argued that once the mortgage property was sold, the mortgage was discharged and the unpaid moneys were no longer “moneys secured by a mortgage or other charge on property”. The argument was based, in part, on s.35 (1) of the Land Registration Act 1925 [U.K.]. That section is to an effect similar to s.68 of the Land Transfer Act (Cap.131) which provides that upon presentation of a form of discharge signed by the mortgagee discharging the land from the whole or part of the moneys secured by the mortgage, the Registrar shall make an entry on the register noting the discharge. Upon the entry being made the land “shall cease to be subject to or liable for such principal sum or other moneys.” The presentation of the transfer of the hotel property signed by the mortgagee in this case led to an entry on the register which freed and discharged the land from all liability on account of the mortgage; (see s.72 of the Land Transfer Act). The Court of Appeal in Bristol & West held that the effect of a notation on the register cancelling the mortgage merely had the effect of releasing the land from the mortgage entry, but “accrued rights arising under the deed of mortgage are not affected”(at para. [15]).

In the present case, clause 23 continued to operate after the mortgagee sale of the hotel property. However, it will be noted that the Court of Appeal said that the relevant provisions of the mortgages under consideration in Bristol & West continued to operated in respect of “accrued rights.” In that case the relevant rights had accrued at the time of the default leading to the exercise of the power of the sale. In the present case there is a question whether the rights which the Bank now seeks to enforce under clause 23 had accrued at the date when the company claimed an immediate entitlement to the money, at the latest on 18^th June 1996 when the originating summons the subject to these proceedings was issued.

The Bank in its written submissions seeks to answer this question by arguing that the Bank had incurred, and was liable to pay, costs to its solicitors for defending the action against it as soon as the proceedings were issued by the mortgagor, even although the quantum of that liability had yet to be determined. We are unable to accept that argument. The contract between the Bank and its solicitors would not be an entire contract for a pre-determined sum. Rather, the Bank’s solicitors would become entitled to costs as and when the relevant work is performed, and accordingly the Bank has no right to debit those costs under recital (e) and clause 23 of the mortgage until it is called upon to pay its solicitors.

The liability against which the Bank seeks to hold the disputed moneys is a contingent future liability. It is contingent because the costs, or much of them, may never be incurred. For example, the company might discontinue the proceedings or the proceedings might be brought to a premature end by a summary judgment. The estimate of potential future costs placed before the trial Judge was in the sum of $47,000, being $15,000 for a three day trial, $12,000 in the event of an appeal to the Court of Appeal and a further $20,000 in the event of an appeal to the Supreme Court. Even if the matter proceeded to trial there may be no appeal, and a second appeal to the Supreme Court could only occur with leave.

The question therefore arises: how does a mortgagor obtain a discharge of a mortgage from a mortgagee where the mortgage secures future contingent liabilities? That question is posed by the facts of this case, and it would arise where a bank takes a mortgage over property to secure a guarantee or a performance bond which will mature in the future. The answer is essentially a practical one. The contingent future liability must be valued, and sufficient money or other security put up to cover that value. Naturally enough the mortgagee will have to accept the valuation as adequate before agreeing to discharge the mortgage, and mortgagees would be anxious to avoid arguments over value with mortgagors.

The Property Law Act provides the mortgagor with certain rights of redemption in ss.72 and 73 and envisages that redemption can occur regardless of the type of liability against which the property is secured. The proviso to clause 6 of the Schedule earlier set out also envisages that the mortgagor in a case where the clause applies will have an absolute right to redeem within two months. Again, the exercise of these rights may require contingent future liabilities to be quantified.

Once it is recognised that a future contingent liability can be valued, thus enabling redemption and discharge, the company’s argument that clause 23 of the mortgage is a clog on the equity of redemption disappears. The clause does not “prevent or impede redemption” (Fairclough v. Swan Brewery Co. Ltd. 1911-1913 All ER Rep. 397 at 399) if the liability can be valued and paid out or otherwise secured.

The difficulties of valuing future liabilities are overcome by the widespread practice by banks and financial institutions of inserting in mortgages and similar security documents a clause like clause 21 in the present mortgage which reads:

“THAT a certificate signed by for or on behalf of any Manager stating the amount of the moneys hereby secured and the date mentioned in any such certificate shall be conclusive evidence against the Mortgagor that the amount so stated is the amount of the moneys due by the Mortgagor under these presents at the date mentioned in the said certificate and is the amount of the moneys hereby secured as at such date.”

Clauses of this kind have been upheld by the Courts. In Dobbs v. National Bank of Australia Ltd. [1935] HCA 49; (1935) 53 CLR 643 at 651-652 the High Court of Australia said:

“...............the manifest object of the clause was to provide a ready means of establishing the existence and amount of the guaranteed debt and avoiding an inquiry upon legal evidence into the debits going to make up the indebtedness. The clause means what it says, that a certificate of the balance due to the bank by the customer shall be conclusive evidence of his indebtedness to the bank.”

Dobbs case has been followed by the Court of Appeal in England in Bache a Co. (London) Ltd. v. Banque Vernes et Commerciale de Paris SA [1973] 2 Lloyds Rep 437, and in New Zealand in ANZ Banking Group (NZ) Ltd. v. Gibson [1981] 2 NZLR 513 at 524.

The Court of Appeal in this case said it was unreasonable for the Bank to hold $138,000 against a remotely possible future liability of $47,000. Plainly that stance was very unreasonable, and it is probably the reason why this case has gone so far through the Courts. The course which the Bank should have taken was to issue a certificate under clause 21, and to have released the balance over the amount so fixed to the company.

As it was, the trial judge was confronted with an unreasonable stance by the Bank, and was not directed to the real question that needed to be resolved, namely what was the amount of the “moneys hereby secured” within the meaning of the mortgage. There was argument before the Court of Appeal about how this situation came about. The question was decided against the Bank. No ground of appeal entitles us to revisit the question even although counsel for the Bank urged us to find that what happened before the High Court was not the Bank's fault. We mention this as we think it bears on the question of the costs of the appeals in this Court and in the Court of Appeal. The Bank should not recover the costs of these appeals and should continue to suffer the burden of the costs orders made by the trial judge.

The answer to the third question certified by the Court of Appeal, for the above reasons, is that the Bank was entitled to retain sufficient of the disputed moneys to cover the amount of the “moneys hereby secured” as defined by the mortgage, but no more. The “moneys hereby secured” would include the liability of the Company arising under clause 23 of the mortgage.

We do not consider s.81 of the Property Law Act requires a different conclusion. By its terms the section applies only to ‘purchase money’ arising from the sale of mortgaged property, but even if the section can be extended to an insurance recovery, as the Court of Appeal held, we do not think the section mandates that the disputed money was due to the company. First, under s.81(b) money must be applied in payment of the moneys which are “due or owing.” The requirement is not one limited to the payment of moneys “due and owing”. The difference is important. A liability to pay money arising under clause 23 is a liability which renders money “owing” even if not then due.

Secondly, the obligation arising under s.81(d) to pay surplus money to the mortgagor is subject to equities otherwise arising. Thus, if the surplus is money that is caught by the terms of the mortgage as part of the security, it will not be payable to the mortgagor. Hope v. Hope [1977] 1 NZLR 582 and Bhasin v. Elite Lifestyles Ltd. (1990) 1 NZ Conv C 95-077.

We have been informed from the Bar Table that pursuant to the orders of the trial judge, and other orders of the High Court, the Bank has already paid to or on account of the company all the disputed moneys. Other information in the Record Book suggests that the company is presently insolvent. In these circumstances any order of this Court in relation to the disputed moneys is not likely to have any practical consequence. Nonetheless the Bank is entitled to have its legal rights appropriately recognised.

In the events which have happened there is no longer any utility in varying the orders of the trial judge which were upheld by the Court of Appeal, and in any event those orders also affected other parties who are not before this Court. We think the justice of the situation will be met by varying the order of the Court of Appeal as follows:

1. Add a declaration that at all times material to these proceedings the sum of $13,143.91 being the balance of the sale price of mortgaged property and the sum of $125,000 being the proceeds of an insurance policy were part of the security under memorandum of Mortgage No. 171120 for moneys falling within the description “moneys hereby secured” as defined in the said mortgage.

2. Set aside the order that the appellant pay $1,500 costs of the appeal to the respondent and in lieu order that there be no order for costs in the Court of Appeal.

Subject to these variations to the order of the Court of Appeal, this appeal should be dismissed with no order as to costs.

Hon. Justice Daniel V. Fatiaki
President of Supreme Court

Hon. Justice Jai Ram Reddy
Judge of Supreme Court

Hon. Justice John von Doussa
Judge of Supreme Court

Solicitors:

Messrs. Young and Associates, Lautoka for the Appellant
Valenitabua, S.R. Esquire, Suva for the Respondent