Cyrel v National Bank of Vanuatu [2008] VUSC 55; Civil Case 35 of 2006 (16 July 2008)

IN THE SUPREME COURT OF
THE REPUBLIC OF VANUATU
(Civil Jurisdiction)

Civil Case No. 35 of 2006

BETWEEN:

HENRY CYREL
Claimant

AND:

NATIONAL BANK OF VANUATU
Defendant

Coram: Justice C.N. Tuohy

Date of Hearing: 30 April, 12, 13, 14 May 2008
Date of Sentence: 16 July 2008

Counsel: Mr. Nalyal for Claimant
Mr. Morrison for Defendant

RESERVED JUDGMENT

Introduction

1. This is a claim by the former owner of the Nagar Resort in North Efate against his mortgagee ("the Bank") for damages for breach of the duty it owed him when it exercised its power of sale under the mortgage by selling the property at a gross undervalue. The amount sought is not precisely specified but in submissions counsel for the claimant suggested that a sum in the vicinity of VT 50 m is appropriate.
   
2. The defence of the Bank is that there was no breach of its duty and, in any event, it strongly disputes the level of damages sought.
   

The Duty of a Mortgagee exercising its Power of Sale

3. It is convenient to first define the duty of the Bank to the claimant and then to consider the evidence to decide whether or not that duty was breached because submissions exposed a certain difference in approach by counsel in their formulations of the duty. Mr. Morrison for the Bank urged the Court to adopt the test followed fairly uniformly by the Australian courts: that a mortgagee is required only to act in good faith for the purposes of obtaining repayment without a reckless or wilful sacrificing of the interests of the mortgagor. Mr. Nalyal for the Cyrels relied upon what is said to be the more stringent test adopted by the United Kingdom courts as set out in Cuckmere Brick Co Ltd v. Mutual Finance Ltd [1971] 1 Ch 949 viz. that a mortgagee exercising its power of sale is required to take reasonable care to obtain a proper price for the property, that is, the best price reasonably obtainable at the time. There was no Vanuatu authority cited.
   
4. The duty in question arises from the common law, in the sense of the judge made case law developed over many centuries first in England but now continuing to develop in many countries whose legal systems have grown from English roots. The common law became part of the law of Vanuatu at Independence pursuant to Article 95(2) because it was part of
   

"the British Law in force and applied in Vanuatu immediately prior to the Day of Independence".

5. It is the nature of the common law that it is sometimes not perfectly clear and that lines of authority diverge from time to time, sometimes from one jurisdiction to another, sometimes within the same jurisdiction. In the absence of binding authority from the Vanuatu Court of Appeal, this Court is not bound to follow the common law as declared by the United Kingdom courts if it diverges from the common law as declared by the Australian or New Zealand Courts – or the reverse. It is open to the Court to adopt for Vanuatu the approach which is appropriate for the country.
   
6. The current English approach was summarised by Lightman L. J. in Silven Properties v. Royal Bank of Scotland [2004] [2003] EWCA Civ 1409. He confirmed the well-established principle that a mortgagee has an unfettered discretion to sell when he likes to achieve repayment of the debt. It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained. He is not bound to postpone in the hope of obtaining a better price. He is also entitled to sell the mortgaged property as it is and does not have to take any steps to make it more saleable. Those principles are universally accepted.
   
7. He then went on to say (at Para 19):
   

"When and if the mortgagee does exercise the power of sale, he comes under a duty in equity (and not tort) to the mortgagor (and all others interested in the equity of redemption) to take reasonable precautions to obtain "the fair" or "the true market" value of or the " proper price" for the mortgaged property at the date of the sale, and not (as the Claimants submitted) the date of the decision to sell. If the period of time between the dates of the decision to sell and of the sale is short, there may be no difference in value between the two dates and indeed in many (if not most cases) this may be readily assumed. But where there is a period of delay, the difference in date could prove significant. The mortgagee is not entitled to act in a way which unfairly prejudices the mortgagor by selling hastily at a knock-down price sufficient to pay off his debt: _Palk_ at 337-8 per Nicholls V-C. He must take proper care whether by fairly and properly exposing the property to the market or otherwise to obtain the best price reasonably obtainable at the date of sale. The remedy for breach of this equitable duty is not common law damages, but an order that the mortgagee account to the mortgagor and all others interested in the equity of redemption, not just for what he actually received, but for what he should have received: see _Standard Chartered_ at 1416B."

8. In Upton v. Tasmanian Perpetual Trustees Ltd [2007] FCAFC 57, the Full Court of the Federal Court of Australia recently reviewed the history of the divergence between the Australian and the English cases. While commenting (at para 18) that the question had not been authoritatively ruled upon by the High Court of Australia, the Full Court stated that the law as it is generally accepted to be in Australia does not extend a mortgagee’s duty to obtaining the best price reasonably possible (Para 27). Rather the Court in effect accepted that the law as generally accepted in Australia is that the duty to act in good faith of a mortgagee means that he should act without fraud and without wilfully and recklessly sacrificing the interests of the mortgagor (see para 22).
   
9. In New Zealand, as in some Australian states, the mortgagee’s duty has been defined by statute. Section 103A of the Property Law Act 1952 was enacted in 1993 and provides:
   

"Duty of Mortgagee exercising power of sale – A mortgagee who exercises a power of sale of land or other mortgaged property ..... owes a duty to the mortgagor to take reasonable care to obtain the best price reasonably obtainable as at the time of sale".

10. In Apple Fields Ltd v. Newport Farm Ltd & Ors [2001] NZCA 105, McGrath J giving the judgment of the New Zealand Court of Appeal stated unequivocally in the first sentence of his judgment that s. 103A
    

"gave statutory recognition to a duty of care recognised by the common law as owing by a mortgagee who has decided to exercise the power of sale of a mortgaged property to subsequent charge holders, in particular, the mortgagor".

11. McGrath J saw that duty of care as arising in negligence co-existent with the equitable duty of good faith and in most cases more onerous than it (Para 47). With respect the first proposition seems not to be consonant with the decision of the Privy Council on appeal from the New Zealand Court of Appeal in Downsview Nominees Ltd v. First City Corporation [1993] 1 NZLR 513. It is now firmly established in both the United Kingdom and in Australia that the duty however formulated is (in the absence of statute) an incident of the equitable duty to act in good faith: Silven Properties Ltd v. Royal Bank of Scotland (supra at para 19); Upton v. Tasmanian Perpetual Trustees Ltd (supra at Para 18).
    
12. Nevertheless, the decision in Apple Fields Ltd v. Newport Farm Ltd demonstrates two points:
    
    1. A duty to take reasonable care to obtain the best price reasonably obtainable at time of sale is more onerous than a duty to act without fraud and without wilfully and recklessly sacrificing the interests of the mortgagor. That proposition is also widely accepted in Australia: Upton v. Tasmanian Perpetual Trustees Ltd (supra); Commercial and General Acceptance ltd v. Nixon [1981] HCA 70; (1981) 152 CLR 491; Forsyth v. Blundell [1973] HCA 20; 129 CLR 477;
       
    2. The statutory formulation of the duty in s. 103A of the Property Law Act represents the duty at common law (in its wider sense) as understood and applied in the New Zealand Courts prior to its enactment.
       
13. I turn now to consider which of the two formulations should be adopted in Vanuatu. The more onerous approach has its modern genesis in Cuckmere. Two of the judges in that case justified that approach in terms of principle as well as precedent. Salmon L.J. stated (at 966 C-F):
    

"The proposition that the mortgagee owes both duties, in my judgment represents the true view of the law Approaching the matter first of all on principle, it is to be observed that if the sale yields a surplus over the amount owed under the mortgage, the mortgagee holds this surplus in trust for the mortgagor. If the sale shows a deficiency, the mortgagor has to make it good out of his own pocket. The mortgagor is vitally affected by the result of the sale but its preparation and conduct is left entirely in the hands of the mortgagee. The proximity between them could scarcely be closer. Surely they are "neighbours." Given that the power of sale is for the benefit of the mortgagee and that he is entitled to choose the moment to sell which suits him, it would be strange indeed if he were under no legal obligation to take reasonable care to obtain what I call the true market value at the date of the sale."

Cross L.J said (at p 972 G-H):

" There is no doubt that a mortgagee who takes possession of the security with a view to selling it has to account to the mortgagor for any loss occurring through his negligence or the negligence of his agent in dealing with the property between the date of his taking possession of it and the date of the sale, including, as in the McHugh case [1913] A.C.299, steps taken to bring the property to the place of sale. It seems quite illogical that the mortgagee’s duty should suddenly change when one comes to the sale itself and that at that stage if only he acts in good faith he is under no liability, however negligent he or his agent may be."

14. In Apple Field Ltd v. Newport Farms Ltd (supra), the Court said that the purpose of s. 103A, which replicates the common law duty, is to protect those to whom the duty is owed in the absence of any other incentive for a mortgagee selling the property to obtain the full economic value over and above the sum which will clear the mortgage.
    
15. There is little discussion of policy or principle as opposed to precedent in those Australian cases where the less onerous approach has been taken. It has been said that there is no justification in logic to saddle a receiver who has decided to sell a mortgagor’s assets with more onerous duties such as the duty to obtain the true market value of the property or a duty not to act negligently in connection with the sale: Expo International Pty Ltd v. Chant [1979] 2NSWLR 820. But it is, with respect, difficult to see how the issue is one of logic. If it is, then the view about logic expressed by Cross L.J in Cuckmere (supra) seems to me preferable.
    
16. It is certainly commercially imperative that the realisation of a lender’s security should not be so difficult that it becomes impracticable. However the more onerous approach does not in any way fetter the mortgagee’s right to decide in its own interests when it will sell, it merely imposes a duty on him when he does decide to. In my view the imposition of that duty is reasonable and does not interfere with the mortgagee’s right to realise its security. Rather it requires him to have full regard for the mortgagor’s interest, which he otherwise would have no incentive to do beyond the amount required to clear the mortgage.
    
17. It is noteworthy also that New Zealand and Queensland at least have chosen to impose the more onerous duty legislatively: see s.103A Property Law Act (NZ), s. 85(1) Property Law Act (QLD). Furthermore, the High Court of Australia has on two occasions declined to decide between the two approaches: Forsyth v. Blundell (supra) CLR 477, Commercial and General Acceptance Corp. v. Nixon (supra). The possibility remains that the Australian courts may move towards the more onerous approach.
    
18. I am of the view that in the law of Vanuatu the appropriate duty of a mortgagee exercising its power of sale is to take reasonable care to obtain the best price reasonably obtainable at the time of sale. It will always be necessary to carefully consider the particular facts of each case to decide whether the duty has been breached. In that regard, the English cases must be read with caution, having regard to the different methods of selling property and the size and nature of the respective property markets.
    

The Evidence

19. The claimant became the registered proprietor of leasehold title 12/0321/006 in 1994. He was the original lessee, the lease having been granted to him by the Minister of Lands acting under s. 8 of the Land Reform Act (Cap.123). The lease is for a period of 50 years commencing on 17 February 1994. The land is situated at Paunangisu Village, North Efate. The claimant is a chief in the village.
    
20. In August 1997, the claimant granted a mortgage over the leasehold title to the Bank to secure a loan of VT2,000,000 to himself and his wife Fanny Cyrel. At that time, the Nagar Restaurant was already established on the property.
    
21. In November 1998 the mortgage was varied to increase the principal sum secured to VT3,000,000. Prior to the variation, Loic Bernier of Caillard & Kaddour completed a valuation giving an estimated market value of VT 26,550,000 made up of VT7,500,000 for the land itself and the balance for the buildings. The valuation indicates that at that time the buildings consisted of a restaurant with bar and kitchen, 2 double units and 4 single units together with a toilet block.
    
22. The Cyrels fell behind with payments and on 4 October 2001 the Bank issued a Notice of Demand demanding immediate repayment of all monies owing then totalling VT1,019,562. Repayment not having been made, the Bank issued proceedings in this Court under Civil Case No. 57 of 2002. On 23 August 2002, the Court made a number of orders including:
    

"1. The plaintiff, as Mortgagee, be empowered to sell and transfer the leasehold properties and described in Title Number 12/0321/006 by such means and in such manner as it shall deem fit":

23. The Bank did not initially seek to exercise its power of sale. However on 28 April 2003, Mr. Ben Dick Dali of the Bank wrote to the Cyrels stating that the Bank now intended to sell the Nagar Resort pursuant to the Supreme Court Order dated 23 August 2002. Mr. Dali’s letter went on to say:
    

"In order to maximise the sale proceeds, the Bank would like to encourage you to assist with the advertising and selling of the resort, either through tender or by private treaty. In doing so, you must make sure that you keep the Bank informed of all you dealings. The Bank on it’s part, will also try to recover it’s loss by selling the resort through tender or otherwise. To do this, we need to have the resort valued by a Real Estate Agent. For this purpose, we would appreciate that you forward to us (various information)".

24. The property was inspected by Mr. Levi Tarosa of De Roza Investment Group on 7 June 2003 and he provided a valuation report for the Bank following his inspection. The approach was to make "an open market valuation of the land and buildings only" rather than on a "going concern" basis. In summary, the valuation was for a total of VT43,400,000 made up of land at VT27,230,000 and buildings at VT16,131,890 rounded up to the total.
    
25. Under "Marketability", Mr. Tarosa made the following comments:
    

"Given the inherent and external features of the property and the prevailing adverse market conditions in the tourism industry, this may have some impact in the ease of sale of the property. The same can be said with the on-going chiefly title dispute which the owner is a party to. In the past, the owners fell victim in the saga with sustained damages to their property and business. This all may have a adverse impact or serve as a deterrent to any potential buyers if the property were to be put on the market at all, nonetheless, the property is presented well for further development and expansion due to its ideal resort style development along the waterfront."

He also made the comment that

"unless the tourism market improves, and the proper road infrastructure improves the ability to sell this property as a resort at its market value will be reduced".

26. At the end of the report, Mr. Tarosa stated that the value represented, in his opinion,
    

"what the property may be able to be sold (for) in an open market between a willing buyer and a willing seller dealing in an arm’s length transaction".

Mr. Tarosa described himself as a "Private Valuer" while making it clear he was not then a registered valuer.

27. A copy of the valuation was sent to the Cyrels on 3 July 2003. On 9 August 2003, after a discussion about renegotiating the Cyrel’s indebtedness led nowhere, the Bank advertised the property for sale in the Daily Post. The advertisement was in the advertisements section. It was in the middle of a column one–third of the page wide which was headed with the Bank’s logo and underneath the words "National Bank of Vanuatu is selling the following properties by tender". Five properties were listed, 3 with a photo of the building. The ad for Nagar Resort had no photo and only the bare details of the property appeared. It did however mention that there were 500 metres of water frontage. At the bottom of the column, the advice was given that tenders should be in writing and delivered to the bank before Friday 22 August 2003 at 4:30 pm. The evidence was not clear about how many times the ad appeared between 9 and 22 August. It may have been twice, possibly four times.
    
28. A further inconclusive discussion took place between the bank and Mrs. Cyrel on 13th August 2003 on which date Transpacific Real Estate of Port Vila wrote to the Bank offering to advertise the property on its website in an attempt to interest an overseas buyer. The Bank accepted this offer on 28 August 2003. In the letter it said that it had no asking price but would consider any reasonable selling offer. It expressed the expectation of selling off the property as soon as possible. The Bank signed a non-exclusive agency agreement with Transpacific.
    
29. In the meantime, negotiations to refinance or renegotiate the debt continued. The tender date passed without an offer.
    
30. There was no direct evidence from anyone at Transpacific about their involvement with the property. However correspondence with them was annexed to the sworn statements of Peter Dundas, the Manager Finance and Risk Management for the Bank, who made the principal sworn statement for the Bank. Correspondence and a copy of a print-out of the website advertisement was annexed to the sworn statement of Ben Dali formerly Manager of Recoveries for the Bank. The advertisement was not long but quite informative and featured 3 photos. It advertised the property as an operating resort with no mention of subdivisional potential. The asking price is stated at VT 42 m.
    
31. The print-out shows that it was made on 20 January 2005. It was suggested therefore that the property was advertised on the website from late August 2003 until at least 20 January 2005. That is a probable inference although not certain because obviously there was no asking price originally.
    
32. On 27 August 2003, Mr. Alistair Campbell, the ultimate purchaser, proposed a price of VT 2m for the property on the basis of some sort of partnership agreement being entered into with the Cyrels. The Bank agreed in principle provided a partnership agreement was reached with the Cyrels. Nothing seems to have come of this approach.
    
33. After the Cyrels had made a proposal for refinancing, by letter dated 31 August 2003 the Bank agreed to "put a hold on further legal action for the present" on certain conditions. One of the conditions was that
    

"if any reasonable offers are received for Nagar Resort as a result of advertising, they will be discussed with you prior to any decisions being made by the Bank".

In my view, that did not amount to an agreement to the Bank to take the property off the market. Nor was it an agreement to give the Cyrels a veto on any sale. The arrangement was to be reviewed on 31 December 2003.

34. On 11 December 2003, the Bank received an email from Transpacific advising that a Mr. Tony Greenwood was offering to buy the resort for AUD$230,000. (roughly VT 18m). The Bank called in the Cyrels to discuss the offer. They rejected it outright saying they would look at VT100m. The Bank ordered another valuation from Caillard & Kaddour.
    
35. That valuation dated 2 January 2004 gave a value of VT 26.55 m. This was signed by Loic Bernier and gave a value for land at VT7.5m and buildings at VT 19.05m. There was no discussion in the report apart from the figures and the value was described as "estimated market value". Mr. Bernier pointed out that he was not a registered valuer and the valuation was

"only the opinion of a Real Estate Agent according to the present market in Vila and by comparison with other similar properties for sale".
In his evidence Mr. Bernier suggested this may have been prepared not by him but by one of his staff. Since the figures are exactly the same as his November 1998 valuation it may have been just a reissue of that.

36. The Bank went back to Mr. Greenwood on 8 January 2004 advising him that if he increased his offer to VT25.5m the Bank would accept it. Further negotiations ensued. The Bank re-advertised the property for sale by tender in the Daily Post on Wednesday 11 February through to Saturday 14 February inclusive. The advertisement is not in evidence but the order for it is. It is likely that these ads were the same as the first one. The date for closing of tenders was 28 February 2004 at 4.30 p.m. It is clear from the contemporary correspondence that the motive for re-advertising the property was not so much to find another buyer but because the Bank was contemplating selling to Mr. Greenwood and wished to be in a position to show that his offer was the best available.
    
37. In answer to a question by the Court, Mr. Dundas said that the Bank did not accept Mr. Greenwood’s VT 18 m offer because the Cyrels would not accept it. When it was suggested that the Bank could have accepted the offer without the Cyrel’s agreement, Mr. Dundas referred to the earlier agreement saying that this gave the Cyrels the right to agree or not to any sale during the 4 month period 31 August to 31 December 2003. However the Bank’s letter of 31 August 2003 undertook no more than to discuss any offer with the Cyrels before making any decisions.
    
38. On 11 February 2004, Mrs. Cyrel advised Mr. Ben Dali of the Bank that a group of investors in nearby Kakula Island Resort represented by a Mr. Douglas Bailey were interested. The next day Mr. Greenwood wrote to the Bank offering AUD$80,000 (approx VT6.5m) but his letter clearly invited a counter-offer. On the same day Mr. Bailey telephoned the bank and was advised to forward a tender.
    
39. By letter dated 15 February 2004, Mr. Bailey tendered to purchase at VT2.3 m that being the amount then understood to be owing under the mortgage. It was in terms an unconditional tender. However, Mr. Bailey and Mrs. Cyrel subsequently told the Bank of discussions between them about the continued involvement of the Cyrels in the Resort. On 19 February 2004, Mr. Bailey wrote a longer letter essentially repeating the earlier offer (but now at VT2.34m because he thought that was the amount required to clear the mortgage). Included in the letter was an agreement between Mr. Bailey’s company and the Cyrels for them to continue operating the resort. The agreement was signed by Mrs. Cyrel. It appears she had done so on the understanding that Mr. Bailey’s company would simply acquire the bank’s security not the ownership of the property. However, Mr. Bailey’s communications to the Bank indicated that he was looking to acquire ownership.
    
40. The Bank accepted the offer conditional on payment being received on or before 27 February, the day before close of the tender. Mr. Bailey went as far as having a formal agreement for sale and purchase drawn up by his solicitors for purchase from the Bank at VT2.34m by one of his companies Teouma Bay Marina Ltd. The agreement appears to have been sent to the Bank unexecuted. The agreement was not conditional upon the consent of the Cyrels or the making of any agreement with them. However when the Bank was advised that the Cyrels, having come to understand that Mr. Bailey sought full ownership, no longer had an understanding with him, it declined to proceed with the agreement.
    
41. The Bank apparently accepted Mr. Greenwood’s tender on 2 or 3 March 2004 although the evidence does not disclose any written acceptance. On 10 March, the Bank forwarded to Mr. Greenwood in Australia a formal agreement for sale and purchase in duplicate for approval and, if approved, execution and return. The price was AUD$80,000.
    
42. On 18 May 2004, Mr. Bob Wylie of Rainbow Garden expressed to the Bank an interest in the property and was told that he would be advised if the existing negotiation fell through.
    
43. On 19 May 2004 there was a meeting held at the Bank regarding the Nagar Resort. That was attended by Mrs. Cyrel, Mr. Greenwood and a friend, Police Superintendant Arthur Caulton, another Police Officer Ron Tamtam, Mr. Dundas and Mr. Dali. (There was another uncategorised attendee named Joel). The evidence of Mr. Tamtam which I accept is that he had to go to the Nagar Resort 4 times at this time because of threats to Mr. Greenwood by the Cyrels. They blocked the road and accused him of stealing their land, telling him to go back to his own country. He said that Mrs. Cyrel threatened Mr. Greenwood in front of Police Officers. He said that at the meeting of 19 May 2004 Mrs. Cyrel threatened Mr. Greenwood that if he bought Nagar Resort, they would burn down the houses on it. Mr. Dali’s note of the meeting confirms that Mrs. Cyrel threatened to block the road if the property was sold. Where Mrs. Cyrel’s evidence about threats made by her differs from that of the Bank’s witnesses, I accept the latter. It is clear that the Cyrels were strongly opposed to a sale to Mr. Greenwood at the price offered.
    
44. On 23 May 2004 Mr. Greenwood sent an email to the Bank indicating that he wanted still to work with the Cyrels in his plans but still intended to proceed if necessary with a Police eviction. The email impliedly indicated that he had received threats from the Cyrels. A further email of 28 May sent from Australia again mentioned a threat but still indicated an intention to proceed as did another on 9 June. However, the last email contradicted one sent by Mr. Greenwood to the Lands Department on 1 June stating that he would not be proceeding with the tender for Nagar. The Bank sought confirmation of this from Mr. Greenwood on a number of occasions but never got a clear answer from him and eventually imposed a time limit of 31 July for return of the executed agreement. A Bob Reischl then responded stating that he "acted on behalf of Tony with a common interest" and indicating a continued intention to proceed with the purchase of Nagar. Apparently Mr. Reischl was given until 30 September 2004 although there is no written evidence of that before the Court. Mr. Reischl’s interest did not lead anywhere.
    
45. Right throughout the Cyrels were trying to arrange refinancing or repayment of the debt, and advising the Bank of their efforts.
    
46. On 1 October 2004, once it was apparent that the Greenwood tender was dead, the Bank offered to refinance the Cyrels loan if they would pay off VT0.5m cash, open to 15 October otherwise the Bank would re-tender. This offer was not acted upon by the Cyrels. On 25 October, Mrs. Cyrel advised that they were negotiating with a potential buyer and over the following months Mrs. Cyrel advised the Bank from time to time of various proposals for refinancing or sale which the Cyrels were pursuing, none of which came to fruition.
    
47. The Bank does not seem to have done anything much to sell the property itself after the Greenwood tender came to nothing. There is a file note of 31 January 2005 by Mr. Dali that the Bank would send an Australian investor to the Cyrels to discuss a possible sale of Nagar Resort after that date. But there is no other mention in the evidence of this Australian investor, who he was, what interest he had shown and what the Bank did about it.
    
48. On 16 June 2005, Mr. Dali spoke to Bob Wylie of Rainbow Gardens who again indicated interest in the Resort. It was left on the basis that he was to try to do a deal directly with the Cyrels. On the same day Mrs. Cyrel also reported on negotiations the Cyrels were having with a New Zealander, Sydney McGreal.
    
49. On 29 June 2005, Mr. Dali had a discussion with Mr. Wylie who was looking for some finance if he proceeded. He was invited to submit a proposal. He stated he would think about it and might do so. There is no evidence of any further interest by Mr. Wylie.
    
50. On 24 August 2005, Mr. Alistair Campbell called into the Bank and requested to see Mr. Dundas. His file note of the meeting is set out below:
    

"A Mr. Alistair Campbell called into the Bank and requested a meeting with me today. He stated that he had had discussions with the proprietors regarding purchasing the resort which had not been successful and wanted to know if the Bank was in a position to sell the property.

I confirmed that the Bank did hold a "power of sale" and that in fact the property had been advertised and tendered on more than one previous occasion by the Bank.

He said that he wished to offer the Bank VT 3 million for the property. He argued that the business held no "goodwill" value, that the buildings were in need of some repair, and that as he was aware that the existing owners may attempt to create difficulties for him which could involve further expenditure on his behalf, and accordingly was not prepared to pay more than VT 3 m for the property as is.

Given the efforts that the Bank has made to have the proprietors make any repayments to the Bank, and the efforts that have been made to sell the property by public tender, and the efforts to sell via local agents, all without success, I stated that the Bank would be prepared to enter into a contract for sale at VT3m.

Mr. Campbell went on to claim that the proprietors (Henry) had a history of destroying assets rather than let someone else get them and for that reason requested the Bank not to inform the proprietors of the sale until settlement date. I said that the Bank would not agree to that and that the proprietors were entitled to a reasonable period to remove all the chattels not covered by the mortgage from the resort buildings to their house property. I said that the Bank would issue the proprietors with a notice to quit which would give them 2 weeks to move the chattels not covered by the mortgage.

He expressed concern about what the proprietors may do to the property prior to settlement once they found out about the contract, but after further discussion accepted that the Bank would issue them two weeks notice and would do what it could to protect the property."

51. The same day, 24 August 2005, the Bank’s solicitors drafted an agreement for sale and purchase for a sale at VT3m to Mr. Campbell and his wife. Completion date was within 14 days from the date of receipt of consent to the transfer by the Minister of Lands. The agreement was executed by both parties and dated 26 August 2005. The sale was settled on 13 March 2006. It is unnecessary to relate the evidence of attempts to repay after the unconditional agreement was executed and the equity of redemption thereby lost because it is irrelevant. There is however, no evidence that the Bank fulfilled its duty to the Cyrels to account to them following the sale.
    
52. On 28 September 2005, Loic Bernier prepared another valuation of the property, this time for the Cyrels. It gave an estimated market value of the property of VT 70.7 m made up of VT 45 m for the land and VT 25.7 m for the buildings. Mr. Bernier stated that the value of one hectare of waterfront land in 2005 was about VT 5.7 m. Mr. Bernier’s valuation contained no analysis or comparative sales. It did no more than express his opinion as to value.
    
53. After the Bank signed unconditionally with Mr. Campbell, there were considerable problems with the Cyrels. Mr. Campbell’s evidence was that they threatened to burn the property, to assault him and the security guards he put in to secure possession, they chained the gate and locked the road. He received abuse and at one time Mrs. Cyrel stated that "anybody who buys the property will have a problem that never goes away." I accept that evidence in general terms. Mr. Campbell also stated that the main reason his offer was so low was because of perceived threats and problems from the Cyrels towards any buyer of the land. I accept that evidence also. Nevertheless it is clear that Mr. Cambell did manage to secure possession, the buildings were not burnt and he has been able to achieve a subdivision and sale of some of the subdivided lots.
    

Discussion

54. I propose to adopt the approach recommended by Jonathan Parker L.J. in Michael v. Miller [2004] EWCA Civ 282 (at para 141) viz to start by considering the steps which the mortgagee took to sell the property and then to consider whether, in all the circumstances, the mortgagee acted responsibly in accepting the purchaser’s offer and contracting to sell the property at that price. The duty to take reasonable steps arose when the decision to sell was made in this case, 28 April 2003. It is obviously a continuing duty. However the time for assessing whether the price was the best price reasonably obtainable is the time of sale, August 2005, more than 2 years later. This is a significant difference.
    
55. The first matter to consider is what steps the Bank took to properly expose the property to the market. A feature of the evidence in this regard is the apparent lack of any conscious formulation of a marketing strategy. Initially, the Bank took the sensible step of obtaining a valuation at VT43.4m. It did not, however, take any steps to obtain professional advice as to the best means of exposing the property to the potential market and thus maximising the sale price.
    
56. While officers of the Bank, such as Mr. Dundas and Mr. Dali, must acquire a considerable knowledge of the property market in Vanuatu by virtue of their work, they are not professionals in real estate marketing. People like the witnesses Loic Bernier of Caillard & Kaddour and Douglas Patterson of Island Property Ltd are. Expertise of professionals like them was not sought by the Bank. This property was not a "run of the mill" residential property in Port Vila. Its size, location and water frontage obviously made it potentially of interest to a wider market than just the local. No advice was sought as to the best way of tapping this market.
    
57. Then a decision was made to market the property by tender for a period of only 13 days (9-22 August 2003). The only advertising was 2 ( or perhaps 4) fairly small and unattractive ads in the Daily Post. Both the initial advertising and the initial marketing period were grossly inadequate. Although tender is apparently the standard practice, there was no evidence that it was the method of sale best suited to maximise price.
    
58. On the initiative of one real estate firm, not the Bank, internet advertising was carried out by that firm only. There is no evidence of what other internet advertising was available. There is also no clear evidence of how long the internet advertising continued or how many hits there were on the advertisement. There is no real explanation of why the property was not listed with any other real estate firms in Port Vila. While it was said that the real estate agents in Port Vila would have been aware from the tender advertisements that the property was on sale (and Mr. Bernier’s firm certainly was), no agent is likely to actively market a property which has not been listed with him or her. It is hard to imagine that anyone selling his own property would have proceeded as the Bank did initially.
    
59. Apart from that, the Bank took no steps to actively market the property again until after Mr. Greenwood made his offer. It then prudently obtained a second valuation, this time at VT26.55m. Then a further series of the same type of advertisement was placed in the Daily Post for a period of 4 days, beginning to end.
    
60. That really was the end of efforts by the Bank itself to actively market the property. It just waited for buyers to surface. From then on, the Bank appears to have relied upon the Cyrels to seek out and negotiate with potential purchasers. While it was understandable for the Bank to try to ensure that the Cyrels were in accord with any sale, the fact is that the Cyrels were essentially opposed to selling to anyone, except perhaps in the very unlikely event of an unrealistically high offer. For entirely understandable reasons, the Cyrels did not want to lose the property they had put so much effort and expense into. What they were clearly looking for was an arrangement which would enable them to pay off the Bank while retaining ownership. This must have been evident to the Bank. To the extent that it relied upon the Cyrels, as marketing agents for the property, the Bank was unrealistic. Sending potential buyers to the Cyrels was a recipe for losing them.
    
61. When Mr. Campbell came in with his offer in late August 2005, there had been no newspaper advertising of the property for a year and a half. There is no evidence that internet advertising continued after January 2005, if it continued until then. The property was listed only with Transpacific Real Estate and there is no evidence that they did anything other advertise it on the internet. No effort was made to enlist the active efforts of any other agent. The last time other agents might have seen newspaper advertising alerting them to the property was over a year earlier. None of the advertising or marketing seems to have focussed on or even mentioned the subdivisional potential of the property. Yet by 2005, I am satisfied that that is where its value lay. In that respect I accept the evidence of Mr. Patterson and Mr. Bernier that there was a real estate boom in Vanuatu in the period, particularly focussing on waterfront properties for subdivision. That must have been known to the Bank which by the nature of its business is intimately in touch with the local economy.
    
62. The price offered by Mr. Campbell was extremely low, just over 10% of the latest valuation obtained by the Bank. Since that valuation property prices especially for waterfront land had grown strongly. Mr. Bernier’s September 2005 valuation confirms it. The Bank must have known that. The Bank was of course fully entitled to take into account its experience over the preceding 2 years, in particular the depressing effect on the market for the property caused by the behaviour of the Cyrels. It knew, though, that it had had an offer more than a year, a year previously for 6 times the price offered by Mr. Campbell but had allowed the Cyrels to veto it.
    
63. In my judgment, the steps taken by the Bank to market the property were seriously inadequate, particularly in the year leading up to the signing of the contract. There is no doubt that the attitude and behaviour of the Cyrels had a significantly depressive effect on the market but not to the extent of justifying a discount of probably well over 90% of open market valuation. This is particularly so when proper regard is had to the fact that the real value of the land was not in the resort which was more vulnerable to harassment but in the potential for subdivision. The extreme nature of the undervalue is illustrated by the fact that Mr. Campbell has been able to successfully subdivide the land into 110 lots which he is selling for between AUD$50,000 and $120,000 each. He has entered into contracts for 13 sales, 9 of which have settled. In my view, in selling to Mr. Campbell at VT3m in the circumstances, the Bank failed in its duty to Mr. Cyrel to take reasonable care to obtain the best price reasonably obtainable at the date of sale. It had not taken adequate steps to properly expose the property to the potential market over the period leading up to the sale and was not therefore justified in accepting a virtual "give-away" offer.
    

Damages

64. The measure of damages is the difference between the best price reasonably obtainable at the date of sale and the price actually obtained: Skipton Building Society Ltd v. Stott [2001] 2 All E.R.779. That is complicated in this case by the fact that the actual sale price was apparently less than the Cyrels then owed under the mortgage. The Bank failed to comply with its duty to account to the mortgagor after the sale. It appears to have taken no further steps to recover the balance of the debt but there is no evidence that it has formally forgiven it. In oral evidence Mr. Dundas stated that the Bank wrote off VT1.067m as at the date of settlement of the sale.
    
65. There was a considerable amount of evidence as to the market value of the property at time of sale. The claimant relied upon Loic Bernier and Douglas Patterson. Mr. Bernier’s valuation at VT70.7 m has been referred to in Para 52 above. Mr. Patterson of Island Property Ltd made a sworn statement which contained much more analysis. His evidence was that the year 2005 was perhaps the most active year in Vanuatu real estate history. It was the peak of the boom in real estate not only in Vanuatu but worldwide. He stated that the highest demand was for coastal beach front land for holiday homes and tourism projects. He referred to a number of other bungalow resort properties on Efate on the market at the time and the sale of waterfront land at Eratap for a resort at a price of AUD$1m in 2005. His conclusion was:
    

"Considering the improvements on the land in 2005, the length and type of water frontage, the total land area and the potential for future development as subdivided land, I believe a fair and reasonable market value for this property would be VT70.75m".

66. Mr. Bernier and Mr. Patterson were both cross-examined in some detail. Neither of them appears to have any formal qualifications in valuation although Mr. Bernier is now a duly registered valuer, having qualified by experience, and Mr. Patterson also has the credentials for qualification. Regardless of formal valuation training or registration, however, both have vast experience in and knowledge of the real estate market in Vanuatu and the opinions of both of them are worthy of great respect. Their evidence satisfies me that there was indeed a boom in coastal real estate in Vanuatu in 2005 and the value of this property must have increased significantly between the time of the decision to exercise the power of sale in 2003 and eventual sale in August 2005.
    
67. However, both their valuations lack detailed reasoning. Neither attempted any estimate of the actual or potential profitability of the property as a resort, although both saw the property’s appeal as lying in its subdivisional potential. Mr. Patterson did not ascribe any separate value to the buildings. All the comparison resorts, whose asking (not sale) prices were compared are much closer to Port Vila and with superior buildings and facilities. Neither ascribed any discount for problems with custom owners or with the Cyrels.
    
68. The Bank relied upon valuation evidence from Glen Craig and Levi Tarosa. Mr. Craig is another real estate agent in business in Port Vila. He has a considerable business which opened in June 2005. His business specialises in dealing in larger properties and resorts. His company has sold several resorts since it opened. His company has acted on some significant mortgagee sales. He has also provided in excess of 100 valuations since establishing in Vanuatu. His opinion of the value of the property, if it was not what he termed a "distressed sale" situation, is that it would be in the VT 40 m range. He pointed out the depressing effect on value of custom owner disputes and custom owner aggression towards vendors and purchasers which he categorised as the single most significant factor affecting the ability to sell and gain fair market value for such properties. His opinion was that a reasonable discount in all the circumstances for this property would be 60% so that to use his words,

"a sale in the VT 16 m range would not have been unreasonable".

69. Mr. Tarosa is a registered valuer with formal valuation qualifications. He prepared a valuation report for Alistair Campbell in June 2006. The stated purpose was to value the unimproved value of the land in order for the lessor (the Minister of Lands) to determine the applicable land premium and rental on the leases. The stated basis of the valuation was unusual:
    

"Open Market Value & Fair Value:

The basis of this valuation shall be the Open Market Value as defined under the Vanuatu Code of Professional Practise:

Open Market Definition:

Market Value is a representation of value in exchange, or the amount a property would bring if offered for sale in the open market at the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.

Unlike the Market Value definition explained above it was noted that the subject property was sold recently under a "Mortgagee Sale" or "forced sale" circumstances pursuant to orders of the Supreme Court of Vanuatu dated 23rd August 2002. The purported sale having taken place amidst differing circumstances and in conditions other than those prevailing in the open market for normal orderly disposal of assets. I am also being informed by Mr. Campbell that the previous proprietor is also threatening full enjoyment of his rights on the property as well as allegations that the previous owner is threatening to burn down the property. This has lead to the Insurance companies refusing to insure the subject property and business.

Under these circumstances, the basis of this valuation will not be on the Open Market Value but rather the Fair Value;

Fair value anticipates a sale, which occur in differing circumstances and in conditions other than those prevailing in the open market for normal, orderly disposal of assets.

The above definition will be relied upon in the final analysis of the determination of the unimproved value of the subject land.

70. Mr. Tarosa then carried out an exercise, using comparative waterfront sale values, of costing a subdivision and sales of the subdivided lots which resulted in a net value of the block of VT11,250,000. Having done that, he stated under the heading "Valuation Reconciliation":
    

"The subject property has some 400 metres of absolute waterfrontage. In today’s market, this waterfront block could be sold for over VT70 m gross realisation after subdivision. The unimproved value, however, assessed above, is approximately VT 11 m. However, given the circumstances surrounding the subject property and the status of the leases I consider a fair value of the subject land that a prudent buyer would be willing to pay from the land would be no more than 20% of value declared which is approximately VT 2,250,000 m".

71. There are several criticisms which can be made of Mr. Tarosa’s methodology. First his notional subdivision of the property contains 7 lots with 50 m water frontage each and a depth of 100 m and 20 rear lots of similar size. (This would require an area greater than the area of the property). Mr. Campbell has apparently subdivided into 110 lots. Secondly, by an unexplained discount factor Mr. Tarosa’s methodology has produced a price of VT7.4 m for a waterfront block of 5,000 m2 with 50 m of waterfrontage using as a base the sale of a waterfront block of 3329 m2 with 27 m waterfrontage at Havannah Harbour for VT 12m. Then a further unexplained "market adjustment" (in fact a reduction) of 20% or 25% is used to produce a value of VT 6 m each for the 7 notional waterfront lots and VT 2.7 m for the inner lots.
    
72. Then the calculation proceeds on the basis that there would be 12 (not 20) inner lots to give a gross realisation of VT 74.4 m with a 15% costs of sales reducing the net realisation to VT 63.24 m. At that point a profit and risk allowance of almost 50% is applied to reduce that figure to VT33.3 m approximately. The risk is noted as "augmented by threats from previous proprietor". That of course is the same factor which is later used to reduce the final unimproved value by 80%.
    
73. From the figure of VT 33.3 m there is then a deduction of 45% for subdivisional costs producing a figure of VT 18.3 m approximately. The cost of the block presumably to Mr. Campbell (VT 3.3 m not VT 3 m) is then deducted even though the valuation purports to be of the land, not of the profit to a developer. This leaves VT 15 m from which yet a further "market adjustment" of 25% is made to produce the unimproved value of VT 11.25 m.
    
74. I am satisfied that the valuation of Mr. Tarosa was artificially contrived for the purpose of producing a very low value to assist Mr. Campbell in fixing the lowest lease premium and rental possible. I find it so obviously contrived and unrealistic that it is of no assistance to the Court.
    
75. In order to assess the best price reasonably obtainable at the date of sale, I propose to first make an assessment on the evidence of the open market value of the land (as defined in Mr. Tarosa’s valuation) and then to consider how that might be affected by the particular factors which existed here viz. the fact that this was a forced mortgagee sale and the opposition and interference of the Cyrels.
    
76. On an open market valuation basis, I am of the view that Mr. Craig’s assessment is closer to the mark than the VT 70 m plus assessments of Mr. Bernier and Mr. Patterson. I consider that the higher range fails to adequately take into account the significance of Paunangisu’s distance from Port Vila on a (still) extremely poor road combined with the relative unattractiveness of the water frontage and the poor condition of the buildings. The evidence is that only a fairly small proportion of the sea front consists of desirable white sand. These factors must make this property much less desirable than all the competing properties mentioned in evidence, from the point of view of either a developer or a resort operator. I assess the open market value of the land at VT 40 – 45 m as at August 2005.
    
77. However that value must be heavily discounted for the factors already mentioned. It is generally accepted that the fact that a property is being sold by the mortgagee, not the owner, depresses price because purchasers expect a bargain price. In this case, there is the added factor of the Cyrels attitude and behaviour. In my judgment, this factor was particularly important in regard to the saleability of the property. This was something more than the usual dispute between different claimant custom owners, which is often not so much about the sale of the land but who is to receive the proceeds. The Cyrels were the owners of the leasehold interest itself, they were in actual occupation and control of the buildings, they lived close by and they had some physical control over the road access. In addition Mr. Cyrel is a chief of the neighbouring village, although it seems from the evidence that there is division within the village and dispute over the custom ownership of the land.
    
78. Furthermore the events surrounding the Greenwood offer and the Campbell purchase show that Mrs. Cyrel particularly was capable of physically threatening violence against the person and property of any potential purchaser. I am sure that all potential purchasers would soon become aware of that. Unless a purchaser could reach an accommodation with the Cyrels, which would probably necessitate an unattractive equity partnership, he would be faced with the prospect of serious harassment or worse and having to carry out a removal and security measures of the type undertaken by Mr. Campbell. It is likely that a purchaser would discount entirely any value for the buildings which could easily be deliberately burned down (as had been threatened). Mr. Campbell found that QBE was not prepared to insure them for that reason. As well as that the value of the land would be much reduced.
    
79. In my view a discount of 50 - 60% is required for these factors from the open market value which is close to the discount suggested by Mr. Craig. I conclude that the best price reasonably obtainable at August 2005 was in the order of VT 18 m, which happens to be also the amount earlier offered by Mr Greenwood (which could have been accepted).
    

Conclusion

80. Therefore the difference between that sum and the price paid by Mr. Campbell is VT 15 m. There will be judgment against the Bank for that sum. The Bank is entitled to set off against the judgment any amount still owing to it by the Cyrels on the advances secured by the mortgage. There will be costs in favour of the claimant to be agreed or fixed by the Court on application.
    

DATED at Port-Vila this 16th day of July, 2008

BY THE COURT

C.N. TUOHY
Judge