Case Note by Paul Ryan February 2014

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1 Case Note by Paul Ryan February 2014 Settlement Group Pty Ltd v Purcell Partners [2013] VSCA 370 Catchwords: Mortgages Real property Refinancing Multiple mortgages to be refinanced Concurrent transactions Outgoing mortgagee provided discharge of mortgage and signified satisfaction with settlement Settlement concluded Outgoing mortgagee discovered settlement cheque insufficient to repay loan Discharge of mortgage returned to outgoing mortgagee Incoming lender suffered loss Whether incoming lender entitled to retain discharge of mortgage Whether lender s solicitors negligent in miscalculating payout figure Whether settlement agent breached contract by returning discharge of mortgage Whether outgoing mortgagee estopped as against incoming lender from demanding return of discharge No estoppel Solicitors negligence sole cause of lender s loss Appeal allowed. Facts: 1. This appeal concerned the settlement of certain mortgage finance transactions. Borrowings secured by separate mortgages over 4 different properties were to be refinanced, on the same securities. One of the refinancing transactions was not completed at the settlement, as a result of which the incoming lender suffered loss. The question for determination at trial, and on the appeal, was how legal responsibility for that loss was to be allocated. 2. The incoming lender, Permanent Mortgages Pty Ltd, had agreed with the borrowers, Mr and Mrs King, it would refinance their existing debt. The loan would be secured by first mortgages over each of four properties. The appeal concerns only one property an apartment in Adelaide Terrace, East Perth (the Adelaide Terrace property ). The outgoing mortgagee of the Adelaide Terrace property was John Investments Pty Ltd. 3. The incoming lender retained the respondent firm of solicitors, Purcell Partners, in relation to the refinancing transactions. The solicitors in turn engaged the appellant, Settlement Group Pty Ltd, to act as its settlement agent in relation to the settlement. In summary, the participants by their respective roles, as follows: Mr and Mrs King: the borrowers ; Permanent Mortgages Pty Ltd: the incoming lender ; John Investments Pty Ltd: the AT mortgagee ( AT being a reference to the Adelaide Terrace property); Purcell Partners: the solicitors ; and Settlement Group: the settlement agent. 4. The solicitors obtained from the borrowers signed authorities to obtain payout figures from each of the outgoing mortgagees of the four properties. The solicitors then sought payout figures from the mortgagees. Settlement was arranged with all parties for 18 June 2007.

2 5. The solicitors asked the settlement agent to arrange settlement to occur on 18 June, and provided written settlement instructions. In the days leading up to settlement, the solicitors received written confirmation of payout figures from outgoing mortgagees. A figure was received by the solicitors in respect of a second mortgage held by John Investments Pty Ltd over the property at Terrace Road, Perth. However, no figure was received in respect of the mortgage over the Adelaide Terrace property. 6. On the morning of settlement, the incoming lender released the mortgage proceeds of approximately $1.13 million into the solicitors trust account. In turn, the solicitors authorised their bank to issue cheques drawn on their trust account in favour of the outgoing mortgagees. 7. The settlement was attended by representatives of each of the outgoing mortgagees. The AT mortgagee was represented by a clerk from a different law firm, GV Lawyers. The settlement agent handed payout cheques to the representatives of the mortgagees, each of whom provided in exchange a signed discharge of mortgage. The trial judge found that all of the representatives present to receive cheques said that they were happy with the cheques they had received. The settlement agent then announced that the settlement was concluded. Soon afterwards, the agent told the solicitors that settlement had taken place. 8 After all of the other representatives had left, the clerk from GV Lawyers (acting on behalf of the AT mortgagee) told the agent s representative that as was the fact he had not been provided with sufficient funds to discharge his client s mortgages. The clerk therefore asked the agent s representative to give him back the discharge of mortgage over the Adelaide Terrace property (the DM ). 9 The settlement agent s representative (Michele) consulted the solicitors and was told the settlement was complete and.she should not do anything. The solicitors then contacted the other parties who had attended settlement, some of whom said that they had already banked the cheques and that it was not possible for settlement to be undone. While those calls were taking place, however, Michele handed the DM back to the representative of the AT mortgagee. The judge found Michele had no instructions from the solicitors to do so, and that she had acted contrary to the express instruction.she should do nothing. 10 In the result, the incoming lender obtained only a second registered mortgage over the Adelaide Terrace property. When the borrowers subsequently defaulted, and the security properties were sold, the incoming lender recovered only $2,000 from the proceeds of sale of that property. Had the incoming lender had a first registered mortgage, it would have received approximately $166,000 from the proceeds of sale. The proceedings 11 The incoming lender subsequently sued the solicitors in negligence. That proceeding was settled on the basis that the solicitors would pay the incoming lender $200,000 inclusive of interest and costs, in full settlement of its claim. For the purpose of the present proceeding, the settlement agent admitted that this had been a reasonable settlement.

3 12 The solicitors instituted a third party proceeding against the settlement agent, claiming that the loss which they had suffered (in having to compensate the incoming lender) was wholly caused by the negligence of the settlement agent, in disobeying its instructions and returning the DM to the representative of the AT mortgagee. The trial judge upheld the third party claim, holding that the settlement agent was liable to pay the solicitors the full amount of the settlement sum, together with costs. 13 The settlement agent has appealed from that judgment. Held: 14. All 3 Justices of Appeal considered the solicitors were negligent, and in breach of their contract to be satisfied prior to settlement that the existing loans on all of the properties be repaid in full by the advance, and that this breach was causative of the loss suffered by the incoming lender. The solicitors had breached their contract with the incoming lender, by failing to make the necessary arrangements to enable all of the outgoing mortgagees to be paid out at settlement. 15(a) Maxwell, P and Redlich, JA held the settlement agents were not at fault in returning the DM to the representative of the AT mortgagee. The legal consequence of what occurred between the settlement agent and the representative of the AT mortgagee fell to be determined in accordance with the terms of the contract between the borrowers and the AT mortgagee. It was under that contract the relevant obligations fell to be performed. The borrowers were not entitled to receive the DM from the AT mortgagee unless they were able simultaneously to discharge their contractual obligation to pay the full amount outstanding under the mortgage contract. Accordingly, although the representative of the settlement agent was found to have disobeyed the instruction of the solicitors not to do anything, her conduct was in accordance with the true legal position under the contract between the borrowers and the AT mortgagee. The majority said the outgoing AT mortgagee handed over the discharge of the AT mortgage under a mistake of fact namely, that it had been paid the outstanding balance. 15(b) Dixon, AJA, in dissent, held the conduct of the representative of the AT mortgagee created an estoppel not as against the borrowers but as against the incoming lender. His Honour concluded that the AT mortgagee was estopped, as against the incoming lender, from asserting that it had a legal right to the return of the DM once it discovered that there had not been repayment in full. The estoppel was said to be founded on the conduct of the representative of the AT mortgagee in handing over the DM and in confirming to all present (whether expressly or by acquiescence) that the relevant transactions were complete. As noted earlier, it was following that confirmation that all of the other parties to the settlement left. On his Honour s analysis, the AT mortgagee had thus completed the settlement and had created an assumption or expectation in the incoming lender that it (the AT mortgagee) was no longer entitled to mortgage security over the Adelaide Terrace property, because it had been paid out. His Honour pointed out that the representative of the AT mortgagee could see that the incoming lender (through the settlement agent) was simultaneously settling other refinancing transactions, by making payments (on behalf of the borrowers) to other

4 mortgagees. It is this feature the concurrency of the respective transactions which, on his Honour s view, means that an analysis based simply on the separate contracts to which the borrowers were parties does not do justice to the position of the incoming lender. Rather, his Honour says, it is the settlement as a whole which becomes unconditional, once the outgoing mortgagees have signified their assent. 16. None of the Justices of Appeal considered by settling the AT mortgagee waived their rights. Maxwell, P pointed out there was no intentional act with knowledge to receive it for the discharge of the AT mortgage. 17. Dixon, AJA also considered the issue of election: When John Investments arrived at the point where it was required to complete its finance contract with King by accepting the sum tendered in exchange a discharge of its mortgage, it faced an election between inconsistent rights. One course was rejecting the inadequate tender and reclaiming its discharge, which would have been to decline to complete its agreement with King.[67] In that circumstance, there would not be simultaneous acts in performance of concurrent and mutually dependent obligations. The alternative course, which it adopted, was to complete its agreement with King by retaining what it had received and permitting Permanent Mortgages to retain the discharge. To borrow Jordan CJ s wonderful aphorism, John Investments elected to accept the halfpenny and extinguished its right to the return of the egg. In the finish Dixon, AJA said while I am attracted to the conclusion that John Investments, by its election to complete the contract, was not later entitled to the return of the discharge on the grounds of its solicitor s mistake, I prefer not to base my rejection of this appeal ground on notions of waiver or election. In my view, the ground must fail because, John Investments would have been estopped from asserting, following completion, that notwithstanding its agent s mistake, it had a better right to possession of the discharge than Permanent Mortgages. It follows that the conduct of the appellant, in breach of its instructions to do nothing and returning the discharge as it did, was unjustified. 18. Dixon, AJA, in dissent, found there was contributory negligence by the settlement agent. He said: I find the causal potency of each party s breach to be significant and material. Had the respondent not been negligent, Permanent Mortgages would not have made any advance to King and there would have been no liability in the respondent for any loss. Equally, had the appellant not handed back the discharge to John Investments, Permanent Mortgages would have obtained a registered first mortgage and avoided the loss. Each of the parties was obliged, either directly or indirectly, to look out for the interests of Permanent Mortgages. The respective culpability of the appellant (settlement agent) is in my view greater than that of the respondent (solicitors). The breach by the respondent of its duty was by an oversight, a failure to carefully read and appreciate the contents of correspondence. That oversight became more significant when it certified title to Permanent Mortgages, which the respondent knew to be an act on its part that induced Permanent Mortgages to release its funds. The respondent s negligence initiated the course of events that led to the loss. Despite that negligence, the respondent remained in a position to safeguard the interests of Permanent Mortgages and avoid inflicting any loss on it in the aftermath of the settlement when it acted prudently in instructing its agent to maintain the status quo and retain possession of the discharge while inquiries were made. The appellant s negligence deprived

5 the respondent of control over events when it was seeking to protect the interests of its client. The appellant inexplicably disobeyed its instructions and in so doing deprived the respondent of the opportunity to save Permanent Mortgages from the consequences of the respondent s own actions. It did so when it had no relevant knowledge of the material facts. It was unable to offer any credible explanation for its conduct, and none is apparent. In my view, the appellant departed from the standard of care of the reasonable person to a greater degree than the respondent did. Dixon, AJA,in dissent, held the settlement agent 66% to blame whereas the majority of Maxwell, P and Redlich, JA said, if they were wrong about the settlement agent s right to return the AT Discharge of Mortgage, then they would both have held the settlement agent 25% to blame. 19. Observations: (a) the 64 page Judgment is well worth reading. On the face of it, the majority view in the Court of Appeal, is a party who effects a conveyancing settlement and then, shortly after, realises they settled in error can call on the other parties to undo it. (b) As a teacher I have always found both defining and describing a conveyancing settlement as an extraordinarily difficult task and I usually resort to giving examples of settlements. However, in paragraphs Dixon, AJA analyses the settlement in this case and, in precise terms, what a settlement is as a matter of law. (c) The case considers in depth arguments about once a conveyancing settlement is effected whether the parties are estopped (prevented) from re-opening it and, in this regard, principles of election and waiver are considered. (d) This is one of the few decided cases on pure economic loss negligence by professionals where the court has considered contributory negligence in detail, but it is in the dissenting judgment.