The Judicial Committee of the Privy Council Decisions

Privy Council Appeal No. 49 of 1995

 

(1) Murray Stanley Goss and

(2) Jennifer Roseanne Goss Appellants

v.

Laurence George Chilcott as Liquidator of Central

Acceptance Limited (in liquidation) Respondent

 

FROM

 

THE COURT OF APPEAL OF NEW ZEALAND

 

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JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL,

Delivered the 23rd May 1996

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Present at the hearing:-

Lord Goff of Chieveley

Lord Jauncey of Tullichettle

Lord Steyn

Lord Hoffmann

Lord Cooke of Thorndon

  ·[Delivered by Lord Goff of Chieveley]

 

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1. This appeal is concerned with an action brought by the respondent (as liquidator of a finance company, Central Acceptance Ltd.) to recover from the appellants, Mr. and Mrs. Goss, the amount of an advance made by the company to the appellants which was secured by a mortgage over their property.  (For the purposes of this appeal, their Lordships will for convenience treat the action as having been brought by the company itself.) The mortgage instrument was subsequently altered by a solicitor, Mr. Haddon, in circumstances in which, on the authority of a line of cases stretching back to Pigot's Case (1614) 11 Co.Rep. 26b, the effect was that (as is now accepted) the appellants were discharged from liability under the instrument from the date of the alteration; and the central question in the case has been on what basis, if any, in these circumstances the company is entitled to recover the amount of the advance from the appellants.  At first instance Neazor J. held that the company was  not  entitled  to  recover the  money,  but his  decision was reversed by the Court of Appeal.  From that decision the appellants now appeal to the Privy Council.

 

2. The facts of the case are of some little complexity.  Their Lordships however propose gratefully to adopt the lucid and economical account of the facts set out in the judgment of the Court of Appeal [1995] 1 N.Z.L.R. 263 at pages 265-266, which was delivered by Richardson J. This reads as follows:-

" Mr. Haddon was one of four directors of a small finance company in Palmerston North.  Two were chartered accountants whose firm did accountancy work for the company and the other was a businessman.  Mr. Haddon was also a major shareholder in a company which had half the shares in the finance company.

 

  At a directors' meeting on or about 6 May 1987 Mr. Haddon put forward a proposal for a loan to Mr. and Mrs. Goss.  They had a nursery property and Mr. Goss was involved in a development at Waitarere.  Mrs. Goss was Mr. Haddon's sister.  The proposal was for an advance of $30,000 for three months on the security of the nursery property.  The proposal was made orally to the directors by Mr. Haddon.  It was agreed to orally by them and there was no minute of the directors' decision.

 

  On 6 May a cheque for $30,000 drawn on the company's account was paid to Haddon Marshall & Co. for the credit of the mortgagors and was credited to them in the trust account of the firm.  Mr. Jourdain, a director who gave evidence, said that their normal procedure before paying over loan moneys was to sight a security and possibly obtain an undertaking from the solicitors that certain requirements would be carried out.  In this case the solicitor gave a written undertaking dated 6 May 1987 to hold the proceeds of the advance undisbursed until the mortgage was signed and registrable in all respects.  On the same day Mr. and Mrs. Goss called into his office and signed a memorandum of mortgage and a disclosure document to satisfy the Credit Contracts Act 1981.

 

  The mortgage was in standard form.  As signed, it secured a principal sum of $30,000 repayable on 6 August 1987 carrying interest at 33 per cent (penalty rate 36 per cent) payable on 6 June, 6 July and 6 August.  The disclosure document was to the same effect.

 

  Mr. Goss's evidence was that Mr. Haddon told him that he wanted to borrow $30,000 but as a director could not borrow from  the  company. Mr. Haddon asked him to give

a mortgage over his property on the basis that Mr. Haddon would have the loan repaid in three months and would then have the security cancelled.  Mr. Goss agreed and was insistent that the security be for only three months.  There is no evidence of any oral agreement on Mr. Goss's part to pay interest or of any discussion relating to interest.

 

  The mortgage was never registered.  At some later time it was altered, as was the disclosure document.  The repayment date was amended to 6 May 1988 and the interest dates were also amended to provide for monthly payments throughout the 12 months.  That was done without the mortgagors' authority or knowledge.  No doubt it was done because Mr. Haddon could not provide the funds for repayment in August.

 

  Mr. Jourdain's evidence was that the original loan for three months was rolled over.  There is no clear evidence as to what happened.  But on 11 December 1987 Mr. Haddon wrote to the company advising that registration of the mortgage had been delayed, that they (the law firm) had been able to amend the mortgage to provide for a 12-month term expiring 6 May 1988 and had disclosed the extension to the borrowers in terms of the Credit Contracts Act.

 

  Only two repayments were made to the company in respect of the loan.  One was of $914.25 on 31 July 1987 when a cheque on Mr. Goss' bank account was paid to the company.  His evidence was that Mr. Haddon said that he wanted to repay part of the loan, asked Mr. Goss for the cheque and put him in funds for that amount.  The other payment was of $2625 on 6 November 1987 by cheque drawn on Mr. Haddon's own account.  Both payments were appropriated in the accounts of the company to interest due.

 

  Mr. Goss said that in September 1987 Mr. Haddon led him to believe that the loan had been repaid and the security cancelled. They knew nothing of the alterations to the mortgage or of the purported extension of the term until November 1988 when the company's accountant told him they owed the company $47,000.  The first formal demand was made by letter of 6 December 1988.  Mr. Goss saw Mr. Haddon who undertook to pay but did not do so before his wider misconduct became known."

 

 

 

The course of the proceedings

The company commenced proceedings against the appellants, claiming the principal and interest due under the mortgage instrument.  It applied for summary judgment on this basis; but this was refused by Neazor J. who held that the appellants had an arguable defence that they had been discharged from liability under the instrument by reason of the subsequent alteration made to it by Mr. Haddon.  Following an amendment to the Statement of Claim adding a claim for repayment of the advance as money had and received, either on the basis of an implied contract to repay or on the ground of failure of consideration, the action came on for trial before Neazor J.  Numerous defences were relied on by the appellants.  Neazor J. reached a number of conclusions on the facts, the most relevant for present purposes being the following:-

 

(1)  He held that there were two transactions involved, the first being a loan by the company to the appellants (the loan being secured by a mortgage on the appellants' property), and the second being a personal loan of the same sum by the appellants to Mr. Haddon, on the terms that he would meet all the costs involved, including interest.  Neazor J. rejected the suggestion of the appellants that this was a sham transaction.  His conclusion on this point was accepted by the Court of Appeal.

 

(2)  He rejected a submission by the appellants that they had never received the money, which had been paid to Mr. Haddon whom the appellants had authorised to receive it.  This conclusion too was accepted by the Court of Appeal.

 

(3)  He held that the mortgage instrument was in the possession of Mr. Haddon at the time when it was altered; and that the possession of Mr. Haddon at that time must be held to have been the possession of the company.  On that basis he held, following in particular Davidson v. Cooper (1844) 13 M. & W. 343, that (see page 100 of the Record):-

"There is no injustice in holding that Central Acceptance cannot sue on the mortgage as a deed: the alteration was on my finding probably made by the company's solicitor and a director of it who had custody of the document for the company at the relevant time.  Further, if either of the parties was on notice that something might be wrong it was Central Acceptance: the directors knew that the mortgage had not been registered and were on notice that some alteration had been made to it."

 

3. This conclusion was endorsed by the Court of Appeal (see [1995] 1  N.Z.L.R.  263, at  page  272), when they stated that Mr. Haddon's

act in altering the document was "a wrongful mode of what he was authorised by the company to do", and that he should therefore be treated as "the agent of the company in that regard".

 

(4)  He rejected a submission that the appellants had been subject to undue influence on the part of the company, Mr. Haddon not having acted as agent for the company in exerting whatever influence he did over the appellants in respect of the loan, and the company having no notice (actual, constructive or imputed) of any such influence.  This conclusion, too, was endorsed by the Court of Appeal (at page 275).

 

4. On the basis of the third of these findings, Neazor J. held that the company was unable to sue the appellants on the mortgage instrument; and he then turned to its alternative claim for money had and received.  This however he held must fail because there had been no failure of consideration for the advance, consideration having been furnished for it in the form of a valid registrable mortgage.  Thereafter, there had been a failure to repay, but the company had lost its remedy against the appellants under the mortgage instrument.

 

5. As already recorded, the Court of Appeal likewise rejected the company's claim under the mortgage instrument.  However, they adopted a different approach to the company's alternative claim. First of all, they allowed the company leave to amend its Statement of Claim, to rely simply on the advance as such, and an agreement to repay it in three months, together with an implied agreement to pay monthly interest.  Next, they held that the company was entitled to succeed on that basis.  Their conclusion on this point was stated to rest on two grounds (see pages 274-275) - first, that the discharge of the appellants from liability under the mortgage instrument did not preclude the company from characterising the payment from the company to the appellants as an advance repayable in three months which had not been repaid, so that there remained a debt owing by the appellants to the company; and second, that the mortgage instrument was preceded by an oral agreement to repay the loan which survived the discharge of the appellants from liability under the mortgage instrument. On these grounds they held that the company was entitled to recover the advance, but not to recover interest at the agreed rate.  In the result, they gave judgment against the appellants for $26,460.75 (the capital sum of the advance, which was treated as having been reduced by the two payments of $914.25 and $2,625 paid by way of interest), together with interest under section 87 of the Judicature Act 1908.  It is against that judgment that the appellants now appeal to their Lordships.

 

The form of the appeal.

Before their Lordships, the appellants criticised the decision of the Court of Appeal on two grounds.  First, they submitted that the Court erred in granting the company leave to amend its Statement of Claim.  Second, they submitted that in any event the Court erred in holding that the company was entitled to recover the advance on the basis of the amendment, in face of the fact that any oral contract by the appellants had merged in the mortgage instrument, and the further fact that the appellants were discharged from liability under the instrument by reason of the alteration to it.  However, of the two grounds relied upon by the Court of Appeal, Mr. Reardon for the company felt unable to uphold the decision of the Court that the outstanding advance could be claimed as a debt notwithstanding the avoidance of the mortgage instrument.  This was because he recognised that the continued existence of the debt was contingent upon the continued existence of the instrument. Next, he was prepared at first to submit that the decision of the Court of Appeal should be upheld on the basis that a preceding oral agreement by the appellants to repay the advance survived the discharge of the appellants from liability under the mortgage instrument. But after a short time, he felt compelled to abandon that submission also.  Let it be supposed (which their Lordships respectfully doubt) that there was any such binding oral agreement between the appellants and the company before the mortgage instrument was executed.  Nevertheless it was plainly intended that, upon the execution of the instrument, any such oral agreement should merge in and be wholly superseded by such instrument, which embodied detailed personal covenants by the appellants for the repayment of the advance and the payment of interest, as well as providing for security for the advance.  Furthermore the effect of the alteration to the instrument was simply to discharge the appellants from liability under it.  In these circumstances there could be no question of any such oral agreement having survived the discharge of the appellants from that liability.

 

6. From this it followed that the matter of the amendment ceased to be relevant; and the central question in the appeal became whether the company was entitled to succeed in restitution.

 

The claim in restitution.

As their Lordships have already recorded, Neazor J. held that the company could not succeed on its claim in restitution, because he considered that there had been no total failure of consideration for the loan, the appellants having furnished consideration for it in the form of the mortgage instrument.  With this conclusion, their Lordships are unable to agree.

 

7. The advance was in fact paid by the company to Haddon Marshall & Co., as solicitors, but, having regard to the terms on which they received it from the company, was retained by them in their trust account until after the appellants had executed the mortgage instrument.  It was then available to the appellants but was in fact received by Mr. Haddon, as agreed between him and the appellants.  In these circumstances the loan appears in fact to have been advanced to the appellants pursuant to the terms of the mortgage instrument, the consideration for the advance being expressed to be the personal covenants by the appellants to repay the advance upon those terms.  Even if (which their Lordships doubt) the loan had been paid pursuant to a preceding oral agreement between the company and the appellants, it must have been paid in consideration for the appellants' promise to repay it, though the ensuing loan contract would (as their Lordships have already indicated) have become merged in and superseded by the contract contained in the mortgage instrument.

 

8. But the consideration there referred to, necessarily implicit if not explicit in every loan contract, was the consideration necessary for the formation of the contract; and, as Viscount Simon L.C. observed in a much-quoted passage in his speech in Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32, 48:-

"... when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise ...  If this were not so, there could never be any recovery of money, for failure of consideration, by the payer of the money in return for a promise of future performance, yet there are endless examples which show that money can be recovered, as for a complete failure of consideration, in cases where the promise was given but could not be fulfilled."

 

9. Of course, in the case of a loan of money any failure by the borrower to repay the loan, in whole or in part, by the due date, will in ordinary circumstances give rise to a claim in contract for repayment of the part of the loan which is then due.  There will generally be no need to have recourse to a remedy in restitution.  But in the present case that course is, exceptionally, not open to the company, because the appellants have been discharged from their obligations under the mortgage instrument; and so the company has to seek recovery in restitution.  Let it however be supposed that in the present case the appellants had been so discharged from liability at a time when they had paid nothing, by way of principal or interest, to the company.  In such circumstances  their Lordships can see no reason in principle why

the company should not be able to recover the amount of the advance made by them to the appellants on the ground that the money had been paid for a consideration which had failed, viz. the failure of the appellants to perform their contractual obligation to repay the loan, there being no suggestion of any illegality or other ground of policy which precluded recovery in restitution in such circumstances.

 

10. In the present case however, although no part of the principal sum had been repaid by the appellants, two instalments of interest had been paid; and the question arises whether these two payments of interest precluded recovery on the basis that in such circumstances the failure of consideration for the advance was not total.  Their Lordships do not think so. The function of the interest payments was to pay for the use of the capital sum over the period for which the loan was outstanding, which was separate and distinct from the obligation to repay the capital sum itself.  In these circumstances it is, in their Lordships' opinion, both legitimate and appropriate for present purposes to consider the two separately.  In the present case, since it is unknown when the mortgage instrument was altered, it cannot be known whether, in particular, the second interest instalment was due before the appellants were discharged from their obligations under the instrument.  Let it be supposed however that both interest payments had fallen due before that event occurred.  In such circumstances, there would have been no failure of consideration in respect of the interest payments rendering them recoverable by the appellants; but that would not affect the conclusion that there had been a total failure of consideration in respect of the capital sum, so that the latter would be recoverable by the company in full on that ground.  Then let it be supposed instead that the second interest payment did not fall due until after the avoidance of the instrument.  In such circumstances the consideration for that interest payment would have failed (at least if it was payable in advance), and it would prima facie be recoverable by the appellants on the ground of failure of consideration; but that would not affect the conclusion that the capital sum would be recoverable by the company also on that ground.  In such a case, therefore, the capital sum would be recoverable by the lender, and the interest payment would be recoverable by the borrower; and doubtless judgment would, in the event, be given for the balance with interest at the appropriate rate (see Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1994] 1 W.L.R. 938).  In either event, therefore, the amount of the loan would be recoverable on the ground of failure of consideration.  In the present case, since no part of the capital sum had been repaid, the failure of consideration for the capital sum would plainly have been total. But even if part of the capital sum had been repaid, the  law would  not  hesitate to  hold  that the balance of the loan

outstanding would be recoverable on the ground of failure of consideration; for at least in those cases in which apportionment can be carried out without difficulty, the law will allow partial recovery on this ground (see David Securities Pty. Ltd. v. Commonwealth Bank of Australia (1992) 175 C.L.R. 353, 383).

 

11. Before their Lordships, it was submitted by Mr. Walshaw for the appellants that they should not be required to make restitution in respect of the advance.  First, it was said that they never received the advance; but their Lordships agree with the judge that they received it when it was paid, with their agreement, direct to Mr. Haddon.  Second, it was submitted that the company could not recover the amount of the advance in restitution, because the appellants had changed their position by reason of their having allowed the money to be paid to Mr. Haddon, from whom in the event they were unable to recover it.

 

12. Under the New Zealand Judicature Act 1908, section 94B, a statutory defence of change of position is made available in the case of payments made under a mistake, whether of law or fact.  In such cases, if the defendant has received the payment in good faith and has "altered his position in reliance on the validity of the payment", he will be protected by the defence if "in the opinion of the Court, having regard to all possible implications in respect of other persons, it is inequitable to grant relief, or to grant relief in full, as the case may be".  That provision may be relevant to the present case, for the company might never have made the payment if aware of the arrangement between Mr. Haddon and the appellants.  Their Lordships will however consider the question on the basis that, with the development of a law of restitution founded upon the principle of unjust enrichment, the defence of change of position is widely applicable at common law.  Even so, their Lordships are unable to accept that, in the circumstances of the present case, there was a change of position on the part of the appellants which rendered it inequitable to require them to make restitution.

 

13. From the beginning, the appellants were under an obligation to repay the advance once it had been paid to them or to their order; and this obligation was of course unaffected by the fact that they had allowed the money to be paid over to Mr. Haddon.  The effect of the alteration of the mortgage instrument was that their contractual obligation to repay the money was discharged; but they had nevertheless been enriched by the receipt of the money, and prima facie were liable in restitution to restore it. They had however allowed the money to be paid over to Mr. Haddon in circumstances in which, as they well knew, the  money  would nevertheless have to be repaid to the

company. They had, therefore, in allowing the money to be paid to Mr. Haddon, deliberately taken the risk that he would be unable to repay the money, in which event they themselves would have to repay it without recourse to him.  Since any action by them against Mr. Haddon would now be fruitless they are seeking, by invoking the defence of change of position, to shift that loss onto the company.  This, in their Lordships' opinion, they cannot do.  The fact that they cannot now obtain reimbursement from Mr. Haddon does not, in the circumstances of the present case, render it inequitable for them to be required to make restitution to the company in respect of the enrichment which they have received at the company's expense.

 

14. Finally, it was sought to suggest that restitution should not be ordered in the present case, because it was a case of "ministerial receipt", in which the appellants had paid the money over to Mr. Haddon as their principal. The short answer to that submission is that Mr. Haddon was not their principal.  As the judge held, there were two separate loans, one by the company to the appellants, and one by the appellants to Mr. Haddon.  No question of ministerial receipt therefore arises in this case.

 

15. It remains to consider what order should be made on the appeal.  Prima facie, the company is entitled to restitution in a sum equal to the amount of the advance, viz. $30,000.  The question of restitution in respect of the interest payments in theory depends upon whether one or both payments were made before the date when the contractual obligation of the appellants to repay the loan was discharged, i.e. the date of the alteration of the instrument by Mr. Haddon - a date which, as their Lordships have already recorded, is unknown. However the Court of Appeal, in giving judgment in favour of the company for the sum of $26,460.75, deducted both interest payments from the amount of the advance; and, since there is no cross-appeal by the company against the judgment on that point, their Lordships need not consider whether the judgment should be varied in this respect.  There is no appeal as to the amount of interest awarded under section 87 of the Judicature Act 1908.

 

16. For the above reasons their Lordships will humbly advise Her Majesty that the appeal should be dismissed.  The appellants must pay the respondent's costs before their Lordships' Board.

 

 

© CROWN COPYRIGHT as at the date of judgment.