This week's TGIF considers a recent NSW Supreme Court decision in which it was held that a mortgagor's restitutionary obligation to repay money mistakenly advanced by the bank was secured by the bank's "all moneys" mortgage.
WHAT HAPPENED?
On 30 November 2007, a financier (the Bank) mistakenly advanced $760,692.48 to two borrowers, Mr and Mrs Di Pietro, under their credit facility.
The Di Pietros drew down on this additional credit within two months and subsequently defaulted under the facility six months later. The Bank opted to exercise its power of sale over a property of the Di Pietros that secured the Bank's advances to them.
The Bank's mortgage contained terms in the form of an "all moneys" mortgage. Relevantly, clause 4.1 of the mortgage, which referred to the "total amount owing", was defined broadly to capture "all money which...you owe us".
On settlement of the Bank's mortgagee sale, it applied the sale proceeds against the amounts it claimed as then owing by the Di Pietros (including the mistaken advance).
Meldov Pty Ltd (Meldov), the plaintiff, held a second mortgage over the property sold by the Bank and claimed a portion of the proceeds of sale under its mortgage.
The question for the Court was whether or not those monies which comprised the Bank's mistaken advance to the Di Pietros were secured under the Bank's first ranking mortgage over the property.
The primary arguments
The Bank contended that:
- the Di Pietros, as mortgagors, were under a contractual obligation to repay the total amount owing and that this debt was secured by the mortgage; and
- as the additional funds were advanced by mistake, these were recoverable from the borrowers in a restitutionary claim for moneys had and received, and also secured under the terms of the mortgage.
Meldov denied that the Di Pietros were contractually required to repay the additional funds.
While it accepted that, because of the Bank's mistake, the Bank had a claim in restitution against the Di Pietros for an amount equal to the additional funds, Meldov submitted that this claim was not secured under the terms of the mortgage.
Meldov argued that the "all moneys" clause should be read as only covering obligations of "the same character as the Bank's agreed advance". In its view, a debt owing by reason of a restitutionary claim, in consequence of a mistaken payment, was not a debt "of the same type or character" as that rising from the agreed advance of funds.
THE COURT'S DECISION
The Court found that the mistaken advance was captured by the terms of the first mortgage and therefore the Bank was entitled to the entire proceeds of sale under the first mortgage.
In reaching its decision, the Court conducted a thorough analysis of the authorities dealing with "all moneys" mortgages. Following this review, his Honour accepted that he was obliged to interpret the provisions in accordance with the general principles of contractual construction, most recently stated by the High Court in Woodside.
As such, Justice Slattery held that the meaning of the words contained in the mortgage – "total amount owing" and "all money which...you owe us" – ought to be determined by what a reasonable businessperson would have understood those terms to mean. His Honour held that in applying these principles, there was no reason why such terms should not be wide enough to include restitutionary obligations.
The Court also found that the obligation to repay the mistaken advance was captured by the "all moneys" clause as it was a transaction "within the purview of the ongoing banking arrangements the subject of the original agreement" (i.e. the mortgage and loan facility). Indeed, the concept of a banking error was specifically contemplated in the loan facility, including errors in the making of advances by the Bank.
As to Meldov's contention that the obligation had to have been "of the same character" as the Bank's agreed advance, the Court found that the funds were provided to the Di Pietros as commercial borrowers in consequence (even if an accidentally) of a transaction that they had agreed to secure with a mortgage. On this basis, the Court held that the restitutionary obligation was indeed "of the same character".
SIGNIFICANCE
This decision confirms that there is no principle of law that an "all moneys" clause will be read down. The task of construction is to give effect to the intention of the parties, as reflected in the language used, in the context in which it appears and the commercial purpose which it is intended to serve.
As a result, banks can remain confident that a clearly drafted "all moneys" clause, drafted as widely as possible, will be interpreted broadly and secure any moneys owing to the bank, howsoever the obligations may have arisen.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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