By Russell Cocks, Solicitor
First published in the Law Institute Journal
The Victorian Court of Appeal has introduced an element of uncertainty into conveyancing settlements that will have property lawyers anxious to adopt the (hopefully) soon to be introduced electronic settlement regime.
Settlement Group P/L v Purcell Partners [2013] VSCA 370 conducts a post-mortem on a conveyancing settlement that will have all parties looking over their shoulder as they leave settlement, fearful that someone will be waving at them to return. In brief, the facts are:
- PP retained SG to act as settlement agents. PP instructed SG in relation to distribution of cheques to discharge a number of encumbrances over 4 properties and the documents to receive in return for those cheques;
- SG conducted the settlement in accordance with those instructions and all attending parties confirmed their satisfaction in relation to settlement and left settlement, however G, a very inexperienced clerk who represented one of the discharging mortgagees, remained to telephone his office;
- G was told by his office to retrieve the Discharge of Mortgage as he had not received sufficient funds;
- SG rang PP and was instructed to hold the discharge, nevertheless SG shortly thereafter returned the discharge to G;
- Subsequently, PP’s client was registered as second, rather than a first, mortgagee and ultimately suffered a loss of $200,000 as a result of a default under the mortgage.
PP was liable to its client and joined SG to the proceedings. In the County Court, SG was held liable to PP for the full amount as a consequence of breach of its contract of retainer with PP, however the Court of Appeal reversed this decision and PP alone was responsible for the loss.
There is no doubt that PP was negligent. It was a complex transaction and a simple error was made. PP sought payout figures from the various out-going mortgagees in respect of the various securities. One mortgagee gave payout figures in respect of some but not all of the securities, and PP failed to recognise the absence of this information. Arguably, the outgoing mortgagee created the circumstances that led PP to make the mistake but, between PP and its client, PP was liable for its negligence.
In the County Court, the subsequent decision by SG to act contrary to PP’s instructions by returning the discharge was found to be the cause of the loss but the majority of the Court of Appeal, placing emphasis on the mortgagor’s contractual right to receive a discharge only after repayment of the mortgage, concluded that the mortgagee was entitled to demand return of the discharge as the mortgage had not been repaid. Indeed, the court characterised SG as an agent of the borrower when it said: ‘the settlement agent had no right (acting, as it been authorised to do, on behalf of the borrowers) to refuse the request … to return the DM’.
It seems a long bow to suggest that SG was an agent of the borrower. The only connection between the two was that SG had a contract with PP, who in turn had a contract with the incoming mortgagee. PP did not act for the borrower and the only connection was an authority to seek payout figures and arrange discharges. A simple test to determine whether SG was an agent of the borrower would be to ask whether, if PP did not pay SG’s settlement fee, would the borrower have been liable to do so?
Dixon AJA was in the minority and held that whilst PP’s negligence was a contributing factor, SG’s decision to hand back the discharge contrary to PP’s specific instructions was negligent and deprived PP of the ability to control subsequent events. He therefore would have apportioned liability two-thirds to SG and one-third to PP.
If PP had have retained control of the discharge it would have been in a better position to secure a more favourable outcome for its incoming mortgagee client, thereby reducing liability for its negligence. Notwithstanding mistakenly handing over the discharge, the outgoing mortgagee would have retained a right to payment against the mortgagor and could have taken steps to secure its interest. This would have called into question the original failure of the out-going mortgagee to fully respond to PP’s inquiry for payout figures which led PP into making the error in the first place. By returning the discharge, SG gave the party that had arguably made two mistakes a ‘get-out-of-jail-free card’.
Electronic settlements will solve this problem but, in the meantime, don’t look back!
Tip Box
Whilst written for Victoria this article has interest and relevance for practitioners in all states.