NZLII Home | Databases | WorldLII | Search | Feedback

Court of Appeal of New Zealand
You are here:  NZLII >> Databases >> Court of Appeal of New Zealand >> 2008 >> [2008] NZCA 346

Database Search | Name Search | Recent Decisions | Noteup | LawCite | Download | Help

Westpac Banking Corporation v Clark [2008] NZCA 346; [2009] 1 NZLR 201; (2008) 6 NZ ConvC 194,670 (5 September 2008)

Last Updated: 2 February 2018

For a Court ready (fee required) version please follow this link


IN THE COURT OF APPEAL OF NEW ZEALAND

CA172/06
[2008] NZCA 346


BETWEEN WESTPAC BANKING CORPORATION
Appellant

AND ALAN JOHN CLARK
Respondent

Hearing: 29 May 2007 and 9 April 2008

Court: Glazebrook, Robertson and Arnold JJ

Counsel: M M B van Ryn and M V Robinson (on 29 May 2007) and
R B Stewart QC and M V Robinson (on 9 April 2008) for Appellant
A C Challis for Respondent

Judgment: 5 September 2008 at 10.00 am

JUDGMENT OF THE COURT

A The appeal is dismissed.

  1. There are no costs orders.

____________________________________________________________________

REASONS OF THE COURT
(Given by Glazebrook J)



Table of Contents

Para No
Introduction [1]
Issues [7]
Are Westpac’s lending practices relevant? [12]

Did Westpac contribute to its loss by alerting the Registrar
as to possible fraud? [16]

Could the Registrar have refused to register the mortgage
had it been presented earlier? [19]

Would Westpac have enforced its mortgage? [21]
Was there any amount secured by the mortgage? [25]

Should we accept the Scott thesis? [29]

The Australian decisions [33]

Commentaries on the Australian decisions [39]

Were the terms of the forged loan agreement incorporated
into the mortgage? [44]

TERMS OF “FENECH” MORTGAGE AND LOAN AGREEMENT [45]

WAS THE LOAN AGREEMENT INCORPORATED? [54]

WERE THE AUSTRALIAN CASES WRONGLY DECIDED ON THIS
POINT? [63]

Does the LTA deem the loan agreement terms to be incorporated
into the mortgage? [67]

Is there a valid distinction between a fixed sum mortgage and
an “all obligations” mortgage regarding reference to
outside sources? [75]

Would the policy of the LTA as to compensation be overridden? [77]

Are there policy reasons for not applying the Australian cases? [84]

Summary [90]
Result and costs [91]

Introduction

[1] Westpac agreed to lend $180,400 to a person calling herself Marie Antoinette Fenech on the security of a mortgage over a Remuera property purportedly owned by her. “Ms Fenech” instructed Mr Clark to act for her and Mr Clark was also instructed to act as Westpac’s solicitor on the transaction. “Ms Fenech” was not an existing client of Mr Clark’s.
[2] Mr Clark arranged execution of the mortgage and accompanying loan agreement by “Ms Fenech” and, after satisfying himself of her identity from her passport, witnessed her signature on the mortgage. He also arranged all the usual searches of the title of the Remuera property. The search of the title showed that the property was registered in the name of Marie Antoinette Fenech. Mr Clark also received from “Ms Fenech” a Tower certificate of insurance showing Marie Antoinette Fenech as the insured and Westpac as the first mortgagee.
[3] On 30 September 2005, Mr Clark provided a solicitor’s certificate and undertaking to Westpac. Relevantly for this appeal, he undertook to lodge the mortgage for registration “promptly”. Westpac advanced the money to “Ms Fenech” on 4 October 2005 in reliance on Mr Clark’s certificate and undertakings. “Ms Fenech” has made no payments of either interest or principal on the loan.
[4] Mr Clark took no steps to register the mortgage until 6 December 2005. It is common ground that this was in breach of his undertaking. When Mr Clark did attempt to register the mortgage, registration was refused by the Registrar. It turns out that “Ms Fenech” was a fraudster of some sophistication who had perpetrated frauds on three other banks. Westpac’s evidence was that it had no knowledge of the fraud until 18 November 2005 when it notified the Registrar of that possibility.
[5] Westpac applied for summary judgment against Mr Clark with regard to the breach of his undertaking. Summary judgment was refused by Associate Judge Christiansen. The Associate Judge accepted that, had Mr Clark registered the mortgage promptly, Westpac would have had an indefeasible title. He considered, however, that issues of causation of loss needed to be further explored in a full trial. In particular, he considered that Westpac’s loss may have been a result of “slack lending practices”. He also said that it was not clear from what point the Registrar would have refused to accept the mortgage for registration and that there was no evidence to suggest that Westpac would have exercised its power of sale against the true registered proprietor of the property.
[6] Westpac appeals against that decision.

Issues

[7] There are five issues for the appeal, set out at [11] below. The first four issues were argued at the hearing on 29 May 2007. Argument on the last issue was heard on 9 April 2008. That issue was raised (without objection by Westpac) by Mr Clark after the Court had referred Mr Clark’s counsel to this Court’s decision in Dollars & Sense Ltd v Nathan [2007] NZCA 177.
[8] In that case, this Court raised (by majority), at [147], the possibility that, where a separate loan document is void because of forgery, the covenant to pay may be indefeasible but secure nothing. The question did not arise in that case as the mortgage was a fixed sum mortgage. The majority said:

Where mortgage documents are drafted so that the charging clause is dependent upon the underlying documents (and most modern mortgages secure “all obligations”) and the underlying transaction is set aside, the charge is likely to be seen as indefeasible but securing nothing.

[9] The majority referred to the extra-judicial comments of Blanchard J in “Indefeasibility under the Torrens System in New Zealand” in Torrens in the Twenty-first Century (2003) at 49. In that article, Blanchard J said:

An intriguing issue arises, as yet not adequately explored in case law, where the obligation to pay is in an unregistered document, like a loan contract for a particular advance, and the charge in the registered mortgage secures all obligations of the mortgagor. If, prior to registration of the mortgage, both documents were void, it may well be that the charge is indefeasible but secures nothing. What if in [CN and NA Davies Ltd v] Laughton [[1997] 3 NZLR 705 (CA)], instead of an act of a mortgagee which vitiated the guarantee (an event which could have occurred either before or after registration) so that an in personam claim arose, there had been a separate guarantee document and that guarantee and the mortgage had both been forged and the mortgage had been innocently registered by the mortgagee? Or, what if there was already an “all moneys” mortgage executed by the mortgagor covering any future guarantee given by the mortgagor and, after the mortgage had been registered, there was a forgery of the mortgagor’s signature on a fresh guarantee and the mortgagee then innocently advanced money to the principal debtor unaware of the forgery and on the strength of the mortgage? It would seem that in both of these situations the guarantee must be void and that the mortgage would not secure any obligation arising under the guarantee.

[10] The Supreme Court, in Dollars & Sense Ltd v Nathan [2008] NZSC 20, upheld this Court’s judgment. No comment was made by the Supreme Court, however, on the issue set out at [8] and [9] above.
[11] The issues for the appeal, which we now deal with in turn, are:

(a) Are Westpac’s lending practices relevant?

(b) Did Westpac contribute to its loss by alerting the Registrar to the possible fraud?
(c) Could the Registrar have refused to register the mortgage had it been presented earlier?
(d) Would Westpac have enforced its mortgage?
(e) Was there any amount secured by the mortgage?

Are Westpac’s lending practices relevant?

[12] Mr Clark’s position is that a full trial is needed to explore whether Westpac took adequate steps to prevent fraud in making the loan to “Ms Fenech”. The significance of that inquiry in his submission is that proper precautions may have meant that the loan was never drawn down. Thus Westpac’s loss may have been caused by less than prudent lending practices rather than by Mr Clark’s failure to register the mortgage promptly.
[13] We would have preferred there to have been further evidence put before the Court both as to the circumstances of the loan and as to what alerted Westpac on 18 November 2005 to the possibility of fraud. However, ultimately these matters are not relevant. Had Mr Clark registered the mortgage promptly, Westpac would have had an indefeasible title and thus an enforceable security. This would have applied however slack its lending practices, provided it had no actual knowledge of or wilful blindness to fraud.
[14] The Associate Judge’s finding that Westpac would have had an indefeasible title had Mr Clark registered the mortgage promptly has not been challenged by Mr Clark. This means that Mr Clark accepts that Westpac had no actual knowledge of the fraud at the time of the advance and was not wilfully blind to the possibility of fraud.
[15] In any event, we accept Westpac’s submission that there is no proper evidential basis for the assertion that Westpac did not take adequate steps to prevent fraud. There was a level of sophistication in “Ms Fenech’s” fraud and nothing had, it appears, aroused the suspicions of Mr Clark as to “Ms Fenech’s” identity. She had, it appears, similarly fooled three other banks and three other solicitors. Something other than an assertion that it was possible that Westpac had less than prudent lending practices would have to have been put forward in order to found the defence, even had it been available.

Did Westpac contribute to its loss by alerting the Registrar as to possible fraud?

[16] Mr Clark submits that Westpac may have directly contributed to any loss suffered by alerting Land Information New Zealand (LINZ) to possible fraud. Although he accepts that, once Westpac became aware of the existence of fraud, it could no longer rely on indefeasibility, he submits that it is possible registration could still have taken place prior to 18 November 2005.
[17] This question can be answered shortly. It would have been totally unacceptable for Westpac, having knowledge of possible fraud, to have attempted registration of the mortgage without alerting the Registrar. It follows that it could not have allowed its agent to attempt to register the mortgage without alerting the Registrar either. Mr Clark appears to accept this.
[18] It is true that the mortgage could have been registered prior to 18 November 2005 when Westpac became aware of possible fraud for the first time and that this would have provided Westpac with an indefeasible title but Mr Clark made no attempt to register the mortgage until December 2005.

Could the Registrar have refused to register the mortgage had it been presented earlier?

[19] Mr Clark’s argument on this point is that the Registrar may have queried the identification of the signatory to the mortgage even had it been presented for registration earlier. There is, however, no evidential basis at all for a suggestion that there would have been any problems with the registration of the mortgage before 18 November 2005 when Westpac notified the Registrar of possible fraud.
[20] Indeed, Mr Clark refers in his affidavit to a conversation with the office solicitor of LINZ in which the LINZ solicitor said that Westpac had drawn LINZ’s attention to the possible identity issue. There is no suggestion in that affidavit that there had been any prior knowledge of possible fraud on the part of LINZ. If Mr Clark wished to assert that there was a reason why LINZ would, of its own volition and absent information provided to it, have raised questions about the documentation (which was after all in proper form), evidence to that effect should have been placed before the Court.

Would Westpac have enforced its mortgage?

[21] Mr Clark submits that there is no evidence that Westpac would have enforced its mortgage against the true registered proprietor. In his submission, there would have been obvious public relations issues in doing so. The enforcement steps that Westpac would have taken should, in Mr Clark’s submission, be the subject of oral evidence, including cross-examination.
[22] There is nothing in this point. Had the mortgage been registered the true registered proprietor would have been entitled to compensation under s 172(b) of the Land Transfer Act 1952 (“LTA”). That would have given her sufficient funds to discharge Westpac’s mortgage: Hinde McMorland and Sim Land Law in New Zealand (Looseleaf, LexisNexis New Zealand) at 9.091; Heron v Broadbent [1919] NSWStRp 62; (1919) 20 SR (NSW) 101; Waller v Davies & Ors [2007] NZCA 51 (CA). The registered proprietor would thus in no sense have been “out of pocket” if Westpac had enforced its mortgage and we can see no public relations issue in it doing so.
[23] Mr Clark points out that there was no evidence to the effect that Westpac would have required the registered proprietor to trigger the compensation provisions. He submits that such evidence should have been placed before the Court.
[24] While it may have been better if the willingness to trigger the compensation provisions had been explicitly deposed to, there is no reason for the Court to assume that Westpac would have acted in a non-commercial manner by not enforcing its mortgage in circumstances where to have done so would not have impacted adversely on the registered proprietor.

Was there any amount secured by the mortgage?

The parties’ submissions

[25] Mr Clark’s final argument is that, even if there had been timely registration of the mortgage, it would have secured nothing as the true registered proprietor (Marie Antoinette Fenech) owed Westpac nothing. Westpac thus suffered no loss through Mr Clark’s breach of his undertaking to register the mortgage properly.
[26] Ms Challis, on behalf of Mr Clark, adopted in support of this submission the reasoning in the Australian cases of Perpetual Trustees Victoria Ltd v Tsai [2004] NSWSC 745, Printy v Provident Capital Ltd [2007] NSW ConR 56180 (which we note has since been upheld: Provident Capital Ltd v Printy [2008] NSWCA 131), Chandra v Perpetual Trustees Victoria Ltd [2007] ANZ ConR 481 and Yazgi v Permanent Custodians Ltd [2007] NSWCA 240; [2007] ANZ ConvR 566. We also refer to Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505, a case to similar effect. Ms Challis also relied on the broader view taken by Associate Professor Scott, in “Indefeasibility and the Forged Mortgage” [1998] NZ Law Rev 31 and the extra-judicial comments of Blanchard J set out above at [9].
[27] Mr Stewart QC, on behalf of Westpac, argues that:
[28] We examine first whether the Scott thesis should be applied in New Zealand. We then summarise the Australian decisions and some commentaries on those decisions. Finally, we deal with each of Westpac’s submissions set out at [27](b)(i) – (v) above.

Should we accept the Scott thesis?

[29] In Associate Professor Scott’s view, where there is a forged mortgage, the charge on the property never has any debt on which to operate, irrespective of registration. He considers that, if there is no primary obligation between the true mortgagor and the mortgagee, there can be no default and thus no recourse to the security, despite indefeasibility. He does not accept that registration has any validating effect on the covenant to pay.
[30] We accept Westpac’s submission that the Scott thesis is contrary to this Court’s decision in Duncan v McDonald. In that case it was held that registration did not “validate” the personal covenant to pay but did confer a title to an interest in land. Further, the covenant to pay contained in a registered mortgage protects the charge and enables the mortgagee to exercise the power of sale and recoup the proceeds from that sale.
[31] Blanchard J for the Court said (at 681):

It is important to remember that registration does no more than confer a title to an interest in land – in favour of a transferee, lessee or mortgagee – and that where an otherwise void instrument becomes part of the register, it is effective so far only as is necessary to uphold and protect the title but no further. As Peter Butt says in Land Law (3rd ed, 1996) at para 2019:

“Registration does not necessarily confer indefeasibility on all the provisions of a registered instrument. It validates only those provisions that ‘delimit or qualify’ the registered interest or that are otherwise necessary to assure that interest to the registered proprietor [PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643 at 679] or that have a ‘direct application’ to the registered interest [Travinto Nominees Pty Ltd v Vlattas [1972] 1 NSWLR 24 at 48.”

In Congregational Christian Church of Samoa Henderson Trust Board v Broadlands Finance Ltd [1984] 2 NZLR 704 at pp 713 – 714 Barker J observed:

“...there is a line to be drawn between covenants and rights contained in a registered instrument protected by the indefeasibility provisions and those not so protected. On the one hand, covenants affecting the estate or interest with which the interest deals or rights pertaining to a registered proprietor as such are upheld, notwithstanding invalidity. On the other hand, rights contained in a registered instrument which are not an integral part of the estate or interest of the registered proprietor are not easily protected.”

In the case of a registration of an otherwise void transfer, ordinarily the instrument will be effective in its entirety. Its function is no more than the conveyance of title, perhaps with the benefit or burden of covenants affecting the land (for example, creating or preserving an easement or right of way); such covenants add to or subtract from the ordinary incidents of an unencumbered title. Likewise, the covenants in a memorandum of lease setting forth the conditions upon which the leasehold interest is held are intimately related to the title under the Act created by its registration.

The position of covenants in a mortgage or charge is different because the property interest serves a more limited and collateral purpose. The primary transaction is the incurring of an obligation by A to B. That does not involve any dealing with property. Collaterally A provides security over property to B subject to a right of redemption. If the security takes the form of a memorandum of mortgage over land and is registered it operates as a legal charge on the estate or interest of the mortgagor. It is intended to give the mortgagee an interest in the land for, and only for, a particular purpose – in order that in the event of default, the mortgagee may have recourse to the land to satisfy the obligation secured by the mortgage. It is therefore only the right of recourse for the principal, interest and expenses in the event of default which is integral to the mortgage. See Whenuapai Joinery (1988) Ltd v Trust Bank Central Ltd [1994] 1 NZLR 406 at 411.

A registered mortgage consists of a covenant to pay and other supporting covenants by the mortgagor and a charge to secure their performance. Where, apart from registration, the mortgage would have been a nullity, registration protects the charge. In that situation the covenants are effective and enforceable to enable the charge to operate and moneys owing to be recovered by that means, but the covenants are not enforceable against the mortgagor separately from the right of recourse by means of a proceeding for the recovery of debt.

Assume that an unregistered mortgage is null and void. The mortgagee cannot obtain judgment on the personal obligations recorded in the covenants in the instrument nor obtain a judgment ordering sale of the land and application of its proceeds to discharge those obligations. After registration of the instrument is obtained without fraud the latter becomes possible (and the mortgagee can simply sell the land without Court Order in exercise of power of sale) but not the former. Take, for example, a situation like that which existed in Frazer v Walker [1967] NZLR 1069 or in Grgic v Australian and New Zealand Banking Group Ltd (1994) 33 NSWLR 202, of a mortgagee who advances money on the strength of a forged mortgage which is innocently registered. Upon default, the mortgagee can recover the money by exercising the power of sale and recouping the advance from the proceeds. But if the proceeds are insufficient, the mortgagee cannot pursue the mortgagor for the balance in reliance on the forged covenant to pay (Grgic at p224); nor can the mortgagee prior to any such sale elect to sue the mortgagor personally on the covenant, not seeking to enforce the security, perhaps because it is discovered to be valueless. What registration of an otherwise void mortgage gives the innocent mortgagee in these circumstances is the right of recourse to the security for such value as the land may have. The charged property is rendered liable for the debt by the registration. The covenants to pay and supporting covenants given by the registered proprietor then become operative to such extent only as is necessary to enable realisation of the security and recovery of the advance or part thereof by that means.

[32] We see no reason to depart from the conclusion reached in Duncan v McDonald. We discussed, in R v Chilton [2005] NZCA 295; [2006] 2 NZLR 341, the circumstances in which this Court may properly reconsider its own previous decisions. Those circumstances are not met here. We thus reject the submission that Associate Professor Scott’s thesis be adopted in New Zealand, insofar as it departs from the reasoning in Duncan v McDonald.

The Australian decisions

[33] In Yazgi and the other three Australian cases referred to by Ms Challis, Printy (both SC and CA), Chandra and Tsai, the mortgages at issue were a mixture of fixed sum and “all obligations” mortgages. With regard to the “all obligations” mortgages, the Australian cases held (or it was conceded) that the accompanying loan agreements were separate from and not incorporated into the mortgages. It was held therefore that these mortgages were indefeasible but secured nothing. It was noted in those cases that, in respect of fixed sum mortgages, production of the mortgage instrument is prima facie evidence of the debt, and therefore that the incorporation problems endemic to “all obligations” mortgages do not arise: Tsai (at [20]); Provident Capital Ltd v Printy (CA) (at [32]).
[34] It suffices at this stage to summarise the reasoning of the New South Wales Court of Appeal in Yazgi in this regard. Yazgi concerned a mortgage and accompanying loan agreement where the wife’s signature had been forged by the husband.
[35] It was common ground in Yazgi (see at [13] of the decision) that, because of the forgery, the personal covenant contained in the mortgage was not discretely enforceable. This is also the position in New Zealand (per Duncan v McDonald), albeit arguably not in Victoria, Queensland and South Australia – see Stoljar “Mortgages, indefeasibility and personal covenants to pay” (2008) 82 ALJ 28 at 37 38.
[36] It was also common ground in Yazgi (see at [14] of the decision) that, despite the forgery, registration of the mortgage gave the mortgagee an indefeasible title with regard to the mortgaged interests. The Court in Yazgi held that it was, however, necessary to examine the extent of indefeasibility. It approved, at [21], the comment of Campbell J in Small v Tomassetti [2001] NSWSC 1112; (2001) 12 BPR 22,253 at [9]:

Notwithstanding that registration confers indefeasibility on a mortgagee, there is still a question “indefeasibility for what?”

[37] The Court in Yazgi also, at [22], approved Campbell J’s observation (at [12] of Small) that it is necessary to look at the terms of the particular mortgage to determine the scope of the estate or interest in the land in respect of which indefeasibility was claimed by the registration of the mortgage. In this regard, the Court also approved the reasoning in the decisions of Tsai, Printy and Chandra.
[38] The mortgage instrument in Yazgi provided a definition of “mortgage debt” that was narrower than the definition of “mortgage debt” in the personal covenant. The mortgage instrument also provided that, in the case of a conflict between its terms and those of the (forged) personal covenant, the terms of the mortgage instrument were to prevail. Because the narrower definition in the registered mortgage instrument prevailed, the debt (of the wife) actually secured by the mortgage was nil.

Commentaries on the Australian decisions

[39] The Australian cases have been the subject of comment by Professor Butt in two notes. In the first note, (2007) 81 ALJ 714, he discuses Printy and Tsai and refers to the distinction drawn in those cases between the forged mortgage itself and the forged collateral documents under which the mortgage loan is purportedly “drawn down”. He says (at 714):

Unless those collateral documents are incorporated into the mortgage so as to enjoy the benefits of indefeasibility, they are not worth the paper they are written on – specifically, the mortgagor’s “signature” being forged, no obligations can arise under them.

[40] Professor Butt suggests that the clearest way to avoid that result would be to state the amount secured in the mortgage itself or in a memorandum effectively incorporated into the mortgage itself. He says that it is not enough for the mortgage merely to refer to a collateral (but unincorporated) document that appears to carry the mortgagor’s signature.
[41] In his second note, at (2007) 81 ALJ 916, Professor Butt also discusses (with approval) the cases of Chandra and Yazgi. The Professor recognises that his suggestion in his previous note, of incorporating a fixed sum into the mortgage, might not be commercially realistic as most mortgages now are “all obligations” mortgages to allow flexibility in lending arrangements.
[42] The Professor went on to discuss lenders’ remedies. The two possibilities were to recover from the forger (unrealistic usually) or to claim compensation from Registrar under the Assurance Fund provisions. (We note that, under the various Australian provisions, mortgagees are able to claim compensation, except where the loss arises through their own negligence.) Professor Butt considers that the most commercially realistic step might be for lenders to introduce more thorough screening procedures in order to avoid allegations of negligence if, despite those measures, a fraudster manages to secure funds.
[43] The Australian cases are also discussed (again with approval) in Stoljar. The summary of the law at the end of this judgment (see below, at [90]) is partly based on Stoljar’s summary at 38 – 39 in his article.

Were the terms of the forged loan agreement incorporated into the mortgage?

[44] Westpac submits that the terms of the loan agreement signed by “Ms Fenech” were all incorporated into the mortgage. Thus, in terms of Duncan v McDonald, the amount owing under the loan agreement is secured by the mortgage (up to the value of the land). Westpac submits further that the Australian cases were wrongly decided on this point. We summarise the terms of the loan agreement and the mortgage before examining Westpac’s submissions on this point.

TERMS OF “FENECH” MORTGAGE AND LOAN AGREEMENT

[45] On the same day as the mortgage was executed, “Ms Fenech” signed a loan agreement. This provided for a credit limit of $180,400 with a term of 25 years. Interest was fixed at 7.6% for a three year period. Payment obligations with regard to principal and interest were set out in the agreement. The agreement provided that the loan was to be secured by an “all obligations” mortgage.
[46] The mortgage that was entered into was in a form approved by the Registrar-General. The “Operative Clause” of the mortgage referred to and incorporated all the provisions of Memorandum No. 2001/4106 (“the Memorandum”) registered in the Land Registry Office. This Memorandum contains Westpac’s standard provisions for a residential mortgage. The “Operative Clause” further provides that:

... in consideration of the ‘secured money’, you as the mortgagor, hereby mortgage to the Mortgagee all of your estate and interest in the land described in the above certificate of title.

[47] There is a cross-reference to the Memorandum for the definition of “secured money”. Clause 1.1 of the Memorandum provides that “Secured Money” means:

... the money which you (whether alone or with one or more others) may owe to Westpac now or in the future for any reason. It includes money which you contingently owe Westpac now or in the future. It also includes money which you may owe Westpac if something happens or is discovered, even when there is no existing obligation to pay it.

[48] Clause 2 of the Memorandum headed “What you must pay” states in clause 2.1:

... you must pay to Westpac, on time, the Secured Money. You must pay the Secured Money on demand except where your Loan Agreement or another Bank Document provides otherwise in which case you must pay in the manner agreed in your Loan Agreement or that other Bank Document.

[49] The definition of “Bank Document” (cl 6.1 of the Memorandum) includes the mortgage and “your Loan Agreement (if you have one)”. “Loan Agreement” is defined as including any agreement relating to the money lent to you by Westpac to buy or refinance the “Mortgaged Property”. “Mortgaged Property” means “the property mortgaged by the mortgage.”
[50] The first specific mention of the term “Loan Agreement” is in clause 2.1 of the Memorandum but that relates to the manner of payment and not the amount. The next mention is in clause 2.2 which deals with the payment of costs and expenses of the preparation of the Loan Agreement, late payment and the costs of responding to any governmental inquiry.
[51] The next mention of the term is in clause 2.3 relating to interest accrual. Clause 3 provides for undertakings by the mortgagor relating to such matters as title, maintenance, outgoings, insurance, building and alterations and compliance with the law. It provides that these undertakings can be modified by any Loan Agreement. Clause 4.1 provides the power for Westpac to do what the mortgagor has failed to do under any Loan Agreement. Clause 4.2 provides for powers on default, including if a person is in default under a Loan Agreement. The powers on default include a power of sale.
[52] Clause 5.9 states that the mortgage is a continuing security until a final discharge has been given by Westpac despite any payment or anything else. The clause goes on to provide:

You will not be entitled to a final discharge of the mortgage until Westpac is satisfied that all Secured Money has been repaid in full and that no payment may be voided, voidable or required to be repaid by Westpac under any law.

[53] Finally, the mortgage itself, by reference to clause 1.2 of the Memorandum, specifies a priority amount for the purposes of s 80A of the Property Law Act 1952 up to $545,000. Now, see ss 92 and 93 of the Property Law Act 2007.

WAS THE LOAN AGREEMENT INCORPORATED?

[54] Westpac argues that the fact that the detailed terms of the loan agreement entered into between “Ms Fenech” and Westpac were contained in a separate, forged and unregistered document is not crucial, since the covenant to pay and the definition of Secured Money in the Mortgage is tied to the loan agreement. The loan agreement is expressly referred to in the registered Memorandum and thereby incorporated to form part of the registered documents and thus forms an integral part of the single transaction which is completed on registration of the mortgage and Memorandum. In Westpac’s submission, it is artificial to attempt to isolate the unregistered loan agreement from the registered documents which refer to it, particularly as the loan agreement is not a registerable document.
[55] We accept Westpac’s submission, based on the High Court of Australia case of Gibb v Registrar of Titles (Victoria) [1940] HCA 15; [1940] 63 CLR 503, that it is possible to incorporate covenants into a mortgage by reference to and by incorporation of the terms of another agreement. We, however, agree with the view expressed by Professor Butt, in his article ((2007) 81 ALJ 714) referred to above at [39], that mere reference to a document does not suffice for this purpose.
[56] We do not accept Westpac’s submission that the terms of the forged loan agreement between “Ms Fenech” and Westpac are incorporated into the mortgage. The specific loan agreement was not expressly referred to in the mortgage, although it was one of a class of documents coming within the definition of “Loan Agreement” in the mortgage (see above at [49]). It is also true that the term “Loan Agreement” is used in the mortgage and accompanying Memorandum in a number of clauses (see above at [49] [51]). None of these clauses, however, expressly incorporates all of the terms of all loan agreements into the mortgage.
[57] More importantly, however, “Loan Agreement” is defined as an agreement relating to “money lent to you”. We accept Ms Challis’ submission that “you” must, in the context of the mortgage, be a reference to the mortgagor or registered proprietor. This is made explicit in the “Operative Clause” of the mortgage where it is stated that “you, as the mortgagor, hereby mortgage all of your estate and interest in the land”. “Loan Agreement” is not defined as “an agreement relating to money lent to you or to a fraudster purporting to be you.” Further, the definition of secured money means money which “you [the mortgagor] (whether alone or with one or more others) owe to Westpac now or in the future”. It does not include money owed by “you or anyone purporting to be you”.
[58] Bryson J came to a similar conclusion in Chandra. He held, on the basis of terms very similar to those in this case, that, when seeking to understand the covenants in the mortgage, the reader is led back to the need to identify an agreement which falls within the defined expression “Secured Agreement”. He said that, unless there is and can be identified an “agreement between us and you”, there is no Secured Agreement and there is no Secured Money identified by reference to a Secured Agreement. His Honour held that the only agreement which might fall within the definition of “Secured Agreement” was the forged loan agreement. It was clear, however, that this was not in fact an agreement between Perpetual Trustees and the plaintiffs. The plaintiffs had “nothing to do with it”.
[59] In Printy (SC), Studdert J applied similar reasoning with regard to a reference in the memorandum to an agreement “which relates to the mortgagor”. He said that he was satisfied that the deed of loan entered into by the fraudster in that case did not come within that description. At [40](vii), Studdert J accepted that it would have been open to the lender in that case to fashion the mortgage obligations so as to make the mortgagor liable not only for his own conduct but for the dishonest conduct of others over whom the mortgagor had no control. However, he considered that the “clearest possible expression would have been needed to achieve that effect”. Such clear expression was not to be found in the subject mortgage.
[60] We also refer to the recent decision of the High Court of Australia in Queensland Premier Mines Pty Ltd v French [2007] 240 ALR 234 (see especially [33], [44], [55] and [56] of the judgment). That case concerned the effect of registration of a transfer of mortgage. Section 62 of the Land Title Act 1994 (Qld) provides that, on registration of a transfer, all rights, powers and liabilities of the transferor vest with the transferee. The High Court held that, as a matter of statutory construction, transfer of a mortgage did not effect a transfer of the separate related loan agreements but only a transfer of the mortgage and the interests intimately connected to it.
[61] The mortgage in Queensland Premier Mines was in similar terms to the one in this case. For example, there was a covenant by the mortgagor to pay the “Secured Moneys” to the mortgagee on the date fixed for payment in any “Facility Agreement”. “Secured Moneys” was defined as all moneys owing or which will become payable on any account, and “Facility Agreement” was defined to include the provision of finance on any agreement pursuant to which moneys are lent by the mortgagee to the mortgagor. While not directly on point, Queensland Premier Mines supports the view that the loan agreement in this case is separate from the mortgage.
[62] For these reasons (subject to the discussion below as to the effect of the LTA and policy arguments), we reject Westpac’s submission that all the terms of the forged loan agreement between “Ms Fenech” and Westpac are incorporated by reference into the mortgage.

WERE THE AUSTRALIAN CASES WRONGLY DECIDED ON THIS POINT?

[63] It follows from what we have said above at [58] [62] that we reject Westpac’s submission that the Court in Printy and Chandra wrongly decided that the terms of the forged loan agreements were not incorporated into the mortgages. The terms of the mortgages in those cases were very similar to those in this case and in Tsai.
[64] The terms of the mortgage in Yazgi were different. The issue in that case related to a loan agreement and mortgage purportedly entered into by a husband and wife as registered proprietors. The signature of the wife had been forged by the husband. In that case the Schedule to the mortgage defined the “mortgage debt” as including “all moneys owing under the Housing Loan Contract by the Borrower to the Mortgagee”. The Housing Loan Contract was defined as a “Residential Housing Loan contract dated the [blank] day of [blank] 2003 between the Borrower and the Mortgagee”.
[65] In Yazgi it was conceded (see [12] of the decision) that the term “the Borrower” referred to both the husband and wife and that, because the wife’s signature was forged, the Housing Loan Contract actually entered into by the husband alone did not come within the description in the mortgage. Westpac submits that the concession was wrong. We reject that submission. Given the definition of “Borrower”, we consider that the concession was well made.
[66] If the definition in the mortgage instrument in Yazgi had not referred to the “Borrower”, the situation may have been different. In such a situation, the terms of the forged Housing Loan Contract may have been held to be incorporated into the mortgage. The contrary argument would be that there was no explicit importing of the terms of the Housing Loan Contract into the mortgage and thus that it remained a separate document and there was, because of the forgery, nothing owing under it. In logical terms, although the presence of the definition of “Borrower” precluded the conclusion that the loan contract was incorporated, the absence of that definition may not have been sufficient to incorporate the loan contract: the differential effect of the presence of the definition is not necessarily symmetrical in both circumstances.

Does the LTA deem the loan agreement terms to be incorporated into the mortgage?

[67] Mr Stewart, on behalf of Westpac, submits that, on registration of a forged mortgage containing a covenant to pay the secured sums, the mortgagor is deemed to owe the secured sums by virtue of the indefeasibility provisions in s 62 of the LTA. The registered proprietor’s land thus becomes liable as security for repayment of the secured sums, notwithstanding that the true registered proprietor did not sign the mortgage and no monies were advanced to the true registered proprietor and the true registered proprietor in fact owed no monies to the mortgagee.
[68] As we understand it, Mr Stewart’s argument is that, as registration in effect validates a forged mortgage, that mortgage must be deemed to be a document executed by the registered proprietor. This means, in Mr Stewart’s submission, that the other documents referred to in the mortgage must be deemed also to be documents executed by the true registered proprietor, at least to the extent they were executed at the same time as the mortgage. They must also be deemed to be incorporated into the mortgage by operation of the indefeasibility provisions. Mr Stewart argues that there is therefore a curiosity in the judgment of Bryson J, in Chandra at [31] where he says:

All considerations of indefeasibility come later than ascertaining, on the construction of the mortgage, what according to its true meaning and effect, is the debt which it secures.

[69] We consider that Bryson J’s formulation is correct. The first issue is what has been registered and the terms of those registered documents. The next step is to determine which of the terms in the registered documents are indefeasible. Mr Stewart’s approach, in our view, reverses the two steps. He attempts, wrongly, to use indefeasibility to define and expand the terms of the registered document.
[70] Mr Stewart’s position also contains a fallacy. Because registration does not validate a personal covenant in a forged mortgage the true registered proprietor is not deemed to owe the secured sums. Nor does it deem the mortgage to have been executed by the true registered proprietor. All that registration achieves is to delimit or qualify the estate or interest of the mortgagee in the land (see above at [30] [31]). It is correct that the true registered proprietor’s land becomes liable as security for repayment of the secured sums. However, at most, the personal covenant can provide quantification of the amount by which the land stands charged. This, however, applies only where that amount is set forth or expressly incorporated into the mortgage itself.
[71] In any event, even if Mr Stewart’s submission is correct with regard to the mortgage itself, it is difficult to see how registration deeming the mortgage to have been executed by the registered proprietor could apply to deem unregistered documents to have been so executed. The same applies to the argument that registration somehow incorporates the terms of separate documents even if they would not be held to be incorporated using the normal rules of construction of documents. To accede to such an argument would extend the ambit of the LTA to unregistered documents.
[72] It seems to us that Westpac is asking us to hold, as a matter of statutory interpretation, that the phrase “the money which you ... may owe to Westpac” (see at [47] above) includes money owed by “you or anyone purporting to be you, including under any unregistered documents that are not incorporated into the mortgage”. It must be remembered that, if this was implied in by the LTA, then it would apply no matter how negligent the lender had been, short of actual fraud or wilful blindness, which would distort the concept of registration under the LTA. The rule in s 62 of the LTA provides for the effect of registration, but it does not purport to extend beyond registered instruments. It is not plausible to suggest that documents that cannot (directly or by incorporation principles) be brought within the ambit of the registered instrument itself are within the purview of s 62. To so hold would be to misunderstand the Torrens system of registration.
[73] Studdert J commented in Printy (SC) (see at [59] above) that it would have been possible to fashion the mortgage obligations in that case so as to make the mortgagor liable not only for his own conduct but for the dishonest conduct of others over whom the mortgagor had no control. However, he said that very clear language would have been required to achieve that effect. The same comments must apply with even more force in relation to statutory language. There is no clear language in the LTA deeming related unregistered documents to be incorporated into the mortgage. There is no way an ordinary person reading either the LTA (or indeed the mortgage itself) in this case would be able to discern that the words of the mortgage, “the money which you ... may owe to Westpac”, would be expanded by the LTA to include “money owed by you or anyone purporting to be you”.
[74] Further, Mr Stewart conceded that, if lenders tried to put the words, set out at [72] above, explicitly into mortgages, they would be difficult to “sell”. Mr Stewart is therefore asking us to hold that the LTA implies into mortgages terms that are commercially unrealistic, an unlikely intent to ascribe to Parliament. His interpretation would also entail a substantial “reading up” of the legislation for which we consider there is no justification.

Is there a valid distinction between a fixed sum mortgage and an “all obligations” mortgage regarding reference to outside sources?

[75] Mr Stewart submits that, under an all obligations mortgage, the amount that is secured is the amount actually advanced and outstanding and that this is the same with regard to a fixed sum mortgage. In both cases, the actual amount owing is established by records or documents which are not registered and cannot be registered. Thus in both cases there must be reference to documents or evidence outside the mortgage in order to ascertain the sums in fact secured. Mr Stewart submits that there is no distinction between the two types of mortgages. The extent of indefeasibility is determined in both cases by reference to the mortgages and the loan agreements and to outside information as to the balance actually owing at the time the lender wishes to enforce the security.
[76] We consider that this submission confuses the amount potentially secured under the mortgage (which is determined only by reference to the mortgage documentation) and the amount actually owing at any time (which is determined by reference to outside documents or sources). We are concerned in this case with the former. In any event, it is not the case, as Mr Stewart submits, that in respect of all mortgages it is necessary to enquire beyond the registered instrument. Outside documentation is not uniformly required to ascertain the amount secured.

Would the policy of the LTA as to compensation be overridden?

[77] Mr Stewart points out that the Torrens system provides certainty of title and, to the extent that this carries risk of fraud and injustice, this should be dealt with by the compensation system, which provides an innocent party with a right to claim for loss or deprivation of their land or estate. In New Zealand, unlike in Australia, (see above at [42]) there is no compensation for lenders in Westpac’s position. In Mr Stewart’s submission, this points to a significant difference between the position in New Zealand and that prevailing in Australia. Lenders in New Zealand should be able to realise their security and the true registered proprietor should receive compensation. In Mr Stewart’s submission, the State should absorb the loss, which it recoups from registration fees, and the two innocent parties should suffer no loss.
[78] Ms Challis, for Mr Clark, submits that, as a matter of policy, it is arguable that a large corporate mortgagee, as opposed to the State, should bear the financial responsibility for loss arising from a forged mortgage in circumstances where the mortgagee is attempting to enforce the mortgage against an innocent mortgagor who is not indebted to the mortgagee.
[79] We accept Mr Stewart’s submission that the policy of the LTA is to compensate for the effects of indefeasibility on an innocent registered proprietor but this in itself cannot be a justification for extending indefeasibility beyond what is assured under the mortgage in question and the LTA. In this case both Westpac and Mr Clark would assert (seemingly with justification) that they were the innocent victims of a clever fraudster. However, not all lenders (and their agents) will be in that position. Even if such lenders were not fraudulent or wilfully blind, they may well have been negligent and thus not so easily characterised as innocent. In this regard, we note that the Australian compensation provisions exclude negligent lenders (see above at [42]).
[80] We are also concerned that compensation may not be available in all circumstances. We postulate the situation of a valid “all obligations” mortgage entered into by a registered proprietor and a later forged loan agreement purportedly secured by that mortgage. If amounts owing under that forged loan agreement were secured by the mortgage, as Westpac submits they should be, we are uncertain if compensation would be available.
[81] In such a situation, it may be problematic that the loss is occasioned not by the registration of the mortgage instrument, but by the contents of the later loan document. The later loan document, as the locus of loss, would purportedly attach itself to the mortgage instrument, and, coming after the mortgage instrument, would usually not be incorporated into it: the forgery would be in the loan document, not the mortgage. In such a situation, the registered mortgage is a necessary but not sufficient condition for the loss, and it may therefore be difficult to hold that the loss is brought about by the operation of the LTA.
[82] If compensation is not available in such cases it would be most unfair on the innocent registered proprietor for us to accede to Westpac’s submission and extend the concept of indefeasibility. This would be favouring lenders, who had much more opportunity to protect themselves against fraud and who may have been negligent, over innocent registered proprietors.
[83] Against this background, we consider that any extension of the indefeasibility provisions should be for Parliament. In this regard, the Law Commission is currently conducting a review of the LTA and this may be an opportunity for the matter to be considered (including the policy issues discussed in the next section).

Are there other policy reasons for not applying the Australian cases?

[84] Mr Stewart submits that to accede to Mr Clark’s position is to create an unintended anomaly in respect of all obligations mortgages and to frustrate the clear intention of the Legislature. The LTA expressly contemplates both fixed sum and “all obligations” forms of mortgage and Schedule 2 to the Land Transfer Regulations 2002 provides for separate forms in respect of both types of mortgages (forms 7 and 6, respectively). Mr Stewart submits that it would be an oddity if one form of registered mortgage provided an indefeasible security for monies advanced, but the other form did not.
[85] Mr Stewart points out that the Australian cases relied on by Mr Clark were decided by the New South Wales Courts pursuant to the provisions of the Real Property Act 1900. The Real Property Act 1900, unlike the LTA, makes no separate provision for all obligations mortgages. On a wider scale, Mr Stewart submits that, if lenders are not able to enforce their securities despite the standard procedures to protect against fraud adopted in this case, it will result in lenders in New Zealand having to return to more intrusive and costly investigative practices prior to lending and taking security, which the principle of indefeasible title was designed to prevent. This will increase the costs of borrowing and lead to delays.
[86] There is also no guarantee, in Mr Stewart’s submission, that any such increased scrutiny would completely prevent forgery and identity theft cases from occurring and leading to registered mortgages. Indeed, there is little incentive on lenders to adopt tighter practices if in a case where proper procedures are followed (as opposed to a case like Dollars & Sense, for example) all they are given is an “indefeasible charge over nothing”. Westpac points out that in the United States there is no State compensation, but there is a thriving private title insurance market. Again, if indefeasible titles are not effectively protected here, private title insurance may become necessary, which will add to lending costs and delay.
[87] Ms Challis submits that Westpac’s submissions are hypothesis and speculation. She says that, given the comparative rarity of forged mortgages, it is unlikely that lenders would undertake more stringent checks. Ms Challis accepts that the LTA provides for both fixed sum and “all obligations” mortgages. If lenders choose all obligations mortgages for commercial advantage, she submits that they must also take the consequences of that decision.
[88] We agree with Westpac’s submission that there is no obvious policy reason (apart from the compensation issue referred to at [80] – [82] above) why “all obligations” and fixed sum mortgages should have a different effect. However, these policy considerations cannot, in our view, override the wording of the LTA and the instruments in question. As we indicated above at [83], any change to this position is for Parliament.
[89] As to Westpac’s argument that the result of the interpretation Ms Challis contends for will be that more stringent precautions will need to be taken by lenders, we are not in a position to assess how much more intrusive and costly such precautions might be. It may be, however, that (even if the type of wording discussed at [72] would not be commercially feasible), that there could be some changes in wording to “all obligations” mortgages so that it is clear that they incorporate at least the terms of the particular loan agreements signed at the same time as the mortgage – see the discussion of Yazgi at [66] above.

Summary

[90] We consider that the state of the law in New Zealand is as follows:

(a) Registration of a mortgage confers an indefeasible title on the mortgagee: section 62 LTA; Frazer v Walker [1967] NZLR 1069.

(b) Registration of a mortgage validates those terms and conditions in the instrument of mortgage which delimit or qualify the estate or interest in the mortgaged land or that are otherwise necessary to assure that interest to the registered proprietor: Butt Land Law (5ed 2006) at 2022 (citing Duncan v McDonald); Hinde McMorland and Sim at 15005.
(c) It is necessary to examine the terms and conditions of the mortgage to determine the scope of the estate or interest in land so validated: Yazgi.
(d) Terms and conditions contained in an unregistered document can be incorporated by reference into a registered instrument of mortgage: Gibb v Registrar of Titles (Victoria); Vella v Permanent Mortgages.
(e) Whether such terms and conditions are so incorporated will be a question of interpretation of the relevant mortgage. “All obligations” mortgages, as currently drafted in New Zealand, are unlikely to incorporate the terms of separate loan agreements (see above at [54] [62]).
(f) A personal covenant to pay contained in a mortgage is independent of the charge created by the mortgage and does not attract indefeasibility on registration: Duncan v McDonald.
(g) If the mortgage is forged, or otherwise void, the personal covenant does not oblige the registered proprietor personally and the mortgagee is confined to its remedies against the land. If a personal covenant to pay contained in a mortgage instrument measures the amount by which the land stands charged for the debt, however, the amount is secured by registration up to the value of the land.

Result and costs

[91] The appeal is dismissed. We have concluded, for reasons which differ from those of the Associate Judge, that Westpac is not entitled to summary judgment.
[92] It was necessary to reconvene the Court to hear the argument on Mr Clark’s additional ground for supporting the Associate Judge’s judgment. That ground was new and the only successful one. The grounds argued at the earlier hearing all failed. In the circumstances costs should lie where they fall.

Solicitors:
Simpson Grierson, Auckland for Appellant
McElroys, Auckland for Respondent

NZLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.nzlii.org/nz/cases/NZCA/2008/346.html