Mitchell Morgan Nominees v Vella (No 2) [2012] NSWCA 38

This decision of the Court of Appeal was a follow on from the main decision the Court of Appeal which was handed down on 15 December 2011 which we have already reported on. In that decision the Court of Appeal ruled that Hunt & Hunt was liable for 100% of the damaged caused by its negligence. In addition overruling the trial judge on that point the court also made the following observation:

The trial judge erred in his dealing with interest. Assuming no recovery from the fraudsters, Mitchell Morgan’s damages are the amount it would have obtained from a sale of the Enmore property, at the time of the cancelled auction, and interest thereafter. A non-negligent solicitor would have drawn the mortgage with a covenant to pay $1,001,748.85 and interest on that sum at the mortgage rates. If so, the amount Mitchell Morgan would have obtained is not the principal but also interest at the mortgage rates until the date of realisation of its security.

It is possible that the Enmore property would not have sold for a price sufficient to meet the interest as well as the principal, and in that event the net sale amount will be a cap. The interest thereafter should not be at the exorbitant mortgage rates but at Court rates, and it should run from when the money would have been obtained.

The Court of Appeal then gave leave the parties to make submissions on the calculation of damages.

Mitchell Morgan argued interest should be calculated at mortgage rates until the date of the cancelled auction and at court rates thereafter.

Hunt & Hunt argued:

  • the interest should be calculated on the expiry date of the loan (a much earlier date) on the basis that if there had been a genuine borrower, then the loan would have been paid out by then.
  • alternatively the sale was in fact delayed because of the dispute as to the validity of the loan–a dispute which presumably would not have occurred if an all monies clause had not been used.
  • the scope of there liability should be considered to have been to protect the enforceability of the recoupment of the advance and the intended profit (the two months’ interest), and not to facilitate a windfall profit solely obtained by the fact that enforcement was delayed by reason of the mortgagor being unaware of the loan and subsequently disputing its liability.

The Court of Appeal rejected the arguments made by Hunt and Hunt on the grounds:

  • It would be erroneous to use an earlier date upon the basis that, of a genuine borrower who would have repaid the loan. What needs to be hypothesised is what would have occurred if Hunt & Hunt had not been negligent. That requires consideration of what the fraudster did not what a hypothetical borrower did. 
  • Hunt & Hunt was unable to point to any evidence showing that the auction sale of the property was delayed by the existence of a dispute.
  • Hunt & Hunt undertook to prepare a mortgage to protect the interests of its client lender. It was fully aware of the terms of the loan transaction, including the interest rates payable.

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