On Tuesday, Corboy J of the Supreme Court of Western Australia delivered the reasons for decision in Saraceni v Mentha [No 2]  WASC 336 (Saraceni). The decision dealt with the central question in the dispute between various entities associated with the long-running Raine Square saga – namely, were the receivers of Westgem Investments Pty Ltd (receivers and managers appointed) (administrators appointed) (Westgem) validly appointed?
In an April 2011 publication¹ we introduced you to the dispute over the Raine Square development in the context of various interlocutory skirmishes.²
By way of a reminder:
In November 2004, St.George Bank Limited (as it was then known) (St.George) provided Westgem with a loan. Westgem granted St George a fixed and floating charge over all of its assets and undertakings in order to secure its obligations under that loan (St.George Charge).
In April 2008, BOS International (Australia) Limited and the Bank of Western Australia Limited (together the Financiers) agreed to provide Westgem with financial accommodation in connection with a project to develop land located in the Perth CBD known as “Raine Square” (Raine Square Development). Contemporaneously with the execution of the facility agreement, Westgem entered into a deed entitled “Fixed and floating charge (all assets)” with BOSI Security Limited (BOSI)¹ (BOSI Charge). Westgem also granted BOSI a mortgage over the Raine Square Development and St.George assigned the St.George Charge to BOSI. Subsequently:
In the Saraceni decision, handed down on 14 April 2011, Justice Corboy found that (among other things), contrary to Saraceni’s and Saracen’s view, the Receivers had at least an arguable case that if the BOSI Charge was not effective to charge all of Westgem’s property, it was the common intention of the parties that the BOSI Charge was an “all assets” fixed and floating charge and the definition of “Secured Property” in the BOSI Charge should be rectified accordingly.
By this decision, delivered earlier this week, his Honour found that, not only was the BOSI Charge effective, it could, in any event, be rectified notwithstanding that Westgem was in administration.
The BOSI Charge
The plaintiffs put forward a number of reasons why the appointment of the Receivers was invalid. Chief among these was the claim that the BOSI Charge was, on its proper construction, ineffective to charge any of the assets of Westgem.
This argument relied on an unfortunately worded clause. Clause 3.1 of the BOSI Charge provided that “the Chargor charges the Secured Property to the Security Trustee to secure payment of the Secured Money”. Westgem was the Chargor and BOSI was the Security Trustee.
Neither “Secured Money” nor “Secured Property” was defined in the BOSI Charge. However clause 1.3 provided that “terms and expressions defined in the Restated Facility Agreement apply in this document unless that term or expression is defined in this document or the context indicates otherwise”. Both of these terms were defined in the Restated Facility Agreement.
The definition of “Secured Property” in the Restated Facility Agreement was, in effect, not as broad as it should have been. Importing this definition, on the plaintiff’s construction of clause 1.3 of the BOSI Charge, none of the assets or undertakings of Westgem were charged.
The defendants disputed this. They claimed that the Restated Facility Agreement’s definition of “Secured Property” should not be imported into the BOSI Charge. On a proper construction, they argued, “Secured Property” meant all the assets and undertaking of Westgem.
It was held that the failure to include words to describe what was meant by “Secured Property” was a mistake. In his Honour’s words,
It was not that the Deed [that is, the BOSI Charge] failed to record what had been agreed; rather it used language that did not express what had been intended by the agreement that was recorded.³
After review of the authorities, Corboy J identified a distinction between the process of construction of a contract that includes a mistake and the distinguishable act of rectification.
The court rectifies an instrument so that it conforms to the parties’ prior agreement or common intention, including what they agreed or intended would be the effect of their agreement… The instrument is ‘reformed’ so that it accurately records what was actually agreed or intended by the parties. The court … construes an instrument that records the parties’ agreement or intentions. Consequently, mistakes are ‘corrected’ to give effect to what the parties objectively intended by the actual record of their agreement.4
Corboy J afforded the offending clause a liberal construction, holding that if the clause is given a meaning derived from the context of the instrument, then the defendants’ interpretation will prevail. It was held that such a construction would give effect to the parties’ objective intentions.5
This would have been enough to deny the plaintiffs success. However, Corboy J went on to find that the clause could be “corrected” through rectification.
Rectification is an equitable remedy that allows a court to vary a document to record the terms of an agreement fully and accurately, so as to reflect the original intention of the parties.6 The defendants were pushing to have the BOSI Charge rectified.
The plaintiffs denied that the Deed could be rectified, on three bases:
After a review of the case law, Corboy J found that an instrument may be rectified where it does not give effect to the parties’ antecedent agreement or common intention, even in cases that involved a deliberate choice of words and drafting techniques.8
The question of whether rectification should be granted given the appointment of the administrator raised “discretionary considerations”. Rectification is a discretionary remedy; the court is not compelled to provide it. Corboy J found that the fact of a putative charger being in administration is a factor to be considered in exercising the equitable discretion as to whether to rectify an instrument.9 The implication was that administration favours restraint of the exercise of discretion.
In the end, Corboy J had reference again to the intention of the parties:
It would, in my view, be an inequitable outcome if the effect of the appointment of an administrator in all the circumstances of this matter was to deny the Financiers the security that they were plainly intended to have over assets that were acquired with their funding.10
On the issue of unclean hands in relation to the stamping of the Deed, his Honour noted that, for the defence to operate, the impropriety claimed of must have an immediate and necessary relation to the equity sued for.11 Applying this principle, it was found that “[t]he claim for rectification rested on matters that were wholly independent of the alleged misconduct by the Financiers, BOSI and their solicitors.”12 In any event, the conduct of the Financiers, BOSI and their solicitors was not at a level of impropriety to support refusal of the rectification remedy.13
Lavan Legal comment
This decision serves as yet another reminder of the care that must always be taken in the drafting of documents that purport to give rise to security interests. In complex transactions involving a number of facility documents, particular care should be taken in considering the interoperation of those instruments. The key to avoiding many of the issues that were raised in this case is the provision of careful, quality drafting at the front end. In this case, if BOSI had appointed the Receivers pursuant to the mortgages in the first instance, it is likely that these proceedings would never have been commenced.
Based on comments made in the press this week, this is unlikely to be the last of the Raine Square saga. We will keep you updated as matters progress.