#6798 - Goss V. Chilcott I - Restitution of Unjust Enrichment BCL

Goss v. Chilcott

Facts

Mr. Haddon was one of four directors of a small finance company in Palmerston North. At a directors' meeting on or about 6 May 1987 Mr. Haddon put forward a proposal for a loan to Mr. and Mrs. Goss. They had a nursery property and Mr. Goss was involved in a development at Waitarere. Mrs. Goss was Mr. Haddon's sister. The proposal was for an advance of $30,000 for three months on the security of the nursery property. The proposal was made orally to the directors by Mr. Haddon. It was agreed to orally by them and there was no minute of the directors' decision. On 6 May a cheque for $30,000 drawn on the company's account was paid to Haddon Marshall & Co. for the credit of the mortgagors and was credited to them in the trust account of the firm. On the same day Mr. and Mrs. Goss called into his office and signed a memorandum of mortgage and a disclosure document to satisfy the Credit Contracts Act 1981.

The mortgage was in standard form. As signed, it secured a principal sum of $30,000 repayable on 6 August 1987 carrying interest at 33 per cent. (penalty rate 36 per cent.) payable on 6 June, 6 July and 6 August. Mr. Goss's evidence was that Mr. Haddon told him that he wanted to borrow $30,000 but as a director could not borrow from the company. Mr. Haddon asked him to give a mortgage over his property on the basis that Mr. Haddon would have the loan repaid in three months and would then have the security cancelled. Mr. Goss agreed and was insistent that the security be for only three months. There is no evidence of any oral agreement on Mr. Goss's part to pay interest or of any discussion relating to interest. The mortgage was never registered. At some later time it was altered, as was the disclosure document. The repayment date was amended to 6 May 1988 and the interest dates were also amended to provide for monthly payments throughout the 12 months. That was done without the mortgagors' authority or knowledge. No doubt it was done because Mr. Haddon could not provide the funds for repayment in August. Mr. Jourdain's evidence was that the original loan for three months was rolled over. There is no clear evidence as to what happened. But on 11 December 1987 Mr. Haddon wrote to the company advising that registration of the mortgage had been delayed, that they (the law firm) had been able to amend the mortgage to provide for a 12-month term expiring 6 May 1988 and had disclosed the extension to the borrowers in terms of the Credit Contracts Act 1981.

Only two repayments were made to the company in respect of the loan. One was of $914.25 on 31 July 1987 when a cheque on Mr. Goss's bank account was paid to the company. His evidence was that Mr. Haddon said that he wanted to repay part of the loan, asked Mr. Goss for the cheque and put him in funds for that amount. The other payment was of $2,625 on 6 November 1987 by cheque drawn on Mr. Haddon's own account. Both payments were appropriated in the accounts of the company to interest due. Mr. Goss said that in September 1987 Mr. Haddon led him to believe that the loan had been repaid and the security cancelled. They knew nothing of the alterations to the mortgage or of the purported extension of the term until November 1988 when the company's accountant told him they owed the company $47,000. The first formal demand was made by letter of 6 December 1988. Mr. Goss saw Mr. Haddon who undertook to pay but did not do so before his wider misconduct became known.

Holding

The company commenced proceedings against the defendants, claiming the principal and interest due under the mortgage instrument. It applied for summary judgment on this basis; but this was refused by Neazor J. who held that the defendants had an arguable defence that they had been discharged from liability under the instrument by reason of the subsequent alteration made to it by Mr. Haddon.

Was there failure of consideration?

The advance was in fact paid by the company to Haddon Marshall & Co., as solicitors, but, having regard to the terms on which they received it from the company, was retained by them in their trust account until after the defendants had executed the mortgage instrument. It was then available to the defendants but was in fact received by Mr. Haddon, as agreed between him and the defendants. In these circumstances the loan appears in fact to have been advanced to the defendants pursuant to the terms of the mortgage instrument, the consideration for the advance being expressed to be the personal covenants by the defendants to repay the advance upon those terms. Even if (which their Lordships doubt) the loan had been paid pursuant to a preceding oral agreement between the company and the defendants, it must have been paid in consideration for the defendants' promise to repay it, though the ensuing loan contract would (as their Lordships have already indicated) have become merged in and superseded by the contract contained in the mortgage instrument.

Citing Viscount Simon in Fibrosa: “When one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise.… If this were not so, there could never be any recovery of money, for failure of consideration, by the payer of the money in return for a promise of future performance, yet there are endless examples which show that money can be recovered, as for a complete failure of consideration, in cases where the promise was given but could not be fulfilled.”

Of course, in the case of a loan of money any failure by the borrower to repay the loan, in whole or in part, by the due date, will in ordinary circumstances give rise to a claim in contract for repayment of the part of the loan which is then due. There will generally be no need to have recourse to a remedy in restitution. But in the present case that course is, exceptionally, not open to the company, because the defendants have been discharged from their obligations under the mortgage instrument; and so the company has to seek recovery in restitution.

Was there a total failure of consideration?

Let it however be supposed that in the present case the defendants had been so discharged from liability at a time when they had paid nothing, by way of principal or interest, to the company. In such circumstances their Lordships can see no reason in principle why the company should not be able to recover the amount of the advance made by them to the defendants on the ground that the...