Banque Nationale De Paris v Falkirk Developments Ltd [1977] HCA 12; (1977) 136 CLR 177 (4 March 1977)

HIGH COURT OF AUSTRALIA

BANQUE NATIONALE DE PARIS v. FALKIRK DEVELOPMENTS LTD. [1977] HCA 12; (1977) 136 CLR 177

Deeds

High Court of Australia
Barwick C.J.(1), Mason(2) and Jacobs(3) JJ.

CATCHWORDS

Deeds - Alteration and cancellation - Production from proper custody in cancelled condition - Prima facie evidence of cancellation - Delivery under mistake by obligee for cancellation by obligor - Effect.

HEARING

Sydney, 1976, November 16.
Melbourne, 1977, March 4. 4:3:1977
APPEAL from the Supreme Court of New South Wales.

DECISION

1977, March 4.
The following written judgments were delivered: -
BARWICK C.J. The first named appellant ("the bank") was sued in the Supreme respondent on demand a sum equal to the amount which, at the date of the demand, would have been held by the respondent as a retention fund under a building contract between the respondent with a company named Citra Constructions Ltd. ("Citra"), the second named appellant, such sum in any event not to exceed $164,144. By reason of the terms of the building contract and the course of its performance, the sum of $82,070 was the sum which at the date of the respondent's demand on the bank for payment under the deed the respondent would, but for the execution and delivery of the deed, have held in a retention fund under the building agreement. The Supreme Court gave judgment for the respondent for $82,070. (at p179)

2. On production of the deed to the Court from the custody of the bank, it clearly bore the word "cancelled" upon its face. That circumstance afforded prima facie evidence that it had been duly cancelled and its obligation terminated. (at p179)

3. However, evidence before the Supreme Court established to the satisfaction of the learned trial judge, Sheppard J., that the respondent had not agreed to the cancellation of the deed, its delivery by the respondent to the builder, Citra, and thence to the bank having taken place under a mistake, and in any case doubtfully with the authority of the respondent. That finding of fact resulted from the oral examination of witnesses and the consideration of the probabilities. There is no ground for disturbing the finding. Consequently, the cancellation not having been with the consent of the obligee, the respondent, it was nugatory. The obligation of the deed none the less remained. (at p179)

4. The details of the significant points in the case are set out in the reasons for judgment prepared by my brother Mason which I have had the advantage of reading. Also there, and in the reasons for judgment of the Supreme Court, were such references to the decided cases as support the two propositions I have mentioned: first, the prima facie consequence of the word "cancelled" on the face of a deed produced from the appropriate custody and, secondly, the necessity of the consent of the obligee to the cancellation of a deed if it is to be effective to terminate the obligations of the deed. (at p179)

5. I agree with the reasons expressed by my brother Mason, both as to the effect of the purported cancellation of the deed and as to the rejection of other submissions made in the appeal. I share his conclusion that the appeal should be dismissed. (at p179)

MASON J. This is an appeal from a judgment given by the Supreme Court of New South Wales (Sheppard J.) in favour of the respondent (plaintiff) Falkirk Developments Ltd. ("Falkirk") in the sum of $82,070 against the appellant Banque Nationale de Paris ("the bank"), the defendant and cross-claimant in the action, and a consequential judgment in the same amount in favour of the bank against Citra Constructions Pty. Ltd. ("Citra"), the cross-defendant in the action. The cause of action on which the judgment was obtained arose out of a deed, called a deed of guarantee, dated 18th August 1971 between the bank and Falkirk by which the bank bound itself upon written demand by Falkirk to pay to Falkirk a sum of money equal to the retention fund which otherwise would have been held by Falkirk under a building contract between itself and Citra, the amount in question not to exceed $164,140. The bank's defence to the action was that the deed was cancelled on 5th November 1973 in circumstances to be outlined shortly. The judge rejected this defence. The issue in the appeal is whether he was correct in so deciding. (at p180)

2. The building contract to which Falkirk and Citra were parties was dated 2nd July 1971. By it Citra agreed to build for Falkirk a multi-storey office building at 185 Macquarie Street, Sydney, for $1,641,449. Forming part of the contract were detailed conditions, of which the following are relevant to the question which has arisen:

"30 (a). An amount referred to in these Conditions as the
Retention Fund shall be retained by the Proprietor in
accordance with sub-clause (b) of this clause as
security that the Builder shall carry out his
obligations under this Contract.
30 (b). The amounts certified by the Architect for payment
by the Proprietor to the Builder pursuant to clause 28
of these Conditions shall be exclusive of the
retainable percentage as stated in the Appendix to
these Conditions of the Architect's estimate of the
contract value of the work executed provided that
when the total amount thereby retained reaches the
amount stated in the said Appendix as the Limit of
Retention Fund (which shall not exceed ten per
centum of the Contract Sum) or that amount as
reduced pursuant to any provision of this Contract or
any agreement, no further amounts may be retained
by the Proprietor by virtue of this sub-clause.
30 (c). The Proprietor agrees to accept a Deed of Security in
the form which has been submitted by the Proprietor
and approved by the Builder prior hereto, executed
under seal by the Banque Nationale de Paris in lieu
of retaining the Retention Fund provided for by
clause 30 (a) hereof and the Builder agrees to
forthwith procure execution of such Deed of Security
by the said Bank. If the Builder fails to procure
execution of such Deed to the satisfaction of the
Proprietor the Proprietor shall be entitled to hold the
Retention moneys provided for by 30 (a) hereof in the
manner provided notwithstanding the provisions of
this sub-clause.
30 (d). Where the Limit of Retention Fund as stated in the
Appendix to these Conditions is $4,000 or greater, the
amounts which the Proprietor is entitled to retain
progressively pursuant to sub-clause (b) of this clause
shall, unless otherwise agreed, be paid by him to the
credit of an interest bearing deposit in the joint
names of the Proprietor and the Builder at a Bank
nominated by the Builder and approved by the
Proprietor. Such payments to such joint deposit shall
be made by the Proprietor within 7 days of the
presentation to him by the Builder of any progress
Certificate issued pursuant to clause 28 of these
Conditions to which the provisions of sub-clause (b)
of this clause have been applied and evidence of each
such payment shall be provided to the Builder by the
Proprietor within a further 7 days. The amount to be
held in the aforesaid joint deposit shall be upon trust
for the Proprietor subject to the provisions of
sub-clauses (e) and (f) of this clause except that in the
event of the Builder determining his employment
pursuant to clause 23 of these Conditions, the rights
and interests of the Proprietor in respect of such
amount shall be and are hereby transferred to the
benefit of the Builder.
...
30 (h). Where the Builder with the Proprietor's agreement
provides a security pursuant to sub-clause (c) of this
clause thus rendering the Retention Fund provisions
of this clause not applicable such security shall be
maintained effective until the issue by the Architect
of the Notice of Practical Completion pursuant to
clause 25 of these Conditions or until the date the
Works are deemed to be practically completed
pursuant to that clause and thereafter, upon the
Builder providing a further security equal to one half
of the first-provided security, such first-provided
security shall be released. The second security shall
be released in accordance with sub-clause (j) of clause
31 of these Conditions. The provisions of this
sub-clause are subject to the Proprietor's right to have
recourse to any security provided by the Builder in
the event of any of the circumstances described in
clause 22 of these Conditions arising, or if the
employment of the Builder is determined thereunder.
If any of the circumstances described in clause 23 of
these Conditions arise, and if the Builder determines
his employment pursuant to that clause, the
Proprietor shall release his interest in any such
security immediately upon written notice from the
Builder to do so."

(at p181)

3. The deed dated 18th August 1971 was executed by Falkirk under its common seal. However, it was not executed by the bank under its common seal in accordance with the provisions of cl. 30 (c); it was expressed to be signed, sealed and delivered by Herve Babron as attorney under power on behalf of the bank. It was accepted by Falkirk in this form, no point being taken on the ground that the deed was not executed by the bank under its common seal. (at p182)

4. The deed, after stating the effect of cl. 30 (a), went on to recite:

"AND WHEREAS by Clause 30 (c) it was provided, inter alia,
that the Builder (Citra) might provide a bank guarantee,
guarantee bond or other form of security in lieu of such
Retention Fund AND WHEREAS the Bank has agreed to grant
such security pursuant to the said Clause." (at p182)

5. The deed then provided:

"that in consideration of the Company (Falkirk) agreeing
to accept this security in lieu of holding the Retention Fund
provided for by the said Building Agreement
1. The Bank shall upon the written demand of the
Company pay to the Company a sum of money equal to
the amount of the Retention Fund which would have
been held by the Company at the date of such demand
pursuant to clause 30 (b) of the said Building
Agreement if Clauses 30 (c) and 30 (d) had not formed part of
such Building Agreement, not in excess of an amount
of $164,144.00 (One hundred and sixty four thousand,
one hundred and forty four hundred (sic) dollars).
...
3. Upon payment by the Bank to the Company of monies
demanded pursuant to 1 hereof, the Company shall
hold such monies on the terms on which the said
Building Agreement provides that the Retention Fund
shall be held with the exception that conditions 30 (c)
and 30 (d) shall not apply."

(at p182)

6. Messrs. Meldrum, Burrows and Partners, who evidently became the architects under the building contract some time after it was executed, issued the certificate of practical completion on 2nd August 1973. Correspondence then took place with reference to the giving of a second security as contemplated by the conditions in the contract to which I have already referred. In a letter dated 21st August 1973 from Citra to the architects, Citra stated:

"Following the meeting in your office on 20th August 1973,
we advise the following relative to the finalization of the
above contract: -
...
4. Bank Guarantee
In accordance with Clause 30, we are having prepared
a new Bank Guarantee for half the amount of the
existing Guarantee. When this is in your hands, we
would expect return of the existing Guarantee." (at p182)

7. On the following day Citra sent a letter to the architects enclosing the second security. The letter stated: "This Guarantee is issued in accordance with the Contract Conditions and is additional upon the existing Guarantee being returned." The word "additional" was a typographical error. It should have read "conditional" and was no doubt so understood. (at p183)

8. On 24th August 1973 the architects sent the deed on to Falkirk stating that the common seal of Falkirk should be affixed and witnessed. On 14th September Falkirk wrote to the architects stating that the second deed was unacceptable and requested that it be "resubmitted on a Company letter head, or in any other manner necessary, and that a Common Seal be affixed to the Document." This request was passed on to Citra by the architects. It was confirmed by Falkirk to Citra. (at p183)

9. In subsequent correspondence a form of deed was agreed upon between Citra and Falkirk. In the course of this correspondence Citra requested Falkirk to return the unacceptable deed, that which was enclosed in the architect's letter of 24th August. Falkirk complied by sending the document to Citra. (at p183)

10. On 31st October 1973 Citra wrote to the bank returning the second deed for cancellation. The letter stated that the deed had been returned to Citra by Falkirk for cancellation. It was cancelled by the bank by means of writing across the face of the deed in parallel lines the word "CANCELLED". The learned judge stated that the evidence did not enable him to find when the second deed was returned to Citra but said that it was presumably before 31st October 1973. (at p183)

11. Mr. Bygrave, the property manager of Falkirk at the relevant time, stated that after a conversation he had with the architect on 6th November 1973 he made a search for the first deed and could not find it. He asserted that he could not recall what had happened to it but that he thought that through a mistake on his part it was enclosed in a letter dated 31st October 1973 to Citra. In that letter Falkirk had indicated its agreement to the proposed form of deed and had requested its completion and that it be forwarded to Falkirk for execution. The letter contains no reference to the first deed. (at p183)

12. On 2nd November 1973 Citra wrote to the bank enclosing the first deed, stating that it "has been returned to us for cancellation by the client". The letter went on to ask the bank to cancel the deed. The letter and the deed were produced from the custody of the bank. When produced, the deed had stamped across its face the word "CANCELLED" in large block letters between two parallel lines. According to evidence by the bank and accepted by the judge, the deed was so stamped on 5th November 1973. (at p183)

13. Having discovered on 6th November that the deed was no longer in his possession, Mr. Bygrave sent telexes to the bank and to Citra asserting that the deed was "returned in error" and that the bank was not released from liability. On 14th January 1974 the bank wrote to Falkirk stating that the guarantee had been forwarded to it on 2nd November 1973 by Citra for cancellation, that the documents had been received by the bank on 5th November 1973 when the bank proceeded to effect "these formalities on our books on the same date". (at p184)

14. Mr. Bygrave gave oral evidence. It was not regarded as entirely satisfactory by the judge. However, the judge found that the first deed was returned "by mistake", a finding which, as his Honour says, "seems to be in accordance with the inherent probabilities of the matter". There was no reason why Falkirk would give up the only security which it then held. (at p184)

15. The consequence is that the matter is to be approached on the footing that the deed dated 18th August 1971 was mistakenly sent to Citra with Mr. Bygrave's letter of 31st October 1973, without any intention on the part of Falkirk of giving up rights conferred by the deed upon it, and that Citra's letter to the bank of 2nd November 1973 was written without authority from Falkirk for the statement that the deed was being returned for cancellation. (at p184)

16. The bank's first submission is that in these circumstances a second security was furnished so as to satisfy cl. 30 (h), thereby bringing about the cancellation of the first deed. It is urged that the form of the second deed, that dated 21st August 1973, was not in any way dependent on the prior approval of Falkirk and that it was therefore operative and effective upon its execution and delivery by the bank without more. (at p184)

17. There are, I think, at least three answers to this submission. The first is that, though the second security may well have been drawn in the form of a deed poll in which event it would have become operative upon its execution and delivery by the bank to Falkirk, it was drawn as a deed with provision for execution by Falkirk and Citra. Why this was so does not explicitly appear, but it serves to indicate that the bank required its execution at least by Falkirk and indeed it was sent on to Falkirk by the architects with instructions to execute it accordingly. In these circumstances it would not be right to impute to the bank an intention to become bound by the deed when it executed and delivered the deed on the footing that it had yet to be executed by Falkirk, an event which did not occur. It may be that the bank required Falkirk to execute the deed so as to evidence its approval to the form in which it was drawn and to put beyond any question the reduction in its liability from $164,140 to $82,070. Be that as it may, the second deed was not executed by Falkirk and, for this reason, it did not become binding on the bank before it was cancelled. (at p185)

18. This is not the only rock on which the bank's case founders. If it should be thought that the second deed was a deed poll and that it could become effective without execution by Falkirk and Citra, it was nevertheless delivered in escrow. The letter by which it was sent by Citra to Falkirk stated that it was conditional upon the first deed being returned. Yet it seems evident that in the events which happened, the second deed was cancelled by the bank on or immediately after 31st October 1973, that is, before the return of the first deed. Consequently, the second deed never became operative or effective. (at p185)

19. Next, the bank's argument assumes that the first security ipso facto terminates once a second security is furnished. This assumption is misconceived. The first deed makes no reference to the provision of a second security. I t contains an absolute obligation to pay, which is not conditioned to be void if and when a second security is provided. There is, as I see it, no basis on which the material provisions of the building contract (to which the bank was not a party) could be read into the deed. The provisions of that contract are not incorporated by reference. It is not necessary to read these provisions into the deed or to imply them in order to give business efficacy to the deed. The execution of the deed does not deny to Citra the exercise of its rights under the building contract, in particular its right to insist upon a release of the security once the appropriate circumstances occur. Thus the deed operates according to its tenor without creating untoward consequences, the rights of the parties being otherwise regulated by the building contract, the bank having recourse against its customer Citra. (at p185)

20. Indeed, the expression "shall be released" in cl. 30 (h) is not apt to signify "shall become void" which in essence is the meaning which the bank seeks to assign to it. The expression "shall be released" rather indicates that an obligation is imposed upon Falkirk to execute and deliver a release or, alternatively, to physically hand over the deed, thereby enabling the bank to effect its cancellation. As the deed was an independent legal instrument to be executed by the bank, which was not a party to the contract, it could not provide directly that the deed was not to become void in a certain event; however, it could impose an obligation on a party to the contract to take action with respect to the deed and this is what the contract did. So, even if the provisions of the contract were to be read into the deed they would not be effective to terminate the liability of the bank. Only formal release or cancellation would achieve that result. (at p186)

21. The bank's final argument is that the cancellation which took place on 5th November brought an end to the bank's liability, although Falkirk physically released the deed inadvertently, without intending that it should be cancelled. The appellant invoked the statement contained in Sheppard's Touchstone, 8th ed. (1826), p. 26:

"And if a deed be delivered up to the party that is bound by
it to be cancelled and it be so; or if he that hath the deed doth
by agreement between him and the other cancel the deed; by
either of these means the deed is become void. But if an
obligee deliver up an obligation to be cancelled, and the
obligor do not afterwards cancel it; but the obligee happen to
get it again into his hands and sue the obligor upon it, the
obligor hath not any plea to avoid it, for the deed remains
still in force."

The statement denies this submission. The cancellation is effective if it takes place after the deed is delivered up for that purpose and not otherwise. (at p186)

22. It should also be noticed that in footnote (e) on the same page of Sheppard's Touchstone it is said:

"Where the seal is destroyed by accident the deed is still
good if there is proof that it was once sealed. I n order to
destroy the operation of a deed by breaking off the seal, or by
cancellation, the act must be done eo animo ..." (at p186)

23. Mr. Lockhart, for the bank, also relied on the decision in Davidson v. Cooper [1843] EngR 819; (1843) 11 M & W 778 (152 ER 1018) . There Lord Abinger C.B., speaking for the Court, said (1843) 11 M & W, at pp 799-800 (152 ER, at p 1027) :

"There is no doubt but that, in the case of a deed, any
material alteration, whether made by the party holding it or
by a stranger, renders the instrument altogether void from
the time when such alteration is made. This was so resolved
in Pigot's case [1595] EngR 12; 11 Co Rep 266 (77 ER 1177) , and though it was contended

in

argument, that the rule has been relaxed in modern times, we are
not aware of any authority for such a proposition, when
the altered deed is relied on as the foundation of a right
sought to be enforced."

But his Lordship is speaking of an alteration made by the obligee or by a stranger when the deed is in the possession of the obligee. He is not speaking of an alteration made by the obligor without the consent of the obligee. This is made clear by Lord Denman C.J. in the Court of Exchequer Chamber when the case went on appeal [1844] EngR 748; (1844) 13 M & W 343 (153 ER 142) . (at p187)

24. The matter is dealt with in some detail in Norton on Deeds, 2nd ed. (1928), pp. 34-35. There the learned author, after referring to the following observations of Lord Denman C.J. in Davidson v. Cooper (1844) 13 M & W, at p 352 (153 ER, at p 146) :

"The strictness of the rule on this subject, as laid down
in Pigot's case (6) , can only be explained on the principle
that a party who has the custody of an instrument made for
his benefit, is bound to preserve it in its original state. It is
highly important for preserving the purity of legal
instruments that this principle should be borne in mind, and
the rule adhered to. The party who may suffer has no right to
complain, since there cannot be any alteration except
through fraud, or laches on his part."

goes on to say, "but the cases cited ... have shown that the rule is far too wide". (at p187)

25. The more recent authorities indicate that, where there is an alteration in the document, the party producing it bears the onus of explaining the alteration (Earl of Falmouth v. Roberts [1842] EngR 220; (1842) 9 M & W 469, at p 471 (152 ER 198, at p 199) ), and that a cancellation by the obligor is only effective if it takes place with the consent of the obligee (Alsager v. Close (1842) 10 M & W 576, at p 577 [1842] EngR 1067; (152 ER 600, at p 601) ; Meiklejohn v. Campbell (1940) 56 TLR 663, at p 665 ). In these cases it is pointed out that where a deed is produced in a cancelled state this may constitute prima facie evidence of cancellation with the consent of the obligee. Here, however, it is different because, in view of his Honour's findings, Falkirk did not authorize or consent to the cancellation. (at p187)

26. In these circumstances I would dismiss the appeal. (at p187)

JACOBS J. As I understand the arguments presented on behalf of the appellants on this appeal they were fourfold and in order of presentation were as follows:

(1) That there was a condition of the deed dated 18th
August 1971 that upon the issue by the architect of notice of
practical completion and the provision by the builder of a
further security equal to one-half of the security under the
deed the security of the first mentioned deed should be
released, that is to say, void: and that these conditions
were fulfilled.
(2) That there was an implied condition of the deed to
the same effect.
(3) That Citra Constructions Ltd., into whose possession
the deed of 18th August 1971 came, had ostensible authority
to deliver the deed to the appellant bank for cancellation.
(4) That the cancellation of the deed by the appellant
bank after it had in fact been returned by the respondent
made the deed void, even though the respondent had not
intended to deliver up the deed. (at p188)

2. In my opinion none of these arguments can be sustained. There is no condition of the deed, express or implied, of the kind suggested. There is a term of the building contract, not of the deed. The appellant builder could require performance of the term of the building contract if it so wished; but of course it does not wish that at all, because it would be a condition of any order for performance that the appellant presently provide the further security which the building contract envisaged. (at p188)

3. Even assuming that there was a term of the deed of the kind suggested, one of the conditions precedent was not fulfilled, namely, the provision of further security equal to one-half of the security under the deed of 18th August 1971. I agree with the reasons expressed by Mason J. for this conclusion. (at p188)

4. As to the third submission that there was ostensible authority in the builder to deliver the deed to the appellant bank for cancellation, I can see no ostensible authority. Indeed, I am not quite clear what is meant by these words in this context. It was not said that the respondent held the builder out as its agent with authority on its behalf to request the appellant bank to cancel. At the most it could be said that the appellant bank was entitled to assume that the builder had recovered the deed pursuant to the terms of the building contract and that the deed was rightly in the builder's possession. So to express the matter is to raise a defence of estoppel, rather than ostensible authority. However, the appellant bank did not change its position to its detriment after it received the deed back. It simply cancelled the deed. It incurred no obligation because the proposed substituted deed had already been received back by it and had been cancelled. And the third deed was no more than a draft. (at p188)

5. Lastly, there is the argument that the cancellation took effect despite the mistake of the respondent in delivering up the deed to the builder. The word "mistake" is ambiguous. The respondent never intended to give up possession of the deed at all. It lost possession of it, it would appear, by inadvertently enclosing it in a letter to the builder. This is not the delivering up of a deed for any purpose. It is distinguishable from a case where there is an intention to deliver up but the intention is formed on mistaken grounds. That would be a different case which it is unnecessary here to pursue. Where possession is given up through inadvertence and without any intention at all so to do, the fact that the deed comes into the hands of the covenantor, who purports to cancel it, cannot make the deed void against that covenantor. It is as though he found it and purported to cancel it and avoid his obligation. In no such case where the covenantee never intends to part with possession can the covenantor improve his position because it accidentally comes into his possession. I agree with the conclusion of the Chief Justice and of Mason J. on this point and with the reasons which they have respectively expressed therefor. (at p189)

6. I also would dismiss the appeal. (at p189)

ORDER

Appeal dismissed with costs.