Forsyth v Blundell
High Court of Australia · 1973
Forsyth v Blundell (1973) 129 CLR 477
A mortgagee selling up a defaulting borrower is spending someone else's equity to recover its own debt. How carefully does it have to sell?
The question Forsyth left open has been answered by statute in some jurisdictions, so check the Act before arguing the common law. Section 111A(1) of the Conveyancing Act 1919 (NSW) requires a mortgagee exercising a power of sale to "take reasonable care to ensure that the land is sold for" not less than market value where the land has an ascertainable market value, or otherwise "the best price that may reasonably be obtained in the circumstances"; s 111A(2) extends that to an agent appointed to sell; s 111A(5) makes it non-excludable. Section 111A(4) then shapes the remedy FOR BREACH OF THAT SECTION and nothing wider: "[t]he title of the purchaser cannot be challenged on the ground that the mortgagee or chargee has committed a breach of any duty imposed by this section", but a person who suffers loss "has a remedy in damages". Two limits worth noting. Section 111A(4) is confined to challenges on the ground of a breach of s 111A -- it does not by its terms bar relief sought on some other ground, such as the reckless sacrifice of the mortgagor's interests found in Forsyth. And s 111A(6) preserves one specific thing: "any rule of law relating to the duty of the mortgagee or chargee to account to the mortgagor or chargor", not every mortgagee duty at large. Outside New South Wales, check the local provision; where there is none, the common law and Forsyth's open question remain the starting point.
What happened?
Associated Securities Ltd held a mortgage over a service-station site and went to sell it. The property had a special value to a limited class of buyers — oil companies. It had been with agents for twelve months and had drawn one unconditional offer of $90,000. ASL knew of a 1966 valuation at $98,000 and of a 1967 valuation of $150,000 obtained by the mortgagors.
XL had expressed real interest in bidding at the forthcoming auction and had mentioned $150,000. Instead of going to auction, ASL sold privately to Shell for $120,000. In the negotiation ASL's officer told Shell it held a valuation near Shell's own $80,000 figure, and talked down XL's interest; he did not mention the rejected $90,000 offer, the $98,000 valuation or the $150,000 one. Mason J found that the $120,000 figure was one Wilkie suggested first, and that it "represented the amount which he believed A.S.L. should receive on sale in order to meet the principal debt, interest and expenses owing to it" ([11], at 510).
What did the Court decide?
The appeals were dismissed, and Shell was restrained from completing the contract of sale.
The finding matters more than the label. Fox J at first instance had found ASL failed "to take reasonable steps to obtain the best price available in all the circumstances", but went further: its conduct reflected "calculated indifference" to the mortgagor, and was "reckless", and "sacrificed" the mortgagor's interests (at 493). On appeal Walsh J declined to resolve whether the duty is broken by negligence alone, because it did not arise: "[w]hat the mortgagee did in this case was done deliberately and not through carelessness". A mortgagee "was entitled to have regard primarily to its own interests", but "was not entitled, if those interests were not at risk, to act in a manner which sacrificed the interests of the mortgagor" (at 494).
Mason J made the point sharper by saying what was not established. "[N]either the evidence, nor the findings of his Honour, reveal the true value of the property"; expert evidence of value was never called; "the plaintiffs were unable to show that the sale was at an undervalue. Nor did they show that A.S.L. failed to take usual steps to test the market or bring the property to the attention of potential buyers" (at 507). The breach lay in selling privately to Shell while knowing XL was interested, "instead of proceeding to auction at which Shell and XL could be expected to compete against each other, or informing XL of the Shell offer and giving it the opportunity of improving upon that offer" (at 507). That was acting "recklessly, without caring whether the price which it obtained was a proper price" (at 509). His Honour too found it unnecessary to decide whether a duty of reasonable care exists in addition to good faith (at 506).
Proposition
What is the principle?
A mortgagee exercising the power of sale may have regard primarily to its own interests, but where those interests are not at risk it may not act in a way that sacrifices the mortgagor's. Selling without regard to a known competing buyer, and so without caring whether the price is a proper one, is reckless and a breach of duty. Whether mere negligence in conducting the sale also breaches the duty was left open.
Why does this case matter?
Because of what the mortgagors could not prove. No expert evidence of value was called, so the true value of the property was never established and no sale at undervalue was shown. Nor was it shown that the usual steps to test the market or bring the property to buyers' attention had been skipped. On the two things a mortgagor would expect to have to prove, they had nothing.
They still won. That is worth sitting with, because it means the case cannot be read as a rule about price. What the mortgagors had instead was a detailed account of how one negotiation was conducted: what ASL's officer told Shell, what he did not tell it, whose valuations were mentioned and whose were not, and what he did with an expression of interest he knew about. Findings of that kind are made from correspondence, file notes and cross-examination, not from valuers — and they are what this case is built on.
Exam and application relevance
Check the statute first. In New South Wales, s 111A of the Conveyancing Act 1919 imposes an express duty of reasonable care as to price and makes damages the remedy, so Forsyth's open question does not arise there; other jurisdictions differ, and some leave you on the common law. Say which regime you are in before you argue a standard.
At common law, do not simply assert that reasonable care was not taken — whether negligence alone suffices is the very question Forsyth declined to decide. Build the case the way Mason J did: set out what the mortgagee knew that pointed to a higher price, what it did with that knowledge, and how the sale was actually negotiated. Recklessness is a conclusion drawn from that material, not from the arithmetic of the debt alone — in Forsyth the mortgagee had a known interested competitor and neither took the property to auction nor told that competitor of the rival offer.
Check your understanding
A mortgagee sells at a properly advertised auction, for less than the mortgagor believes the property is worth, and no other buyer was known to it. Has the duty been breached?