Key takeaways
Burden of Proof Rests with Mortgagor
Mortgagee must act reasonably, but proof lies with borrower.
Special Circumstances Can Reverse Burden
Close ties between mortgagee and buyer trigger stricter scrutiny.
Expert Evidence Is Crucial in Valuation Disputes
Documentary evidence alone rarely suffices to challenge sale price.
Gart O’Finlayson & another -v- Caterpillar Financial Services Corporation [2025] UKPC 24
The Privy Council has affirmed that a mortgagor bears the burden of proof to evidence that a mortgagee did not take reasonable care, when disposing of a mortgaged asset, to obtain the best price reasonably obtainable in respect of that asset. Whilst possible, a reversal of this burden of proof would typically only occur where there was a close relationship between the mortgagee and the buyer of the mortgaged asset in question.
The background facts
Caterpillar Financial Services Corporation (Caterpillar) made available a loan facility in the principal value of US$9.68m to Kurc Limited (Kurc) to facilitate the construction of the 44-meter motor yacht Maratani X (the Vessel) by the Sensation shipyard in New Zealand (the Loan). A mortgage was granted by Kurc over the Vessel in favour of Caterpillar to secure the Loan.
The Loan was further secured by Mr Garet O Finlayson and Mr Mark G Finlayson (the Guarantors), each guaranteeing Kurc’s obligations to Caterpillar pursuant to the terms of personal guarantees.
A number of issues and delays presented during construction of the Vessel, which was finally delivered in 2006. After some years of private use and chartering, the Vessel was put up for sale by Kurc. Despite repeated price drops, a buyer was not found.
In December 2015, Kurc defaulted on the Loan and Caterpillar took possession of the Vessel, seeking to sell it to satisfy Kurc’s debt.
Due to the poor condition of the Vessel and numerous technical faults (e.g. overheating exhaust systems, water leaking into the fuel tanks, dangerously wired ship power systems etc.), many brokers in the market had reservations as to whether or not it would pass a sea trial and therefore refused to entertain the Vessel as a serious option for their clients. Caterpillar had spent the sum of US$700,000 to repair the most urgent technical issues of the Vessel and would be required to spend a further US$500,000 to have any hope of it passing a sea trial, though there were no assurances in this regard.
Consequently, Caterpillar decided on 29 December 2016 to sell the Vessel to a purchaser on an “as is, where is” basis, netting a total of US$2.43m (after deduction of the expenses of the sale), which was about US$2.76m less than the amount Caterpillar was owed pursuant to the Loan (the Balance).
Caterpillar claimed against Kurc and the Guarantors in the courts of the Bahamas in respect of the Balance. Whilst Kurc and the Guarantors did not dispute that the Balance was outstanding, they argued that Caterpillar had not taken reasonable care to obtain the best price reasonably obtainable in respect of the Vessel, which price they asserted would have covered the entirety of the debt due from Kurc to Caterpillar, including the Balance.
The lower court proceedings
While the burden of proof rested on Kurc and the Guarantors to show that the price obtained by Caterpillar in respect of the Vessel was less than the best price reasonably obtainable, they chose not to rely on technical expert evidence to support their claims.
Instead, the parties agreed on a number of documents relating to the Vessel’s history and condition, which they wanted the Court to consider in order to decide the issue. Furthermore, although some witness evidence was submitted, the trial judge decided that those witnesses were not qualified to comment on the value of the Vessel.
The Bahamian trial court found in Caterpillar’s favour, deciding that it had acted reasonably in exercising its power of sale and in securing a proper price for the Vessel, especially given the Vessel’s condition.
The Bahamian Court of Appeal subsequently dismissed the Guarantors’ appeal. It held that, in the absence of expert evidence being presented to support Kurc’s assertions, the trial judge was entitled to make the findings that he had on the basis of the agreed documentary evidence as to the value of the Vessel.
The Guarantors appealed to the Privy Council. They argued that the onus was, in fact, on Caterpillar as the mortgagee to prove that it took reasonable precautions to obtain the best price reasonably obtainable at the time of sale of the Vessel. They relied on the decision in Tse Kwong Lam -v- Wong Chit Sen [1983] UKPC 24, in which the Privy Council reversed the usual position and imposed the burden of proof on the mortgagee, rather than the mortgagor.
The Privy Council decision
The Privy Council dismissed the appeal. In doing so, it stated that the Tse Kwong Lam decision concerned a particular set of circumstances where the mortgagee had sold the secured asset to a purchasing company with which it had a close relationship.
Due to the existence of this close relationship, the Privy Council in that case decided to reverse the burden of proof and require the mortgagee to show that it had taken reasonable precautions to obtain the best price reasonably obtainable. Absent such special circumstances and a similarly close relationship in this case, the burden of proof remained with the Guarantors.
The Privy Council also stressed its reluctance to challenge any concurrent findings of fact made by lower courts save in exceptional circumstances. The circumstances in this case were not, in its view, exceptional.
Comment
This decision does not establish any novel legal principle, but it affirms and more clearly delineates key principles of mortgagee conduct, evidentiary burden and procedural fairness and will likely serve as a leading appellate authority on these issues.
Mortgagees can take comfort from the fact that, in selling mortgaged assets, their obligation is not a strict one but is limited to a ‘reasonable efforts’ endeavour involving the use of their commercial judgement. Here, the commercial considerations included the Vessel’s condition, the brokers’ advice and the additional costs of carrying out further repairs to the Vessel.
From the mortgagors’ perspective, this decision underscores the importance of arranging expert evidence to support any assertion that the price obtained by a mortgagee was insufficient. It is possible that a different conclusion may have been reached by the courts in this case had the mortgagor submitted expert evidence, instead of relying on purely documentary evidence and unqualified witnesses.
Finally, the case highlights the risk of granting a personal guarantee, especially where the guaranteed loan relates to a high-value depreciating asset. In this case, the Guarantors were liable to cover the shortfall between the sale price of the Vessel and the outstanding balance of the loan (some US$2.6m).
