EARL OF HALSBURY L.C.
(read by Lord Macnaghten ). My Lords, I regret that the state of the authorities leaves me no alternative other than to affirm the judgment of Kekewich J. and the Court of Appeal. A perfectly fair bargain made between two parties to it, each of whom was quite sensible of what they were doing, is not to be performed because at the same time a mortgage arrangement was made between them. If a day had intervened between the two parts of the arrangement, the part of the bargain which the appellant claims to be performed would have been perfectly good and capable of being enforced; but a line of authorities going back for more than a century has decided that such an arrangement as that which was here arrived at is contrary to a principle of equity, the sense or reason of which I am not able to appreciate, and very reluctantly I am compelled to acquiesce in the judgments appealed from.
LORD MACNAGHTEN . My Lords, both Kekewich J. and the Court of Appeal decided in favour of the company. Having regard to the state of the authorities binding on the Court of Appeal if not on this House, it seems to me that they could not have come to any other conclusion, although the transaction was a fair bargain between men of business without any trace or suspicion of oppression, surprise, or circumvention.
It is, I think, unnecessary to consider what the true construction of the agreement between Mr. Samuel and the company may be. The result would have been precisely the same if the agreement had in terms declared that the option was not to continue after repayment. The law undoubtedly is that a condition such as that in question, if legal and binding at all, must come to an end on repayment of the loan.
In the Court of Appeal the question was treated as governed by the principle, of which Noakes v. Rice(1) is a recent example, that on redemption the mortgagor is entitled to have the thing mortgaged restored to him unaffected by any condition or stipulation which formed part of the mortgage transaction.
That principle, I think, is perfectly sound. But, in my opinion, the question here depends rather upon the rule that a mortgagee is not allowed at the time of the loan to enter into a contract for the purchase of the mortgaged property.
This latter rule, I think, is founded on sentiment rather than on principle. It seems to have had its origin in the desire of the Court of Chancery to protect embarrassed landowners from imposition and oppression. And it was invented, I should suppose, in order to obviate the necessity of inquiry and investigation in cases where suspicion may be probable and proof difficult. I gather from some general observations made by Lord Hardwicke in Mellor v. Lees(2) that he would have been disposed to confine the rule to cases in which the Court finds or suspects "a design to wrest the estate fraudulently out of the hands of the mortgagor," and to cases of "common mortgage" - that is, as I understand it, mortgage of land by deed. It will be observed that in the later case of Toomes v. Conset(3),which is often referred to for a statement of the rule, his Lordship speaks only of "a deed of mortgage"; an instrument which perhaps rather lends itself to imposition - for no one, I am sure, by the light of nature ever understood an English mortgage of real estate.
In Vernon v. Bethell(4), however, Northington L.C. (then Lord Henley) laid down the law broadly in the following terms: "This Court, as a Court of conscience, is very jealous
(1)  A. C. 24.
(2) (1742) 2 Atk. 494.
(3) (1745) 3 Atk. 261.
(4) (1761) 2 Eden, 113.
of persons taking securities for a loan and converting such securities into purchases. And therefore I take it to be an established rule that a mortgagee can never provide at the time of making the loan for any event or condition on which the equity of redemption shall be discharged and the conveyance absolute. And there is great reason and justice in this rule, for necessitous men are not, truly speaking, free men, but to answer a present exigency will submit to any terms that the crafty may impose upon them."
This doctrine, described by Lord Henley as an established rule nearly 150 years ago, has never, so far as I can discover, been departed from since or questioned in any reported case. It is, I believe, universally accepted by text-writers of authority. Speaking for myself, I should not be sorry if your Lordships could see your way to modify it so as to prevent its being used as a means of evading a fair bargain come to between persons dealing at arms' length and negotiating on equal terms. The directors of a trading company in search of financial assistance are certainly in a very different position from that of an impecunious landowner in the toils of a crafty money-lender. At the same time I quite feel the difficulty of interfering with any rule that has prevailed so long, and I am not prepared to differ from the conclusion at which the Court of Appeal has arrived.
I am therefore of opinion that the appeal must be dismissed with costs, and I move your Lordships accordingly.
LORD LINDLEY . My Lords, the letter of June 11, 1901, written by the defendant to the plaintiff company, contained an offer of a loan of 5000 l. to the company upon certain terms, and this offer and the terms proposed were accepted by the company by their letter in answer, dated June 14, 1901. These two letters constituted an agreement between the parties. The main provisions are as follows, namely: 1. That the defendant should forthwith lend the company 5000 l. at 6 per cent., redeemable on thirty days' notice by either party. 2. That the defendant should have as security 30,000 l. of the company's first mortgage debenture stock transferred to him. 3. That the directors of the company should elect a nominee of his on their board. 4. That the defendant should have the option of purchasing the whole or any part of such stock at 40 per cent. at any time within twelve months. 5. That he should have a further option, namely, in the event of the company at any time raising further capital or selling its undertaking for shares or stocks of another company, the defendant should have the option of underwriting the taking up of such new capital, or shares, or stocks at a commission of 10 per cent.
The first question is, What is the true nature of this agreement? Is it a mortgage with an option to purchase, or is it a conditional sale? Or is it an agreement giving Samuel an option to hold the debenture stock as a mortgage or a purchase? It appears to me to be clearly a mortgage with an option to purchase. A loan of 5000 l. on security was what the company wanted, and what Samuel agreed to let the company have on terms. They were not bargaining for anything else. As soon as the 5000 l. was advanced and the debenture stock was placed at Samuel's disposal he was in the position of mortgagee of that stock. He had the rights of a mortgagee, and the company had the rights of a mortgagor. There was that reciprocity and mutuality of remedies which distinguish a mortgage transaction from a conditional sale and from other transactions more or less resembling a mortgage, but not really constituting a mortgage. The transaction was in my opinion a mortgage, plus, amongst other things, an option to purchase, which if exercised by the mortgagee would put an end to the mortgagor's right to redeem - i.e., would prevent him from getting back his mortgaged property. This was the view taken by Kekewich J. and by all the members of the Court of Appeal, and I am unable myself to view the transaction differently.
In Lisle v. Reeve(1) Buckley J. suggested some instances in which he considered a mortgagee might validly stipulate for an option to buy the equity of redemption; but although his decision was affirmed first by the Court of Appeal and afterwards by this House (Reeve v. Lisle(2)), the affirmance proceeded entirely on the fact that the agreement to buy the
(1)  1 Ch. 53, at p. 68.
(2)  A. C. 461.
equity of redemption was no part of the original mortgage transaction, but was entered into subsequently, and was an entirely separate transaction to which no objection could be taken. It is plain that the decision would not have been affirmed if the agreement to buy the equity of redemption had been one of the terms of the original mortgage.(1) The Irish case Re Edward's Estate(2) is to the same effect.
I cannot help thinking that both parties intended that the two options to purchase the 30,000 l. debenture stock and to underwrite further capital or debenture stock if issued were to be exercisable even after payment off of the 5000 l. But the decisions of this House in Noakes v. Rice(3) and Bradley v. Carritt(4) conclusively shew that, whatever might have been intended, Samuel could not have been entitled to exercise either option after repayment of his loan. But these decisions and the previous decision of Salt v. Northampton(5) emphatically recognise the old doctrine, "Once a mortgage always a mortgage," which is too well settled to be open to controversy. Lord Hardwicke said in Toomes v. Conset(6): "This Court will not suffer in a deed of mortgage any agreement in it to prevail that the estate become an absolute purchase in the mortgagee upon any event whatsoever." But the doctrine is not confined to deeds creating legal mortgages. It applies to all mortgage transactions. The doctrine "Once a mortgage always a mortgage" means that no contract between a mortgagor and a mortgagee made at the time of the mortgage and as part of the mortgage transaction, or, in other words, as one of the terms of the loan, can be valid if it prevents the mortgagor from getting back his property on paying off what is due on his security. Any bargain which has that effect is invalid, and is inconsistent with the transaction being a mortgage. This principle is fatal to the appellant's contention if the transaction under consideration is a mortgage transaction, as I am of opinion it clearly is.
Then it was contended that, as the property mortgaged was
(1) 2 W. and T. 7th ed. p. 16.
(2) (1861) 11 Ir. Ch. Rep. 367.
(3)  A. C. 24.
(4)  A. C. 253.
(5)  A. C. 1.
(6) 3 Atk. 261.
debenture stock issued by a limited company, the case did not fall within the principle to which I have been referring. I confess my inability to follow the argument on this point. Debenture stock is usually a sum of money charged on the assets of the company issuing it. It may be redeemable or irredeemable, in which case it is not a mortgage at all. But whether redeemable or irredeemable, it is capable of being made a security for money lent upon it. It can be mortgaged as well by the company which issues it as by an ordinary holder. I can discover no reason for treating a mortgage of debenture stock as something so different from other mortgages as to render the principle "Once a mortgage always a mortgage" inapplicable to it.
In my opinion the appeal ought to be dismissed with costs.