Submissions
93 The appellants' written submissions put their claim of unconscionability on two bases.
94 First, they submitted that should the Court find that Tony must have known of the intention on the Bank's part to insist on a condition of confirmed sales, that this was material to his decision to support the transaction and that he relayed this to Allan and Mary, then it was unconscionable for the Bank to seek to enforce the guarantees and mortgages after it dispensed with that condition. They submitted that irrespective of whether this change amounted to a variation of the underlying contract sufficient to attract the rule in Ankar Pty Limited v National Westminster Finance (Australia) Limited (1987) 162 CLR 549, such a change in the conditions of credit brings on the Bank a duty to disclose. They cited Westpac Banking Corporation v Robinson (1993) NSWLR 668, at 689 as authority for this proposition.
95 Secondly and quite independently of the first submission, the appellants submitted that the Bank had knowledge of a host of objective features which indicated that Tony, Allan and Mary were not in a position to know and understand the risk they were undertaking as guarantors for Demson, including that the Bank was clearly aware that the proposed business venture was decidedly speculative, that the Zone initially rejected the application, that there were devised controls to minimise risks, that the Zone altered the conditions of the loan to permit some speculative orders in September 1989, that the Bank failed to police not only the original conditions but also the modified September conditions, and that the Bank actually breached the conditions by extending credit over the set limit.
96 Further, they submitted that it was a disabling condition for Allan and Mary, within the meaning of that term under the doctrine of unconscionability, that the Bank took no steps to ensure that either of them had any knowledge, let alone a proper understanding, of the proposed business of Demson. In support of this the appellants referred to the authorities of Commercial Bank of Australia v Amadio (1983) 151 CLR 447, especially at 461-462, 467, 476-477, 479 and 481, Bridgewater v Leahy (1998) 194 CLR 457, in particular at 478-479 and 490-493 and Garcia v National Australia Bank Limited (1998) 194 CLR 395, particularly at 406-409.
97 They submitted that, despite the primary judge having found Allan and Mary to have understood the nature of the obligations because they had a previously signed mortgage documents to secure advances to Bakarich Industries, neither of them had explained to them the business of Demson. Moreover, they submitted that there was no basis for the respondent's argument, accepted by the primary judge, that Tony obtained a sufficient understanding of the commercial risks involved and conveyed that full understanding to each of Allan and Mary.
98 Finally, the appellants submitted that alternative relief was available to them under the Contracts Review Act. They submitted that a contract may be unjust within the meaning of that Act to justify relief if a party understands the nature of the legal obligation on them but does not appreciate the nature of the commercial risk, and that this is especially so in circumstances where the other party has detailed information allowing it to assess those commercial risks but gives the first party no indication of the existence of those risks, and has reason to believe that the first party has not or could not have independently acquired such information regarding those risks. They referred to Beneficial Finance Corp v Karavas (1991) 23 NSWLR 256, at 277 ff.
99 In oral submissions, Dr. Birch submitted that the primary judge's reasons disclosed error, in particular in par.[228] where the primary judge said that the risk important for the understanding of Allan and Mary was the consequence of Demson's default; and in par.[229], where he put the issue in terms of a question whether the Bank was under a duty to divulge to those providing securities the comments concerning Demson which passed between its officers. Dr. Birch submitted that the risk that was important for the guarantors was the risk, plainly identified by the Bank, that gave rise to the condition limiting the facility to air conditioners for which Demson had orders (both before and after the relaxation of that condition); and that the Bank had options other than divulging its communications, for example, to obtain guarantees limited to the contract that the Bank considered appropriate for the Bank itself to make with the principal debtor.
100 Dr. Birch referred to the following discussion of the term "unjust" in the Contracts Review Act by Mahoney JA in Elders Rural Finance Limited v. Smith (1996) 41 NSWLR 296 at 298-299:
Without limiting the ambit of the term - what I say should not be seen as a paraphrase of it - regard may be had in the application of it to the present facts to matters such as the following. The contract had a potential "at the time it was made" to result in the future in the imposition on the plaintiffs of great burdens and, perhaps, benefits of significant dimensions. The likelihood, at that time, of its doing so - particularly the likelihood of its imposing burdens - and the possibility that the burdens would be heavy was substantial. The capacity of the plaintiffs to appreciate these possibilities, to assess them, and to determine whether they should be accepted and with what safeguards, was limited. The position of the parties, particularly their financial position, and accordingly their capacity to bear the burdens which might result from the contract, was a matter of importance. It was important that, if the contract proved to be burdensome rather than beneficial, the plaintiffs might well be financially destroyed. It was relevant in considering the justice of the contract in the circumstances in which it was made that one of the parties, Elders, knew and appreciated the extent of the risks and what might happen to the plaintiffs and that the other party, the plaintiffs, did not understand this or the real implications of it. And I think that, knowing what they did, Elders were under a duty, not legal but in justice, to ensure that the plaintiffs appreciated the extent of the burdens which might fall upon them and the likelihood that they would. I do not mean by this that there was, in law or in judging the justice of the contract, a duty on Elders to dissuade the plaintiffs from the contract. The judge held that the figures and the significance of them were discussed with some of the plaintiffs and the projections were made in consultation with them. But Elders were much more pessimistic of the outcome of the matter than the plaintiffs and they were so because they understood better the reasons for their pessimism. I do not mean that business is, within the contemplation of the Act, to be conducted upon the basis of compassion or even charity. But the Act requires that the Court is to look at the justice of a contract which results from its conduct. In determining what is just, it is in my opinion proper to have regard to what one person knew and the other did not of the potential consequences of the contract.
101 Dr. Birch referred to references to that passage in Elkofairi v Permanent Trustee Co. Limited [2002] NSWCA 413 at [71] and Perpetual Trustee Co. Limited v. Khoshaba [2006] NSWCA 41 at [127].
102 Dr. Birch submitted that in circumstances where the Bank participated with Stephen in putting the deal together, knew of the risks highlighted in Mr. Fowler's note of about 17 August 1989, and knew that Stephen did not have the orders he had initially claimed to have, the Bank could not assume that Tony who was not active in the business, knew of the risks, much less that Allan and Mary did so.
103 The Bank in its written submissions contended that none of Tony, Allan or Mary were in a relevant position of disadvantage, to make out an action under the doctrine of unconscionability. Tony was experienced in business, having been involved in a number of transactions involving ABI and Rutisa since 1975. Moreover, his solicitor had been with him for many years and always explained documents to him and also to Allan and Mary. In relation to Allan, the Bank submitted that he knew what a guarantee and a mortgage were, and whilst he may have had difficulties in reading, there was no suggestion that he was simple, as supported by his apparent ability to swear and understand the affidavit filed in the proceedings, his ability to swear and understand the affidavit verifying the pleading and his acting as managing director of ABI. The Bank also submitted that Mary was an intelligent woman who had no problem understanding the nature of a mortgage and a guarantee. Moreover, she had been both director and secretary of a number of the companies from time to time. In relation to both Allan and Mary, it was submitted that Tony always took responsibility for explaining documents and commercial concepts to them.
104 On the issue of the relief sought under the Contracts Review Act, the Bank made two alternative submissions. First, that the claims made in relation to the identified mortgages are barred by s. 6 of that Act and that the obligations were secured by the guarantees of 18 August 1989 which are not sought to be set aside on the grounds of unconscionability or the Contracts Review Act. Secondly, the bank submitted that the contracts were not relevantly unjust since:
(a) The contracts were not procured by undue influence, unconscionable dealing or some misrepresentation which occurred during the bargaining process.
(b) Mary, Allan and Tony each knew what a guarantee was and what a mortgage was. Tony was well versed in such matters and always explained documents to his mother and Allan. Mary received independent advice from Ms Garland.
(c) There was no significant inequality of bargaining power. Each of Mary, Allan and Tony wanted to secure advances for business purposes. Each of them stood to gain from a successful business. The fact that the business ultimately failed is not a relevant matter as it was not a circumstance which existed at the time the contract was made: Teachers Health Investments Ply Ltd v Wynne (1996) NSW Con R 55-785.
(d) It was in the interests of each of Mary, Allan and Tony to enter into the agreements. Each stood to reap financial gain if the business was successful. In any event, as Handley JA observed in Esanda Finances Corp Ltd v Tong (1997) 41 NSWLR 482 at 491:
Moreover as this Court held in West v AGC (Advances) Ltd (1986) 5 NSWLR 610, a contract is not unjust merely because it was not in someone's interest to enter into it, or because a person is unable to pay the debt when called upon to do so, or because its enforcement will lead to the loss of a home.
105 In oral submissions for the Bank, Mr. Sackar QC submitted that, at the time the transactions between the Bank and Demson were being negotiated, the whole family was involved together in a number of business activities, including the property development activities on Rutisa at Cabramatta. Further, the primary judge had rejected Tony's contention that he was not substantially involved in the running of the company. Stephen had been in the air conditioning business for many years, Tony was an engineer having run a successful business, and the two brothers were working together. The company had obtained financial projections from its accountant. Plainly, Tony had formed the view that the project was not high-risk, because he was prepared to involve Allan and Mary in the giving of guarantees. Tony was involved in the business to the extent of visiting Acma in Singapore and investigating the importation of televisions from Hong Kong.
106 In those circumstances, Mr. Sackar asked, what should the Bank have done at the time the guarantees were obtained? If it should have given advice, what advice should it have given? The assessment made by the Bank was for its own lending purposes, and was not something it was obliged to share with anyone else; especially because this assessment was a subjective judgment about which minds could reasonably differ. Certainly, he submitted, it was not enough to justify the Bank intervening so as to alert Stephen's family to check up on what Stephen was doing.
107 The risk of over-ordering was only one risk of the business. There were risks depending on price, quality, delivery and personal relationships. In fact, the evidence indicated that there were many such factors that led ultimately to the failure of the business and the calling of the guarantees.
108 As regards unconscionability, Mr. Sackar submitted that there was no special disability in this case, of the kind discussed in Commercial Bank of Australia v. Amadio (1983) 151 CLR 447.