Did the bank owe a duty of care to the appellants?
24 The appellants submitted that the Bank owed them a duty not to act, or fail to act, in a way that was prejudicial to their interests. The appellants argued that the respondent's conduct in approving claims for progress payments without proper verification was a breach of this duty which entitled them to have the mortgage declared void.
25 Mr Barry spent much time in oral argument demonstrating the various ways in which the Bank had been careless in allowing funds to be drawn down under the loan. The approvals for the draw downs were also contrary to the Bank's internal procedures but this is irrelevant unless it owed a relevant duty to the guarantors. McInerney J said:
"Clearly, the plaintiff has been extremely careless in the verification, or indeed lack of any verification, of the invoices submitted by the principal debtors. These actions have been contrary to the interests of the defendants as guarantors as it increased their liability under the guarantee upon default and reduced their chances of recovery against the principal debtors after payment under the guarantee. The question is, however, whether such carelessness is sufficient, in the circumstances, to discharge the guarantee given by the defendants?"
26 Mr Barry claimed that the Bank owed a general duty of care to the appellants and relied on Black v The Ottoman Bank (1862) 15 Moore PC 472 (15 ER 573) where, in a case involving a fidelity guarantee, Lord Kingsdown said at 483 (577):
"… the rule at law and in equity is the same - that the mere passive inactivity of the person to whom the guarantee is given, his neglect to call the principal debtor to account in reasonable time, and to enforce payment against him, does not discharge the surety; that there must be some positive act done by him to the prejudice of the surety; or such degree of negligence as, in the language of Vice-Chancellor Wood in Dawson v Lawes ((1854) 23 LJ Ch 434); 'to imply connivance and amount to fraud'. The surety guarantees the honesty of the person employed and is not entitled to be relieved from his obligation because the employer fails to use all the means in his power to guard against the consequences of dishonesty".
27 Fraud in this context has been said to be "any conduct which is unfair to the surety": Mayor of Durham v Fowler (1889) 22 QBD 394 at 419; but this is given a narrow meaning. In that case Denman J, who also referred to the judgment of Wood VC in Dawson v Lawes (above), said at 419:
"by … 'fraud' we understand unfair conduct, towards the sureties, but … [Wood VC says] 'there must be …such an act of connivance as enables the party to get the fund into his hands,' which is a somewhat different thing; but it is clear that Wood VC, draws a great distinction between affirmative and negative misconduct, and that when he deals with the latter he imposes a further condition in order to absolve the surety from liability, for he adds to the words I have last quoted the words 'or such an act of gross negligence as to amount to a wilful shutting of the person's eyes to the fraud which the party is about to commit' … the evidence in the present case fails to show that the plaintiffs had the least suspicion that Goundry was at all likely to commit the frauds". (emphasis in original)
28 It is clear from these passages that only a wilful act or neglect can absolve the surety. Indeed it was said in Mayor of Durham that not even "great negligence" by the creditor, in acquiescing in slovenly accounting, could avoid the surety's obligations. These cases have never been applied in the broad way for which Mr Barry QC contended. The gravity of the conduct by the creditor, which alone can relieve the surety, has also been emphasised in O'Day v Commercial Bank of Australia (1933) 50 CLR 200 at 223; and in Westpac Securities v Dickie [1991] 1 NZLR 657, CA at 663-5.
29 There is also modern authority that mere carelessness or irregularity on the part of the creditor will not discharge the guarantor. In Bank of India v Trans Continental Commodity Merchants Ltd [1983] 2 Lloyd's Rep 298, it was alleged that the failure of the creditor to obtain written confirmation of foreign currency transactions had increased the liability of the principal debtor and therefore of the guarantor. At 302 Robert Goff LJ approved the statement by Bingham J in the court below that "a surety is discharged if the creditor acts in bad faith towards him, or is guilty of concealment amounting to misrepresentation, or causes or connives at the default by the principal debtor in respect of which the guarantee is given, or varies the contract between him and the principal debtor in a way which could prejudice the interests of the surety". He continued:
"… there is no general principle that "irregular" conduct on the part of the creditor, even if prejudicial to the interests of the surety, discharges the surety, though there are particular circumstances in which the surety may be discharged, of which the instances specified by the learned Judge provide certainly the most significant, and possibly the only, examples. I say that simply because I do not wish to be thought to be shutting the door upon any further development of the law in this field by rigidly confining the circumstances in which a surety may be discharged to the specified instances, though I am unaware at present of any others. But that merely irregular conduct on the part of the creditor, even if prejudicial to the interests of the surety, does not discharge the surety, there can in my judgment be no doubt. Here … the criticised 'irregularity' consisted of a failure on the part of the creditor … to conform strictly to procedures devised to protect himself against possible repudiation of liability by the debtor, irrespective of the interests of any surety".
30 See also China and South Sea Bank Ltd v Tan Soon Gin (1990) 1 AC 536, 543-4; and Westpac Securities Ltd v Dickie (1991) 1 NZLR 657, CA 663-5. The stipulations in the letter of 3 February, and the Bank's internal procedures, were for the Bank's own protection, and not for the protection of guarantors, least of all for the protection of the borrowers. The Bank's failures do not rise to the level identified by Goff LJ which could discharge the guarantors. This ground of appeal fails.
31 The question of constructive knowledge by the Bank was also raised but not really pursued. The submission was that the Baulkham Hills branch where the Imperial Tiles account was conducted should have known about the operation of the housing loan facility at the Winston Hills branch and vice-versa. Presumably the Lending Support Centre at Parramatta should have known about the situation at both branches. If such knowledge had existed in fact, or was deemed in law to exist, the destination of the amounts lent to Carlo would have become apparent at the outset. However such knowledge cannot in law be imputed to the Bank, or to its Winston Hills Branch.
32 Information in the possession of an agent can be imputed to the principal where the agent is the relevant actor, or where the agent has a duty to communicate the knowledge to the principal. Bowstead & Reynolds on Agency, 16th Ed, 1996 p 532. Although there appears to be no authority on the point, it may be that a similar principle applies as between agents of a common principal.
33 McInerney J was satisfied that the information available to the relevant officers in each branch did not require them to communicate with the other branch and this finding cannot be disturbed. In my judgment there is no other basis for imputing the knowledge of the relevant officers of one branch to the relevant officers in the other. It would be absurd and unjust for the legal responsibility of a Bank to be determined on a fiction that the officers in any branch had imputed to them all the knowledge of its officers having dealings with the same customer in every other branch in the world.
Breach of s 52 of the Trade Practices Act 1974 (Cth)
34 Mr Barry QC did not press the Trade Practices Act claims in oral argument, but they were not formally abandoned. The submission was that the Bank breached ss 52 and 52A by its letter of offer of 3 February and the conduct which followed. It was argued that the Bank's conduct in approving the drawing down of funds, contrary to the terms of the letter of 3 February, made it a misrepresentation. He also relied on statements, based on this letter, made to them by Mr Agostino.
35 The Bank did not send the letter to the guarantors or require it to be shown to them. The letter was not, in itself, a representation to the guarantors, and it was not established that the letter reached Mr Agostino. The representations attributed to Mr Agostino, even if made, went beyond the 3 February letter because they converted terms inserted by the Bank for its own protection, which it was free to waive, into terms of the contract of guarantee for the protection of the guarantors. Such representations were not made or authorised by the Bank and in the absence of some estoppel did not constitute conduct by it for the purposes of ss 52 and 52A of the Trade Practices Act. This ground of appeal also fails.
Was the transaction unconscionable under the general law?
36 This submission was made briefly in the appellant's written submissions. At trial the question of unconscionability appears to have been part of the claim that the Bank breached s 52A of the Trade Practices Act. Mr Dowdy for the Bank argued that a claim under the general law had not been made at trial and could not be made on appeal. However s 52A was pleaded and unconscionability was therefore in issue. The Bank was not prejudiced, in a procedural sense, by this issue being considered on appeal.
37 The appellants relied on Garcia v National Australia Bank Ltd (1998) 72 ALJR 1243 where the High Court explained the equitable principles referred to in Yerkey v Jones (1939) 63 CLR 649 which protect wives who voluntarily undertake liability for the debts of their husbands. Those principles have not been applied to transactions involving parents and their adult children.
38 The appellants trusted Carlo ("a good boy") but there was no evidence that he exercised coercion or undue influence over them. On their own evidence they agreed to his proposals straight away ("That's alright with us"). The evidence supports the trial Judge's conclusion that they entered into the transaction under no special disadvantage which might have made the transaction unconscionable. The Bank made a fresh advance to the principal debtors, supported by a secured guarantee from the parents of one of them, to enable them to acquire a home. There was nothing unfair about the original proposal or the transaction as documented and the appellants had independent advice. The difficulty arose because their trusted son defrauded both them and the Bank and used the proceeds of the loan for other purposes. The submission that the transaction was an unconscionable dealing must therefore fail.
39 The appellants also raised the defence of non est factum but this fails because they received independent advice from Mr Agostino about the mortgage which was not shown to be inaccurate.
The Culburra mortgage
40 Another issue raised in the appeal concerned the application of the proceeds of sale of the Culburra property. The mortgage to the Bank over this property contained an "all monies" clause that secured all debts owed by Carlo to the Bank. There was no dispute that it secured Carlo's investment loan of $26,565.12, but the Bank claimed that it also secured the housing loan.
41 The appellants argued that the Bank was not entitled to apply any part of the proceeds of the sale of Culburra towards the housing loan because the borrowers under the mortgages were different. The borrower under the Culburra mortgage was Carlo and under the Bega Street mortgage the borrowers were Carlo and Danielle.
42 The "all monies" clause in the Culburra mortgage was as follows:
"… the amount which shall for the time being be owing or unpaid by the Mortgagor and/or the Borrower to the Bank … for or in respect of all loans or advances … made by the Bank to or for or at the request of the Mortgagor and/or the Borrower or in respect of any indebtedness from the Mortgagor and/or the Borrower to the Bank by any means whatsoever including all sums in which the Mortgagor and/or the Borrower … may hereafter become liable … to the Bank in respect of any guarantee … given … by the Mortgagor and/or the Borrower to the Bank …".
43 The definition of "Borrower" in both mortgages included:
"… when the Borrower consists of more persons than one such persons jointly and every two or more of them jointly and each of them severally …".
44 The effect of these clauses is clear. The "all monies" clause in the Culburra mortgage secured the Bega Street housing loan, and the definition of "Borrower" in the Bega Street mortgage made Carlo separately liable for the whole of that debt. Compare Re Modular Design Group Pty Ltd (1994) 35 NSWLR 96, 99-102. Carlo's misconduct did not affect the giving of the guarantee but occurred later. It follows that the Bank was entitled to appropriate the surplus proceeds from the sale of the Culburra property against the debt on the Bega Street mortgage.
45 The appellants' appeal therefore fails on all grounds and must be dismissed with costs.
46 STEIN JA: I agree with Handley JA and with the additional remarks of Fitzgerald AJA.
47 FITZGERALD AJA: The circumstances giving rise to this appeal are set out in the reasons for judgment of Handley JA, which I have had the advantage of reading in draft. While I perceive no reason to disagree with any part of what his Honour has stated, it is sufficient for me to base my agreement with the orders proposed upon his Honour's conclusions with respect to the appellants' mortgage over their Culburra property. I have not found it necessary to decide whether the bank's mortgage over their Pendle Hill property was also enforceable against the appellants.
48 Both the Culburra and Pendle Hill properties had been sold prior to the trial, and the bank had been paid in full. The appellants' cross-claim remained for determination and was dismissed by the trial judge. It is unnecessary for present purposes to discuss the detail of that cross-claim or the orders sought by the appellants on this appeal beyond noting that, in practical terms, the substantive relief which the appellants seek is a payment to them by the bank. The fundamental premises underlying their claim are that the bank was not entitled to rely upon the Pendle Hill mortgage against the appellants and that that mortgage provided the sole material basis of the appellants' liability to the bank in respect of advances relating to the Pendle Hill property which the bank made to the appellant's son, Carlo Modderno, and his then wife.
49 As Handley JA has pointed out that is not correct. Prior to the appellants mortgaging the Pendle Hill property to the bank, they and their son Carlo, who was also a part-owner of the property at Culburra, had mortgaged that property to the bank. All three mortgagors were liable as principal debtors for all money secured by the Culburra mortgage. I agree with Handley JA, for the reasons given by his Honour, that that mortgage secured debts which became owing to the bank by Carlo or by Carlo and his then wife. It is not in dispute that Carlo and his then wife, became indebted to the bank for the money which it advanced to them in respect of the Pendle Hill property, and it was not argued that those advances constituted a breach by the bank of its obligations to the appellants under or in respect of the Culburra mortgage.
50 Any claim by the appellants against the bank on some wider basis must, in the circumstances, depend upon their reliance to their detriment upon a statement made by the bank and/or some breach by the bank of a duty which it owed the appellants which caused them loss additional to their liability under the Culburra mortgage.
51 The only statement by the bank relied upon by the appellants was the provision with respect to progress payments made by the bank in its letter of 3 February 1992 to the appellants' son Carlo and his then wife. I agree with what Handley JA has written on that subject, which is sufficient to dispose of the appellants' contention that they are assisted by that statement in this litigation.
52 Neither that statement nor any other identified circumstance constituted a breach by the bank of any obligation which it had to the appellants which materially worsened their position. In particular, any breach of the bank's obligation to the appellants under or in respect of the Pendle Hill mortgage did not cause them any damage since the bank's entire claim was provided for by the Culburra mortgage.
53 As earlier stated, I agree that the appeal should be dismissed with costs.