BETWEEN : AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD (005 357 522)

MOSZKO MEJER DZIENCIOL by his guardian ad litem PHILLIP DZIENCIOL

PHILLIP DZIENCIOL as representative of the estate of the late LEAH DZIENCIOL

Claim for possession of land pursuant to mortgages - Whether mortgagee engaged in unconscionable dealing - Whether a special disability known to the mortgagee - Whether substantive unconscionability when mortgagors also

principal debtors - The Garcia principle - Relationship with the doctrine of survivorship - Nature and extent of duty of disclosure in equity, at law, and pursuant to the Trade Practices Act - Whether claims statute barred

Trade Practices Act 1974, s 52, s 80, s 87

Transfer of Land Act 1893, s 116

Limitation Act, s 38(1)(v), s 40

Plaintiff : Mr C J L Pullin QC & Ms K F Banks-Smith

Alati v Kruger [1955] HCA 64; (1955) 94 CLR 216

Alec Lobb Ltd v Total Oil GB Ltd [1983] 1 All ER 944

Antonovic v Volker (1986) 7 NSWLR 151

ANZ Banking Group v Barry [1992] 2 Qd R 12

Armstrong v Commonwealth Bank of Australia [1999] NSWSC 588

Australia & New Zealand Banking Group Pty Ltd v Petrik [1996] VicRp 91; [1996] 2 VR 638

Barclays Bank v O'Brien [1992] EWCA Civ 11; [1993] QB 109

Beneficial Finance Corporation v Karavas (1991) 23 NSWLR 256

Bosnjak v Farrow Mortgage Services Pty Ltd (1993) ASC 56-225

Brighton v Hollingdale [1965] 1 All ER 540

Bylander v Multilink [2001] NSWCA 53

Cockerill v Westpac Banking Corporation (1996) 142 ALR 227

Commonwealth Bank of Australia v Khouri [1998] VSC 128

Cranfield Pty Ltd v Commonwealth Bank [1998] VSC 140

Dobbs v National Bank of Australasia [1935] HCA 49; (1935) 53 CLR 643

Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218

Familiar Pty Ltd v Samarkos (1994) 115 FLR 443

Guthrie v ANZ Banking Corporation [1989] NSW ConvR 55,463

Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1988] FCA 40; (1988) 79 ALR 83

James v Australia & New Zealand Banking Group Ltd [1986] FCA 41; (1986) 64 ALR 347

Kimberley NZI Finance v Torero Pty Ltd (1989) ATPR (Digest) 46,054

Leister Permanent Building Society v Shearly [1951] ChD 90

Lenin v Australian Bank Ltd, unreported; SCt of NSW; 21 June 1991

McLaughlin v Daily Telegraph Newspaper Co Ltd [1904] HCA 51; (1904) 1 CLR 243

Morlend Finance Corp (Vic) Pty Ltd v Luke [1991] ASC 56-095

Nolan v Westpac Banking Corporation (1989) 51 SASR 496

Penny Nominees Pty Ltd v Fountain [No 3] [1991] NSW Conv R 55-561

Re Shannon's Transfer [1967] TAS SR 245

Smith v Elders Rural Finance Ltd (1996) 41 NSWLR 296

Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422

Teachers Health Investments Pty Ltd v Wynne (1996) ASC 56-356

Tepco v Water Board [2001] HCA 19

Westwill Pty Ltd v Heath (1989) 52 SASR 461

1 The plaintiff bank ("Bank") is seeking possession of the property at 403 Wellington Street, Perth pursuant to its registered mortgage E256675 ("Wellington Street Mortgage"), possession of the property at Unit 1, 470 Crawford Road, Dianella pursuant to its registered mortgage E002700 ("Residential Mortgage") and judgment for the sum of approximately $2,376,135 which the Bank says is secured by both the Wellington Street Mortgage and the Residential Mortgage.

2 At the relevant times, Mr Moszko Dzienciol and his wife Mrs Leah Dzienciol were the registered proprietors as joint tenants of the property at 403 Wellington Street, Perth (the "Wellington Street premises") and Unit 1, 470 Crawford Road, Dianella (the "residential premises").

3 The Residential Mortgage was signed by Mr and Mrs Dzienciol on 12 January 1989. The Wellington Street Mortgage was signed by Mr and Mrs Dzienciol on 5 December 1989. The Wellington Street Mortgage was provided to the Bank to secure a loan of $650,000 from the Bank to Mr and Mrs Dzienciol to assist in the purchase by a partnership (which included Mr and Mrs Dzienciol and the third defendant) of the Bentley Tavern.

4 Mr Dzienciol suffers from Alzheimer's disease and appears in these proceedings as first defendant by his eldest son and guardian, Mr Phillip Dzienciol ("Phillip"). Mrs Dzienciol died in July 2000. Phillip is now the second defendant in this action as the representative of the estate of his mother.

5 Mr Dzienciol was born in Poland on 14 July 1914. At the time he signed the Residential Mortgage he was 74 years old and he was 75 when he signed the Wellington Street Mortgage. Mrs Dzienciol was born in Russia on 27 March 1921. At the time she signed the Residential Mortgage she was 67 years old and was 68 when she signed the Wellington Street Mortgage.

6 The third defendant, DKD Holdings Pty Ltd ("the Company") was registered on 17 March 1982. Mr Dzienciol was a director of the Company from 18 March 1982 until 21 July 1991. Mrs Dzienciol was a director of the Company from 21 July 1991 (the date her husband ceased to be a director) until 21 July 2000.

7 The Company has three issued shares. Mr Dzienciol, Mr Bruce Allan Kennedy and another of Mr and Mrs Dzienciol's sons, Bray Dzienciol ("Bray"), each hold one share. At all material times the Company was the trustee of the Pelco Unit Trust trading as Pells Surplus Stores. The business of Pells Surplus Stores was at all material times carried on in Western Australia at the Wellington Street premises.

8 Mr and Mrs Dzienciol and the Company were customers of the Bank from approximately 1982 until at least 1992 when these proceedings commenced. At all material times the accounts were held at the Bank's Town Hall branch. From September 1983, Mr Raymond Kensitt, a senior officer of the Bank, was primarily responsible for the accounts of Mr and Mrs Dzienciol and the Company. He was assisted for part of that time by Mr Ryan.

9 Mr Dzienciol was diagnosed with Alzheimer's disease in January 1992. The defendants allege that Mr Dzienciol was, to the Bank's knowledge, suffering from Alzheimer's disease at the time of the grant of the Residential Mortgage and the Wellington Street Mortgage in 1989. The defendants also allege that the Bank was in possession of information which should have been disclosed to Mr and Mrs Dzienciol.

10 The first and second defendants resist the Bank's claim on the grounds that the Wellington Street Mortgage and the Residential Mortgage were obtained in circumstances which were unconscionable and rendered the Mortgages void and counterclaim against the Bank for breach of contract, negligence and for misleading and deceptive conduct in breach of s 52 of the Trade Practices Act.

11 In its statement of claim the Bank seeks judgment for moneys said to be due and owing by the first and second defendants and an order for possession of the Wellington Street premises. The Bank's money claim rests on two separate albeit related legal bases. The first is the personal covenants in the Wellington Street Mortgage. The second is an oral Loan Agreement made in November 1989 between the Bank and Mr and Mrs Dzienciol pursuant to which the Bank advanced the sum of $650,000 to Mr and Mrs Dzienciol to assist in the purchase of the Bentley Tavern ("the Loan Agreement").

12 It is not in dispute that the moneys secured by the Wellington Street Mortgage include:

(a) all moneys and the amount or balance which would for the time being be owing or unpaid by Mr and Mrs Dzienciol to the Bank in respect of:

(i) all loans, advances, credits or banking accommodation already, now or hereafter advanced, paid, created or given by the Bank to, for or on account or at the request of Mr and Mrs Dzienciol;

(ii) any indebtedness of Mr and Mrs Dzienciol on any account whatsoever;

(b) all commissions, stamp and other duties, postage and other lawful and accustomed charges made by the Bank to any account of Mr and Mrs Dzienciol with the Bank (together referred to as "Fees");

(c) all costs, charges, expenses and outgoings which the Bank may incur, inter alia, in:

(i) consequence of any defaults made by Mr and Mrs Dzienciol in the:

A. payment of any moneys intended to be secured by the mortgage; or

B. performance or observance of any covenant or agreement expressed or implied in the mortgage or about or in relation to the ascertainment, exercise or enforcement or attempted exercise or enforcement of any of the powers, rights, or remedies conferred on the Bank under the mortgage or any other security held by the Bank;

and in relation to all costs chargeable under the mortgage, including costs of or incidental to any proceedings in any Court, computed on a solicitor and own client basis.

(d) interest upon the moneys referred to in paragraphs (a), (b) and (c) above, or on so much as shall remain owing or unpaid.

(i) at such rate or rates as the Bank might from time to time charge in respect of similar loans or advances;

(ii) accruing from day to day from and including the day on which such moneys become owing or unpaid to the date preceding the date of payment.

13 It is also not in dispute that in relation to interest, the Wellington Street Mortgage provides that:

(a) interest calculated as aforesaid may, from the date that it becomes due as aforesaid, be capitalised and added to the principal sum upon which interest shall then become payable.

(b) the provisions contained in the mortgage as to the moneys on which interest is payable should continue to apply so long as any of such moneys might remain unpaid, notwithstanding, inter alia, any judgment obtained against the first and second defendants or either of them owing at the rate or rates from time to time usually charged by the plaintiff to its customers in respect of similar loans or advances.

14 The Bank claims that on 7 September 1992 the amount owing and unpaid by Mr and Mrs Dzienciol was approximately $668,530 and, notwithstanding written demand was made of Mr and Mrs Dzienciol for payment of that sum, they failed to pay.

15 The first and second defendant's defence is that by reason of the Bank's conduct, the Wellington Street Mortgage is void, alternatively, should not be enforced.

16 The alternative basis for the Bank's money claim is the Loan Agreement. The Bank claims the Loan Agreement was oral and contained terms that:

(a) the Bank would advance the sum of $650,000 ("Loan") to Mr and Mrs Dzienciol by means of a bank bill facility;

(b) Mr and Mrs Dzienciol would repay the sum of $650,000 to the Bank on 15 July 1990;

(c) the loan moneys would be secured by the Wellington Street Mortgage;

(d) Mr and Mrs Dzienciol would pay to the Bank all the Bank's usual costs, charges, expenses in regard to the bank bill facility;

(e) the bank bill facility would be a variable rate facility for a term expiring on 15 July 1990.

17 The Bank says that pursuant to the Loan Agreement, Mr and Mrs Dzienciol by their attorney the Bank (pursuant to a power of attorney executed by Mr and Mrs Dzienciol on 11 August 1988) signed bills of exchange in favour of the Bank which were to mature on 12 March 1990 ("the first set of bills"). On 11 December 1989 the Bank purchased from Mr and Mrs Dzienciol the first set of bills at a discount and credited the amount to Mr and Mrs Dzienciol's account number 423355487 at the Bank's Town Hall branch ("the Dzienciol Account"). It is pleaded that three sets of bills were drawn and signed by Mr and Mrs Dzienciol and purchased by the Bank at a discount. The third set of bills matured on 13 July 1990 two days prior to the contractual date for repayment of the Loan.

18 The Bank says the Loan Agreement was varied to extend the repayment date of the loan from 15 July 1990 to 13 August 1990 by "rolling over" the third set of bills ("the first variation of the Loan Agreement"). The roll over occurred by Mr and Mrs Dzienciol drawing and signing bills in favour of the plaintiff ("the fourth set of bills") with a maturity date of 13 August 1990 and the Bank purchasing those bills at a discount.

19 The statement of claim then follows the same format in relation to the drawing and purchase of further bills at the maturity date of the immediately preceding bills covering what is described as the fifth and sixth set of bills together with two further agreements to vary the Loan Agreement to extend the repayment date until the maturity date of the fifth and sixth set of bills respectively.

20 Mr and Mrs Dzienciol admit the loan of $650,000 but otherwise put the Bank to proof of all matters relating to the Loan Agreement, the variations to the Loan Agreement and the consequential rollover of bills.

21 The Bank also claims that in the period October 1990 to November 1990 the Bank and Mr and Mrs Dzienciol agreed to further vary the Loan Agreement ("the Overdraft Agreement") on terms, inter alia, that:

(a) the sum of $650,000 would on maturity of the sixth set of bills be advanced by way of overdraft facility rather than bank bill facility;

(b) on the maturity date of the sixth set of bills (12 October 1990) the sum of $650,000 would be debited to the Dzienciol Account by way of an overdraft facility;

(c) Mr and Mrs Dzienciol would pay interest on the outstanding debit balance of the Dzienciol account on a daily basis at the plaintiff's reference rate for overdraft facilities plus 1 per cent.

(d) Mr and Mrs Dzienciol would repay to the Bank the sum of $650,000 together with interest by no later than January 1991.

22 The Bank says that the Overdraft Agreement was varied by the Bank and Mr and Mrs Dzienciol agreeing to extend the repayment date to 28 February 1991 ("the first variation to the Overdraft Agreement"). The Bank also relies on a second variation to the Overdraft Agreement to extend the repayment date to 15 March 1991 on the further terms that if there was default in payment on that date:

(a) interest on the outstanding debit balance on the Dzienciol Account would be debited on a daily basis at the Bank's reference rate for overdraft facilities plus 2 per cent; and

(b) that interest rate would be reviewed and fixed by the plaintiff monthly thereafter.

23 In April 1991 the Bank reviewed the interest rate and fixed it at the Bank's reference rate for overdraft facilities plus 4 per cent from 15 April 1991. The Bank again reviewed the interest rate in May 1991 and fixed the rate at the Bank's reference rate for overdraft facilities plus 5 per cent rate from 15 May 1991.

24 The first and second defendants deny all of the Bank's claims relating to the Overdraft Agreement and the variations thereto.

25 The Bank by way of counterclaim to the defendants' counterclaim claims that the moneys advanced by the Bank pursuant to the Loan Agreement are also secured by the Residential Mortgage. The Bank says that on 10 February 1997 the amount owing and unpaid by Mr and Mrs Dzienciol in relation to the Loan Agreement which was secured under the Residential Mortgage was approximately $1,334,416 and despite written demand being served on Mr and Mrs Dzienciol under the Residential Mortgage, they failed to pay the amount demanded. On the basis of that plea, the Bank seeks possession of the residential premises and solicitor client costs.

Mr and Mrs Dzienciol's Defence and Counterclaim

26 The first and second defendants plead in their defence that the Wellington Street Mortgage is void and of no legal effect. The basis for this claim is the plea of unconscionability in pars 15 and 16 of the counterclaim. Those pleas are in the following terms:

"15. The conduct of the plaintiff in taking the said mortgage was unconscionable by reason of the facts that:

(a) the plaintiff and the defendants were not contracting upon an equal footing in that the defendants were at a special disadvantage as against the plaintiff; and

(b) the plaintiff was aware of such disadvantage by reason of the matters pleaded in paragraph 16 yet took advantage of those circumstances and proceeded with the taking of the said mortgage.

(c) the plaintiff was not satisfied that the defendants were able to service the loan and had doubts that the lessee would be able to meet the premium payment in terms of the contract between the tenant and the defendants and others whereby the tenant agreed to purchase the leasehold interest in the Bentley Hotel ("the Lease Contract");

(d) the plaintiff contacted its subsidiary Esanda Finance Corporation ("Esanda") on or about 14 November 1989 and was advised by Esanda that:

(i) Esanda was also not satisfied that the defendants were able to service the loan;

(ii) Esanda also had doubts that the lessee would be able to meet the premium payment in terms of the Lease Contract;

(iii) the lessee was well known to Esanda.

(e) At all material times, the plaintiff knew from information provided to it by or on behalf of the defendants that:

(i) the sum of $650,000 was required by the defendants to purchase the Bentley Hotel; and

(ii) the lessee's payments were the sole or primary source of funds to be applied to the payment of interest and/or capital in relation to the loan.

(f) At all material times the plaintiff considered the Bentley Hotel to be overpriced and considered the acquisition of the hotel to be an imprudent investment.

(g) The plaintiff did not advise the first defendant of the facts and matters set out in sub-paragraphs (c), (d) and (f) above and did not advise the first and second defendants to seek independent legal advice in relation thereto.

Particulars of Special Disadvantages

The defendants were at a special disadvantage as against the plaintiff because neither of them understood the nature of the effect of the mortgage transaction being entered into by them with the plaintiff for the following reason:

(a) the first defendant did not understand the transaction because he was of elderly age and suffering from Alzheimer's disease and/or dementia and could not form any independent judgment about the mortgage.

(b) the first defendant was not capable of understanding the mortgage document because English was not his native language and he had only a limited knowledge and understanding of the English language.

(c) the first defendant had poor eyesight and was consequently unable to read the mortgage document properly.

(d) the second defendant did not understand the transaction into which she was entering because she did not read the mortgage document no one explained to her the nature and effect of such transaction. She executed the mortgage because she was requested by her husband to do so and in reliance upon his advice.

(e) the second defendant was of elderly age and not capable of understanding the mortgage document because she had only a limited knowledge and understanding of the English language.

16. The plaintiff knew or should have known that the defendants did not understand the nature and effect of the mortgage transaction as pleaded in paragraph 15.

The plaintiff knew or should have known as alleged because:

(i) it was obvious to anyone speaking to him in December 1989 that he was suffering from mental illness and was unable to understand business principles; and

(ii) the plaintiff's officers and in particular Messrs Kensitt and Ryan spoke to and met with the first defendant prior to the execution of the mortgage and should have observed that he was suffering from mental illness; and

(iii) Messrs Kensitt and Ryan knew or should have known that English was not the first defendant's native language and that he had only a limited knowledge and understanding of the English language;

(iv) Messrs Kensitt and Ryan knew or should have known that the first defendant was

unable to read the mortgage document because of his poor eyesight;

(v) Messrs Kensitt and Ryan knew or should have known that the first defendant executed the mortgage without any independent advice; and

(i) for some years the defendants had banked with the plaintiff;

(ii) the plaintiff's officers and in particular Messrs Kensitt and Ryan knew or should have known from their dealings with the defendants that the second defendant had a very limited knowledge and understanding of the English language and of commercial matters and relied upon the first defendant absolutely in all business matters and did not have any understanding or exercise any independent judgment in respect of such business matter;

(iii) Messrs Kensitt and Ryan were present when the mortgage was executed and observed that the second defendant did not read the document and the effect of it was not explained to her; and

(iv) Messrs Kensitt and Ryan knew or should have known that the second defendant executed the mortgage without any independent advice and by reason of the reliance pleaded in 16(b)(ii) hereof."

27 The Bank denies the allegations in par 15 of the counterclaim. It also pleads a positive case to the effect that in the event the Court finds that Mr and Mrs Dzienciol were at a special disadvantage, the Bank denies it took advantage of any special disadvantages and says that:

(a) it took the Wellington Street Mortgage as security for the loans it made to Mr and Mrs Dzienciol (as pleaded in the statement of claim); and

(b) such loans were made to Mr and Mrs Dzienciol personally for their personal benefit.

28 The Bank also denies the allegations in par 16 of the counterclaim and says further that Mr and Mrs Dzienciol offered the Wellington Street property as security for the loans.

29 The first and second defendants also attack the validity of the Residential Mortgage. They plead that the Bank took the Residential Mortgage to support the acquisition by the defendants of a half share in a failing import business known as G R International Pty Ltd and the Bank's conduct in taking the Residential Mortgage was also unconscionable. The pleading of unconscionability is in the following terms:

"18. By reason of the matters pleaded below the conduct of the plaintiff in taking the mortgage over the residential property was also unconscionable.

Particulars

(I) The conduct of the plaintiff in taking the mortgage over the residential property was unconscionable by reason of the facts that:-

(a) The plaintiff and the defendants were not contracting upon an equal footing in that the defendants were at a special disadvantage as against the plaintiff.

(b) The plaintiff was aware of such disadvantage by reason of the matters pleaded in paragraph 16 yet took advantage of those circumstances and proceeded with the taking of the mortgage over the residential property.

(c) The defendants were at a special disadvantage as against the plaintiff because neither of them understood the nature or the effect of the mortgage over the residential property being entered into by them with the plaintiff for the following reasons:

(A) the first defendant did not understand the transaction because he was of elderly age and suffering from Alzheimer's disease and/or dementia and could not form any independent judgment about the mortgage over the residential property.

(B) the first defendant did not understand the transaction because English was not his native language and he had only a limited knowledge and understanding of the English language.

(C) the first defendant was of elderly age and unable to read the mortgage document properly because of poor eyesight.

(D) the second defendant did not understand the effect of the transaction into which she was entering because she did not read the mortgage document and no one explained to her the nature and effect of such transaction. She executed the mortgage over the residential property because she was requested by her husband to do so and in reliance upon his advice.

(E) the second defendant was not capable of understanding the transaction because she had only a limited knowledge and understanding of the English language.

30 The defendants plead that the Bank knew or should have known that the defendants did not understand the nature and effect of the Residential Mortgage and rely on substantially the same particulars as pleaded in par 16 of the counterclaim. The Bank's defence to the unconscionability claim in relation to the Residential Mortgage is a denial of the allegations and a positive plea that in the event that Mr and Mrs Dzienciol were at a special disadvantage and the Bank was aware of such disadvantage, the Bank did not take advantage of any special disadvantage and says:

(a) Mr and Mrs Dzienciol offered the Residential Mortgage to the Bank as security for loans to them, the Company and G R International;

(b) the Bank took the Residential Mortgage as security for loans made to the Mr and Mrs Dzienciol, the Company and G R International;

(c) at all material times Mr Dzienciol was a director and shareholder of the Company until 21 July 1991 and from that date Mrs Dzienciol was a director of the Company.

31 Paragraph 19 of the counterclaim contains a plea of loss and damage and is in the following terms:

"Further, by reason of the unconscionable conduct of the plaintiff as pleaded in paragraphs 15 and 25 herein, the defendants were able to enter into business transactions which would not otherwise have been possible and as a result of which they have suffered significant financial loss."

32 On 18 April 2001, Auxiliary Justice Pidgeon ordered that the hearing of the issues in par 19 be adjourned pending the determination by the Court of all other pleaded issues.

33 On 1 June 2001 I gave the defendants leave to amend the defence and counterclaim to add subparas (c) to (g) of par 15 of the counterclaim and to add causes of action in tort, contract and for breach of s 52 of the Trade Practices Act. As the trial was listed to commence on 20 June 2001 and as the defendants had previously secured from the Full Court a last (and last minute) adjournment of earlier trial dates and had not prepared their damages claim because of the order made on 18 April 2001, the amendments were permitted on the basis that the contractual and tortious liability issues (the existence and breach of duty) would be determined at the trial and the question of damages would be deferred. However, I ordered the defendants to file particulars of their contractual and tortious damages claims because limitation issues may arise at trial.

34 The first and second defendants say that by reason of the facts pleaded in par 15(a) to (g) of the counterclaim, the Bank owed Mr and Mrs Dzienciol a duty of care to inform them of the facts, matters, knowledge and opinions pleaded in par 15(c), (d), and (f) of the counterclaim, that the Bank was in breach of its duty by failing to inform Mr and Mrs Dzienciol of those matters and as a result of the breach, they suffered loss and damage.

35 The contract claim is based on an implied term of the Loan Agreement to the effect that the Bank would advise Mr and Mrs Dzienciol of the matters pleaded in par 15(c), (d) and (f) of the counterclaim, the

Bank breached its duty to inform them of those matters and as a consequence they suffered loss and damage.

36 The Bank's defence to the tort and contract claims is to deny the allegations and to plead that in the event any loss or damage was suffered, the causes of action in tort and contract are statute barred.

37 The trade practices plea is in the following terms:

"24 The plaintiff is a corporation within the meaning of the Trade Practices Act ('TPA').

25 The first and second defendants had a reasonable expectation that the plaintiff would inform the defendants of the facts, matters, knowledge or opinion pleaded in paragraphs 15(c), (d) and (f) if they existed or were known or held.

26 The plaintiff failed to inform the first and second defendants of the facts, matters, knowledge and opinions pleaded in paragraphs 15(c), (d) and (f)

27 The plaintiff's conduct pleaded in paragraph 26 above amounts to misleading and deceptive conduct in trade or commerce in breach of section 52 of the TPA.

28 By reason of the plaintiff's breach of section 52 of the TPA the first and second defendants have suffered and are continuing to suffer loss and damage and seek a mandatory injunction pursuant to s.80 further or alternatively s.87(1) of TPA requiring the plaintiff to discharge the Mortgage as defined in paragraph 2 of the statement of claim and cancel the Loan Agreement as defined in paragraph 13 of the statement of claim."

38 In relation to the plea in par 25 of the counterclaim, the defendants state in particulars that the facts giving rise to the reasonable expectation are those pleaded in par 15(a) to (g) inclusive of the counterclaim. The Bank admits it is a corporation within the meaning of the Trade Practices Act but otherwise denies the allegations in pars 25, 26, 27 and 28 of the counterclaim. The Bank says further that if Mr and Mrs Dzienciol had a special disability as pleaded, they could not have held a reasonable expectation.

39 The relief claimed by the defendants includes orders setting aside the Wellington Street Mortgage and the Residential Mortgage, a claim for equitable damages and a mandatory injunction pursuant to s 80 of the TPA, alternatively pursuant to s 87(1) of the TPA, in the terms set out above. It is to be noted that the defendants do not claim or seek equitable relief on the basis that the Loan Agreement is unconscionable.

Background - Mr and Mrs Dzienciol and Family and the Company

40 Mr Dzienciol was born in Poland and emigrated to Australia in 1939. He married Mrs Dzienciol in 1940 or 1941 and had three sons, Phillip, Simon and Bray (the youngest). Mr Dzienciol was said to have had a very acute memory and been excellent at mental arithmetic. At all material times in 1989, Mr Dzienciol wore spectacles for reading and on occasions used a magnifying glass.

41 Mr Dzienciol started the business known as Pells Surplus Stores ("the Pells business") in around 1970. At the time he started the Pells business he and his wife had another business in Barrack Street, Perth which was an auction mart and furniture store. From around 1948 Mr Dzienciol was involved in buying and selling properties and businesses. He had had a string of businesses, mainly supermarkets, which he purchased, built up and sold. He was a self-made financially successful businessman.

42 According to Phillip, Mr Dzienciol had a very strong personality, a short temper and was very dominant. Mr Dzienciol was always the head of the family and would not accept any advice or interference from anybody. Phillip had never been involved with or worked in the family businesses and said he could not tolerate working with his father because his father was always in full control, barking orders to everyone and demanding action. Phillip accepted that his father did not value his (Phillip's) opinions and told Phillip on various occasions that he did not regard him as a businessman.

43 Phillip's description of his father was confirmed by Bray who described Mr Dzienciol as pretty strict and powerful and a person who liked to be in control of everything.

44 Mrs Dzienciol was born in Russia and emigrated to Australia when she was 5 years old. She left school at age 14. Mrs Dzienciol died before the trial. In a signed witness statement (exhibit 27) Mrs Dzienciol said that:

"We [Mr and Mrs Dzienciol] have been involved in a number of business ventures over the years. I have run a number of businesses owned by my husband and me which have included self-service stores and more lately a frock shop, Sabrina Salon. Over the years my husband discussed with me every detail of our business ventures. I was an equal partner with my husband in his ventures.

I always followed my husband's advice in business matters."

45 In answers to interrogatories (exhibit 5/175) Mrs Dzienciol swore that her level of understanding of English in the spoken and written form was good and that she was involved in the business of the Sabrina Frock Salon "over many years until 1990". The business names extract of the name "Sabrina Frock Salon" (exhibit 5/165) shows that the business commenced on 29 August 1983 and was carried on by the Company until 1989.

46 Mr and Mrs Dzienciol were the joint owners of their business and private assets. In particular, they were the registered proprietors as joint tenants of the Wellington Street premises and the residential premises as well as joint creditors of the Bank in relation to their accounts.

47 In 1976 Mr Bruce Kennedy entered into partnership with Mr and Mrs Dzienciol which partnership thereafter carried on the Pells business. In the 1970s Bray managed the Melbourne branch of the Pells business and some time in the late 1970s joined the partnership.

48 In 1982 the partnership ceased to carry on the Pells business and the Company commenced to do so. The Company was the trustee of the Pelco Unit Trust. At the material times in 1989 its directors were Mr Dzienciol, Mr Kennedy and Bray who each held one share in the Company. There were thirty issued units in the Pelco Unit Trust, ten of which were held by ATA Investments Pty Ltd as trustee for the MM & L Dzienciol Family Trust, ten by Cardavian Pty Ltd as trustee for the Bray Dzienciol Family Trust and ten by Tammas Investments Pty Ltd as trustee for the Bruce Kennedy Family Trust.

49 The 1980s the Company carried on the Pells business and the Sabrina Frock Salon business. It was also involved in other investments which are detailed later in these reasons. The defendants say the Company is in possession of the Wellington Street premises.

50 In 1982 Mr and Mrs Dzienciol and the Company ("the Dzienciol Group") transferred their banking business from the National Australia Bank to the Bank. At all material times from September 1983, Mr Ray Kensitt was the bank officer primarily responsible for the Dzienciol Group accounts.

51 Mr Kensitt worked for the Bank for approximately 43 years until he retired in 1995 at age 59. For 17 years until 1983 he was a manager of various branches of the Bank. In 1983 Mr Kensitt became a Commercial Accounts Manager in which position he was, in effect, the lending manager for 21 Bank branches and directly responsible for approximately 12 accounts including the Dzienciol Group accounts. As Commercial Accounts Manager, Mr Kensitt had discretionary authority to approve loans up to a maximum of $250,000. For borrowings in excess of his discretionary limit, Mr Kensitt was required to prepare a loan proposal with a recommendation which was referred to the Bank's area manager or state manager depending on the size of the proposed borrowing.

52 The Bank had no set criteria for a particular Bank client coming under the control of a Commercial Accounts Manager. It would occur if a customer was difficult or because of recurrent requests for funds in excess of a branch manager's discretionary limit.

53 In 1986 Mr Kensitt became the Manager, Commercial Accounts in the Bank's commercial banking unit, subsequently known as the Business Banking Division. In this position, he ceased to have control of any branches. Four managers, including Mr Kensitt, were appointed to the new commercial division of the Bank and each manager was appointed to look after approximately 40 to 45 accounts. A client's lending requirements generally determined whether the client would be looked after by the commercial banking division of the Bank. At some stage after this time, Mr Kensitt's discretionary limit was increased from $250,000 but later returned to $250,000 as a result of changes in Bank policy. Mr Kensitt was unable to recall the period in which he had a higher discretionary limit.

54 In the period under consideration, it was the Bank's practice to keep two files for each client (or client group), a diary note file and a memoranda file.

55 The diary note file was the prime record of a customer's history with the Bank `. If there was an oral communication, in person or by

telephone, between a bank officer and a client concerning banking business, the event and the substance of the communication was summarised by the bank officer in handwriting usually on the day the communication occurred or, at the latest, the next day. The handwritten diary note would be sent for typing and the typed version would be checked for accuracy by the author of the diary note and initialled. Usually the handwritten note would then be destroyed.

56 On the occasions that Mr Kensitt met with representatives of the Dzienciol Group either at the Wellington Street premises or at the Bank concerning banking matters, he would usually be accompanied by an assistant. In those circumstances, the assistant would take notes and arrange for them to be typed. The typed diary note would then be checked and, if accurate, initialled by both Mr Kensitt and his assistant.

57 The diary note system was not only used for recording communications with Bank's clients. It was also used for recording a bank officer's assessment of a proposed transaction or as part of a regular (annual) review of customer accounts.

58 The diary notes were typed on a stationery item containing the printed words "diary note, name of account" and on the right-hand side of the page in a rectangular box, the printed word "page number". Mr Kensitt's assistant would usually put the page number on the diary note. In some instances the page numbers of diary notes in evidence were altered in manuscript. Mr Kensitt's explanation for the alteration to the numbers was that it would occur if a diary note was out of the file for actioning by somebody and other diary notes were inserted and numbered. The diary notes would need to be renumbered when the diary note being actioned was returned to the file.

59 Mr Kensitt first met Mr Dzienciol in September 1983 in the company of his predecessor, Mr Steer. Mr Dzienciol was 69 years old at this time. Mr Kensitt saw Mr Dzienciol approximately six times a year. If he had not seen or spoken with Mr Dzienciol for some time, Mr Kensitt would drop by the Pells store in the course of a walk around the city in his lunch break. If Mr Kensitt called on Mr Dzienciol in this informal way and there was nothing of any consequence discussed or raised with or by Mr Dzienciol or nothing of consequence for Mr Kensitt to follow up, he would not prepare a diary note.

60 On some occasions when Mr Kensitt dropped in to see Mr Dzienciol during his lunchtime walk, he would also visit Mrs Dzienciol at the Sabrina Frock Salon which was around the corner from the Pells store.

61 Mr Kensitt also had social contact with Mr and Mrs Dzienciol. It was Mr Kensitt's recollection that he went to dinner with Mr and Mrs Dzienciol and others on two occasions in the 1980s. Mr Kennedy's recollection is that Mr Kensitt's social contact with Mr and Mrs Dzienciol and others including Mr and Mrs Kennedy was "probably a couple of times a year I guess".

62 In the period between March 1989 to December 1990 Mr Kensitt's assistant was Mr John Ryan. They shared the same office. Mr Ryan has been employed by the Bank since 1979. In 1990 he was appointed as the manager of the Wickepin branch of the Bank. In January 1991 Mr Kinnimont became Mr Kensitt's assistant and in that capacity attended at meetings with Mr Dzienciol and others.

Mr and Mrs Dzienciol and the Bank - 1983 to December 1988

63 The evidence of what occurred in this period is not contested and emerges primarily from the Bank's diary notes.

64 As stated earlier, Mr Kensitt's first contact with Mr Dzienciol was in September 1983. A diary note (exhibit 2/19) about the visit is dated 6 September 1983 and records that one of the issues discussed with Mr Dzienciol was the cost associated with borrowings in the name of the trustee Company (estimated at between $6500 and $7000). This issue arose in the context of whether a proposed new Melbourne shop and warehouse was to be purchased in the name of the trust or in the joint names of the "partners" (in which case the estimated cost of borrowings was $4000). Mr Dzienciol advised that he would discuss the implications of ownership with his accountants.

65 On 14 September 1983 Mr Dzienciol advised Mr Kensitt that valuers were looking at the Melbourne property and if he received a favourable report from them, he and his wife would fly to Melbourne to make the final decision as to whether to purchase the property. Mr Dzienciol also advised, following discussions with his accountant, that if the purchase of the Melbourne property proceeded, it would be in the name of the Company.

66 The next recorded contact was on 20 December 1983 when Mr Kensitt delivered Bank offer letters of finance to Mr Dzienciol for the purchase of the Melbourne property. However, Mr Dzienciol advised that the Vendor had increased the asking price of the Melbourne property by $80,000 which he (Mr Dzienciol) refused to pay. It appears the purchase of that property did not proceed.

67 On 6 January 1984, Mr Kensitt (in the company of his account's officer, Mr Kirkup) met with both Mr Dzienciol and Mr Kennedy. Mr Dzienciol was to go to the UK and possibly the US on a buying trip and required a loan of $50,000 to purchase stock in the United Kingdom and a further $50,000 if he travelled to the United States. It is recorded that Messrs Dzienciol and Kennedy would accept a commercial bill acceptance discount ("CBAD") facility but to avoid solicitor's costs in the preparation of securities, they required the CBAD in the name of the partners. The diary note also contains a summary of Mr Kensitt's consideration and analysis of the application for finance which includes the existing security held by the Bank, the proposed security for the further advance, the terms of the borrowings and his decision to approve the application. The existing security was a registered mortgage over unidentified property which appears to have been owned by Mr and Mrs Dzienciol and Mr Kennedy and the proposed security was a second registered mortgage over an investment property in Wray Avenue, Fremantle (the first registered mortgage being Perpetual Trustees). Further, the directors of the Company had already provided guarantees which were supported by letters of acknowledgment and deposits of certificates of title for each of the Directors' residences.

68 Mr Kensitt and Mr Dzienciol met again on 23 October 1984 in relation to an offer made by Mr Dzienciol to purchase property at 122 Barrack Street, Perth for $373,000 which he said he would increase to $400,000 if necessary. Mr Dzienciol was seeking a term loan of $200,000 payable over 10 years to assist in the financing of the purchase. Mr Kensitt records in his diary note:

"Conservative people. Will only purchase property at 'the right price' is demonstrated on past occasions of making offers - all, so far, not accepted. No action until directors advise acceptance of offer."

69 The purchase did not eventuate because the vendor's counter-offer was not acceptable.

70 In November 1984 Mr Dzienciol telephoned the Bank to request a loan of $250,000 to enable him to place a cash offer to purchase property at Balcatta/Balga comprising eight shops and doctor's surgery. The loan was approved. Mr Kensitt could not recall whether the purchase proceeded.

71 Mr Kensitt visited Mr Dzienciol at his request on 1 February 1985. Mr Dzienciol wanted the Bank's approval in principle to borrow $770,000 to enable him to bid up to $1,000,000 for a Melbourne property. After a detailed analysis of the application recorded in his diary note, Mr Kensitt recommended giving approval. Subsequently Mr Dzienciol advised Mr Kensitt that the Melbourne property was passed in at auction for $1.8 million and had been sold to the highest bidder at $2,000,000. Mr Dzienciol's maximum offer was $1,000,000.

72 In May 1985, Mr Dzienciol called at the Bank with an offer and acceptance document to purchase a block of nine shops called the Balga Shopping Centre for $385,000 which he said had been negotiated down from $435,000. The purchaser was to be the Company and Mr Dzienciol requested a loan of $290,000 repayable over 10 years. Once again Mr Kensitt recorded an analysis of the loan application including the security and the Dzienciol Group's financial position. Security included a registered first mortgage over the shopping centre. Mr Kensitt recommended approval. That purchase proceeded.

73 When Mr Kensitt called on Mr Dzienciol and Mr Kennedy on 23 October 1985 they were looking at the purchase of the Rosemount Hotel for $700,000. They asked if the Bank would consider 100 per cent funding on the existing securities plus a first registered mortgage over the hotel. Mr Dzienciol stated that he did not want to introduce his personal assets as security for the lending to the Company. It is recorded that the current lessee of the Rosemount Hotel was to remain and that Messrs Dzienciol and Kennedy were to "check lease term and be satisfied lessee is financially sound". This purchase did not proceed.

74 At some stage Mr Kensitt told Mr Dzienciol that because of the amount of work the Bank was devoting to considering and approving his requests for finance on transactions which did not proceed, in future the Dzienciol Group would have to pay 25 per cent of the standard loan approval fee if the transaction did not proceed. Thereafter Mr Dzienciol generally stopped coming to Mr Kensitt with his various proposals.

75 In February 1987 the Town Hall branch manager discussed term deposit rates with Mr Dzienciol. Mr Dzienciol was unhappy with what was offered, threatened to take his term deposits away and so the Bank increased the interest rate by .5 per cent.

76 The Balga Shopping Centre had been purchased in the name of the Company. In May 1987 Mr and Mrs Dzienciol purchased the Balga Shopping Centre from the Company for $397,000 with Mr and Mrs Dzienciol assuming responsibility for the repayment of moneys owed to the Bank in relation to the purchase of that property. Mr Kennedy and Bray explained that the Company sold the Balga shopping centre to Mr and Mrs Dzienciol because the property was not living up to income expectations and it was thought it may not sell at a profit.

77 On 11 August 1988 Mr and Mrs Dzienciol signed a power of attorney in relation to commercial bills (exhibit 2/32). The power of attorney is stated to apply to bills of exchange required to be drawn by Mr and Mrs Dzienciol pursuant to existing and future commercial bill facilities. Mr and Mrs Dzienciol appointed officers of the bank to draw, present and sign bills of exchange. Pursuant to cl 5 of the power of attorney, Mr and Mrs Dzienciol agreed that it would not be revoked unless by mutual agreement until all commercial bill facilities provided by the Bank were terminated.

78 In 1988, Mr and Mrs Dzienciol sold the Balga Shopping Centre at a profit. When that property was sold, Mr Dzienciol had intended to prepay a fixed rate facility with the Bank. However, that course would have cost him more in interest forfeited than what he would get for the same amount of money on an interest-bearing term deposit. Mr Kensitt discussed this with Mr Dzienciol. He let the fixed rate facility run and put the sale proceeds on deposit with the Bank over which the Bank took security.

79 On 30 December 1988 the Company signed an offer to purchase the Ballajura Shopping Centre for $1,875,000 (exhibit 2/33.2). The offer was subject to finance approval from the Bank. Eva Wilczewski was a business broker employed by Richardson and Wrench who were acting as the agents for the vendors of the Ballajura Shopping Centre. It was Phillip's evidence that his father had just sold the Balga shopping centre or was about to sell it and was looking around for another investment. Phillip inspected the Ballajura shopping centre in early December 1988 with Mr Dzienciol, Bruce Kennedy, Bray and Eva Wilczewski. That deal did not proceed.

80 There is very little evidence about the underlying transaction which resulted in the Residential Mortgage being given as security. There is an undated diary note (exhibit 1/1) confirmed by Mr Kensitt which refers to a new partnership account at the Town Hall branch of the Bank, the partnership being between the Company and GR International Agencies Pty Ltd ("GRI"). The partnership had an overdraft facility of $40,000 supported by unlimited guarantees from Mr and Mrs Kennedy, Mr and Mrs Dzienciol, Bray Dzienciol and his wife, and Mr Guido Di Paola and Claudette Di Paola. The guarantee (exhibit 2/33) is dated 29 December 1988 and signed by the persons identified above. Mr and Mrs Dzienciol's signature is witnessed by a Bank officer, Mr Kevin Udy.

81 A diary note (exhibit 2/33.1) dated 30 December 1988 signed by Mr Udy and Andrew Lower is in the following terms:

"Called on Bruce Allan Kennedy, Sandra Lee Kennedy, Moszko Mejer Dzienciol, Leah Dzienciol, Guido Di Paola and Claudette Di Paola for them to execute proposed guarantee on the account of GR International Agencies Pty Ltd and DKD Holdings Pty Ltd.

Prior to signing, the guarantee document was given to them and they were given the opportunity of reading it there or elsewhere and to obtain legal advice as to their position. The purport of the document and their liability thereunder was explained to them in general terms by Kevin Udy in the presence of Andrew Lower and they were advised that execution of the acknowledgment in the guarantee would mean that they had read the document and understood the implications thereof.

They then signed the guarantee in our joint presence."

82 The undated diary note confirmed by Mr Kensitt also refers to the partnership's application (the Company and GRI) for a CBAD facility of $288,000. For that further facility the Bank required, inter alia, the Residential Mortgage. The diary note confirms that Mr and Mrs Dzienciol had previously granted a registered mortgage over "C/T 1279/301 and 1277/903". A letter offering the facility and outlining the security requirements was sent but is not in evidence. Thereafter, Mr and Mrs Dzienciol signed the Residential Mortgage which is dated 12 January 1989. Mr Dzienciol's signature was witnessed by Mr Udy and

Mrs Dzienciol's signature was witnessed by Bank officer, Denise Kelly (now Scott).

83 Denise Scott and Andrew Lower signed a diary note dated 12 February 1989 (exhibit 2/34.1) in the following terms:

"Denise Kelly and Andrew Lower called on Leah Dzienciol to execute a proposed guarantee mortgage on the account of GR International Agencies Pty Ltd and DKD Holdings Pty Ltd. Prior to signing, the guarantee mortgage was given to Leah Dzienciol and she was given the opportunity of reading it here or elsewhere and to obtain legal advice as to their position. The purport of the document and her liability thereunder was explained to her in general terms by Denise Kelly in the presence of Andrew Lower. Leah Dzienciol then freely signed the guarantee mortgage in the presence of Denise Kelly and Andrew Lower."

84 The Residential Mortgage is an all moneys security. The Bank claims that it is entitled to possession of the residential premises under the Residential Mortgage as a result of the defendants' default in payment of the moneys owing under the Loan Agreement. It is not claiming the moneys owing by the Company/GRI partnership.

85 Phillip gave evidence about this matter. According to him, the Company borrowed from the Bank to buy into an already failing business which was on the verge of bankruptcy. However, Phillip confirmed in cross-examination that he had no involvement with his father's business dealings and that Mr Kennedy was reluctant to divulge information to Phillip. However, he received "snippets" of information about this transaction from Mr Dzienciol and Mr Kennedy. There is no evidence the Bank knew of those matters.

86 The documentary evidence discloses that there was infrequent contact between the Bank and Mr Dzienciol (or Mr Kennedy) in the period January 1989 to September 1989. Mr Kennedy and Mr Dzienciol were telephoned requesting instructions concerning the rollover of existing term deposits in March and April 1989. In April 1989 Mr Kennedy was spoken to concerning excesses on the CBAD the Company/GRI partnership. There was further discussion with Mr Kennedy concerning excesses again in August 1989.

87 Save where indicated, the following evidence is not contested. It emerges primarily from the Bank's diary notes and other documentary evidence. The vendor of the Bentley Tavern was Narge Pty Ltd ("Vendor"). It was represented by real estate agents Richardson and Wrench. In September 1989 the Tavern was still in the course of construction but very close to completion. At some time prior to the purchase, Mr Kennedy was provided with a sales brochure in relation to the Bentley Tavern (exhibit 15). The sales brochure contained a sales, expenditure and profit analysis of the Bentley Tavern business. Mr Kennedy showed the sales brochure to Mr Dzienciol and they discussed the purchase and inspected the property. Mr Dzienciol and Mr Kennedy also discussed the funds for the deposit. It was only after Mr Kennedy knew that Mr Dzienciol was prepared to enter into the proposed transaction to purchase the Bentley Tavern and to allow his funds to be used in relation to the deposit that Mr Kennedy signed an offer and acceptance for the purchase of the Bentley Tavern.

88 By an offer and acceptance dated 19 September 1989, the Company (40 per cent) and Mr and Mrs Dzienciol (60 per cent), offered to purchase the Bentley Tavern for $4.2 million. It was a cash offer. The offer document was executed by the Company but not by Mr and Mrs Dzienciol.

89 After the partial execution of the offer and acceptance document, the Vendor's solicitors, Claudio Russo Shaw, prepared a formal contract of sale of the Bentley Tavern between the Vendor and Mr and Mrs Dzienciol and the Company as purchasers which was executed by the parties on 22 September 1989 ("first contract"). The Company purchased two undivided fifth shares in the property in its capacity as trustee of the Pelco Trust. Mr and Mrs Dzienciol, as joint tenants, purchased three undivided fifth shares in the property. The first contract provided for the purchase of the land on which the Bentley Tavern was constructed and surrounding land, the liquor licence and business name for the Bentley Tavern and all chattels situated on the premises. The purchase price was $4,200,000 to be paid as follows:

(a) a deposit of $1,000,000 of which $420,000 was to be paid within three days of acceptance of the offer by the Vendor and the balance of $580,000 within two days of the date on which the Vendor notifies the purchaser of the satisfaction of cl 8;

(b) the sum of $2,200,000 on the settlement date (defined as within three days of the latest of the architect's certificate of practical completion in respect of the hotel, the date of approval of the transfer of the liquor licence or the date on which the Vendor gives notice to the purchaser that he is ready, willing and able to complete settlement);

(c) the balance of $1,000,000 on the date of commencement of the term of a lease of the property to be granted by the Purchaser to a third party on terms satisfactory to the Purchaser;

90 The first contract was not conditional on the purchasers obtaining finance. Clause 8 of the first contract (which affected the date of payment of the second moiety of the deposit) provided that the first contract was "subject to and conditional upon the Vendor's contract for the sale of the property to Warwelt Pty Ltd being terminated or being at an end on or before 9 October 1989".

91 The first recorded contact with the Bank concerning the purchase of the Bentley Tavern was a telephone call from Mr Kennedy to Mr Kensitt on 25 September 1989, three days after the execution of the first contract. The communication is recorded in a diary note (exhibit 2/40). Mr Kennedy told Mr Kensitt that they had executed a contract to purchase the Bentley Tavern and required the Bank to release term deposits to pay the $1,000,000 deposit. The diary note also records a request that Mr Kensitt peruse the contract of sale and make comment.

92 The diary note records details of the purchase price and the payment schedule. It also notes that Mr Kensitt checked out the term deposit position of the Company and Mr and Mrs Dzienciol. The Company had $298,722 on term deposit and Mr and Mrs Dzienciol had $986,823 together totalling $1,285,545. However, some of the term deposits of both the Company and Mr and Mrs Dzienciol were held as security and the only funds available for the payment of the deposit was $850,859. Mr Kensitt records that he alerted Mr Kennedy to this position and was advised by Mr Kennedy that he and Mr Dzienciol had assumed that all term deposits were available for the purchase of the property. Mr Kennedy requested, and Mr Kensitt agreed, to arrange for prepayment of term deposits totalling $420,000 (in the ratio of 40%:60% from the Company and Mr and Mrs Dzienciol respectively) to pay the first moiety of the deposit. The diary note also records:

"Took opportunity to advise Bruce that unless sale of lease were to occur simultaneously to the settlement for purchase of the property, ie, the payment of $2.2 million, then because income to meet interest costs was not in place then it would be unlikely that the bank would be able to assist. In any event advised him the bank would consider any proposal put to us but that approval would depend on repayment capacity and security coverage."

93 Mr Kennedy said that his recollection was that he approached the Bank to see if it was interested in financing the transaction after the execution of the offer and acceptance dated 18 September 1989 but before the execution of the first contract. I regard the contemporaneous diary note as a more reliable guide to the timing of events than Mr Kennedy's unaided recollection of an event occurring over 11 years ago.

94 By letter dated 26 September 1989 signed by Mr Dzienciol to the Bank, he requested that specified term deposits be prepaid on 27 September 1989. The Bank took the necessary steps to arrange for the prepayment of the term deposits for both the Company and Mr and Mrs Dzienciol.

95 The next contact between Mr Kensitt and Mr Dzienciol was on or about 5 October 1989. Mr Kensitt called on Mr Dzienciol and Mr Kennedy at their request. He was advised that the previous offer by the other party (which I take to be a reference to the contract with Warwelt Pty Ltd referred to in cl 8 of the first contract) to purchase the property had lapsed. Mr Kensitt was advised that the purchase of the property by the Company and Mr and Mrs Dzienciol was to proceed and that they required the remaining deposit of $580,000 on the following day, 6 October 1989. In particular, Mr Dzienciol and Mr Kennedy requested the prepayment of all Mr and Mrs Dzienciol's term deposits (except for the sum of $285,000) and to allow an excess of approximately $100,000 on the Company's account until there had been revaluation of Mr Kennedy's house. Mr Kensitt agreed to allow the excess because of the substantial asset position of Mr and Mrs Dzienciol.

96 The Bank immediately took steps to arrange for the prepayment of Mr and Mrs Dzienciol's term deposit on 6 October 1989. Mr Dzienciol signed a cheque dated 6 October 1989 for $473,000 on behalf of himself and his wife in favour of the Vendor and Mr Kennedy, on behalf of the Company, signed a cheque dated 6 October 1989 for $107,000 payable to

the Vendor. The total of the two cheques, $580,000 was for the balance of the deposit.

97 On 11 October 1989, Mr Kensitt had a telephone conversation with Mr Kennedy and Mr Dzienciol who advised of an injunction obtained by the previous purchaser of the property (Warwelt) and requested the Bank to stop payment of the Company cheques (two) and of Mr and Mrs Dzienciol's cheques (two) for the deposit totalling $1,000,000 all of which were made payable to the Vendor. Mr Dzienciol and Mr Kennedy advised that the Vendor was to endeavour to have the injunction overturned the following day and requested that the funds the subject of the stopped cheques be lodged on a seven-day term deposit. Mr Kensitt authorised the stop on the cheques and instructed a Bank officer to arrange the term deposits.

98 On 13 October 1989, Mr Kennedy advised Mr Kensitt that the problems with Warwelt had been sorted out and a new deal had been struck for the purchase of the Bentley Tavern. A deposit of $1,000,000 was required on 16 October to meet the terms of sale. The deposits were paid by the Company and Mr and Mrs Dzienciol in proportion to their interests in the property.

99 The Company and Mr and Mrs Dzienciol as purchasers of the Bentley Tavern were represented by solicitors Warren Harrison, in particular, Mr P Huston and Ms M Hopkins of that firm. In a letter dated 16 October 1989 from the Vendor's solicitors Claudio Russo Shaw to Warren Harrison, the Vendor's solicitors advised that the Vendor and Warwelt had settled their action on 13 October 1989 and the settlement was recorded in a deed of release which was provided to Warren Harrison. The deed of release is not in evidence. There is no evidence concerning Warwelt's arrangements with the Vendor or why the purchase of the Bentley Tavern by Warwelt did not proceed or how it came about that Warwelt subsequently became the lessee of the Bentley Tavern. The Vendor's solicitors confirmed that their client was now free to enter into a contract with Warren Harrison's clients and enclosed a draft of a new contract, also noting that the contract had been amended in accordance with amendments requested by Warren Harrison in their letter of 13 October 1989. The Warren Harrison letter is not in evidence. However, the purchasers under the new contract were Mr and Mrs Dzienciol 50 per cent, the Company 40 per cent and Eva and Gerry Wilczewski 10 per cent. Mr and Mrs Wilczewski became involved in the Bentley Tavern transaction as a result of an approach made to Mrs Wilczewski by Mr Dzienciol, of which more later.

100 The parties subsequently executed a new contract of sale ("the second contract of purchase"). The second contract of purchase in evidence does not clearly identify the day in October 1989 when it was executed by the parties. There are very few differences between the terms of the first contract and the second contract of purchase save that the purchasers under the second contract were the Company as to four undivided tenth shares, Mr and Mrs Dzienciol as joint tenants of five undivided tenth shares and Mr and Mrs Wilczewski as to one undivided tenth share as tenants in common. The purchase price remained $4,200,000 of which a deposit of $1,000,000 had to be paid on or before 17 October 1989. A sum of $2.2 million was to be payable on the settlement date and the balance of $1,000,000 on the date of commencement of the term of a lease of the Bentley Tavern property to be granted by the purchasers.

101 However, the second contract of purchase required that the $1,000,000 deposit be immediately released to the Vendor who was to provide security in the form of a second unregistered mortgage over the Bentley Tavern property. The purchasers' solicitors (Warren Harrison) prepared mortgage E216377 dated 17 October 1989 between the Vendor as mortgagor and the purchasers as mortgagees and signed by all the parties, including Mr and Mrs Dzienciol, to secure the deposit of $1,000,000. The 1988 joint form of general conditions of sale were deemed to be incorporated in the second contract of purchase which (like the first contract) was not conditional on the purchasers obtaining finance approval.

102 On 18 October 1989, Mr Kensitt had discussions with Mr Dzienciol and Mr Kennedy regarding the ongoing financial requirements of the business. It was the annual review of the financial position of the Dzienciol Group. The diary note of the review identifies the existing Bank facilities in favour of the Company (trading as Pells Surplus Stores and Sabrina Frock Salon), the Company/GRI partnership and the moneys owed personally by Mr and Mrs Kennedy and Mr and Mrs Dzienciol. The diary note also records that Mr Kennedy advised that the existing facilities were adequate for their needs and requested the Bank to extend the limits for a further 12 months. Consideration is also given to the Company's profitability and financial stability by reference to its balance sheet and profit and loss statement for the year ending 30 June 1988.

103 Mr Kennedy advised that the Company had sold the Melbourne store and was considering the sale of the Sabrina Frock Salon. Mr Kensitt also did a management ability and a safety assessment of the Company,

Mr and Mrs Kennedy, Mr and Mrs Dzienciol and the Company/GRI partnership. In terms of management ability, Mr Kensitt records:

"Business is essentially run by Bruce with Maurie providing assistance where necessary. Net profit of $172K for the year after allowing for extraordinaries is considered a good result and attributable to close attention to margins by Management."

104 As a result of this review, Mr Kensitt decided to extend the limits of the borrowing of the Dzienciol Group for a further 12 months. The stated justification for the decision was the "long history of profitable trading and business acumen of Directors".

105 Warren Harrison continued to act for the purchasers. In particular, they were involved in the transfer of the Bentley Tavern liquor licence to the purchasers and matters relating to settlement of the sale generally.

106 The next recorded communication between the Bank and Mr Dzienciol about the Bentley Tavern transaction is a letter dated 10 November 1989 from the Bank addressed to Messrs Dzienciol and Kennedy. The letter was written by Mr Kensitt and refers to a telephone discussion earlier in the week and says, "We now advise interest in your proposal to finance the purchase of the Bentley Tavern." Mr Kensitt said in the letter that before a decision could be made it was necessary to receive and fully assess the following information:

"1. Copy of the lease to your tenants.

2. Cash flow forecast showing monthly inflow and outgoings for your investment, including interest at a rate of 19 per cent per annum and lump sum progressive payments by the lessee.

3. Statements of financial position of all directors.

4. Balance sheet and profit and loss accounts for the Pelco Unit Trust to 30/6/89, if available.

5. Evidence of ability of lessee to meet the lump sum payments of $50,000 per month in addition the monthly rental together with the balloon payment of $950,000 in six months.

6. Valuation by Baillieu Knight Frank to be instructed by the Bank at cost to yourselves."

107 The letter identifies what appears to be three alternatives for funding:

"1. Fund $2,660,000; ... ;

2. Fund the first $1,200,000 with an outside party advancing the ongoing borrowing of $1,500,000;

3. Fund the ongoing borrowing of $1,500,000 with an outside party providing a bridging facility of $1,200,000. ... ."

108 The Bank's letter refers to the lessee meeting specific payments. There is no evidence of the background circumstances leading to the Bentley Tavern purchasers entering into a lease of the Bentley Tavern with Warwelt. An agreement to lease initialled by the parties is in evidence (exhibit 17) ("Lease Agreement"). Warwelt (the failed purchaser of the Bentley Tavern) is the lessee. The Lease Agreement is undated. It provides for a payment by Warwelt of a premium of $1,450,000 to be paid in the following manner:

(1) $200,000 upon the commencement of the term of the lease;

(2) $300,000 by way of six instalments of $50,000, the first payment to commence on 15 January 1990;

109 The Lease Agreement provides for Warwelt to grant a debenture charge over its assets and undertakings for the period that the premium or any part of it remained unpaid. It also provides that Hedley O'Meara, a director of Warwelt, was to provide a deed of guarantee as further security for the moneys owing by Warwelt to the purchasers.

110 The parties subsequently entered into a lease dated 1 December 1989 ("Lease"). The provision in the Lease for payment of the premium mirrors the clause in the Lease Agreement. The rent was $260,000 per annum payable in equal monthly instalments of $21,666.66. The Lease does not identify the commencement date. Mr O'Meara is a party to the Lease as guarantor of Warwelt's obligations.

111 The purchasers' solicitors, Warren Harrison, in a letter dated 15 November 1989 to the Company confirmed that they had forwarded a copy of the Lease Agreement to Warwelt's solicitors and Mr Ray Weir and that the draft Lease and security documents (debenture charge and deed of guarantee) had been forwarded by the solicitors to the Bank. I

infer from this letter that the Lease Agreement had been executed by mid November 1989 at the latest.

112 Mr Kensitt in a diary note of 14 November 1989, records the receipt of a proposal to fund the purchase of the Bentley Tavern from finance broker Mr Raymond Weir of Austrafin . Austrafin was a licensed finance broker and consultant. On instructions from the Bentley Tavern purchasers, Austrafin prepared a document entitled "Application for a Mortgage Loan of $3,000,000 on Behalf of DKD Holdings Pty Ltd, M M and L Dzienciol and G R and E Wilczewski" (the "Austrafin Application"). The Austrafin Application describes the property in the following terms:

"The property consists of a new and very modern tavern, which has a freestanding TAB agency situated in the carpark which will be leased rent free from the borrowers. Adjoining the tavern on the highway frontage is a subdivided vacant commercial lot of 1512 square metres which will be onsold or redeveloped within 6 months. At the rear, ... is a vacant multi-residential lot of 2666 square metres which will be developed with home units within 6-12 months.

The borrowers are only interested in the freehold component of the property, as they have arranged immediate onsale of the leasehold for 20 years for a premium of $1,450,000. The purchaser of the goodwill and lease is Warwelt Pty Ltd which also owns the Victoria Park Hotel and Food Hall, and the Hurlingham Hotel in South Perth."

113 The Austrafin Application states that at settlement on 6 December 1989 "the borrowers expected the property valuation to be $2,850,000". Funding of $3,000,000 was sought which (it said) would be reduced primarily from payments due under the Lease and any shortfall would be met by the substantial other income of the borrowers.

114 Attached to the Austrafin Application was a copy of a valuation dated 11 September 1989 from Hillier Parker. That valuation was not in evidence. However, the Austrafin Application states it valued the land and business at $4,550,000. Following the grant of the Lease to Warwelt, the only security available was over the Bentley Tavern land.

115 Also attached to the Austrafin Application were the personal particulars for Mr and Mrs Dzienciol, Mr and Mrs Kennedy and Bray. Only Mr and Mrs Dzienciol's personal particulars are in evidence. It

shows Mr and Mrs Dzienciol had a surplus of assets over liabilities of $4,483,300 which assets included the Wellington Street premises, the residential premises, a third interest in property at the corner of Pier and Wellington Street, Perth, cash and investments of approximately $400,000 and a half interest in a Melbourne store.

116 Mr Kensitt's diary note of 14 November 1989 states that the proposal would be that the Bank fund $1,700,000 of the amount required and a bridging portion of $1,250,000 would be supplied by Esanda or other. The diary note records:

"Esanda funding 1.25 million to cover premium to be paid by lessee to acquire 20-year lease term for tavern and licence."

117 At the material time, Esanda was a wholly owned subsidiary of the Bank. Mr Kensitt notes that the Bank had indicated to Mr Kennedy that a valuation showing the breakdown in the freehold value and the licence value of the Bentley Tavern would be required if the Bank was to proceed with the proposal after initial analysis. There is no evidence that the Bank obtained or received a valuation of the land. The diary note then states:

"SERVICING ABILITY

Evidence of ability to service interest cost of either the ANZ facility or the Esanda facility has not been provided and from assessment made it appears an overall shortfall of $125,000 will occur in the first year with a shortfall in the ANZ facility in the second year of $46,000.

Our previous advices to customer by telephone, when he (Kennedy) requested we consider, was to also provide monthly CFF (cash flow forecast) for 2 years to show all income and outgoings from date of settlement to evidence ability to meet all commitments. This was not included with the proposal.

ESANDA

Referred copy of proposal to Esanda with approval of finance broker who had had tentative discussion with Brian Hartley (we referred to John Orr).

Advised Orr of our concern on servicing ability.

Reply by Esanda, after consideration is to decline - also unable to be satisfied on Customer Servicing ability, also have doubts

on lessee's ability to meet premium payment in terms of contract - lessee well known to Esanda. Principal of lessee company is Hedley O'Meara.

Esanda have advised broker they will reconsider if additional security was available, CFF and balance sheet etcetera to 30/6/89 were provided and satisfied servicing ability.

DECISION

Declined in present state. Telephone Kennedy and advised he seek an outside lender to bridge proposal to enable his timing plan to settle urgently (by end of next week is sought). Bank will reconsider long-term lending after clearance of short-term facility by lessee payments for a premium and conditional on financial data evidencing servicing ability."

118 Mr Kensitt said he would have explained to Mr Kennedy why the loan was declined which was that he did not believe they had the ability to meet the repayments.

119 There were also communications between the purchasers' solicitors Warren Harrison and their finance broker Mr Weir. By letter dated 15 November 1989, Mr Weir advised Warren Harrison that Mr Kennedy and Mr Weir had had a meeting with Mr Forbes at Esanda Finance Corporation Ltd. Mr Weir advised that Mr Forbes said Esanda would only consider advancing funds against the freehold of the Bentley Tavern. The letter from Mr Weir to the purchaser's solicitors continues:

"The minimum estimated valuation of the freehold component is $2,750,000, and based on lending to 80 per cent of that figure, a loan of $2,200,000 would be considered. Based on our client's minimum requirement of $2,860,000, this would leave them $660,000 short. Esanda will consider advancing the additional $660,000 provided additional security is available to them.

The only solution immediately apparent to me is for Mr and Mrs Dzienciol to offer security for the $660,000 advance by way of registered mortgage over their interest in the unencumbered property at 403 Wellington Street, Perth.

In my conversation with Mr Dzienciol this morning, I am aware that he is not in favour of this suggestion, but I cannot otherwise

see a resolution of the problem. As additional comfort to Mr and Mrs Dzienciol, they may request their other partners in this venture to assign their interest in the Vendor's terms contract to Mr and Mrs Dzienciol until they receive the first $660,000 to be repaid by the lessee, before the remaining principal of $590,000 plus interest is reduced off the primary loan from Esanda.

...

Both the primary loan of $2,200,000 and the secondary loan of $660,000 would be advanced to all parties involved in the Bentley Hotel investment.

In regard to Mr Dzienciol's concern about having his major asset on the line to secure the additional $660,000 loan, I would put it to him that all of the $1,000,000 deposit, plus the substantial equity in the Bentley Hotel would need to be lost before his personal assets, particularly the Wellington Street property, are in jeopardy.

We expect to hear from Esanda tomorrow in regard to their interest in proceeding on the above basis, and therefore leave it to you, in the knowledge of your client's obligations to perform under the terms of the two contracts they have entered into, to advise them accordingly."

120 The next record of any communication between Mr Kensitt concerning the Bentley Tavern was with Mr Kennedy on 23 November 1989. The diary note records that Mr Kennedy advised that funding for the purchase of the hotel and licence had been approved by Custom Credit Corporation at $3,000,000. However (the note records) Bruce Kennedy advised Mr Kensitt of three scenarios. The first was that the cost of borrowing with Custom Credit was too expensive and he wanted the Bank to reconsider. Mr Kensitt's diary note records in relation to the first scenario that he had previously advised Mr Kennedy that the servicing ability by the partnership and by the Lessee had not been evidenced as previously requested and the decision not to participate was confirmed. The second scenario was that the Lessee was threatening to withdraw unless further concessions were given and Mr Kennedy sought the Bank's approval to fund the purchase of the property, together with funding to allow the Bentley Tavern partnership to set up and operate the hotel until a new lessee was found if the existing Lessee withdraws. The third

scenario was for the Bank to fund the purchase of the property if the Vendor would take up the licence and operate the hotel.

121 The second and third scenarios required funding of $2.1 million and $1.6 million respectively. Mr Kensitt records in relation to scenario two that:

"Advised Bruce we could not give an indication of approval without knowing what end borrowing would be, nor without receipt of detailed cash flow forecasts and budgets; however, because of the lack of experience of the partners in running a hotel business, it is likely the bank would not participate."

122 Mr Kennedy confirmed that he was aware that Mr Kensitt "did not like the proposed purchase of the Bentley Tavern". In relation to the last scenario, Mr Kensitt advised Mr Kennedy that the Bank would consider funding the amount of $1.6 million but as previously requested, the Bank required cash flow forecasts for two years evidencing ability to service borrowings. The diary note continues:

"Advised Bruce we did not see either scenarios, 1, 2 or 3 to be 'bankable' at this time, particularly without full documentation previously requested. Bruce became upset and stated he expected the bank to support them, particularly now that he needs to enter into a new negotiation with settlement to the Vendor required to be met on 6/12/89 without fail.

Advised Bruce we've always been consistent with our expressions of reservation of the bank being able to assist with the purchase. He abruptly terminated the discussion.

Maurie subsequently telephoned to advise unless we assisted he would have to make other banking arrangements.

Reminded Maurie of our past assistance and of our consistent stance on this deal, which the partners entered into without consultation with the Bank or others as to funding and neither did they make their offer 'subject to finance'.

As a compromise to assist the partnership to overcome their problem, advised Maurie we may be able to provide funding for alternative 3 set out earlier, even with the lack of full financial data if he was prepared to provide the additional security of a RGM over the Wellington Street property.

He refused but stated we could take a mortgage over his 33 per cent share as tenant in common over the property on the corner of Pier Street and Wellington Street. Advised him this was unacceptable.

Discussion terminated."

123 Mr Kensitt agreed in cross-examination that the third scenario involved the Bank taking a third registered mortgage over the Bentley Tavern as well as a registered mortgage over the Wellington Street property. He explained this on the basis that he probably had some doubts about the valuation of the Bentley Tavern.

124 The next day, 24 November 1989, Mr Kensitt met with Mr Weir who called to collect various documents. Mr Weir advised Mr Kensitt that Custom Credit had approved funding of $2.3 million which was said to be 70 per cent of purchase price of the land with the customer to find the balance. Mr Weir also advised that the Lessee was still to proceed with the lease on vendor-funded terms over seven months. Mr Weir stated that Custom Credit was providing the funding on the basis that they have a substantial lending relationship and securities from the Lessee and can protect themselves. It was also said that the purchasers of the property were obtaining finance of $.6 million from the Vendor which was the balance of the purchase price plus costs.

125 Later that day Mr Weir rang Mr Kensitt to advise that the Vendor finance of the balance of $.6 million was not to proceed because of the Vendor's cash requirements (diary note exhibit 3/62). Mr Weir advised Mr Kensitt that Mr Dzienciol had accepted that he would need to provide a first registered mortgage over his Wellington Street premises to a lender to provide the $650,000 required to make up the purchase price of the hotel. Mr Kensitt's diary note of the communication records, inter alia, that:

"Ray advises that Maurie requests that we provide these funds. Repayment is to be from lump sum payment by the lessee of the Hotel in 7 months when he makes his final payment of $.95M. In the meantime $21,000 pm rent is to be received which will cover any short term rollover costs of a bill for funding the $.65M requirement and the amount of the bill will also provide sufficient funds after allowing for discount costs for 180 days to meet the settlement amount required on 1/12/89.

Ray Weir is to arrange for title particulars to be provided. We will then need to arrange urgent title search and preparation of RM execution and proceed to settlement on 1/12/89."

126 Mrs Wilczewski confirmed that Mr Weir had orally advised Mr Dzienciol that he would have to put up the Wellington Street premises as security in order to obtain the funding shortfall of $650,000. Mr Kennedy also discussed with Mr Dzienciol the need to provide the property as security.

127 The next event in the chronology is a meeting at the Bank between Mr Kensitt and Mr Dzienciol with Mr Weir on 28 November 1989. The diary note records:

"Purpose: seek funding $650K to assist with the purchase of the Bentley Tavern.

...

Term: seven months.

Repayment: interest only with principal repayable in full on 15 July 1990.

Source: lump sum repayment of Vendor finance provided by Company to lessees.

Servicing Ability: principal borrowing includes interest cost for first 90 days of CBAD Facility, together with set-up fees, s/duties etcetera. Remaining four months to be serviced from Hotel Rental of $21,666 pm.

Security: RM over Wellington Street property, estimated value $1.2 million (customer value $2,000,000)."

128 After recording a safety assessment and a breakup of the purchase costs of the Bentley Hotel, the diary note continues:

"SUMMARY

Mr Dzienciol is a long-standing customer who is known to possess substantial assets. (Stated net worth in finance proposal for hotel purchase is $4.48 million). He has approached us for this funding, despite our unwillingness to finance the venture, as settlement is to occur 1/12/89 (if possible) and shortfall is

required urgently. He has until now refused to offer the Wellington Street property as security, but now concedes that the additional security is required to obtain funding in timeframe provided. He is very anxious to repay this borrowing and retrieve his title free of any encumbrance.

OUTCOME

Funding sought is approved on the basis set out above."

129 The diary note states that Mr Kensitt's assistant, Mr Ryan, was to document the transaction. However, it appears there was no formal Bank offer or confirmation of this funding facility. At that time, it was not the Bank's standard procedure in the Bank to send letters confirming arrangements although they were in the habit of doing so. Mr Ryan prepared the diary note of this meeting. It was Mr Ryan's evidence that Mr Dzienciol was an active participant and driving force in this meeting and that he was aware of the details of the transaction. Mr Ryan's evidence is confirmed by Mr Weir (whose evidence is detailed later).

130 By letter dated 28 November 1989 (exhibit 3/65), Custom Credit confirmed its approval to advance the sum of $2,300,000 to the partnership at an interest rate of 22 per cent for a term of 12 months on the basis of a first registered mortgage over the freehold of the Bentley Tavern and joint and several guarantees by Bray and Mr Kennedy.

131 Mr and Mrs Dzienciol executed the Wellington Street mortgage on 5 December 1989 in the presence of Mr Ryan. Mr Ryan's evidence was that his invariable procedure when witnessing a mortgage is to present the document to the mortgagees, explain that they have the opportunity to take the document away and read it or seek legal advice, give them a general explanation of the purport of the document in particular that on default, the Bank has the power to take possession of the property and sell it and if they consider they understand the document and are willing to sign it, they can sign it. Mr Ryan did not prepare a diary note of this attendance on Mr and Mrs Dzienciol and had no recollection of what had taken place.

132 Warren Harrison prepared a second mortgage of the Bentley Tavern property granted in favour of Mr and Mrs Dzienciol by all the purchasers of the Bentley Tavern (the Company, Mr and Mrs Wilczewski and Mr and Mrs Dzienciol) to secure the repayment by the mortgagors of the sum of $650,000 (and related moneys) to Mr and Mrs Dzienciol. Thus, the Bank advanced the funds to Mr and Mrs Dzienciol who in turn advanced them

to the purchasers (described as the "Bentley Tavern partnership") to facilitate the purchase of the Bentley Tavern. It was the Bentley Tavern partnership's indebtedness to Mr and Mrs Dzienciol that was secured by registered mortgage E258671. That mortgage is dated 8 December 1989 and was executed by Mr and Mrs Dzienciol and others in the presence of their solicitor, Ms Hopkins from Warren Harrison. The mortgage (in standard terms) obliges the Bentley Tavern partnership to repay, inter alia, the principal sum ($650,000) within seven days of the date that the Lessee pays to the Bentley Tavern partnership the balance of the premium payable under the Lease. Further, the Bentley Tavern partnership was obliged to pay interest on the moneys secured by this mortgage.

133 Mr and Mrs Dzienciol also executed documents relating to the advance by Custom Credit to the Bentley Tavern partnership. Those documents included a Deed of Loan dated 8 December 1989 and a mortgage, also dated 8 December 1989, in favour of Custom Credit to secure the Custom Credit loan. Mr and Mrs Dzienciol's signatures on both documents were witnessed by Ms Hopkins. Pursuant to the Custom Credit Deed of Loan which was also executed by Bray and Mr Kennedy as guarantors, Custom Credit agreed to advance $2,300,000 at an interest rate of 22 per cent for a term of 12 months repayable by eleven equal monthly instalments of $42,166.67 followed by one payment of $2,342,166.67 at the end of the term.

134 By letter dated 11 December 1989 from the Bank to Mr and Mrs Dzienciol, the Bank confirmed the purchase from them on that day of commercial bills as detailed:

Face value: $650,000

Yield rate: 18.90 per cent

Term: 91 days

Maturity date: 21/03/90

135 The net proceeds of the bill ($620,749.92) was credited to the Dzienciol Account. The Bank also advised that that account would be debited with the face value of the bills upon maturity date.

136 In January 1990, the Bentley Tavern partners authorised Mr Dzienciol as a signatory to the Bentley Tavern partnership account with the Bank.

137 Mr Kensitt called on Mr Dzienciol and Mr Kennedy at their request on 30 January 1990. Mr Kennedy advised that they wanted to open a retail manchester/curtain shop and needed increased borrowings from the Bank of $50,000. Mr Kennedy also advised that he wanted to take on a new knife agency from an Italian supplier and would need funds for that purpose. Mr Kensitt declined to increase the Dzienciol Group borrowings above their current level, a decision with which Mr Dzienciol agreed. At this meeting, Mr Kensitt discussed with Mr Dzienciol matters relating to the insurance of the residential premises. The diary note records that Mr Dzienciol was to ascertain and advise the Bank whether the strata company had building insurance. If not, Mr Dzienciol was to arrange insurance showing the Bank as mortgagee. Mr Ryan followed this matter up with Mr Dzienciol on four occasions in the period from 2 to 26 February 1990.

138 By February 1990, Warwelt was in breach of the Lease by failing to pay the first instalment of the lease premium of $200,000. The Bentley Tavern purchasers instructed their solicitors, Sly and Weigall (formerly known as Warren Harrison) to consider the appointment of a receiver under the debenture charge granted by Warwelt. Sly and Weigall wrote to Nelson Parkhill BDO on 13 February 1990 requesting a meeting with, inter alia, Ms Hopkins, Mr Kennedy and Mr Dzienciol. The Sly and Weigall letter provides relevant background. The first instalment of the Lease premium was said to be due on 18 December 1989. Less than two hours before settlement was scheduled to take place, Mr Hedley O'Meara approached a representative of the purchasers (unspecified) who requested the Bentley Tavern partnership to settle for a sum minus the first instalment of $200,000 on condition that that sum would be paid by 16 February 1990 at an increased interest rate.

139 On 27 February 1990, Mr Dzienciol visited a specialist cardiologist, Dr O. Tofler. Dr Tofler records that Mr Dzienciol had suffered intermittent chest pain for the previous two weeks. Dr Tofler diagnosed that Mr Dzienciol had had a heart attack and required heart surgery. Mr Dzienciol underwent coronary artery bypass surgery on 27 March 1990. He remained in hospital for a few weeks because he recovered very slowly. While Mr Dzienciol was in hospital, Phillip took over all of the

business affairs in Perth and in Melbourne. Phillip gave evidence that he visited the Bank in April 1990 because of a matter of debt reduction that had to be attended to which had been outstanding for probably six months or more. He said he went to the Bank with Bray and met with Mr Kensitt and Mr Ryan. Phillip had not met either of them before. According to Phillip, he told them that he had taken over his father's business affairs and told them why. His evidence was that:

"I told them that my father had just undergone a heart operation and that he was also very old and he had to retire; that his memory had gone and that he just didn't understand things any more, at which point Mr Kensitt nodded in agreement that he didn't understand things any more and said, 'Yes, Maurie was not the man he used to be'."

140 According to Phillip, they also discussed the matter of debt reduction.

141 Bray corroborated Phillip's evidence. There is no diary note of that meeting. Mr Kensitt had no recollection of the meeting and said that if anyone called to see him at his office about matters, he always made a diary note. Mr Kensitt was absent from work on an overseas holiday from 12 April 1990 to 5 June 1990. Further, it was Mr Kensitt's recollection that he first met Bray at a meeting at the Bank on 2 August 1990. Mr Kensitt denied making the statement attributed to him.

142 In examination-in-chief Mr Ryan was unsure whether he had met Phillip before May 1990. However, he did recall a meeting attended by Phillip and Bray. In cross-examination he concurred that the meeting was in April 1990 but said his only recollection of what was discussed at the meeting was set out in the diary note. There is no diary note of any meeting in April 1990. However there is a diary note of a meeting attended by Mr Ryan with Phillip and Bray in August 1990. Mr Ryan had no recollection of Mr Kensitt saying that Mr Dzienciol was not the man he used to be.

143 On 16 May 1990, Mr Dzienciol signed a power of attorney in favour of Phillip. On that same day the signatories to the Bentley Tavern partnership account with the Bank were changed to "either of M M Dzienciol or L Dzienciol or Phillip Dzienciol conjointly with any of the remaining signatories". By a power of attorney dated 21 May 1990, Mrs Dzienciol appointed Phillip her attorney.

144 On 28 May 1990, Mr Ryan (in Mr Kensitt's absence on leave) received advice from Mr Kennedy and Mr Phillip Dzienciol (who Mr Ryan records as "Maurie's son who is looking after his affairs while Maurie recovers from his operation - power of attorney held") regarding problems associated with the Bentley Hotel. They said the Lessee had run into financial difficulties and Custom Credit had appointed a receiver/manager. It is also recorded that the Lease will be handed back to the partners of the hotel and that:

"In the event that a new lessee cannot be found prior to 15 July 1990 we will almost certainly be requested to extend our facility."

145 Mr Ryan was unable to recall whether the communication referred to in the diary note was by telephone or in person.

146 In June 1990, Mr Dzienciol and other members of in the Bentley Tavern partnership signed a notice of appointment of Messrs Judge and Constable as agents for the mortgagee in possession of Warwelt's business at the Bentley Tavern and also executed a Deed of Indemnity of Messrs Judge and Constable in the usual terms.

147 By a letter dated 12 June 1990 signed by Phillip Dzienciol on behalf of his mother and by Mr Dzienciol, Mr and Mrs Dzienciol charged a term deposit in favour of the Bank. Mr Dzienciol also signed a letter dated 14 June 1990 to the Bank acknowledging and confirming that the letter of charge dated 12 June 1990 was to support an overdraft facility of $15,000 and bank guarantee in favour of SECWA on the account of the Company and the partners of the Bentley Hotel account.

148 Mr Ryan arranged the execution of the 12 June 1990 letter charging the term deposit. He telephoned Mr Dzienciol and advised him he would come to the Pells store with the documents. Shortly after making the telephone call, Mr Ryan went to the store. According to Mr Ryan, Mr Dzienciol had a blank look on his face and did not recall why Mr Ryan was there. Mr Dzienciol knew who Mr Ryan was but did not appear to recall the phone call. Mr Ryan said that this was the first occasion that Mr Dzienciol presented in this way. He also said that he did not tell Mr Kensitt about this experience.

149 An annual review of the Dzienciol accounts was undertaken in mid-July 1990 by Mr Ryan and Mr Kensitt. There is a diary note prepared by Mr Ryan and confirmed by Mr Kensitt (exhibit 4/104) about the review. The diary note records in relation to management ability:

"Business is essentially run by Bruce Kennedy with assistance provided by Maurie Dzienciol. Previous management control was considered competent, however due to diversification into hotel industry (separate partnership) and ill health (Dzienciol), it is possible that downturn in profitability may also be attributable to lack of management control."

150 The next relevant meeting occurred at the Bank on 2 August 1990. Bray and Phillip called on Messrs Kensitt and Ryan and they were joined later by Mr Dzienciol and Mr Kennedy. The Bank officers prepared a diary note of the meeting. The diary note records:

"Preliminary discussion with Bray and Phillip Dzienciol was centred around their concerns regarding the Bentley Hotel. They basically acknowledged that they were not in possession of all the details when the decision was made to proceed with the hotel purchase. In addition, they advised that their father, Maurie, was recovering very slowly from major heart surgery and as a result they would be running all his affairs in future. (Hence the appointment of Phillip as power of attorney.)

After Maurie and Bruce arrived, plans for debt reduction on each account were discussed ..."

151 The subject matters referred to in the diary note are the same as the subject matters which Phillip and Bray say were discussed in April 1990. Phillip's evidence was that he had taken over the Bentley Tavern which was having a lot of cash flow problems and the Bank had been bouncing cheques for very minor amounts without any prior warning. He said he went to the Bank in August 1990 with his brother Bray to complain about that. Further, he also said that they were seeking to refinance the loans from the Bank because of the high interest they were paying. Mr Kensitt was said to have done all the talking and tried to justify the Bank's actions. Phillip's evidence of what was said at the meeting was as follows:

"Ray Kensitt tried to justify their actions and said to me, 'We never ever wanted anything to do with the hotel from the beginning,' and they said - well, he said it was a very bad deal and he added, 'and especially when we heard who the tenant was going to be.' He said to me also, 'We considered it to be way overvalued.' Those were the words he used. I asked him why did he loan the money if he considered it such a bad deal

and he responded by saying, 'We were trying to do your father a favour by loaning him the money. We thought he'd lose a million dollars deposit if we didn't give him the money'."

152 Phillip said he was astounded by these revelations which was the first time he had heard them. Phillip said he had notes of that meeting but he and his solicitors were unable to produce them. Bray also gave evidence that the August 1990 meeting concerned the Bank bouncing cheques and was about refinancing. Bray's evidence was that:

"When Phillip, my brother, was complaining about the cheques that were being bounced that were being used for the hotel, Ray Kensitt offered some sort of explanation, said he didn't want to handle the loan, didn't want to give him the finance in the first place, was quite happy when it fell over the first time, and when it again came back to life he was a bit disappointed and, you know, he mentioned that he would have liked us to receive the finance elsewhere. My brother Phillip asked him, 'If you weren't' - he did actually mention that he wasn't happy with the deal and especially when he knew who the tenant was and when Phillip asked him why the [sic]?? gave the finance in the first place if they weren't happy with the tenant, Ray Kensitt said Bruce Kennedy and the finance broker - I think his name was Weir - and everybody was telling him what a good deal it was, so he went ahead with it."

153 Mr Ryan recollected discussion at the meeting as to how the Bank became involved in lending money for the Bentley Tavern purchase. However, he did not recall Mr Kensitt saying the hotel was way overpriced and a very bad deal especially when he heard who the tenant was. Phillip and Bray's evidence is not confirmed by the diary note. Further, there is no documentary or other evidence to support the assertion that the Bank was bouncing hotel cheques at that time. This became an issue some time later.

154 Mr Kennedy and Mr Dzienciol wrote to the Bank on 8 August 1990 on behalf of the Bentley Hotel partnership and the Company with a debt reduction programme (exhibit 4/108).

155 Another meeting was held on 28 September 1990 between Messrs Kensitt, Ryan and Phillip. Phillip advised that the family's main concern was clearance of the CBAD facility of $650,000 which was to come from the proceeds of sale of the Bentley Tavern freehold but that

because early clearance from that source was unlikely, Phillip requested that the CBAD term be extended to December/January 1991 to enable an orderly sale. At that meeting Phillip expressed concern at the effect of recent dishonours on the Bentley Hotel account.

156 On 19 October 1990, Messrs Kensitt and Ryan met again with Phillip, Mr Dzienciol, Mr Kennedy and a representative from GRI. At this meeting there was further discussion about dishonouring cheques and of Mr Kennedy being unaware of dishonour action taken by the Bank. Further, the CBAD facility had been converted to an overdraft facility as from the expiry of the CBAD on 12 October 1990 to which both Phillip and Mr Kennedy expressed disapproval.

157 In November 1990, Mr Dzienciol contacted the Bank to make a complaint. As a result, the Chief Regional Manager, Mr C J McPherson, arranged to call on Mr Dzienciol on 19 November 1990. He prepared a diary note of his meeting. Mr Dzienciol complained about the pressure he was under to clear his borrowings with the Bank. Mr Kennedy joined the discussion and Mr Kennedy advised that the borrowings had been reduced by $300,000 but the next day they were not allowed to write out a wages cheque on Pells. The reduction in the borrowings came from realisation of Bank securities. Further, it was alleged that two cheques had been dishonoured on the tavern account without advice. Mr McPherson's note records that he summarised to Messrs Dzienciol and Kennedy "that there appeared to be an obvious total breakdown in the communications between the Bank and themselves".

158 Mr Kensitt and Mr Ryan received a copy of Mr McPherson's diary note and prepared a response dated 20 November 1990. They refuted the allegation of a total breakdown in communication. The diary note records:

"This observation (of a total breakdown) is refuted totally as our requirements have been clearly conveyed to customers in the numerous meetings and correspondence with them over the last several months.

A problem occurs in that because of his advanced age, Mr Dzienciol has recently had difficulty in recalling discussions only minutes after they have occurred. As a result, his son, Phillip Dzienciol, carries power of attorney to act on his father's behalf in his business undertakings.

All discussions with any/or Messrs Dzienciol (father), Phillip (son) and Bruce Kennedy have been clearly documented in diary note form, with confirmatory letters forwarded.

...

In the matter of our lending of $650,000 to M M and L Dzienciol, due for full clearance by 15/7/90, letter from the customer dated 8/8/90 and our letter dated 24/10/90 together with meetings documented in diary notes dated 2/8/90 and 28/9/90 clearly advised our requirements."

159 Phillip and a Mr John Lynn (who was the defendants' financial adviser brought in to assist with trying to refinance the debt) called on Messrs Kensitt and Kininmont on 10 January 1991 to discuss the annual review of Pells stores and clearance of funding. The Bank officers were told that all the Group's borrowings were to be refinanced by the Commonwealth Bank. On that basis credit facilities were continued. By February 1991 the Bank was aware from Phillip that the Commonwealth Bank had refused funding and the National Australia Bank ("NAB") had been approached. On 27 February 1991 Phillip advised that a decision from NAB was expected within two weeks and on that basis the limit was extended until 15 March 1991. By letter dated 28 February 1991 Mr Kensitt advised Mr and Mrs Dzienciol of the Bank's preparedness to extend clearance of the debt until 15 March 1991. The letter states:

"Should the debt not be cleared by 15 March 1991 or a letter of advice not received from the National Australia Bank by that date, advising of their intention to pay us out, then the interest rate to be applied to the joint account debt will increase by 1% per annum to our reference rate plus 2% pa (at present 17.25% pa) and the interest rate reviewed monthly thereafter."

160 On 15 March 1991 Phillip advised Mr Kensitt that NAB had declined to provide finance. Phillip advised he had commenced discussions with PIBS to provide finance. That did not eventuate either and subsequently Phillip advised that he would approach City Bank. By late April 1991 Phillip was advising the Bank that Credit Lyonnais had indicated approval in principle to take out the Bank.

161 In June 1991 Mr Dzienciol swore an affidavit in a Supreme Court action commenced by him and his wife against Custom Credit in support of an application for an injunction. In his affidavit Mr Dzienciol swears that he did not get independent advice about the purchase of the Bentley

Tavern and did not read the Custom Credit documents he signed. No mention is made in the affidavit of any disability apart from his age and his heart problem.

162 Phillip wrote to the Bank on 5 September 1991. The letter contained a submission concerning the loan of $650,000. Phillip goes into very considerable detail concerning the conduct of Custom Credit and the action against them. Somewhat ironically Phillip writes:

"We recognise the past efforts of the bank to assist my father when he was forced to proceed with the purchase of the Bentley Hotel, and for which we are extremely grateful."

163 There were ongoing communications between Phillip and the Bank concerning repayment throughout 1991.

164 The Bank's senior credit inspection manager made handwritten notes on a diary note dated 1 April 1992 (exhibit 8) recording a communication between Mr Kensitt and Phillip. The note records:

"1. Please cull d/notes and c/memos (note: retain between inspection dates). Also update numbering of d/notes and separate monthly excess summary sheets from D/notes for easier verification."

165 Mr Kensitt explained that the instruction was to remove diary notes and memos from beyond a certain date from the file. It was not a direction to take anything out of sequence. Mr Kensitt rejected a suggestion that diary notes had been intentionally removed and the remaining notes renumbered.

166 By notice dated 7 September 1992 (exhibit 5/163) the Bank issued a notice of demand under the Wellington Street Mortgage for the amount then owing.

167 Mr Kensitt had been attempting to contact Mr Dzienciol in October 1992 and he (in the company of Mr Kininmont) managed to catch up with Phillip at the Pells store. Phillip's evidence was that Mr Kensitt came to ask his permission to hold a mortgagee sale of the Wellington Street premises. Phillip said in chief:

" ... I was investigating the circumstances of the hotel purchase and I asked Ray Kensitt for information on what had taken place at the time and I asked him if he saw anything wrong with

my father and he very surprisingly told me something that I had never heard of before, he said that my father had phoned them up to come down to the shop and he had phoned them up - he had phoned Ray up about three times within 10 minutes to make the same appointment and Ray told me that when he got to the shop he couldn't quite make much sense of what my father wanted and when he left he was none the wiser. Apparently this happened a few times. I think it might have happened about three times at least. Then he told me that he eventually got sick of coming down to the shop and he had to phone Bruce Kennedy the partner to tell him to stop my father phoning them up all the time because they didn't have time to come down for nothing."

168 Mr Kensitt denied making any such statement. The diary note of the meeting on 14 October 1992 (exhibit 9) was prepared by Mr Kininmont and confirmed by Mr Kensitt. It does not corroborate Phillip's evidence. The diary note relevantly records:

"Phillip then questioned MBB as aspects surrounding original approval of the $650K to M M and L Dzienciol to assist in the purchase of the Bentley Hotel.

From memory - and without the benefit of any files, MBB advised to the best of his ability questions broadly:

1. discussions held regarding the original request of funds.

2. MBB's initial decision to decline whether formally or verbally.

3. insistence by M M Dzienciol that Bentley Hotel was a sound investment.

4. other financial institutions had refused to fund and failure by ANZ to fund would result in M M Dzienciol losing $1,000,000 deposit already paid. M M Dzienciol would only charge Wellington Street property to ANZ."

169 Mr Kininmont did not recall Mr Kensitt making the comments attributed to him by Phillip. Further, Mr Kennedy was not asked and gave no evidence about whether he had a conversation with Mr Kensitt concerning Mr Dzienciol's behaviour as outlined in Phillip's evidence.

170 The defendants' experts were Dr S Gubbay, a specialist neurologist and clinical professor of neurology at the University of Western Australia, and Dr Boon Loke, a consultant psychiatrist. The plaintiff did not call any expert medical witness.

171 Dr Gubbay gave evidence prior to the trial on 8 June 2001. His evidence was videoed and the videotape and transcript were admitted into evidence. Dr Gubbay first saw Mr Dzienciol on 19 March 1985. Mr Dzienciol was referred to Dr Gubbay by Dr North because Mr Dzienciol had suffered an abrupt onset of diploplia (double vision). In his report to Dr North, Dr Gubbay advised that on examination Mr Dzienciol was alert and co-operative. He diagnosed sudden onset of an isolated abducen's palsy related to Mr Dzienciol's diabetes which should (and did) resolve itself.

172 In March 1985 Dr North also referred Mr Dzienciol to Dr Paul Sprague who undertook a CT head scan. The scan is not in evidence. However, in a report dated 11 March 1985 (exhibit 8), Dr Sprague reported to Dr North that, inter alia, "a mild degree of atrophy is evident with quite prominent sulci". This report is equivocal. According to a report from Dr Raiter (exhibit E7) confirmed by Dr Gubbay in evidence, this result could be a normal finding for Mr Dzienciol's age or, alternatively, evidence of mental deterioration.

173 As stated earlier, Dr Tofler was Mr Dzienciol's cardiologist. In a letter dated 4 May 1990 to Dr Walsh, Dr Tofler listed his diagnoses of Mr Dzienciol, the fourth of which was:

"Cerebral dysfunction in the form of short-term memory loss, present before surgery."

174 In a letter dated 31 July 1990 to Dr Tan, Dr Tofler repeated his May diagnosis with an addition. He wrote:

"Cerebral dysfunction in the form of short-term memory loss which was present before surgery, but which his wife thinks has become much worse since surgery. Perhaps a neurologist should be consulted in this regard."

176 Alzheimer's disease is a progressive, degenerative disease of the brain in which brain cells die and are not replaced. It is the most common

form of dementing illness. Some dementias have a physical cause and the symptoms are reversible with medical treatment. Dementia is also sometimes associated with stroke, head injury and other diseases such as Pick's disease and Huntington's. Similar dementia symptoms occur in each case. As Dr Gubbay said in his evidence, Alzheimer's disease is one of exclusion. If a neurologist suspects Alzheimer's disease after doing a history, examination and investigations (the latter with negative results), the neurologist has about an 89 per cent chance of being correct. Generally, the diagnosis of Alzheimer's is not confirmed until post-mortem. Alzheimer's disease usually has a gradual onset. Symptoms may develop gradually and go unnoticed for some time. As the disease advances, changes become marked. The Alzheimer's Association of NSW has developed a checklist of common symptoms for dementia (exhibit 1/3). The checklist is as follows:

"IS IT DEMENTIA? TEN WARNING SIGNS

To help you know the warning signs to look for, the Alzheimer's Association NSW has developed a checklist of common symptoms for dementia. Review the list and check the symptoms that concern you. If you make several check marks, the individual with the symptoms should see a doctor for a complete examination.

1. RECENT MEMORY LOSS THAT AFFECTS JOB SKILLS

It is normal to forget assignments, colleagues' names, or a business associate's telephone number occasionally, but remember them later. Those with a dementia, such as Alzheimer's disease, may forget things more often, and not remember them later.

2. DIFFICULTY PERFORMING FAMILIAR TASKS

Busy people can be so distracted from time to time that they may leave the carrots on the stove and only remember to serve them at the end of the meal. People with dementia might prepare a meal and not only forget to serve it, but also forget they made it.

3. PROBLEMS WITH LANGUAGE

Everyone has trouble finding the right word sometimes, but a person with dementia may forget simple words or substitute inappropriate words, making his or her sentence incomprehensible.

4. DISORIENTATION OF TIME AND PLACE

It is normal to forget the day of the week or your destination for a moment. But people with dementia can become lost on their own street, not knowing where they are, how they got there or how to get back home.

5. POOR OR DECREASED JUDGMENT

People can become so immersed in an activity they temporarily forget the child they are watching. People with dementia could forget entirely the child under their care. They may also dress inappropriately, wearing several shirts or blouses.

6. PROBLEMS WITH ABSTRACT THINKING

Balancing a chequebook may be disconcerting when the task is more complicated than usual. Someone with dementia could forget completely what the numbers are and what needs to be done with them.

7. MISPLACING THINGS

Anyone can temporarily misplace a wallet or keys. A person with dementia may put things in inappropriate places, i.e., an iron in the freezer, or a wristwatch in the sugar bowl.

8. CHANGES IN MOOD OR BEHAVIOUR

Everyone becomes sad or moody from time to time. Someone with dementia can exhibit rapid mood swings -- from calm to tears to anger -- for no apparent reason.

9. CHANGES IN PERSONALITY

People's personalities ordinarily change somewhat with age. But a person with dementia can become suspicious or fearful or just flat, apathetic and uncommunicative.

10. LOSS OF INITIATIVE

It is normal to tire of housework, business activities, or social obligations. The person with dementia may become very passive and require cues prompting him or her to become involved."

177 Dr Gubbay saw Mr Dzienciol on three occasions, the first was in March 1985 and then on 8 and 28 January 1992. There is no suggestion Dr Gubbay diagnosed or suspected Mr Dzienciol of suffering any dementia symptoms of any nature in March 1985. Even though Dr Gubbay did not take a history or otherwise approach the management of Mr Dzienciol in March 1985 with a view to assessing the existence of a dementia, there was nothing in Mr Dzienciol's conduct which alerted the specialist neurologist to suspect dementia.

178 When Dr Gubbay saw Mr Dzienciol on 8 January 1992, he took a history, conducted a mini mental state examination and a physical neurological examination and ordered, inter alia, a CT head scan. Dr Gubbay obtained a relevant history from Mrs Dzienciol and Phillip with whom he had spoken before the first consultation. By letter dated 8 January 1992 (exhibit E2), Dr Gubbay reported his findings to the referring general practitioner, Dr G Tan. In that letter, Dr Gubbay reports the relevant history in the following terms:

"Thank you for referring this patient whom I examined on 8 January, 1992. He was accompanied by his wife and I had previously spoken to his older son, Phillip.

There has been a problem of severe intellectual deterioration which commenced approximately 4 years ago.

...

Apart from his diabetes he has had coronary artery disease with a by-pass operation carried out in March 1990. After that incident there was a further acceleration of his intellectual decline and he has been as bad as he is now for the past 8 months. He has become uncharacteristically aggressive and has also lost his tendency to be a talkative person. He has become much more withdrawn. He puts on the wrong type of clothing and seems to have lost insight into the problems with his memory. He has forgotten his own address and some time ago could not tell the taxi driver where he lived. Eventually, to

avoid embarrassment as he is a proud type of man, he told the taxi driver that he lived in a particular place when he did not. It was heavily raining at the time but he let himself out of the taxi and had to walk home some streets away.

On a number of occasions he has urinated and not only has his pants become wet, but he has actually had a pool of urine on the ground below him. This has happened in business in front of customers and he has not realised that he has done it. His memory span sometimes is only for about 15 seconds and he can repeat himself 20 times in a short space of time. He has been able to cover up his deficiencies shrewdly with jopkes [sic] and retorts.

His long-term memory has been excellent and he is able to recite long prayers off by heart and can remember his childhood in Poland extremely well. He still considers himself to be a full-time worker at his army surplus store.

...

He has got into extreme difficulty in business because he has made agreements at times when he has not been able to understand what he was doing. Apparently some court cases are now pending in this regard."

179 Dr Gubbay confirmed that the information concerning difficulty in business was supplied by Phillip. Dr Gubbay reported on the results of his examination (exhibit E2) in the following terms:

"On examination he was alert, pleasant and co-operative. He was extremely well-dressed and presented well when I talked to him. However, there was evidence of severe intellectual deterioration. I subjected him to a Mini Mental State Examination and his score was only 13-1/2 out of 30 where 23 or less denotes cognitive impairment. He could not even remember his own address saying it was 70 Chelmsford Road, Dianella whereas he lives at 470 Crawford Road, Dianella. He could tell me the approximate time but did not know the date, day, month or year. He was unable to tell me my address and could only remember two out of three words immediately after I had said them. His calculation ability was reasonably well preserved but his short-term memory was extremely poor and

he was unable to remember any of the three words after one minute.

He had difficulty in repeating his sentence of minor complexity and had problems in following simple commands which were presented to him both verbally and in writing. He had a problem with spatial orientation.

A physical neurological examination revealed no abnormality apart from some possible bilateral [grasp] reflexes."

180 Dr Gubbay concluded that Mr Dzienciol had a very significant dementia and ordered a CT head scan. Dr Gubbay said in evidence that the report of the 1992 head scan (exhibit E3) was also equivocal in that you could not say whether the patient was elderly (there being some shrinkage of the brain) or dementing. The scan was not in evidence.

181 However, Dr Gubbay again wrote to Dr Tan following his second consultation with Mr Dzienciol (this time in the company of Mrs Dzienciol and Phillip). He said in his report (exhibit E4):

"Because of his very severe intellectual deterioration and memory loss, but relatively intact personality and general presentation he has become a menace with regard to driving and an extreme threat to his family finances.

The family are absolutely beside themselves in knowing how to restrain his activities in order to save them from severe danger both physically and in regard to his totally irresponsible business pursuits.

It is clear that his intellectual decline over the years has resulted in a serious attrition of his business interests by his making terribly irresponsible decisions particularly in recent times, but possibly going back for as long as 4 years since the onset of his intellectual changes.

His cerebral CT scan shows clear evidence of cerebral atrophy and I feel sure that he has Alzheimer's disease."

182 Although Dr Gubbay was not prepared to rely on the 1992 report of the CT scan to conclude a dementia, he was prepared to rely on his interpretation of the scan, which, as he said in his report to Dr Tan,

"shows clear evidence of cerebral atrophy" rather than just involutional changes from age.

183 In the history given to Dr Gubbay in 1992 he was told by Phillip and Mrs Dzienciol of Mr Dzienciol's decline "possibly going back for as long as four years since the onset of his intellectual changes". Dr Peter Goldswain, a physician in the Department of Geriatric Medicine at Royal Perth Hospital, saw Mr Dzienciol on 31 August 1995 and took a history from Mrs Dzienciol who advised the doctor that Mr Dzienciol had had symptoms compatible with dementia for at least 4-5 years (exhibit 6).

184 Prior to the trial, Dr Gubbay was supplied with unsigned witness statements from Bruce Kennedy, Eva Wilczewski, Ronald Farris, Ian Cassey, Shoshannah (Susie) Dzienciol, Bray and Phillip. On the basis of those unsigned statements, Dr Gubbay said in examination-in-chief that Mr Dzienciol may first have been suffering from Alzheimer's disease from at least the mid-1980s.

185 Dr Gubbay also gave evidence as to the rate of progress of Alzheimer's. He said it can be very variable. Some patients are dead within two years of showing the first signs of Alzheimer's and others are still going after 20 years. The average length of time from first symptoms until death is about seven years. On the basis that the onset of Mr Dzienciol's disease was in the mid-1980s and as Mr Dzienciol was still alive, Dr Gubbay said that Mr Dzienciol had a much slower rate of progress of the disease than the average case.

186 In examination-in-chief Dr Gubbay was referred to a report from Dr Kroenert, a physician in geriatric medicine at Royal Perth Hospital, who saw Mr Dzienciol in September 1997. Dr Kroenert reported (exhibit 7) that Mrs Dzienciol "was very reluctant for us to gain much information while talking with her, which was understandable, when Mr Dzienciol was present". From that statement in Dr Kroenert's report, Dr Gubbay inferred that Mrs Dzienciol perceived that Mr Dzienciol still had a degree of insight (she not wanting to offend him) and from that inference, he concluded there was a slow progression of the disease between 1992 (when Dr Gubbay saw Mr Dzienciol) and 1997 (when he was seen by Dr Kroenert).

187 Based on Dr Gubbay's inference of Mr Dzienciol's level of insight in 1997 (based in turn on Dr Kroenert's statement), he was asked whether that helped him to determine the rate of progression before 1992. He answered in the following way:

"Yes, I think you can extrapolate. You can say that a degenerative neurological disorder tends to progress along an arithmetic progression, so in other words it progresses in a regular fashion with a possible tendency for the condition to accelerate towards the end."

188 He then referred to a study he had undertaken with 40 to 50 of his patients in which he found a steady progression of intellectual decline along an arithmetic progression. The purpose of the study was to try to establish whether patients tended to plateau "because some authors have said that you can have Alzheimer's disease but plateau and then get bad a long time later, but we never found that".

189 Dr Gubbay said in his evidence-in-chief that Mr Dzienciol must have been significantly demented in 1989 or 1988 and he based that opinion on the unsigned witness statements quite apart from extrapolating back from the rate of progress of the disease. Dr Gubbay described Mr Dzienciol's dementia in 1992 as moderate or moderate to severe and in 1989 he described him as having "an early dementia or mild to moderate dementia". When asked what the usual indicia of mild to moderate dementia was, his explanation was as follows:

"Well, when a person is demented, they can have a disturbance not only of their intellectual functions. Dementia means a loss of intellectual function more literally, but it also means that there can be a loss of behavioural functions and so a person who probably had a very significant disturbance of his frontal lobe function like Mr Dzienciol may not necessarily have been picked up with the tests of intellectual function that I had shown in the terms of the Mini Mental State score; but he may have had a disinhibition of his - in fact he would have had a disinhibition of his behaviour. We already know that. The reason why I say that is because he had probable or possible grasp reflexes, he had lost control of his bladder, which is a frontal lobe function, he was disinhibited anyway in the way he was rude to people, and therefore he would have had a very cavalier approach to his life generally. He would have just said, 'Do this' or 'Do that.' In my opinion, he would have been much more likely to have been summary in his decisions and in his impressions about what was going on around him not because of dementia or loss of intellectual function but a loss of judgment, insight and co-operativeness. Those aspects are also important as far as cognitive functions are concerned. They are

part of a dementing process. In those days we also didn't differentiate much between Alzheimer's disease and fronto temporal lobe dementia. I still think he probably had Alzheimer's disease with a fair amount of frontal lobe disturbance, but in a frontal lobe dementia there tends to be much more characteristically a disturbance of personality which anti-dates the disturbance of intellectual functions."

190 Dr Gubbay accepted in cross-examination that his evidence-in-chief concerning the onset of Mr Dzienciol's dementia and Mr Dzienciol's condition in 1989 was primarily by reference to the unsigned witness statements. This must be the case having regard to the physical and behavioural disinhibitions relied on by Dr Gubbay and referred to in the extract from his evidence set out above.

191 In cross-examination Dr Gubbay was referred to an article in the New England Journal of Medicine (exhibit E29) which Dr Gubbay said confirmed what he already knew, namely, that people who have coronary artery by-pass operations often suffer significant cognitive decline following the operation. After being taken in detail to Mrs Wilczewski's unsigned witness statement, Dr Gubbay accepted that from her point of view in 1989 the symptoms of Alzheimer's had not been present to her. He also accepted that Mrs Wilczewski's proposed evidence concerning Mr Dzienciol's deterioration following the heart by-pass surgery was consistent with what was reported in the New England Journal of Medicine.

192 In addition to the statement of Mrs Wilczewski, Dr Gubbay was referred to the proposed evidence of Mr Ray Weir, Ms Marilyn Hopkins and other matters (including Phillip obtaining and relying on his father's signature on bank documents and a power of attorney). Based on that information Dr Gubbay agreed with the proposition that before the heart operation the indications were that Mr Dzienciol had a relatively good neurocognitive function, at least sufficient to understand the transaction that he was involved in. According to Dr Gubbay, based on that proposed evidence there would have been a dementia before the operation but that what happened in this case was that there was a sudden stepwise progression of an impairment of his intellectual functioning following the by-pass surgery.

193 In cross-examination Dr Gubbay was taken to a statement he wrote to the defendants' then solicitors on 25 February 2000. He said:

"In my opinion, Mr Dzienciol senior's condition could well have been sufficiently bad in October and December 1989 so that he would not have understood a complex financial transaction under which he purchased a $4.2 million hotel. I have no way of confirming that this would have been the case but I am merely stating that it was distinctly possible. I would not be prepared to say that it would have definitely have been the case and I am not prepared to say that it would probably have been the case simply on the observations that were available to me at the time that I saw him regarding his dementia in 1992."

194 This was Dr Gubbay's position before seeing the unsigned witness statements. In the same letter Dr Gubbay said:

"The behaviour of a person suffering from dementia, including Alzheimer's disease, may sometimes be so obvious that a reasonable person would be put on notice that the disabled person has insufficient mental capacity to make a worthwhile judgment about the transaction into which they are entering. That is not to say that this would have applied at that time to Mr Dzienciol in 1989. It would have applied, certainly, in 1992 at the time I saw him."

195 Having regard to the conflict between the information in the unsigned witness statements provided to him by the defendants and the matters drawn to his attention in cross-examination, Dr Gubbay was unable to express a view as to whether persons dealing with Mr Dzienciol in 1989 would have been put on notice of Mr Dzienciol's problems. He preferred to leave that matter to the Court. Having regard to Dr Gubbay's evidence as a whole, his position is that the extent and effect of Mr Dzienciol's Alzheimer's type dementia in 1989, and what a reasonable person should be on notice of, is dependent upon findings of fact made by me concerning the observed history before and after the heart by-pass surgery.

196 Prior to the operation, Dr Tofler explained to Mr Dzienciol and Phillip the risks of the operation, ie, that the mortality risk of the procedure was of the order of 2 per cent and the morbidity risk was 3 per cent but Mr Dzienciol stood a very good chance of being pain free for the next 10 years (exhibit 13). Dr Gubbay accepted that Dr Tofler must have been satisfied that Mr Dzienciol was able to make a judgment about whether or not to undergo the operation as a result of the advice he was given. Dr Gubbay was also prepared to concede that the surgeon who

performed the heart by-pass operation, Mr Nicholls, would have ensured that he obtained Mr Dzienciol's consent before undertaking the operation.

197 Dr Boon Loke is a consultant psychiatrist who previously worked as a psychogeriatrician in the public health sector. He provided a report dated 7 June 2001 (exhibit 29). That report identified 35 documents on which it is said he relied in giving his expert opinion. Of the documents specified, nine were not tendered in evidence at the trial. However, no objection was taken by the plaintiff to the report on this basis at the time of the tender (which was conditional) or at a later stage. In his report Dr Loke identified the facts on which his opinion was based. They were as follows:

(1) in 1980 and prior to 1980, others observed Mr Dzienciol as having good memory functions and other intellectual functions (statements of Bruce Kennedy, Susie Dzienciol and Phillip);

(2) Mr Dzienciol was first noted to have impairment of memory of recent events in the early 1980s (Bruce Kennedy, Susie Dzienciol, Bray and Phillip);

(3) besides memory impairment, Mr Dzienciol also started to show impairment of social judgment and impulse control, such as rudeness towards customers and abusiveness towards staff in the early 1980s (Bruce Kennedy, Susie Dzienciol, Bray and Phillip);

(4) after the early 1980s Mr Dzienciol progressively showed more cognitive decline involving impairments of other cognitive domains including loss of the ability to calculate, disorientation in place, inability to recognise people, impairment of language function and further decline in social grace (Bruce Kennedy, Susie Dzienciol and Phillip Dzienciol);

(5) Mr Dzienciol had relative preservation of memory of remote events in the 1980s which provided him with "a social veneer" (Eva Wilczewski and Ian Cassey);

(6) Mr Dzienciol's forgetfulness became obvious to non-family members in the late 1980s (Eva Wilczewski and Ian Cassey);

(7) it became obvious to a real estate agent in 1988 and 1989 that Mr Dzienciol was incapable of making business decisions (Ronald Farris);

(8) Mr Dzienciol had a further decline in his cognitive functions after a coronary by-pass surgery in March 1990 (Eva Wilczewski and Bray Dzienciol);

(9) on 8 January 1992 Prof Sasson Gubbay diagnosed Mr Dzienciol as having a very significant dementia;

(10) on 11 March 1985 Mr Dzienciol was found to have "a mild degree of 'cerebral' atrophy with quite prominent sulci";

(11) a repeat cranial CT scan on 8 January 1992 showed more evidence of cerebral atrophy as well as cerebellar atrophy.

198 Based on that information, Dr Loke stated in his report that Mr Dzienciol was suffering from a dementia syndrome probably of an Alzheimer's type in 1989 and the onset of his dementia was probably in the early 1980s. In answer to the question whether Mr Dzienciol had the capacity in late 1989 to understand "the hostel [sic] transactions" described in the unsigned witness statements, Dr Loke stated in his report that:

"On the basis of Prof Sasson Gubbay's assessment findings in January 1992, I am of the opinion that Mr Maurie Dzienciol had such severity of dementia that he probably did not have the capacity to understand complex business transactions in January 1992. Given the fact that the usual course of Alzheimer's type dementia is gradually progressive and the onset of Mr Dzienciol's dementia was in the early 1980s, and, allowing for some deterioration of his cognitive functions after his coronary by-pass surgery in January 1990, I would be of the opinion that, on the balance of probability, Mr Maurie Dzienciol's dementia syndrome was already at such level of severity that he would not have the capacity to understand the business transaction of purchasing the hotel at the end of 1989."

199 Dr Loke had had no personal contact with Mr Dzienciol. His opinion was based solely on the documents he was supplied. Because of the difficulties associated with the factual foundation on which Dr Loke's

opinion was given, he was asked in examination-in-chief what inference he would draw based on Dr Gubbay's opinion in January 1992 together with the fact that Mr Dzienciol was still alive in 2001. He said the way it can be done would be to imagine a relatively straight line because the usual course of the illness is gradual. His estimation of Mr Dzienciol's situation in 1989 was in the following terms:

"I would think that his cognitive impairment is likely to be moderately severe; maybe a little better than 92 but it would not be significantly better."

200 He later limited this observation to memory impairment rather than impairment in other domains. Dr Loke was also asked about the CT scans performed in 1985 and 1992. Although he had not personally viewed the 1985 or the 1992 scans, was admittedly no expert in radiology and that a CT scan is not diagnostic of dementia, he said the 1985 scan was probably indicative of dementia which was shown up in the later CT scan. Dr Loke's preparedness to provide an opinion by reference only to the reports (without viewing the scans) is to be contrasted with the more cautious approach of Dr Gubbay.

201 Dr Loke had been provided with the same unsigned witness statements given to Dr Gubbay. When Dr Loke was asked to consider factual evidence which appeared to contradict his opinion concerning the extent and effect of Mr Dzienciol's impairment in 1989 (the same as that put in cross-examination to Dr Gubbay), he, unlike Dr Gubbay, was not prepared to alter his opinion. In particular, Dr Loke felt that he needed additional information in order to make a judgment as to whether the further information was inconsistent with the opinion that he had formed. For example, he was referred to the evidence of Mr Doran Ur, a friend of Mr Dzienciol and a Justice of the Peace, who had witnessed Mr Dzienciol's signature on a number of documents up to June 1992 and formed the opinion that Mr Dzienciol understood what he was doing. Dr Loke's response was that because Mr Ur had been a friend of Mr Dzienciol, there was less of a likelihood that Mr Ur would take the risk of upsetting the friendship by checking whether or not Mr Dzienciol had capacity. When questioned about Mrs Wilczewski's evidence of her interaction with Mr Dzienciol and whether that suggested Mr Dzienciol understood the transaction he was negotiating, Dr Loke was unable to answer. He said:

"I don't know the details of the negotiation and also I only understand the nature of the relationship to some degree and

how do they talk to each other, was it one person being more domineering, the other person more submissive?"

202 All he would say was that Mrs Wilczewski's evidence would be considered as a piece of potentially contradictory evidence. Dr Loke's position in relation to all these matters was that he did not have enough information to make a judgment as to whether the events that occurred contradicted his conclusion about capacity.

203 Dr Loke conceded in cross-examination that the basis of his opinion of Mr Dzienciol's capacity in 1989 was Dr Gubbay's assessment in 1992, his projection of the commencement of the illness supported by the unsigned witness statements and allowing for some deterioration after the coronary by-pass surgery. Dr Loke accepted that the decline after coronary by-pass surgery adds a degree of uncertainty in the projection and that he was unable to say what Mr Dzienciol's mental state examination score would have been before the by-pass surgery. The following exchange took place:

"You have told us that you cannot say what his score would have been before and after the operation?---No, no-one can.

No-one can. If you do not know what the score would have been before and after the operation, you cannot express an opinion about his capacity to understand transactions. Do you agree with that? The answer is yes, isn't it?---Yes and no, because the opinion that I provide, it's not just based on the score of the MMSS score. It's also based on various pieces of information that I summarised."

204 I take that final reference to be to the unsigned witness statements. In my assessment of Dr Loke's evidence as a whole, he, like Dr Gubbay, relies on the unsigned witness statements to support his opinion concerning the commencement of the disease and the extent and effect of the disease on Mr Dzienciol's capacity in 1989. Further, whether or not the potentially contradicting evidence put in cross-examination was actually contradictory depended on the supply of further information. In any event, Dr Loke, like Dr Gubbay, accepted that uncertainty about Mr Dzienciol's condition in 1989 is caused or contributed to by the need to establish the effect of the coronary by-pass operation in March 1990.

205 The only remaining medical evidence is documentary, being a letter dated 24 September 1992 by Dr G Tan (exhibit 31), Mr Dzienciol's general practitioner. After the plaintiff successfully opposed the

admission of documents written by Dr Tan without him being called, the defendants' counsel informed the Court that the defendants did not intend to call Dr Tan. There was no suggestion he was unavailable. However, Dr Tan's letter of 24 September 1992 was subsequently admitted into evidence after Dr Loke had, during cross-examination, read into evidence part of the contents of that letter. Dr Tan states:

"This 78-year-old man first consulted me in November 1988 regarding his medical condition of diabetes mellitus and coronary artery disease.

It was then apparent to me that this man was exhibiting symptoms of memory impairment. Subsequent consultations revealed he also had impaired judgment. I felt that he had a clinical diagnosis of dementia in 1989. He had impaired mental competency and would have been incapable in dealing with business matters and would not have understood the complexity of financial transactions and investments, legal documents and bank security dealings in 1988-89. His intellectual impairment [led] him to make irresponsible decisions in his business dealings."

206 It is clear from the expert evidence of Drs Gubbay and Loke that clinical diagnosis of dementia (whether it be of an Alzheimer's type or otherwise) depends upon the history provided to the medical practitioner and any examination undertaken to test any cognitive impairment. The basis for Dr Tan's assessment and conclusions (if they were indeed contemporaneous) is unknown.

207 In order to make findings on matters the subject of the expert evidence adduced by the defendants, it is necessary to determine whether the facts on which the expert opinion was based are supported by the evidence. As already noted, both Dr Gubbay and Dr Loke relied on the factual information in the unsigned witness statements of Ronald Farris, Ian Cassey, Eva Wilczewski, Bruce Kennedy, Susie Dzienciol, Bray and Phillip. The unsigned witness statements were admitted into evidence for the limited purpose of identifying the information provided to the experts and not as evidence of the truth of their contents. The unsigned witness statements provided to Dr Loke were in all material respects the same as those provided to Dr Gubbay.

208 Mr Farris' evidence does not support a finding that Mr Farris was concerned about Mr Dzienciol's capacity in 1989. Mr Farris, a real estate agent, said he first met Mr Dzienciol in the very late eighties and saw him reasonably often in the following five or six years to chat about property-related matters. Mr Dzienciol had taken Mr Farris to inspect the Bentley Tavern after it had been purchased.

209 Mr Farris said he first began to be concerned about Mr Dzienciol when they were discussing the last transaction they ever discussed. Although Mr Farris may have met Mr Dzienciol once or twice after the meeting at which this discussion took place, there were no further discussions concerning property. The discussion of that last transaction took place after he had inspected the Bentley Tavern with Mr Dzienciol. According the Mr Farris' evidence, it seems the last transaction must have been discussed some time after 1993.

210 Mr Farris was unable to recall the details of the last transaction he discussed with Mr Dzienciol but did recall that it took place (unusually) at Mr Dzienciol's home on a Saturday morning. Mr Farris was asked to identify the cause of his concern. He said:

"Well, I mean, at that stage you can't put your finger on anything - I mean, we're going back quite a lot in time - but you do become aware of - and I am a JP and I'm very aware of the fact that people have got to understand documents they read and they see. You have to make sure that they understand what they're doing, and just through his actions I became very concerned that he didn't know exactly what he was doing. He did nothing specific, you could say, that was silly, that would make you think of that, but it's just his general attitude, the blankness when you asked him a question, his answers sometimes totally unrelated to what you're talking about, his observation of what properties should do for him in the future. I just became concerned that all was not correct."

211 Mr Farris' evidence is inconsistent with the unsigned witness statement provided to the medical experts.

212 Mr Cassey is the sales manager of a wholesale business supplying merchandise (such as knives and maglites) to surplus camping stores. He saw Mr Dzienciol approximately every second month from 1983, but could not recall when he last saw him. Mr Cassey did not discuss the

Pells business with Mr Dzienciol because Mr Kennedy used to do the orders. They would discuss general business and family matters. Mr Cassey noticed that Mr Dzienciol became very forgetful and would repeat himself "towards the end when he wasn't in the business any more". Mr Dzienciol would sometimes forget Mr Cassey's name and his products. Mr Cassey was unable to pinpoint when the behaviour he referred to started but appears to suggest that it was 12 months or a little bit more from the end. The evidence establishes that Mr Dzienciol was still attending for work at the Pells' store in 1992. Mr Cassey's evidence throws no light on Mr Dzienciol's condition in 1989 and is inconsistent with his unsigned witness statement (exhibits 25 and 25A).

213 Eva Wilczewski was a member of the Bentley Tavern partnership. She gave evidence of Mr Dzienciol's role in securing her and her husband's involvement in that partnership. In 1989 Mrs Wilczewski was a business broker with Richardson and Wrench. She said she first met Mr Dzienciol in early 1989. She had a listing for a supermarket in the Wanneroo shopping centre and at Mr Kennedy's request called to see Mr Dzienciol and Mr Kennedy at the Pells store to discuss investing in the supermarket. They did not purchase that supermarket.

214 Mrs Wilczewski continued to drop in at the Pells store about once a month. From the outset, the business discussions were primarily with Mr Kennedy. Mrs Wilczewski, like Mr Dzienciol, was born in Poland and Mr Dzienciol spent most of his time with her discussing matters relating to Poland. However, Mr Dzienciol told Mrs Wilczewski that he had owned the Balga shopping centre and had sold it for a big profit.

215 She said she also raised with Mr Dzienciol and Mr Kennedy another one of her listings which was a supermarket in the Ballajura shopping centre. She went with Mr Dzienciol and Phillip to inspect the supermarket in the Ballajura shopping centre which they did not purchase. It appears from other evidence that the dealings in relation to the Ballajura shopping centre occurred in late 1988/early 1989.

216 Mrs Wilczewski went overseas in July 1989 and returned in early October. When she returned to the Richardson and Wrench office, she became aware that Mr Dzienciol was involved with the purchase of the Bentley Tavern and she rang him to congratulate him. She met him a few days later and they discussed developments in Poland. The Bentley Tavern purchase was not discussed. However, subsequently Mr Dzienciol asked Mrs Wilczewski to drop in to the Pells store. She did so. On this occasion he said to her he had made a very good investment with the

Bentley Tavern and bought very well and wanted her to be part of it because he believed they were going to make a lot of money. Mrs Wilczewski told Mr Dzienciol she and her husband did not have the funds to purchase a share. Mr Dzienciol offered her 10 per cent from his share with payment of their share of the deposit, $100,000, to be deferred. On the day Mr Dzienciol put this proposal (or the day before), Mrs Wilczewski had at Mr Dzienciol's request driven them both to the Bentley Tavern to inspect the property. After Mrs Wilczewski discussed the matter with her husband, they decided to take up a 10 per cent interest in the property.

217 Mrs Wilczewski agreed in cross-examination that throughout the time she dealt with Mr Dzienciol, he was always well-dressed and looking tidy.

218 Mrs Wilczewski was asked a question concerning the reason for her involvement in the Bentley Tavern transaction. The question and her response were:

"The reason you went into this transaction was, as you have said, because you were confident that Mr Dzienciol had been a successful businessman and that you were confident that he would make another good decision for you?---Absolutely."

219 Mr Dzienciol returned to the Pells store about seven weeks after his operation. Mrs Wilczewski noticed a dramatic change in him after the operation. Before the operation he had no difficulty at all in recognising her but he did have difficulty after the operation. After the heart operation he started repeating himself often and was very impolite to clients. Before the operation he seldom served clients. After the heart operation, Mrs Wilczewski found it impossible to have a normal conversation with him. She stopped seeing him when he had to be physically removed from the shop. Mrs Wilczewski was then asked (and she responded):

"If he had been like he was when you saw him after the operation in the way that you have just described before the Bentley transaction, would you have gone into the transaction with him?---Absolutely not."

220 Much of Mrs Wilczewski's evidence at the hearing concerning Mr Dzienciol and her observations of him were not contained in her unsigned witness statement.

221 Mr Kennedy also gave evidence concerning Mr Dzienciol. He described him as very astute in business and very knowledgeable in the areas of business and religion. According to Mr Kennedy, Mr Dzienciol was always fairly aggressive with customers and with staff. In relation to staff he demanded a high standard and did not put up with incompetence. He would tell the staff off in front of customers and peremptorily sack them. He was very difficult to work with, and for, and there was a high turnover of staff from the early eighties onwards. The impression from Mr Kennedy's evidence is that Mr Dzienciol was always aggressive and hard to get along with but that he deteriorated over time although the nature and extent of the deterioration is not clearly identified.

222 For some unstated period, the stock in the Pells store was displayed without any pricing and this was when the business was fairly simple. At some stage that changed at least coinciding with an increase in complexity of the business (in particular, aspects relating to stock). According to Mr Kennedy, as Mr Dzienciol "lost his memory" of the prices of stock, he started to ask that prices be marked on the goods and that this happened from about the mid-1980s onwards. Mr Kennedy took over the role of managing the shop from about the mid-1980s. Further, Mr Dzienciol did the banking until the end of the 1980s although at some unspecified time it became difficult for Mr Dzienciol to tally up or reconcile the day's takings and on occasions he forgot to do the banking.

223 Mr Kennedy referred to Mr Dzienciol keeping his private papers in his pockets and aimlessly shuffling through papers in the office. He said "this was probably towards the end of the - middle to the end of the eighties". Further, from the early 1980s Mr Kennedy did not have confidence in Mr Dzienciol's driving. Apparently Mr Dzienciol drove very slowly, a little erratically, had a lot of trouble finding his way around and was not cognisant of what was going on around him. Even so, Mr Dzienciol continued to drive to and from work up to and for some considerable period after 1989.

224 According to Mr Kennedy, Mr Dzienciol's condition had been going downhill before the heart by-pass operation and continued to go downhill after the operation. In his estimation, the operation just exacerbated the situation he was in before the operation. The last occasion on which Mr Kennedy saw Mr Dzienciol was some time in 1992. At that time Mr Kennedy said he would not have been prepared to enter into a business transaction with Mr Dzienciol because it was Mr Kennedy's assessment that Mr Dzienciol could not understand the transaction. The following exchange took place in cross-examination:

"In relation to the Bentley transaction, you discussed it with him?---Yes.

He understood what he was doing sufficiently for you to be able to ask him to release term deposit moneys?---Mm.

- - - and used partially for your benefit?---Mm.

Is that right?---For the benefit of the company, yes.

You asked him to provide his own property by way of security to support the transaction when the $650,000 was necessary?---That's right.

You discussed that with him and you appreciated that he understood what he was doing, didn't you?---Well, he understood that it had to be put up, yes.

You wouldn't take advantage of an old man who didn't know what he was doing, I take it. You're not that sort of person?---I don't consider myself that sort of person.

No, and you have told us that in 1992 you would not have attempted to enter into a transaction where you asked him to put up his property as security or to use his money for the purpose of a transaction and so at some stage between 1992 and 1990 the point was reached where you feel that he was not capable of understanding the transaction. Now, I know it might be difficult and perhaps you can't say other than that it was some time between 1990 and 1992 but I am giving you the opportunity to identify approximately when it was that you felt he wouldn't understand a transaction?---I can honestly say I think it would have been from early 1990 onwards."

225 However, Mr Kennedy restated that the situation with Mr Dzienciol was a progressive one and they had problems with Mr Dzienciol in the business from the middle of the 1980s onwards. I am unable to extract from Mr Kennedy's evidence a clear picture of what Mr Dzienciol's difficulties actually were and when and how they presented themselves. This is in contrast with his unsigned witness statement (exhibits 22 and 22A).

226 Susie Dzienciol was Phillip's former wife. They were married in December 1967, divorced in April 2001 and have two children. She

worked in the Pells store in the period 1981 to 1984 as a salesperson. She said that Mr Dzienciol had been a very smart person who was knowledgeable about business and Jewish history. She also confirmed that Mr Dzienciol was a very overbearing person.

227 When she worked in the store there were prices on some of the stock items but not all. During the period that she worked at the Pells store she noticed a change in Mr Dzienciol's behaviour. He became forgetful, very irritable, very absent-minded and very, very difficult. He would abuse the staff. Susie confirmed there was a big turnover in staff and that he always gave staff a difficult time, but it became worse. He became slightly incontinent around 1982-83. He also became nastier in his personal dealings with Susie Dzienciol. She confirmed that Mr Dzienciol was a bad driver.

228 When her children were small Mr Dzienciol remembered their birthdays. He later forgot. By the time he had 10 grandchildren Susie prepared a chart of relevant birthdays and other dates of family significance. She also gave evidence of an occasion in 1982 when Mr Dzienciol and his wife were to travel overseas and he forgot their tickets and left the front door open.

229 Susie Dzienciol agreed that there was a significant decline physically and mentally after Mr Dzienciol's heart operation in March 1990.

230 Susie Dzienciol's evidence is significantly different from the information in her unsigned witness statement which goes into considerably greater and wider detail of a negative nature concerning Mr Dzienciol's conduct. Further, her evidence concerning Mr Dzienciol's incontinence is substantially different from the information contained in the unsigned statement which suggests a significant ongoing problem.

231 Bray Dzienciol also gave evidence on this issue. He was 17 when he first went to work in Victoria. In the late 1970s he began to manage the Melbourne branch of the Pells business and became a partner. He saw his father once or twice a year when his father went to Melbourne for one or two weeks to do buying for the business. In the early years Mr Dzienciol stayed with Bray when he went to Melbourne. Later he stayed at the Diplomat Hotel in St Kilda. When Mr Dzienciol went to Melbourne on buying trips regardless of where he stayed, Bray saw very little of his father because he (his father) was busy socialising with his friends.

232 In the early eighties Bray said that Mr Dzienciol was becoming forgetful and gave as examples the double booking of appointments or

forgetting about appointments. Bray was also critical of two stock purchases made by his father (army jumpers and toy cameras and binoculars). His spoke to his father approximately once a week by telephone but usually about personal matters. On occasions when Bray would ask his father about business matters, he would refer him to Mr Kennedy.

233 Bray was aware from Bruce Kennedy that the Company was buying and selling properties in Perth during the 1980s. Bray came to Perth in early 1989 to look at the Ballajura shopping centre with Mrs Wilczewski and Mr Dzienciol. The asking price for the centre was $2.5 million.

234 Bray was unable to be specific about the number of times he had been to Perth in the 1980s but thought it was once or twice. Notwithstanding he could not recall the number of visits or when they occurred, he confirmed that his father was quite aggressive to the customers and staff of the Pells store.

235 Bray first heard about the fact and details of the proposal to purchase the Bentley Tavern from Bruce Kennedy. Based on the information given to him by Mr Kennedy, he agreed with the proposal.

236 Bray agreed in cross-examination that Mr Dzienciol went downhill very badly after the heart operation. Much of the detail in Bray's unsigned witness statement concerning Mr Dzienciol's behaviour was not given in evidence at the trial.

237 Phillip gave evidence of an overseas buying trip in 1980 when Mr Dzienciol insisted on buying army jumpers notwithstanding Phillip's objections (based on Bray's instructions). Phillip said that in the early eighties while Susie was working in the shop he also noticed that his father's memory had deteriorated in that he could not remember birthdays, could not remember the names of people and was becoming rude to customers. His behaviour became worse in the mid 1980s and he was doing irrational things such as going through papers in his pockets continuously and not doing the banking properly. Phillip said that his father's driving in the mid to late eighties was dangerous. Phillip also gave evidence of violent exchanges between Mr Kennedy and his father, of Mr Dzienciol's failure to remember the names of old acquaintances, the names of his grandchildren or how many grandchildren he had and his "blankness" on most details in the late 1980s.When asked how he was dealing with all this, Phillip said:

"Well, I wasn't involved in his business affairs, and he would never allow me to be, and I merely thought that he was getting old. There wasn't much I could do. He was always the head of the family and in full control of everything."

238 Phillip also gave evidence that "towards the end" although Mr Dzienciol was still doing the banking for the business, he made many mistakes and would forget what he went out to do and whether or not he had done it. In cross-examination Phillip confirmed that his father did the banking of the Pells business until he had his heart operation and continued to do some banking on his return to work after the heart operation.

239 Phillip confirmed that his father had always been aggressive but that his level of aggression increased over the years.

240 Phillip said towards the end of 1989 his father was rather gaunt and did not seem to be taking care of himself properly. He said his clothing was rather shabby and dishevelled and that he would wet his pants and there were very obvious stains on his pants. Further, according to Phillip, by the end of 1989 Mr Dzienciol's vocabulary had become very restricted and he would use simple words.

241 Phillip said he first heard of the Bentley Tavern transaction in November 1989 from Bray who asked him to look into it for him. Phillip said he asked his father about the matter and his father confirmed they were thinking about buying a hotel but his father did not know the name of the hotel, the address of the hotel or where it was or the purchase price. Mr Dzienciol referred Phillip to Bruce Kennedy for the details.

242 At some stage Phillip inspected the Bentley Tavern with his father and told him that he thought it was overpriced, that it was an inappropriate transaction for him at his age and that Mr Dzienciol should speak to his accountant, Mr Bloor. According to Phillip, Mr Dzienciol did not respond and was "totally blank for the whole time".

243 Mr Dzienciol was placed in a nursing home some time between 1998 and 2000. According to Phillip, "He was totally gone. He didn't know anything at that stage. To put it bluntly, he was like a vegetable." Phillip was asked to try and pinpoint a date or a year when he thought his father was "totally gone". Phillip answered:

"He was pretty much gone in 1990 after his heart operation. There was such a dramatic decline in his capacity. It was very obvious then."

244 Phillip agreed that Mr Dzienciol's memory had been seriously affected by the heart operation. In May 1990 Phillip instructed solicitors Sly and Weigall to prepare the power of attorney for his father. Phillip was aware that the document was of considerable importance because it gave him authority to deal on Mr Dzienciol's behalf with his property and he asked his father to sign it. Phillip explained to Mr Dzienciol what the document was. On the same day as the power of attorney was executed, Phillip obtained forms from the Bank which Mr Dzienciol had to sign to have Phillip joined as a signatory to the Bentley Hotel account. Phillip took those documents to his father and explained what they were to him and got him to sign the authority.

245 In June 1990 Phillip also arranged for his father to sign a Deed of Indemnity in relation to the appointment of Messrs Judge and Constable as mortgagees in possession of the Bentley Tavern business (exhibit 3/93). Phillip signed as attorney on behalf of his mother. Mr Dzienciol also signed a notice of application for a protection order under the Liquor Licensing Act in June 1990 (exhibit 3/94) and witnessed the affixing of the Company's seal to that document. Further, Mr Dzienciol signed the charge over the term deposit dated 12 June 1990 (exhibit 3/95) and Phillip signed as attorney for his mother. There were other examples of Mr M Dzienciol signing documents in July 1991 (exhibits 4/147 and 5/149). On each occasion when Mr Dzienciol has signed the form (a number of which were addressed to the Bank), Phillip explained the document to his father before he signed.

246 Mr Dzienciol was diagnosed with Alzheimer's disease in January 1992. In February 1993 Phillip applied for and obtained from the Guardianship and Administration Board an order that Phillip be appointed as plenary administrator of the estate of Mr Dzienciol with all the powers and duties conferred by the Guardianship and Administration Act 1990. Phillip also applied for and obtained an order that he be granted leave to apply and be appointed limited guardian of Mr Dzienciol subject to Div 3 of Pt V of the Act to consent to any treatment or health care of Mr Dzienciol other than treatment in an approved hospital under the Mental Health Act 1962 (exhibit 24).

247 There is no evidence that Phillip approached Mr Kensitt or any other representative of the Bank at any stage during the 1980s and said that

there was or may be a problem with Mr Dzienciol's memory or judgment or anything of that nature. The following exchange occurred on this subject:

"Why didn't you tell the bank in December or November of 1989 - ring them up and say, 'If my father comes and asks for any money from you, he doesn't understand what he's doing'?---Because I wasn't involved in his business affairs at the time. I was busy doing my own work, for a start. I did not realise fully the incapacity of my father at that time because I wasn't working with him on a day to day basis. I knew he was incapacitated. I didn't believe anybody would even give him the money on a venture like this."

248 Phillip and Bray are beneficiaries of the estate of Mr Dzienciol.

Evidence of Others Who Dealt with Mr Dzienciol

249 Mr Ray Weir was a finance broker retained by the Dzienciol Group to assist in obtaining finance for the Bentley Tavern transaction. He was called by the Bank to give evidence. The substance of his evidence is as follows.

250 Mr Weir attended a meeting arranged by Mrs Wilczewski with Mr Dzienciol and Mr Kennedy at the Pells store which must have been some time after mid October 1987. The people present at the meeting invited him to act on their behalf to secure finance for the purchase of the Bentley Tavern. It was mentioned that they had already made an approach to a bank which Mr Weir thought was the Challenge Bank. There were at least three meetings at the Pells store attended by Mr Weir and on each occasion Mr Dzienciol and Mr Kennedy were present. At one of the meetings, probably the first meeting, Mr Weir negotiated his fee directly with Mr Dzienciol. Mr Weir's fee on commercial loans was generally 1 per cent of the amount of the loan. However, Mr Dzienciol said that on a transaction of that size he would not be prepared to pay that fee and he would find someone else to do it for him unless Mr Weir was prepared to discount it. Following a few minutes of negotiation, Mr Weir and Mr Dzienciol came to an agreement for a 0.5 per cent fee.

251 Mr Weir said that Mr Dzienciol was also sensitive about the interest rate he was prepared to pay on the loan and stipulated a maximum rate. Mr Dzienciol stipulated the ground rules concerning what he expected in relation to the provision of finance.

252 The information in the Austrafin Application was provided by Mr Dzienciol and other people present at the meetings. Mr Weir initially presented the Austrafin Application to a number of banks other than the Bank because he did not normally go to the clients' own bank first. Mr Weir was unsuccessful in obtaining bank finance and reported his lack of success to Mr Dzienciol and the others. He sought and obtained permission to approach the Bank. Mr Weir contacted Mr Kensitt who advised Mr Weir that the gearing level would mean that the Bank could only provide so much and he suggested that Mr Weir approach Esanda. Mr Weir approached Esanda who declined to get involved, so Mr Weir approached Custom Credit. Custom Credit agreed to lend some money but not the full amount because the purchasers had onsold the leasehold portion of the business which was then not available as security to lenders. Accordingly, the lender could only mortgage the freehold land and buildings and Custom Credit were only prepared to lend 80 per cent of the value of the freehold. However, Custom Credit indicated that it would be prepared to provide the full amount if additional security was provided. Mr Weir was sure that Custom Credit would have asked whether the Wellington Street premises were available as security. Mr Weir discussed the availability of the Wellington Street property as security with Mr Dzienciol. Mr Weir's evidence is that:

"He [Mr Dzienciol] wouldn't commit that building to a loan of this size because that would be unfair. He had partners. Why should he put in personal property of his if they weren't putting in other security, so he wouldn't offer it as security for the loan of whatever it was going to be, $2.8m or $3.0m. So we had subsequent discussions about that and it was decided that they would accept the loan from Custom Credit to the 80 per cent of the value of the Bentley property and that the shortfall would be picked up as a separate exercise whereby DKD or Mr Dzienciol, whoever owned that property - I don't recall - would mortgage that separately elsewhere. And the ANZ was thought of by then because they were already the bankers for the group."

253 Mr Weir gave evidence of a second approach to the Bank. He spoke of Mr Dzienciol's position in the following terms:

"On the second occasion the approach was on the basis that we got X amount from Custom Credit on the hotel. Mr Dzienciol and his partners didn't want to let the deal go because, from memory, they had already paid a $1,000,000 deposit, unconditional, and the deposit was arguably non-refundable, so

they were determined to go ahead despite the fact that the Custom Credit rate didn't appear that attractive to them at that stage, because in late 1989 the interest rates had started to go very high, but it was either that or walk away from the deal I think was their option. Mr Dzienciol was then prepared to offer the Wellington Street property as security.

Did he tell you this?---Yes. He said he would make that property available but not if it was tied up in the total borrowings of the $3,000,000 but only if it was limited to the amount of, as it turned out to be, $650,000 because on that basis the arrangement they had with the vendor that he was paying so much a month but then he was paying a lump sum at the end of 9 months or 12 months and that when the tenant paid that amount to conclude his vendor's purchase contract, that will be enough to pay back the $650,000 and he would get back the title to his Wellington Street property at that stage, so he was prepared to commit it in isolation to a limited amount of money for a limited time."

254 Mr Weir also gave evidence of the meeting with Messrs Kensitt and Ryan that he attended with Mr Dzienciol on 28 November 1989. Mr Dzienciol attended at the Bank with Mr Weir because Mr Dzienciol did not want Mr Weir dealing alone with his banker:

"During the course of the meeting that Maurie Dzienciol attended with the bank, did Mr Kensitt say anything about going into the transaction, about whether he should go into the transaction or not?---Yes, I think because he had the opportunity to interview his client there before him he questioned why he would want to enter into the transaction, being a hotel, and he said something - - -

What did Mr Dzienciol - - -?---He said something along the lines, 'Why do you want to go into this? Is this what you want to do at your stage of life?' and - - -

That's Mr Kensitt saying - - -?---That's Mr Kensitt saying to Mr Dzienciol, you know, 'Is this what you want to do?' Mr Dzienciol's reply was along the lines that, you know, 'I've been self-employed all my working life,' or since he migrated to Australia. He was a self-made man. He'd dealt in property over many years and in business and he thought he was in a position

to make his own best judgments and he questioned the right of Ray Kensitt, who was a bank manager and he suggested he'd never been self-employed so, you know, 'How could you make a judgment of this kind? Don't tell me what to do. I'm self-employed, I'm successful and, you know, if I want to enter into this transaction, that's my decision and you don't need to question me on that because you don't have the same background that I do.'

The bank then agreed to lend the $650,000?---They did."

255 Mr Weir was then asked questions concerning whether he observed anything which indicated that Mr Dzienciol was suffering from dementia or Alzheimer's disease or did not understand the transaction. Mr Weir responded as follows:

"No, I would say to the contrary. I took him to be fairly astute, particularly in regard to the way he was negotiating things with me and saying what he would and wouldn't agree to and what property he would and wouldn't offer and those kind of things, so while I appreciated he was an elderly man, he appeared to be fairly astute. He was working in the shop on occasions when I went down there for meetings and on the occasions when Bruce Kennedy was there, Bruce Kennedy always seemed to defer to Mr Dzienciol for decisions or comment on important matters, so I got the impression that Bruce Kennedy was the junior partner in the business and while, you know, he asked questions and had things to say, I think on the important matters and when decisions were made Mr Dzienciol was the one that had the final say. He was the one that wanted to go to the meeting at the ANZ to talk them into giving him the loan on that property and he's also the one that went with me to a meeting to Custom Credit when we went to pick up the approval letter there one day.

I think the Dzienciols' interests also retained solicitors to act. Is that right?---I do recall in regard to the Custom Credit transaction Mr Dzienciol wanted his solicitors to overview the security documents before they were signed and I can remember arranging for the documents to be couriered straight from Custom Credit to DKD's lawyers and then I'm fairly certain that not only did Mr Dzienciol go to that but I think Bruce Kennedy

and Eva Wilczewski all went, and that's probably the occasion when they discussed the documentation."

256 Finally, Mr Weir was referred to exhibit 1/3 which is the pamphlet from the Alzheimer's Association of New South Wales containing the checklist of common symptoms of dementia and warning signs to look out for referred to previously. Mr Weir said none of common signs were evident in his dealings with Mr Dzienciol at that time.

257 Mr Weir rejected a suggestion that Mr Dzienciol's attitude to the transaction was cavalier. Mr Weir said he was always cautious but determined to go ahead with the transaction.

258 The plaintiff called Marilyn Hopkins, a solicitor who in 1989 and 1990 practised at Warren Harrison (later Sly and Weigall). Although Mrs Hopkins was a restricted practitioner at the material time, she had worked in conveyancing in the United Kingdom for 15 years before she came to Australia.

259 Mrs Hopkins acted for the Dzienciol Group from at least October 1989 until she left Warren Harrison in September 1990. In that period she prepared a number of documents including the transfer of the Bentley Tavern property (exhibit 3/54), the Mortgage from the purchasers of the Bentley Tavern to Mr and Mrs Dzienciol (exhibit 3/69), a Notice of Default to the Lessee dated 20 February 1990 (exhibit 3/81), the Appointment of Messrs Judge and Constable as Agents of the Purchasers in possession of the Bentley Tavern business dated 5 June 1990 (exhibit 3/92) and the a Deed of Indemnity in relation to the Judge and Constable appointment (exhibit 3/93). Mrs Hopkins witnessed Mr and Mrs Dzienciol's signature on the Transfer and the Mortgage. Although Mr Dzienciol signed the Appointment of the Agent and the Deed of Indemnity, he did not do so in her presence.

260 Mrs Hopkins also witnessed Mr and Mrs Dzienciol's signature on the Custom Credit mortgage (exhibit 3/70) and the Deed of Loan between Custom Credit and the purchasers (exhibit 3/70.1).

261 During the course of acting for the Dzienciol Group Mrs Hopkins met Mr Dzienciol "more than half a dozen times easily". On occasions it was at the Warren Harrison offices. On any occasion where Mrs Hopkins signed as a witness to a signature on a document, it meant that the document was signed by the relevant person in her presence.

262 In examination-in-chief Mrs Hopkins said that at no time did she have any concern that Mr Dzienciol did not understand the document or the transaction at the time she witnessed the document. As to Mrs Dzienciol, she had no doubts about Mrs Dzienciol's understanding of English and no doubts that Mrs Dzienciol understood the document she was signing and which Mrs Hopkins witnessed.

263 In cross-examination Mrs Hopkins agreed that she received most of her instructions from Bruce Kennedy. Mrs Hopkins had a recollection of going to the Pells Surplus Store on a couple of occasions to witness the signatures on the documents. She said:

"Yes?---So I can recall going to the shop and I can recall witnessing signatures and explaining documents in a room or a bit of a back area of the shop.

Is your recollection that Mr Maurie Dzienciol was prepared to sign anything you put in front of him?---It wasn't entirely my recollection. My recollection is that he wanted to know everything that he was signing. He had concerns, I think, about anything he was signing so I think it was true to say I had to go through the documents with him.

Is that your specific recollection or are you surmising?---No, I'm not surmising that, no. I very definitely recall him having concerns about the documents and me having to go through them. I went through them quite at length when I did.

Which document was that?---I don't recall. I think it would have been the Custom Credit documents, but I also prepared lease documents for the tenant and I would have had those witnessed, I assume."

264 Mrs Hopkins did not have a recollection of the Wilczewskis being in the surplus store to sign documents. Mrs Hopkins' clear recollection was that she explained the Custom Credit documentation to Mr and Mrs Dzienciol. However, she had no recollection of either of them reading the documents.

265 The plaintiff also called Mr Doran Ur. Mr Ur was appointed a Justice of the Peace in Western Australia in June 1983 and lived in Western Australia from, inter alia, 1975 to 2000. Mr Ur was a friend of Mr and Mrs Dzienciol and used to socialise with them approximately once a week. It is unclear when that social contact ceased.

266 Mr Ur witnessed Mr and Mrs Dzienciol's signature on a number of documents in 1991 and 1992. Those documents included a Deed of Variation and Indemnity dated 25 February 1991 between the purchasers of the Bentley Tavern varying the Mortgage to the Dzienciols, a Deed of Release of Messrs Judge and Constable dated 14 February 1992 (exhibit 3/77), an affidavit of discovery in the Custom Credit Action (No 2011 of 1991) sworn by Mr Dzienciol on 6 April 1992 (exhibit 5/157.1) and a Power of Attorney dated 8 June 1992 (exhibit 5/158). By June 1992 Custom Credit had appointed a Receiver of the Company which included the Company's interest in the Bentley Tavern. Custom Credit and the Receiver wanted to sell the land, business and chattels and the remaining purchasers granted to Custom Credit and the Receiver a power of attorney to enable that to occur.

267 There came a time, which Mr Ur could not remember precisely, when he refused to witness Mr Dzienciol's signature because Mr Ur formed the view he was no longer competent.

268 In relation to his role as a Justice of the Peace Mr Ur said he had the habit every time he witnessed Mr Dzienciol's signature of asking all sorts of questions in order to verify whether he was competent and whether he understood what he was signing. He did this because there were many people in town who said that after the heart operation, Mr Dzienciol had become more aged and that he no longer knew what he was doing.

269 On each occasion Mr Ur witnessed the documents referred to, he was requested to do so by Phillip who was present when his father signed the document. Dr Ur confirmed that Mrs Dzienciol was able to speak and understand English.

270 The plaintiff also called Mr Peter Beekink, a solicitor from Phillips Fox who was acting for Custom Credit. Mr Beekink had sworn an affidavit in the Custom Credit action concerning a meeting on 21 May 1990 with a person he identified in the affidavit as Mr Dzienciol. It appears the person who attended the meeting was Phillip not his father.

271 The bank officers were also asked about their observations concerning Mr Dzienciol at the relevant times. Mr Kensitt had no personal experience of family members with Alzheimer's. He was referred to exhibit 1/3 and referred to the ten warning signs. His evidence was that he did not see any of those signs in Mr Dzienciol in the period to the end of 1989. However, the defendants rely on Phillip's evidence that Mr Kensitt made admissions to the contrary on these matters.

272 Mr Ryan was also asked about these matters. Mr Ryan had contact with Mr Dzienciol in relation to the rollover of term deposits. He also arranged for the release of the term deposits with the Bank to enable payment of the deposit for the Bentley Tavern. Further, Mr Ryan was present at the meeting on 28 November 1989 with Mr Dzienciol and Mr Weir at which it was agreed the Bank would advance the Loan and prepared the diary note (exhibit 3/63). Mr Ryan also witnessed Mr and Mrs Dzienciol's signature on the Wellington Street mortgage. Mr Ryan said there was nothing in Mr Dzienciol's behaviour at the time that suggested he did not understand the transaction he was involved in. There was nothing to suggest he was suffering from Alzheimer's. There was nothing to suggest Mr Dzienciol did not understand English and there was nothing to suggest that he had any difficulty in reading documents. Further, there was nothing to suggest that Mrs Dzienciol had a limited knowledge or understanding of English.

273 Mr Ryan had not had any close contact with anyone who had suffered from Alzheimer's disease. His evidence was that he had not noticed any of the common signs of Alzheimer's disease referred to in exhibit 1/3 in the period up to the signing of the Wellington Street Mortgage on 5 December 1989. The only sign observed by Mr Ryan was Mr Dzienciol's memory loss in connection with the letter of 12 June 1990 charging a term deposit.

274 Mr Kininmont took over from Mr Ryan as Mr Kensitt's assistant in January 1991. His first meeting with Mr Dzienciol was in October 1991. On that date Mr Kensitt and Mr Kininmont called upon Mr Dzienciol at the Pells Surplus Store at Mr Dzienciol's request. At this meeting Mr Dzienciol told them of the court case against Custom Credit and requested the Bank to carry on with its funding pending a satisfactory conclusion to that case. He also said that he believed that the Bank's valuation on the Wellington Street premises was "a little underdone" mainly because he thought the property was valuable as a redevelopment site. Mr Kininmont recalled that Mr Dzienciol was talking to Mr Kensitt in a friendly manner and thanked the Bank for helping them out and saying Mr Kensitt was a good manager. Mr Kensitt and Mr Kininmont also called on Mr Dzienciol at his request on 1 November 1991 to discuss the servicing of interest of the CBAD facility. Mr Dzienciol had decided to sell shares in Birtway Ltd for this purpose. At this meeting Mr Dzienciol repeated himself a couple of times. However, he did not seem to have a lack of knowledge about the details of the matters they were discussing.

275 That completes the survey of the evidence adduced at trial. I turn now to deal with the Bank's claims.

276 Proof of the Bank's claims under the Wellington Street Mortgage (for possession of the Wellington Street premises and on the personal covenants for the moneys secured by the Wellington Street Mortgage) and under the Residential Mortgage (for possession of the residential premises) was a matter of formality on the pleadings. The Bank relied on "Dobbs certificates" (exhibit 10) under cl 2(c) of the Wellington Street Mortgage and the Residential Mortgage. Clause 2(c) materially provides:

"And it is declared that a certificate in writing signed by any of the Officers of the Bank ... shall be conclusive evidence of ... the rate or rates of interest from time to time or at any time charged by the Bank or otherwise applicable as aforesaid shall be conclusive evidence of the rate or rates therein certified to and payable hereunder and that a statement of the principal interest and other monies due or owing under or secured by this Mortgage at the date mentioned in such statement signed in a like manner shall be prima facie evidence against all parties interested hereunder of the amounts so due owing or secured."

277 An officer of the Bank certified that the amount of principal, interest and other moneys due and owing under the Wellington Street Mortgage and the Residential Mortgage as at 19 June 2001 was $2,376,135.80 and certified the rates of interest charged by the Bank or otherwise applicable to the Dzienciol account. The Bank has proven, and I so find, that:

(a) Mr and Mrs Dzienciol duly executed the Residential Mortgage and the Wellington Street Mortgage on 12 January 1989 and 5 December 1989 respectively;

(b) demand for moneys secured by the Wellington Street Mortgage was made by the Bank and served on Mr and Mrs Dzienciol in September 1992;

(c) the Residential Mortgage is an all moneys security which secured, inter alia, moneys owing by Mr and Mrs Dzienciol advanced pursuant to the Loan Agreement;

(d) demand for moneys secured by the Residential Mortgage was made by the Bank and served on Mr and Mrs Dzienciol in February 1997;

(e) Mr and Mrs Dzienciol failed to comply with the demands;

(f) as at 19 June 2001, the amount of principal, interest and other moneys due and owing by Mr and Mrs Dzienciol to the Bank is the sum of $2,376,135.80;

(g) subject to the matters raised in the defendants' defence and counterclaim, the Bank is entitled to possession of the residential premises and the Wellington Street premises pursuant to the Residential Mortgage and Wellington Street Mortgage respectively.

278 It is also necessary to rule on the Bank's claim in relation to Loan Agreement. The evidence on this matter is contained primarily in the Bank's diary note dated 28 November 1989 (exhibit 3/63), the witness statements of Bank officers John Sullivan and Patrick O'Dwyer which were tendered by consent (exhibits 11, 12 and 13) together with the Bank's accounting records identified in the witness statements and also tendered in evidence. The evidence establishes, and I so find, the matters pleaded in pars 13 to 31 of the Bank's statement of claim proven. That covers the Loan Agreement and its terms, the purchase and rollover of the first set of bills through to the sixth set of bills as well as the first, second and third variation to the Loan Agreement.

279 The third variation to the Loan Agreement relates to the rolling over of the fifth set of bills to the sixth set of bills which matured on 12 October 1990, being the date on which the Bank agreed to extend the repayment date of the Loan.

280 The Bank relies on the terms of the Overdraft Agreement entered into in October/November 1990 as subsequently varied to govern what occurred after 12 October 1990. The Overdraft Agreement as varied relates to the debiting of the sum of $650,000 to the Dzienciol Account by way of overdraft facility with the Bank charging interest on the outstanding debit balance of that account on a daily basis at the Bank's reference rate for overdraft facilities plus an additional margin of between 1 per cent increasing to 5 per cent. The Bank reference rate is the starting interest rate to which the Bank then adds a margin depending on the classification of a customer. Mr Kensitt said, and I so find, that the margins above the reference rate was not something to which the clients agreed but was a matter dictated by the Bank.

281 Further, Mr Kensitt accepted that Phillip and Mr Kennedy expressed disapproval and resentment at the Bank "converting" the CBAD to an overdraft. However, as Mr Kensitt explained, that is the automatic

consequence of the CBAD facility ending. When the sixth bills matured, the face value of the bills were debited to the Dzienciol Account pursuant to the Loan Agreement as varied which resulted in that account going into overdraft. The account, appropriately being in overdraft, I see no ground, contractual or otherwise, for the Bank, in the absence of agreement, to charge anything other than the Bank reference rates which are set out in annexure 1 to Mr Sullivan's supplementary witness statement (exhibit 12).

282 I turn now to consider the defendant's unconscionability defences and counterclaims, starting with the relevant legal principles.

283 This is not a case where the mortgages are said to be void at law on the basis of non est factum. In particular, it is not alleged that Mr Dzienciol's faculties were so defective that he did not have contractual capacity because "he [did] not really know what he [was] doing - that his mind [did] not go with his deed": Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 at 401; Petelin v Cullen [1975] HCA 24; (1975) 132 CLR 355 at 359 -360.

284 The equitable doctrine of unconscionable conduct is a species of that genus of equitable intervention to refuse enforcement of or to set aside transactions which, if allowed to stand, would offend equity and good conscience: Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457 at 477 - 478. There is no uniformity in nomenclature of the equitable doctrine in the case law. It is variously described as "unconscionable conduct" "unconscionable dealings" and "unconscionable contracts or bargains". The latter description owes much to the origin of the jurisdiction which is to be found in the protection afforded to expectant heirs who entered into commercially disadvantageous or unfair contracts.

285 The equitable jurisdiction arises whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands: Blomley v Ryan at 415 per Kitto J.

286 The various strands of the doctrine are identified by Deane J in Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1982) 151 CLR 447 at 474. He said:

"The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or 'unconscientious' that he procure, or accept, the weaker party's assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable:"

287 Much is written as to what constitutes a special disadvantage or special disability. Fullagar J said in Blomley v Ryan at 405:

"The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other."

288 The situations identified by Fullagar J are examples of the underlying principle which is that whenever one party by reason of some condition or circumstance is placed at a special disadvantage vis-a-vis another and unfair and unconscientious advantage is then taken of the opportunity thereby created. The disabling condition or circumstance must be one which "seriously affects the ability of the innocent party to make a judgment as to his or her own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party": Commercial Bank of Australia Ltd v Amadio per Mason J at 462.

289 Further, the particular examples identified by Fullagar and Kitto JJ in Blomley v Ryan (cited with approval in Commercial Bank of Australia Ltd v Amadio) are not intended to and do not reflect general assumptions about the ability of people in the specified category to make a judgment as to his or her own best interests. In particular, a person's age, whether it be youth or seniority, does not automatically qualify a person as being at a

special disadvantage: Page v Commonwealth Bank of Australia, unreported; CA NSW; CA40746 of 1994; 6 October 1995 Gleeson J at 8. The issue is not a matter of mere academic interest. The identification of the requisite disability can have a significant impact on the outcome because of the requirement that the party in the stronger bargaining position knew or ought to have known of the disability.

290 Further, special disability or special disadvantage cannot be determined in a vacuum. Regard must be had to the person's individual circumstances including in a case such as this, their knowledge of and involvement in business and the circumstances of the transaction under consideration. Thus, the assessment whether a person is able to judge what is in his own best interests can only be made by taking into account all the relevant factors which arise in a particular case. Age in combination with other factors has resulted in transactions being set aside: Commercial Bank of Australia v Amadio; Blomley v Ryan and Adenam v Buise [1984] WAR 61.

291 As to the requirement that the stronger party have knowledge of the special disability, Mason J in Commercial Bank of Australia v Amadio (at 462) put the requirement in terms of "when the other party knows or ought to know of the existence of the condition or circumstance and its effect on the innocent party". However, the fact that the bank in Amadio had knowledge of facts which would raise a possibility of special disadvantage or disability in the mind of any reasonable person was sufficient: Commercial Bank of Australia v Amadio per Mason J at 467 - 468. Deane J in Amadio required the disability to be sufficiently evident to the stronger party to make it prima facie unfair or unconscientious to procure the weaker parties' assent.

292 I turn now to the question of the fairness or otherwise of the impugned transaction. This is a matter usually considered by reference to whether the consideration for the transaction was adequate. The cases establish that inadequacy of consideration is a significant factor in determining whether the stronger party acted unconscionably. In those cases concerning expectant heirs, the transactions were invariably for an undervalue and in Fry v Lane (1888) 40 Ch D 312, Kay J said that a considerable undervalue was a necessary element to ground relief.

293 Fullagar J in Blomley v Ryan did not agree that inadequacy of consideration was necessary. However, inadequacy of consideration can be important either as supporting the inference that a position of

disadvantage existed or as tending to show that unfair use was made of the occasion. Fullagar J said (at p 405):

"[Inadequacy of consideration] will almost always, I think, be ' ... an important ingredient in considering whether a person did exercise any degree of judgment in making a contract or whether there is a degree of unfairness in accepting the contract ... ' (per Page Wood VC in Wiltshire v Marshall)"

294 Deane J in Commercial Bank of Australia Ltd v Amadio agreed that inadequacy of consideration was not essential. However, he noted that in most cases where relief had been granted there had been inadequacy of consideration moving from the stronger party. He said (at 475):

"Notwithstanding that adequate consideration may have moved from the stronger party, a transaction may be unfair, unreasonable and unjust from the viewpoint of the party under the disability. An obvious instance of circumstances in which that may be so is the case where the benefit of the consideration does not move to the party under the disability but moves to some third party involved in the transaction."

295 Deane J was referring to a third party security. Mason J in Commercial Bank of Australia Ltd v Amadio refers to the stronger party making unconscientious use of his or her position "to the detriment" of the weaker party. By focussing on the adequacy of the consideration, attention is directed to the fairness or otherwise of the bargain itself. This action raises the question whether the detriment has to arise directly from the bargain or whether it can be consequential.

296 The role of independent advice in this equitable doctrine also arises for consideration. The matter was considered by the High Court in Bridgewater v Leahy. The Judge at first instance in that case had concluded that even if the weaker party had been independently advised, the end result would likely to have been the same. The High Court recognised there was authority for that approach in relation to undue influence where the focus was on the quality of the assent of the disponee to the transaction. However, the Court said (at 485):

"Where the complaint is of unconscionable dealing, the point is rather different. As Manning J put it in Re Levey; Ex Parte Official Assignee, 'The court does not allow any person to take advantage of any known weakness of the vendor' and the court asks whether that party had the 'opportunity' of professional

advice as to 'the effect of what he [was] doing'. This denial of the opportunity to have 'the assistance of a disinterested legal adviser', rather than speculation as to what might have followed had it been pursued, is an element in the unconscientious conduct in respect of which equity intervenes to deny the entitlement of the disponee to retain the property in question unless the disponee shows the disposition to have been 'fair, just and reasonable'."

297 The High Court in Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 held that the principle in Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649 continues to apply and has not been subsumed by the decision in Commercial Bank of Australia Ltd v Amadio. It is probably correct to describe the Garcia principle as closely related to, but distinct from, the equitable doctrine of unconscionable dealings in the same way as the equitable doctrine of undue influence is distinct from unconscionable dealings.

298 In Garcia a married woman signed a number of guarantees at the request of her husband. The guarantees related to loans made by a bank to, inter alia, a company. The wife was a director of the company. The trial Judge found the wife was not directly involved in the company and in fact obtained no real benefit from entering into the transaction and was thus a volunteer. The trial Judge also found that the husband had assured his wife that there was no risk involved; that the wife did not understand the guarantee to be secured by a mortgage, she had given over the matrimonial home; and that the bank did not explain the effect of the guarantees to her. The High Court held that it would have been unconscionable for the bank to enforce the guarantee against the wife as:

(a) the wife did not understand the purport or effect of the transaction;

(b) the wife was a volunteer because she did not obtain any financial benefit from the transaction;

(c) the bank was taken to have understood that, as a wife, the appellant may have reposed trust and confidence in her husband in matters of business and therefore to have understood that the husband may not have fully and accurately explained the purport and effect of the transaction to the appellant;

(d) the bank took no steps to explain the purport and effect of the transaction to the wife or to ascertain whether the effect of the transaction had been explained to her by a competent, independent and disinterested stranger.

299 This is category-based liability based on the general assumption that married women repose trust and confidence in their husbands. The bank's knowledge that the proposed guarantor fell within the relevant category (married woman) triggered the relevant legal consequences.

The Equitable Principle and the Doctrine of Survivorship

300 At the time Mrs Dzienciol executed the Residential Mortgage and the Wellington Street Mortgage, she was a co-owner as joint tenant with Mr Dzienciol of the Residential premises and Wellington Street premises.

301 Each of the mortgages, being in standard form, gives rise to contractual and proprietary rights. Mrs Dzienciol's contractual obligations under each mortgage continue notwithstanding her death. The question arises whether any equity Mrs Dzienciol has to set aside the property aspects of the mortgages continues notwithstanding her death. The answer would be yes if she was a co-owner as tenant in common. The issue is whether the doctrine of survivorship alters that outcome. The starting point is the principle that (subject to s 116 of the Transfer of Land Act ("TLA")) where one joint tenant co-owner of Torrens system land mortgages his or her interest in the land and dies before the other co-owner, the co-owner by virtue of the doctrine of survivorship takes the whole of the land free from the mortgagee's interest: Lord Abergavenny's Case [1572] EngR 231; (6 Co. Rep 78(b); 77 ER 373). By parity of reasoning, Mrs Dzienciol's equity would not pass on her death to Mr Dzienciol who must depend on his own equity.

302 However, it has been suggested by Mr R F Baird in his article Mortgage by a Joint Tenant - Torrens System (1936) 9 ALJ 431 at 432 that s 116 of the TLA alters the position where one joint tenant has mortgaged his or her interest in the land on the basis that when the mortgagee asserts a right or remedy under the mortgage, that affects a severance of the joint tenancy.

303 Section 116 of the TLA materially provides:

"In addition to and concurrently with the rights and powers conferred on a mortgagee ... by this Act every present and future mortgagee for the time being of land under this Act ...

shall until a discharge from the whole of the moneys secured or until a transfer upon a sale or an order for foreclosure (as the case may be) shall have been registered have the same rights and remedies at law and in equity ... as he would have had or been entitled to if the legal estate in the land ... had been actually vested in him with a right of the mortgagor of quiet enjoyment of the mortgaged land until default ..."

304 Leaving s 116 of the TLA to one side, a joint mortgage by all co-owners of Torrens title land does not effect a severance of the joint tenancy: Wright v Gibbons [1949] HCA 3; (1948) 78 CLR 313. Section 116 of the TLA does not alter the position in a case where all joint tenants act together because a mortgage of land by all joint tenants under the general law (unlike a mortgage given by one joint tenant) does not sever the joint tenancy: Re Allingham; Allingham v Allingham [1932] VicLawRp 66; [1932] VLR 469. On Mrs Dzienciol's death, Mr Dzienciol became the sole owner of the land by virtue of the doctrine of survivorship. The mortgage by Mr Dzienciol of his interest in the land now covers the whole fee.

305 Accordingly, Mrs Dzienciol's claim to set aside the Residential Mortgage and the Wellington Street Mortgage survives in relation to the contractual but not the proprietary aspects of the mortgages. Mr Dzienciol's claim in relation to the mortgages now relates to the whole of the land. It is not derivative in any way on the success of Mrs Dzienciol's claim.

Unconscionable Conduct - Issues and Findings - Mr Dzienciol - Wellington Street Mortgage

306 The first issue is whether in January and December 1989 Mr Dzienciol was suffering from a special disability or disadvantage vis-a-vis the Bank. The defendants in their pleadings say the special disadvantage in relation to the Wellington Street Mortgage (and the Residential Mortgage) was that Mr Dzienciol did not understand the nature or effect of the mortgage transactions because he:

(i) was elderly and was suffering from Alzheimer's and/or dementia and could not form any independent judgment about the mortgage;

(ii) had only a limited knowledge and understanding of the English language;

(iii) had poor eyesight and consequently was unable to read the mortgage document properly.

307 Although English may not have been Mr Dzienciol's native language, the evidence does not support a finding that he had limited knowledge and understanding of English. Indeed, the evidence is strongly to the contrary. Further, although Mr Dzienciol required spectacles (and on occasions a magnifying glass) to read, I am not satisfied that the need for these aids meant he was unable to read the Residential Mortgage or Wellington Street Mortgage document "properly".

308 There is no dispute that Mr Dzienciol was 74 and 75 when he signed the Residential Mortgage and the Wellington Street Mortgage respectively. The defendants also say that at the material times Mr Dzienciol was suffering from Alzheimer's disease or a similar type of dementia with the pleaded effect that Mr Dzienciol did not understand the nature and effect of the mortgages and could not form any independent judgment about them.

309 In its closing, the Bank submitted that the defendant had to prove that Mr Dzienciol was suffering from Alzheimer's disease and that the effect of the disease was that Mr Dzienciol did not have the capacity or ability to understand the transaction. The specific transaction was not identified. If Mr Dzienciol had the capacity or ability to understand the transaction, there is, according to the Bank, no special disadvantage or disability. This proposition was put at large and not by reference to how the issue had been pleaded by the defendants.

310 I do not understand the Bank to be saying that if a person has contractual capacity there can be no special disability or disadvantage. That is clearly not so having regard to the low threshold for contractual capacity. Even so, the Bank's formulation is unduly narrow in two respects. Firstly, it fails to expressly recognise impairment of capacity or ability as a relevant criterion. Secondly, impairment is not confined to one which impacts on a person's capacity to understand a transaction. A person may understand a transaction and yet still be under a special disability: Bridgewater v Leahy. The test is whether the condition or circumstance affects a person's capacity to conserve his own interests or make a judgment as to his own best interests. For example, the medical evidence in this case was to the effect that a person with a dementia may in certain circumstances understand a transaction but lack (or have

impaired) ability to make a judgment as to whether it is in their best interests.

311 It is necessary to firstly identify the transactions to which the question of Mr Dzienciol's capacity has to be addressed. As previously stated, the defendants' unconscionability claims focus on the mortgages. The defendants do not seek to attack or set aside as unconscionable the underlying agreements for which the Residential Mortgage and Wellington Street Mortgage were granted. Such a focus is understandable in cases where a mortgage or other security is provided by an arms-length third party, by which I mean a security provider who is not also the principal debtor or an associate of the principal debtor. However, it is to be expected in most situations where the person seeking relief is (directly or indirectly) the principal debtor and a party to the underlying agreement pursuant to which a mortgage is granted as security, that the circumstances surrounding and the terms of the underlying agreement which usually (as in this case) contains a term requiring the provision of security will be relevant to capacity and to the propriety of the conduct in taking the security. These are not matters of arid pleading technicality. I have to rule on whether Mr Dzienciol had a special disability which affected his capacity (in broad terms) to conserve his own interests vis-a-vis the Bank in relation to the impugned transactions. In relation to the unconscionability claim concerning the Wellington Street Mortgage, the question of capacity may relate to one or more of:

(2) the entry into the Loan Agreement which resulted in the grant of the Wellington Street Mortgage;

(3) the entry into the Bentley Tavern transaction and the Lease Agreement.

312 Although there is no unconscionability claim directed specifically at the Loan Agreement or equitable relief sought in relation to that agreement, the commercial prudence of obtaining the Loan the subject of the Loan Agreement is raised in subpars 15(c), (d) and (e) of the defendants' counterclaim and was the subject of evidence. Further, it was the defendants' case at trial that the Bank acted unconscionably in advancing the Loan. Evidence was also admitted on question 3. There is (properly) no claim against the Bank in relation to the entry into Bentley Tavern transaction and the Lease Agreement/Lease. The Bentley Tavern partners had entered into the second contract of purchase and the Lease Agreement prior to entering into the Loan Agreement and the Wellington Street Mortgage. However, the defendants rely (in par 15(f)) on the

Bank's alleged undisclosed reservations about the Bentley Tavern transaction and doubts about the Lessee's ability to perform its obligations as grounds of unconscionability in taking the Wellington Street Mortgage. In this way, Mr Dzienciol's capacity in relation to the Bentley Tavern transaction arises or may (depending on the factual findings) arise for consideration.

(a) in 1989 Mr Dzienciol was suffering from dementia of an Alzheimer's type (for convenience I hereafter abbreviate the question to whether Mr Dzienciol was suffering from Alzheimer's disease); and

314 The defendants say I do not, in this context, have to make findings of fact as to what people observed in their dealings with Mr Dzienciol at the relevant time because that "history" is irrelevant to the expert medical evidence concerning the existence and extent of Mr Dzienciol's Alzheimer's disease in 1989. I do not accept that submission. Both Dr Gubbay and Dr Loke relied on the unsigned witness statements supplied to them by the defendants in forming their opinions on the questions they were asked, namely, when the disease commenced and whether Mr Dzienciol had the capacity in 1989 to understand "the hotel transaction". It is necessary to make findings on the history in order to evaluate the admissibility or weight to be given to the expert evidence. Further, these findings will be relevant to the Bank's knowledge of any relevant disability.

315 However, I do acknowledge that there are difficulties in drawing inferences about the existence and extent of Alzheimer's disease from observed behaviour. In relation to negative behaviour, due allowance must be made for an individual's behavioural eccentricities which existed prior to the onset of the disease. Care also needs to be taken about inferences to be drawn from observed "normal" or "expected" behaviour. Of particular relevance in this case is Mr Dzienciol's ability, identified by Dr Gubbay, to camouflage or mask the signs of his cognitive decline. Thus, how Mr Dzienciol presented himself and what people observed may not always be an entirely accurate reflection of the presence or extent of the disease. In addition, at least in the early stages of the disease, its symptoms or manifestations are or may be consistent with behaviour regarded as normal (in the sense of not being a symptom or product of a disease process). This is clearly demonstrated by the Alzheimer's

Association of NSW checklist of symptoms set out earlier. These matters make even more difficult the already problematic task of giving reliable evidence in 2001 of Mr Dzienciol's behaviour in the 1980s.

316 Phillip gave detailed and specific evidence concerning Mr Dzienciol's behaviour and, by inference, his cognitive capacity up to and by the late 1980s. I have already outlined his evidence. In summary, the purport of Phillip's evidence was that:

(a) Mr Dzienciol's short-term memory was impaired in that he could not recall the names of acquaintances, the names of his grandchildren, how many grandchildren he had, and in November 1989 was unable to recall the name, address or the purchase price of the Bentley Tavern;

(b) Mr Dzienciol's comprehension ability was obviously impaired as exemplified by his "blankness" including total blankness when Phillip advised him that the Bentley Tavern was overpriced and an inappropriate transaction for a person of his father's age;

(c) Mr Dzienciol presented as shabby and dishevelled;

(d) Mr Dzienciol was incontinent and there were very obvious signs of his incontinence in the staining on his pants;

(e) Mr Dzienciol's vocabulary was very restricted and he would use simple words.

(f) Mr Dzienciol had violent exchanges with Mr Kennedy.

317 It is to be inferred from Phillip's description of the nature and extent of Mr Dzienciol's conduct and condition in the late 1980s that it was such that a reasonable person who had dealings with Mr Dzienciol in that period would be put on notice of the possibility that Mr Dzienciol was cognitively or otherwise impaired so as to affect his ability to conserve his own interests. I do not accept Phillip's evidence (and the inferences) on these matters. I have reached this conclusion for a number of reasons.

318 Firstly, Phillip's evidence is not supported by and in some cases is inconsistent with that of independent witnesses who had dealings with Mr Dzienciol in 1989. Those witnesses, whose evidence I accept, are Mrs Wilczewski, Mr Weir, Mrs Hopkins, Mr Farris and Mr Cassey.

319 Mrs Wilczewski and her husband assumed part of the risk of the Bentley Tavern transaction by taking a 10 per cent interest. It was Mr Dzienciol who proposed that Mrs Wilczewski and her husband take

that share which came from Mr and Mrs Dzienciol's then 60 per cent interest in the venture. Mrs Wilczewski was a business broker at the relevant time. She had professional and social contact with Mr Dzienciol from the time they investigated the possible purchase of the Ballajura shopping centre in December 1998 or January 1989, during 1989 and up to and after the Bentley Tavern transaction. Mrs Wilczewski had confidence in and relied on Mr Dzienciol's business acumen and his stated belief that they would make a lot of money which is why she agreed to take a 10 per cent interest. It defies commonsense to accept that a person in Mrs Wilczewski's position would invest in such a financially significant transaction as the Bentley Tavern venture based on her confidence in and assurances from a man who presented to the world, intellectually and physically, in the way described by Phillip. The man who presented the investment proposition to Mrs Wilczewski she described as always well dressed and looking tidy. This description of Mr Dzienciol is to be contrasted that given by Phillip of a man in urine-stained clothing looking shabby and dishevelled with papers stuffed in his pockets.

320 Mr Weir's evidence of Mr Dzienciol's interaction with him about the Bentley Tavern transaction is also inconsistent with Phillip's description of Mr Dzienciol's condition in 1989. Mr Dzienciol actively participated in instructing Mr Weir and in negotiating his brokerage fee. Mr Weir saw nothing in Mr Dzienciol's interaction to cause him any concern. To the contrary, Mr Weir's evidence of Mr Dzienciol's interaction with him and the Bank portrays Mr Dzienciol as positively capable of protecting and furthering his own interests.

321 Mrs Hopkins was the solicitor acting for Mr and Mrs Dzienciol and the other members of the Bentley Tavern partnership in relation to the Bentley Tavern transaction. She met with Mr Dzienciol on more than half a dozen occasions. She explained the transactions to and witnessed the execution of documents by Mr Dzienciol. Her recollection was that Mr Dzienciol wanted to know everything about what he was signing and she went through the documents with him. She had no concerns about Mr Dzienciol's understanding of the transactions or the documents.

322 Mr Farris met Mr Dzienciol in late 1989 and discussed business matters with him until Mr Farris suspected that something was amiss with Mr Dzienciol which occurred some time in the 1990s.

323 Secondly, if Mr Dzienciol was in the condition described by Phillip, it is to be expected that Phillip or other members of the family, particularly Bray whose financial position was closely linked with his

father's, would make some attempt to limit or supervise his father's actual or effective involvement in investment and other business decisions. I find that no such steps were taken prior to 1990. Each of Phillip and Bray were aware that Mr Dzienciol (and Mr Kennedy) were looking for financially significant property investment opportunities in 1989 (including considering whether to purchase the Ballajura shopping centre). There is no evidence of any discussions within the family during 1989 (or before) of any concerns they had about Mr Dzienciol and what, if any, steps they could or should take. Notwithstanding Phillip's evidence that he thought the Bentley Tavern was overpriced and inappropriate for his father, there is no evidence that he took any action of any nature to communicate his misgivings to anyone save his father. I infer he did not do so. Part of his explanation for not advising the Bank in 1989 of his father's "incapacity" was that he did not believe anybody would even give him the money for the Bentley Tavern transaction. I do not regard that explanation as credible.

324 Thirdly, the history given by Mrs Dzienciol and Phillip to Dr Gubbay in 1992 is, as is to be expected in the circumstances, equivocal. Even in the context of existing litigation against Custom Credit, they referred to Mr Dzienciol's decline "as possibly going back as long as four years since the onset of his intellectual changes".

325 Fourthly, my impression of Phillip as a witness was that he was prepared to, and did, give evidence with a view to the outcome of the case rather than with due and proper attention to giving his best recollection of matters having regard to the obvious difficulties associated therewith and the long delay between their occurrence and the trial. Further, Phillip's evidence goes considerably further in its scope, nature and detail than that of the other witnesses who gave evidence of negative behaviour, namely, Bray, Susie and Mr Kennedy. I deal with that evidence below.

326 Phillip's evidence of Mr Dzienciol's condition in 1989 links with his evidence concerning Mr Kensitt's knowledge of that matter. Phillip's evidence was that Mr Kensitt was aware of facts which put him on notice of Mr Dzienciol's cognitive problems. That evidence is based on alleged admissions made by Mr Kensitt at meetings at the Bank's offices in April 1990 and October 1992. The evidence is referred to earlier and I do not repeat it here.

327 Before dealing with the issue of Mr Dzienciol's capacity in 1989 by reference to what the Bank knew, it is necessary to make findings about the Bank's diary notes. It was suggested to Mr Kensitt in

cross-examination that diary notes had been improperly removed from the Bank file. Mr Kensitt explained the meaning of the instruction given by a Bank inspector (exhibit 8) concerning culling diary notes and rejected any suggestion of impropriety. I accept Mr Kensitt's explanation. There is no evidence or analysis of the contents of the Bank documents to support an inference of gaps in the recorded chronology. The evidence establishes, and I so find, that:

(a) insofar as a diary note deals with a communication between a Bank officer and customer, the diary note is a contemporaneous record in summary form of matters pertaining to the banker/client relationship the subject of the communication;

(b) by reason of their contemporaneity and the usual involvement of more than one Bank officer, they are an accurate summary of the content of the communications;

(c) if and insofar as they record or reflect a Bank officer's opinion or perception of a customer, the opinion or perception is honestly held;

(d) if Mr Kensitt was involved in a communication with a member of the Dzienciol Group concerning matters pertaining to the banker/customer relationship a diary note was prepared or confirmed by Mr Kensitt.

328 There is no contemporaneous record by any person of a meeting between Phillip and Bray and Messrs Kensitt and Ryan in April 1990. Both Phillip and Bray say that the purpose of the meeting was to advise the Bank that Phillip had taken over his father's business affairs and to discuss debt reduction matters. Mr Kensitt said, and I accept his evidence, that if there had been a meeting of the type described by Phillip in his evidence, there would have been a diary note of the meeting. Mr Kensitt's recollection was that he first met Bray in August 1990. Mr Ryan accepted that there was a meeting in April 1990 but said his only recollection of what was discussed was set out in the diary note. There was a meeting in August 1990 attended by Phillip and Bray with Messrs Kensitt and Ryan at which Mr Dzienciol's condition and debt refinancing was discussed and I find that Mr Ryan has confused the August 1990 meeting with a meeting in April 1990.

329 In any event, Mr Ryan had no recollection of Mr Kensitt making the comments attributed to him (which alleged comments were that in response to Phillip saying that Mr Dzienciol's memory had gone and that

he did not understand things any more, Mr Kensitt nodded and said Mr Dzienciol was not the man he used to be.) In cross-examination of Mr Kensitt on his diary note of 20 November 1990, it was suggested that Mr Kensitt's admitted knowledge in November 1990 that Mr Dzienciol "had recently had difficulty in recalling discussions only minutes after they occurred" went back to before the power of attorney was given in May 1990. Mr Kensitt rejected that proposition. The November 1990 diary note in terms refers to complaints by and conduct of, Mr Dzienciol following the meeting in August 1990 and does not support any inference of Mr Kensitt having knowledge before May 1990. I am not persuaded that Phillip and Bray met with Mr Kensitt in April 1990.

330 Further, even if a meeting did take place around April 1990 at which Mr Kensitt responded in the way suggested by Phillip and Bray, I do not find the response to constitute an admission or acknowledgment by Mr Kensitt that he was aware of a problem with Mr Dzienciol in 1989. After the Bentley Tavern transaction, Mr Dzienciol had suffered a heart attack and had a heart by-pass operation on 27 March 1990. If the meeting occurred when Phillip and Bray say it did, Mr Dzienciol was still in hospital following the heart by-pass operation. Even if Phillip's evidence of what he told Mr Kensitt (that Mr Dzienciol's memory had gone and Mr Dzienciol did not understand things any more) and Mr Kensitt's alleged response is accepted, it does not in terms refer to Mr Dzienciol's condition in 1989.

331 According to Phillip, the next occasion on which Mr Kensitt made an admission concerning his knowledge in late 1989 of Mr Dzienciol's condition was during Phillip's meeting at the Bank on 14 October 1992 with Messrs Kensitt and Kininmont. The substance of Phillip's evidence was that at the time of the discussions concerning the Bentley Tavern purchase, Mr Kensitt said his father had telephoned Mr Kensitt three times in 10 minutes to make the same appointment and that when Mr Kensitt went to the Pells store, he was unable to make any sense of what Mr Dzienciol wanted. This is said to have happened a few times and eventually Mr Kensitt was driven to phone Mr Kennedy to ask him to stop Mr Dzienciol telephoning Mr Kensitt and, in effect, wasting his time. I do not accept Phillip's evidence.

332 It is denied by Mr Kensitt. It is not supported by the contents of the diary note which was prepared by Mr Kininmont and confirmed by Mr Kensitt (exhibit 9). Mr Kininmont did not recall Mr Kensitt making any such comments. Mr Kennedy was not asked whether or not Mr Kensitt had communicated with Mr Kennedy in the terms alleged.

Mr Kennedy's evidence of Mr Dzienciol's condition does not correspond with the substance of the alleged admission (or Phillip's description of Mr Dzienciol's condition in 1989). Further, the Bank diary notes for the period 1983 to 1988 paint a picture of Mr Dzienciol as a person who was:

(a) actively involved in all financial matters relating to the Pells business and in all matters relating to investments made by the Dzienciol Group;

(b) a knowledgeable consumer of a range of financial services and products provided by the Bank including CBADs;

(c) knowledgeable about the Bank's requirements for security and of the different types of security required by the Bank including first registered mortgages of real property. In particular, in addition to the Residential Mortgage and the Wellington Street Mortgage, Mr and Mrs Dzienciol had previously granted a number of real property mortgages;

(d) a sharp businessman who was vigilant to maximise income from his bank deposits and other investments and to reduce expenses associated with Bank borrowings.

(e) a businessman who was capable of looking after his own financial interests and the interests of those who relied and continued to rely on him, including those involved in the Company, and his wife.

333 The recorded contact between the Bank and Mr Dzienciol in 1989 is consistent with the above description. Indeed, in the diary note of the Bank's annual review of the Dzienciol Group accounts in October 1989 Mr Kensitt stated that the success of the Group was as a result "of the acumen of the Directors".

334 The diary notes also reflect on the character and professional conduct of Mr Kensitt. They show he was a cautious and conservative Bank officer. He exhibited none of the entrepreneurial behaviour sometimes seen in the conduct of other members of his profession in the 1980s. I also formed a favourable impression of Mr Kensitt in the witness box. He took care in giving his evidence and understandably, having regard to the significant period between the events under consideration and the time of the trial, placed great reliance on the Bank's diary notes as the basis of his evidence. I find him to be a truthful and reliable witness.

335 Mr Kensitt said, and I accept, that he did not up to the end of 1989 see any of the common signs of Alzheimer's disease identified by the

Alzheimer's Association of NSW (exhibit 1/3). In relation to the Bentley Tavern transaction, he communicated with Mr Dzienciol on about five occasions all of which are the subject of diary notes. There is nothing in the diary notes or the evidence to suggest Mr Kensitt or Mr Ryan had any concerns or should have been put on notice of any concerns about Mr Dzienciol's cognitive capacity or his ability to conserve his own interests. To the contrary, Mr Dzienciol's interaction with the Bank regarding the Loan Agreement and Wellington Street Mortgage is consistent with what would be expected in the circumstances having regard to the history of his dealings with the Bank.

336 Bray, Susie and Mr Kennedy also gave evidence of negative behaviour by Mr Dzienciol up to the end of 1989. Their evidence is referred to earlier and I do not repeat it here. Bray's evidence is of little assistance in identifying systemic conduct. Susie's evidence pre-dates 1985 and is to be considered in the light of Dr Gubbay's failure in 1985 to suspect that Mr Dzienciol was suffering from any dementia related impairment. Mr Kennedy's evidence is understandably general. However, having regard to their evidence as a whole, my findings on Mr Dzienciol's history up to the end of 1989 are as follows. Mr Dzienciol's acute memory started to deteriorate in the 1980s. He had occasional memory lapses. For example, when he was preparing to travel overseas, he arrived at the airport without his airline tickets and the front door of his house was left open. He also failed to recall the birth dates of his ten grandchildren and other family members. Further, as a result of Mr Dzienciol's failure to remember stock prices, the Pells business started to mark the prices on the stock. The change in pricing policy overlapped with an increase in complexity of the Pells business. However, I am not satisfied that there was any "obvious" (in the sense of third parties having reasonable grounds to suspect) impairment of Mr Dzienciol's short-term memory. This could be for one of three reasons. There was no impairment or the impairment was so mild as to be indistinguishable from the failures of memory that are part and parcel of the human condition or the impairment was effectively camouflaged or masked by Mr Dzienciol.

337 I also find that Mr Dzienciol had always been aggressive in his dealings with staff and customers of the Pells business, although his conduct in this regard deteriorated in the 1980s. However, I am unable to make any finding as to how that deterioration manifested itself in terms of nature or frequency. Mr Dzienciol's behaviour in his dealings with staff and customers may be described as demonstrating a lack of social judgment and impulse control but that lack pre-dated any onset of dementia.

338 I also accept that Mr Dzienciol was a bad and at times dangerous driver but that was so from at least the early eighties and was not, at least initially, a result of dementia. Susie said, and I accept, that Mr Dzienciol was slightly incontinent in 1982-1983.

339 The evidence establishes that at some stage in the late 1980s Mr Dzienciol had some difficulty on occasions connected with his responsibility for doing the banking for the Pells' business such as reconciling the takings and forgetting (or failing) to go to the bank. However, the difficulties were not of such a magnitude to prevent Mr Dzienciol from continuing to do the business banking up to and after the heart by-pass operation or sufficient to cause Mr Kennedy or any member of the Dzienciol family to make any attempt to prevent Mr Dzienciol from performing the task at any stage before the end of 1989. This is consistent with Dr Gubbay's finding reported in his letter dated 8 January 1992 (exhibit E2) that Mr Dzienciol's calculation ability was reasonably well-preserved even in 1992.

340 Both Phillip and Mr Kennedy gave evidence concerning Mr Dzienciol stuffing papers in his pockets and going through papers aimlessly and continuously whilst in the office. I am not persuaded that this conduct occurred in the 1980s. In particular, I am unable to reconcile this alleged conduct with what was observed by the independent witnesses.

341 Mr Kennedy's statement that "they had problems Mr Dzienciol in the business from the mid 1980s onwards" is of unhelpful generality. I infer it relates to an increase in Mr Dzienciol's aggression. Whatever the nature of the problems, they did not cause Mr Kennedy or Bray to have any qualms about Mr and Mrs Dzienciol buying the Balga Shopping Centre from the Company when Mr Kennedy and Bray had concerns about the value of that property. I do not question the propriety of their conduct but do infer that they had no knowledge (in the Amadio sense) of any relevant impairment in Mr Dzienciol's capacity.

342 Further, there is no evidence that Mr Kennedy took over management of the Pells business in the mid 1980s because of concerns about Mr Dzienciol or that there were discussions between Mr Kennedy and (or between) members of the Dzienciol family about any concerns Mr Kennedy or the family had about Mr Dzienciol or about him being actively involved in the Pells business or the Company's investment decisions or that any steps were taken to prevent or supervise the actual or effective involvement of Mr Dzienciol in these enterprises before the end

of 1989. Indeed, Mr Kennedy's conduct as well as that of Phillip and Bray is consistent with the failure of the independent witnesses and the Bank officers to suspect that Mr Dzienciol was or may have been suffering Alzheimer's disease in 1989.

(i) Mr Dzienciol's conduct in 1989 was not of such a nature or degree that Phillip, Bray or Mr Kennedy suspected that Mr Dzienciol was or may have been suffering from dementia of an Alzheimer's type or that his ability to conserve his interests was impaired;

(ii) the independent witnesses who gave evidence at the trial and the Bank officers did not perceive that Mr Dzienciol was or may have been suffering from dementia of an Alzheimer's type (or that his ability to conserve his interests was otherwise impaired) at any time before the end of 1989;

(iii) the matters in pars (2), (3), (4), (5), (6) and (7) of Dr Loke's report dated 7 June 2001 (exhibit 29) on which his opinion in that report was based have not been proven.

344 The next issue concerns the observed history of Mr Dzienciol after the heart by-pass operation in March 1990. There is near unanimity in the evidence and I so find that Mr Dzienciol suffered a very significant and marked physical and intellectual decline following the operation. Mrs Wilczewski described the change as dramatic. She said that after the heart operation, Mr Dzienciol started repeating himself often, was very impolite to clients, was impossible to have a normal conversation with and he had difficulty in recognising her. If he had been in that condition before the operation, she would "absolutely not" have been involved in the Bentley Tavern transaction with him. Susie agreed there was a significant decline physically and mentally after the heart operation in March 1990. Bray's evidence was that Mr Dzienciol went downhill very badly after the heart operation. Phillip confirmed that there was a dramatic decline in Mr Dzienciol's capacity after the operation. These observations are confirmed by the history given by Mrs Dzienciol to Dr Tofler in 1990 to the effect that Mr Dzienciol's short-term memory loss was much worse after the surgery. There is no suggestion that following the sharp decline in cognitive function after the March 1990 operation he thereafter improved. Indeed, by all accounts Mr Dzienciol's condition continued to deteriorate.

345 I return now to the medical evidence on the questions whether in 1989 Mr Dzienciol was suffering from Alzheimer's disease and, if so, to what extent and with what effect.

346 The differences between the content of the unsigned witness statements supplied to the medical experts (Dr Gubbay and Dr Loke) by the defendants on the one hand, compared with the evidence given by those witnesses at the hearing together with my factual findings concerning the history on the other, are so substantial in nature and degree as to warrant me giving no weight to those parts of the expert evidence affected or contaminated by reliance on the unsigned witness statements. In particular, that affects the evidence of Dr Gubbay and Dr Loke as to the time of onset of Mr Dzienciol's dementia and (to the extent it is based on those statements) the nature and extent of Mr Dzienciol's disability in 1989. Questions arise as to the admissibility of that evidence. As I have not heard from the parties, I do not propose to rule on that issue. However, I give no weight to the expert opinion evidence affected by the unsigned witness statements.

347 However, in addition to the observed history in the unsigned witness statements, both Dr Gubbay and Dr Loke relied in evidence on the fact that as a general rule Alzheimer's disease develops according to an arithmetic progression. Although the rate of change may be different between different individuals, the rate of change is, generally, constant in an individual. However, there is little expert evidence as to how the arithmetic progression principle affects the commencement and progress of impairment of the various functions or domains affected by the disease such as memory, judgment, insight, spatial orientation, etcetera. Both Dr Gubbay and Dr Loke in their oral evidence gave an opinion concerning Mr Dzienciol's condition in 1989 by extrapolating backwards applying the arithmetic progression principle. In order to apply that principle, it is necessary to have (at least) two reference points. The first and obvious reference point is Dr Gubbay's assessment of Mr Dzienciol in January 1992. The second reference point used by Dr Gubbay was an inference he drew from a reported statement made by Mrs Dzienciol to Dr Kroenert in 1997. The inference drawn by Dr Gubbay from what Dr Kroenert states that Mrs Dzienciol said to him was that Mr Dzienciol still had a degree of insight into his condition in 1997. Using that reference point, Dr Gubbay concluded that the rate of progress of Mr Dzienciol's Alzheimer's disease was very slow (and much slower than the average).

348 However, Dr Gubbay accepted that the arithmetic progression principle can, in effect, be displaced as a result of a person having heart

by-pass surgery. In those circumstances, the deterioration is not by a constant quantity throughout the progress of the disease from its commencement and any extrapolation back to 1989 applying the arithmetic progression rule based on two reference points after the heart by-pass surgery would be unreliable. Having regard to the finding that persons dealing with Mr Dzienciol in 1989 did not suspect that Mr Dzienciol was or may be suffering from dementia and that there was a very significant decline in Mr Dzienciol's intellectual functioning after the heart surgery it follows from Dr Gubbay's evidence, which I accept and I find, that there was a sudden stepwise progression of impairment in Mr Dzienciol's intellectual functioning as a result of and following the by-pass surgery. As a consequence, the general arithmetic progression principle does not apply to enable any reliable inference to be drawn concerning Mr Dzienciol's condition in 1989.

349 I do not regard Dr Loke's position as necessarily inconsistent in principle with that of Dr Gubbay. Having regard to the content of the unsigned witness statements provided to Dr Loke and the matters on which he based his opinion concerning the commencement of Alzheimer's in the early 1980s, it is understandable that he, unlike Dr Gubbay, was not prepared to alter his opinion about Mr Dzienciol's capacity in 1989 when potentially contradictory evidence was put to him.

350 Although Dr Gubbay was also provided with the unsigned witness statements which detail obvious impairment prior to 1985, Dr Gubbay saw Mr Dzienciol in a professional capacity in 1985. This may explain why Dr Gubbay in examination-in-chief relying on the same material as Dr Loke, put the onset of the disease from 1985 rather than the early 1980s as did Dr Loke. Unlike Dr Gubbay who had seen Mr Dzienciol in 1985 and 1992, Dr Loke had never met Mr Dzienciol.

351 Further, Dr Loke accepted that the usual course of the disease can be affected by by-pass surgery. Indeed, because of the by-pass surgery, Dr Loke was unable to say what Mr Dzienciol's mini mental state score would have been prior to the operation. In any event, Dr Loke's assessment of Mr Dzienciol's situation in 1989 (based on Dr Gubbay's assessment in 1992 and the fact that Mr Dzienciol was still alive in 2001 and applying the arithmetic progression principle) caused him to conclude that there would be little difference in Mr Dzienciol's condition, at least in relation to his short-term memory, in 1989 and 1992. That conclusion is clearly contradicted by the evidence and findings on the observed history. In the circumstances, I am not satisfied that there is any proper factual

foundation for Dr Loke's conclusions concerning Mr Dzienciol's condition in 1989 (or before).

352 The documentary evidence suggests Mr Dzienciol had consulted his general practitioner, Dr Tan in 1988 and 1999. Dr Tan was available to give evidence. The defendants chose not to call him. The factual and medical basis for the opinion set out in exhibit 31 is unknown. In the circumstances, I am not prepared to place any weight on that evidence.

353 I am left with little expert evidence of any weight concerning the existence or extent of the disease in 1989. The evidence extends little further than Dr Gubbay's opinion that, based on what had been put to him in cross-examination there would have been a dementia before the by-pass operation but Mr Dzienciol had a relatively good neurocognitative function at least sufficient to understand "the transaction he was involved in" which, in context, is a reference to the hotel transaction.

354 Further, this opinion was necessarily given without reference to all relevant evidence of the observed and recorded history and necessarily without reference to the findings on those matters. Those findings provide additional support for a conclusion of good neurocognitative function. In addition, the expert medical witnesses were asked about and focussed on Mr Dzienciol's capacity to understand the hotel transaction (rather than the Loan Agreement or the Wellington Street Mortgage) and there is no expert evidence to which I attach any weight on the question whether Mr Dzienciol's judgment (in the broad sense previously discussed) was impaired.

355 I referred earlier in these reasons to the difficulties in drawing inferences about the existence and extent of Alzheimer's disease from observed behaviour. As a result of those difficulties, it does not follow from my findings concerning people's perceptions of Mr Dzienciol that he was not suffering from Alzheimer's disease in late 1989. Indeed, having regard to the moderate to severe status of Mr Dzienciol's Alzheimer's disease in January 1992 when seen by Dr Gubbay, that Alzheimer's disease is usually a disease of gradual onset and (most importantly) Dr Tofler's identification of cerebral dysfunction in the form of short-term memory loss before the operation in March 1990, it seems to me on the balance of probabilities, and I find, that at the material times in late 1989 Mr Dzienciol was in the very early stage of dementia of an Alzheimer's type which mildly affected his short-term memory but which he was able to (before the heart by-pass operation) and did effectively camouflage.

356 However, this finding does not, on the medical and other evidence in this case, compel an inference that Mr Dzienciol had a special disability which affected his ability to conserve his interests because of impaired understanding of, or judgment in relation to, the relevant transactions. Accordingly, it is necessary to focus on the evidence relating to the specific transactions.

357 The first question (based on the pleaded issue) is whether Mr Dzienciol understood the nature and effect of the Wellington Street Mortgage. In my assessment the evidence establishes that he did. The starting point is the historical context. Mr Dzienciol had been involved in business and investment for many decades. He had long and wide experience of financial services and products and different types of securities, in particular, real property mortgages. Mr Dzienciol's conduct in relation to the Loan and Wellington Street Mortgage is only consistent with him having the requisite understanding. That conduct includes his initial refusal to use his (and Mrs Dzienciol's) personal assets as security for the Bentley Tavern transaction which was a continuation of a long tradition of reluctance, his negotiations with the Bank in which he attempted to leverage off his standing with the Bank to obtain the Loan and when that failed, to offer as security his interest in his other CBD property. So too Mr Weir's evidence of his interaction with Mr Dzienciol, in particular the active role played by Mr Dzienciol in negotiating the broker's fee and in giving instructions to Mr Weir. For these reasons I find that Mr Dzienciol understood the nature and effect of the Wellington Street Mortgage.

358 That evidence also supports a finding, which I make, that Mr Dzienciol understood the reasons for the Loan and the nature and effect of the Loan Agreement which resulted in him and his wife granting the Wellington Street Mortgage.

359 I turn now to the question of judgment (by which I intend to cover other matters affecting Mr Dzienciol's ability to conserve his interests) in entering into the Loan Agreement and granting the Wellington Street Mortgage. The evidence of Mr Dzienciol's understanding of these agreements also supports a finding of judgment. In addition, Mr Dzienciol was advised on these matters by professionals, Mr Weir and Warren Harrison. The financing arrangement was structured on Mr Dzienciol's instructions, and I infer, on advice from Warren Harrison, to minimise the risk to the Wellington Street premises. The advance was to Mr and Mrs Dzienciol who on lent the funds to the Bentley Tavern partnership and that loan to the partnership was secured by a second

mortgage over the Bentley Tavern property. At the time the decision was made to enter into the Loan Agreement and grant the Wellington Street Mortgage, Mr Dzienciol and the other members of the Bentley Tavern transaction had a contractual obligation to pay the balance of the purchase price in early December 1989. More than 50 per cent of the $1,000,000 deposit had already been paid by Mr and Mrs Dzienciol. Further, I am not satisfied on the evidence that at the relevant time in late 1989, it was an unreasonable commercial judgment for Mr Dzienciol to regard his (and his wife's) interests being best served by performing their contractual obligations under the second contract of purchase. Judgment with the benefit of hindsight is of no assistance. On the evidence (and I so find), the choice was stark: not to perform their obligations under the second purchase contract or offer the Wellington Street property as security either to the Bank or another financier. The matters pleaded in par 15(c) to (f) of the counterclaim (even if proven) do not go far enough to establish that at the material time in late 1989 there were reasonable grounds to believe that it was in Mr and Mrs Dzienciol's interests not to perform their obligations under the second contract of purchase. The pleaded matters are subjective and address only part of any relevant risk analysis. I infer from the advice given by those retained to advise that they did not regard the decision as an unreasonable commercial judgment.

360 Further, there is no suggestion of substantive unconscionability in the terms and conditions of the Loan Agreement or the Wellington Street Mortgage. Thus, the evidence does not establish that the entry into or the terms and conditions of each of the Loan Agreement and the Wellington Street Mortgage were improvident at the time of entry. For these reasons, the objective circumstances do not support an inference that Mr Dzienciol's judgment was impaired in relation to these matters. I am mindful of the distinction between Mr Dzienciol and his advisers. The fact of retaining advisers demonstrates judgment. The active nature of Mr Dzienciol's engagement with Mrs Hopkins demonstrates judgment. Mr Dzienciol wanted to know everything about what he was signing. Further, the use of advisers who are independent of the Bank can, in appropriate circumstances, mean that any disability is not, in effect, an operative disability.

361 Having regard to my findings in relation to the Wellington Street Mortgage (and the Loan Agreement), it is not necessary to make a finding concerning Mr Dzienciol's understanding and judgment in relation to the Bentley Tavern transaction. However, I do so for the sake of completeness. The starting point is Dr Gubbay's (contingent) assessment in cross-examination that he understood the transaction he was involved

in. However, there are some objective aspects of the Bentley Tavern deal which troubled me when considering Mr Dzienciol's capacity and judgment in entering into the second contract of purchase and Lease Agreement. In particular, the amount of the borrowing, the failure to make the Bentley Tavern purchase conditional on finance approval and the provision of vendor finance to the Lessee. However, the impetus for the deal came from Mr Dzienciol's partner, Mr Kennedy, and there is no suggestion his capacity or judgment was impaired. Bray agreed to the Bentley Tavern transaction and there is no evidence that he had expressed any reservations about it. Lawyers were acting for the Bentley Tavern partners in drafting the second contract of purchase and the lease documents. There is no evidence as to why that contract (or the earlier ones) were not made subject to finance. There is no evidence as to why and how Warwelt became involved as the Lessee and what information the partners were acting on. The Lessee's obligations were secured by a debenture and personal guarantee from Mr O'Meara drafted by Warren Harrison. The evidence of the background and circumstances leading to the Bentley Tavern transaction and the Lease Agreement/Lease and in particular Mr Dzienciol's role in relation to the transactions is obviously incomplete. A hindsight analysis based on subsequent events is not sufficient to fill the evidentiary gaps. For these reasons, I am not satisfied on the evidence as it stands that entry into the Bentley Tavern transaction or the Lease Agreement/Lease supports an inference of impaired understanding or judgment by Mr Dzienciol.

362 Thus, notwithstanding that at the material times in 1989 Mr Dzienciol had a disability, I find that it was not such as to impair (and in the circumstances of this case did not in fact affect) his understanding of, and judgment in relation to, the Wellington Street Mortgage and the Loan Agreement. Further, I am not satisfied on the evidence that Mr Dzienciol's ability to understand and make a judgment as to what was in his best interests in relation to the Bentley Tavern transaction and the Lease Agreement/Lease was relevantly affected.

363 As all aspects of the unconscionability claim were in issue, it is appropriate for me to consider the other aspects of that claim on the assumption Mr Dzienciol had a special disability which had the pleaded effect. The next issue is whether the Bank had the requisite knowledge, being knowledge of facts which would raise a possibility of special disadvantage or special disability in the mind of a reasonable person. The

defendants rely on admissions allegedly made by Mr Kensitt that Mr Kensitt was aware of facts from which he (and thus the Bank) should have known of the possibility of the pleaded special disability.

364 I have already made findings that Mr Kensitt did not make any such admissions and that Mr Kensitt did not see any of the common signs of Alzheimer's disease in Mr Dzienciol prior to the end of 1989. Any reservations or doubts Mr Kensitt had as to the subjective or objective suitability of the Bentley Tavern investment and arrangements (which I address in detail in the next section) fall a long way short of the requisite knowledge of impaired capacity or judgment. The evidence establishes, and I find, that Mr Kensitt did not have knowledge of facts which would raise the possibility in the mind of a reasonable person that Mr Dzienciol was suffering from "a mental illness or did not understand business principles" (as pleaded) or that his capacity to conserve his own interests was affected. Further, no other Bank officer had knowledge of any such facts at the material time.

365 The defendants also rely on Mr Dzienciol's age as a ground of disability or disadvantage. In appropriate circumstances, age alone may be sufficient to give rise to a special disadvantage. Not so in this case for the reasons already given concerning Mr Dzienciol's understanding and judgment. However, if I am wrong and age is a contributing factor to any special disability, I find that Mr Kensitt was aware that Mr Dzienciol was old but not of the alleged effect of his age. Mr Dzienciol was elderly from the time that Mr Kensitt assumed responsibility for the Dzienciol Group accounts with the Bank. As a result of Mr Kensitt's dealings with Mr Dzienciol, he knew Mr Dzienciol by his conduct to be a sharp businessman as emerges from the diary notes. Indeed, in October 1989 it was Mr Kensitt's assessment following the annual review of the accounts that the success of the Dzienciol Group was as a result of the acumen of its directors.

(iii) Whether Transaction Fair, Just and Reasonable

366 The final question is whether the Bank acted unconscionably even if (contrary to my findings) Mr Dzienciol was under a special disability known to the Bank. Based on Mason J's statement of principle in Commercial Bank of Australia v Amadio, the entry into the impugned transaction itself would prima facie constitute unconscientious conduct. This approach is consistent with Deane J's statement of the doctrine in the same case that knowledge of a special disability or disadvantage gives rise

to an onus on the stronger party to show the transaction was fair, just and reasonable.

367 As noted earlier, there is (properly) no suggestion that the terms of the Wellington Street Mortgage are substantively unconscionable. Further, the consideration provided by the Bank moved directly to the grantees of the mortgage. However, the authorities already referred to establish that substantive unconscionability is not an essential element of the equitable doctrine.

368 The defendants say the unfairness arises because:

(a) the Bank was not satisfied that the defendants were able to service the loan and had doubts that the Lessee would be able to meet the premium payment under the Lease;

(b) Esanda advised the Bank in the middle of November 1989 that Esanda was not satisfied that the defendants (Mr and Mrs Dzienciol) were able to service the loan, that Esanda had doubts that the Lessee would be able to meet the premium payment in terms of the Lease Contract and that the Lessee was well-known to Esanda;

(c) the Bank knew that the loan was required by the defendants to purchase the Bentley Tavern and that the sole or primary source of funds to repay the loan and interest was the Lessee's payments under the Lease;

(d) the Bank considered the Bentley Hotel to be overpriced and considered the acquisition of the Hotel to be an imprudent investment; and

(e) the Bank did not advise Mr Dzienciol of the matters in subparagraphs (a), (b) and (d) (hereunder collectively referred to as the "Bentley Tavern matters") and did not advise Mr and Mrs Dzienciol to seek independent advice in relation to thereto.

369 The Loan was an interest only loan repayable in full on 15 July 1990 being the date on which the Lessee was required to make part payment of the premium for the Lease in the sum of $950,000. The diary note recording the Loan Agreement notes that the payment by the Lessee of that sum was to be used to repay the Bank. Further, it was the parties' intention, as reflected in the diary note recording the Loan Agreement, that four (out of seven) months' interest and other costs were to be funded from monthly rental payments made by the Lessee. However, the

Austrafin Application referred to any shortfall being met by the "substantial other income of the borrowers". It is not in dispute that the Bank knew that the payments under the Lease were to be the primary source of funds to repay the loan.

370 The next issue is whether the Bank was not satisfied that the defendants were able to service the Loan. When the Bank was initially asked to fund the full amount of the borrowing of $3,000,000, it requested a cash flow forecast showing monthly inflow and outgoings for the investment (including interest at a rate of 19 per cent per annum) and lump sum progressive payments by the Lessee as well as evidence of the Lessee's ability to meet its financial obligations under the agreement to lease (or proposed lease). By 14 November 1989 the Bank was considering funding $1.7 million of the amount required and a bridging portion of $1.25 million being supplied by Esanda or another. At that stage the cash flow forecast had not been supplied. Based on Mr Kensitt's assessment of that proposal, there was a shortfall in servicing ability from the proposed primary source of funds, namely, the payments under the Lease. Mr Kensitt was aware that Esanda had reached the same assessment and was advised that Esanda had doubts about the Lessee's ability to meet the premium payment in terms of the Lease. When Mr Kennedy again approached Mr Kensitt on 23 November 1989 with three scenarios, Mr Kensitt once again requested detailed cash flow forecasts at least for scenarios one and two. However, in relation to scenario three (a loan of $1.6 million with the Vendor retaining the hotel business), Mr Kensitt records:

"As a compromise to assist the partnership to overcome their problem, advised Maurie we may be able to provide funding for alternative 3 set out earlier, even with the lack of full financial data if he was prepared to provide the additional security of a RGM over the Wellington Street property."

371 The Wellington Street Mortgage was to be additional to a registered first mortgage over the Bentley Tavern property. At no stage was the Bank provided with the requested cash flow forecasts or evidence concerning the Lessee's ability to pay the premium.

372 In relation to scenario three, the defendant's counsel suggested to Mr Kensitt that it was because of Mr Kensitt's doubts about the customer's servicing ability that extra security was being sought. Mr Kensitt responded:

"I don't believe that would be the case. I don't recall the precise reasons why I made this decision but I wouldn't think that would be the case because a lending banker takes into consideration two aspects which are equally as important - one is the security; one is the repayment ability - and if I had doubts about the repayment ability, that the repayment source of the - I'm talking about the $650,000, was not there, I would not have lent the money. I had no reason other than possibly a comment to me by telephone from Esanda that they would not lend the $3,000,000 because of their doubt about the ability of Mr O'Meara to make the payments.

And their doubt about Mr O'Meara,.. wasn't that what they were warning you about? "Don't touch this person." Wasn't that what they were telling you?---I can't recall that, but I don't think I would have entered into a proposal where my repayment of my loan was going to come from Mr O'Meara if they'd been as blunt as that.

Isn't that why, in order to save the relationship with this customer, you seek this additional security far in excess of the amount that was sought to be borrowed? Isn't that the case?---I can't recall my reason for making that request for that extra security other than I probably had some doubts about the valuation of the hotel.

You didn't tell Mr Dzienciol that, did you?---That I had some doubts about the valuation of the hotel?

Mm?---Probably not."

373 Insofar as Mr Kensitt's evidence relates to Mr and Mrs Dzienciol's ability to service the loan of $650,000, I accept his explanation. What Mr Kensitt had done when the Bank was considering funding a significantly larger amount was to require cash flow forecasts. However, for a loan of $650,000 on the proposed repayment terms, and having regard to the terms of the Custom Credit finance approval and the terms of the mortgage granted to Mr and Mrs Dzienciol by the Bentley Tavern partnership, the question of servicing ability for the Bank's purposes is linked to the payments by the Lessee under the Lease Agreement/Lease. Further, no express reference is made by the Bank to the cash and investments (other than land) referred to in Mr and Mrs Dzienciol's statement of assets in the Austrafin Application.

374 As to the ability of the Lessee to fund the premium payment, I find that Mr Kennedy and Mr Dzienciol had failed to comply with the Bank's requests for information on that matter. I also find that Mr Kensitt had been informed by Esanda that it had doubts about whether the Lessee, who was well-known to Esanda, would be able to meet the premium payments under the Lease but that Esanda had left the door open to approve funding if further information and security was provided.

375 According to Phillip, Mr Kensitt said at the August 1990 meeting words to the effect that "it" (which I take to be a reference to the Bentley Tavern transaction) was a very bad deal (according to Bray Mr Kensitt said he was "not happy with the deal") especially when he (Mr Kensitt) knew who the tenant was and that it was very overvalued. Mr Kensitt denied making the statement. Mr Ryan did not recall the statement being made. Phillip and Bray's evidence is not supported by the contemporaneous diary note made by Mr Ryan or the diary note recording the information supplied by Esanda to Mr Kensitt. Mr Kensitt said, and I accept, that he had not heard of Mr O'Meara or the Lessee at the time he spoke to Esanda. There is no evidence the Bank undertook independent investigations concerning the Lessee. Insofar as Phillip and Bray's evidence tends to suggest that Mr Kensitt was personally aware of the Lessee and Mr O'Meara and had made a personal judgment based on that knowledge, I do not accept their evidence.

376 However, in the circumstances, I find that Mr Kensitt had not positively satisfied himself that the Lessee would be able to meet the premium payments under the Lease (and thus had not positively satisfied himself about the capacity of Mr and Mrs Dzienciol to be able to service the loan secured by the Wellington Street Mortgage). However, the absence of positive satisfaction does not mean, and I decline to find, that Mr Kensitt himself had doubts that the Lessee would be able to meet those payments. He was aware Esanda had doubts but that is another matter.

377 Mr Kensitt, who had no valuation expertise, said in evidence that he had doubts about the valuation "of the hotel". I infer from the particular question (set out above) and the line of questioning leading to Mr Kensitt's answer that the reference to the valuation of the "hotel" is a reference to the real property that was available to secure the loan funds being sought to complete the second contract of purchase. The Hiller Parker valuation of the Bentley Tavern attached to the Austrafin Application valued the property and business at $4.55 million. There was no valuation of the land alone. Financiers, including the Bank, were informed in the Austrafin application that the borrowers expected the

property valuation to be $2,850,000. The Bank had not obtained a valuation. However, Mr Kensitt was aware from Mr Weir prior to the Loan Agreement that Custom Credit had approved funding of $2.3 million which was said to be 70 per cent of the purchase price of that land.

378 I accept that Mr Kensitt had doubts about the value of the Bentley Tavern land. I also accept that in the absence of the defendants providing information to satisfy the Bank, Mr Kensitt's assessment was that there was a shortfall in income from the Lessee to meet interest costs if the Bank funded $1.7 million and Esanda $1.25 million. However, the evidence did not establish the link between the income and the value of the property as a whole or the value of the real property component. I am not persuaded that Mr Kensitt was of the view that the Bentley Tavern property was overpriced or very overvalued or that the transaction as a whole was, objectively, an imprudent investment. Further, Mr Kensitt did not have the relevant information or valuation expertise to make a judgment in November/December 1989 about whether the Bentley Tavern land was overpriced or otherwise objectively imprudent. The Bank was not advising Mr Dzienciol and the partnership. Other qualified professionals were.

379 However, it is the case that Mr Kensitt had reservations about the suitability of the project for the Dzienciol Group. Mr Kensitt said, and I so find, that at some stage before the entry into the second contract of purchase he told Mr Dzienciol and Mr Kennedy that he was happy the first contract was not proceeding because the level of the borrowing and the nature of the industry were outside the Dzienciol Group's previous experience. Notwithstanding Mr Kensitt's views, Mr Dzienciol and Mr Kennedy entered into the second contract of purchase. Further, Mr Kensitt's inquiries on 28 November 1989 as to why Mr Dzienciol wanted to go into the transaction at his stage were according to Mr Weir, whose evidence I accept, met with a response from Mr Dzienciol which was in the slightly contemptuous terms one might expect from a successful self-made property investor to a person who had been an employee all his working life.

380 In addition, Mr Dzienciol and the other partners in the Bentley Tavern transaction had solicitors acting for them from, at the latest, some time before entering into the second contract of purchase of the Bentley Tavern. The solicitors, Warren Harrison, acted for Mr Dzienciol and the other partners in relation to the proposed terms and conditions of the second contract of purchase. Mr Dzienciol and the other members of the partnership appointed Mr Weir to assist the partnership in their search for

finance. Mr Weir undertook an advisory role. It is clear from his letter of 15 November 1989 to Warren Harrison, and confirmed in oral evidence, that Mr Weir had advised Mr Dzienciol about the need for the Wellington Street property to be provided as security for the balance of the purchase price which had to be paid in early December 1989. Mr Weir in his letter to the solicitors details all relevant matters and says he leaves it to Warren Harrison:

" ... in the knowledge of your client's obligations to perform under the terms of the two contracts they have entered into, to advise them accordingly."

381 I infer from Mr Weir's invitation to Warren Harrison and their preparation of security by way of a second mortgage of the Bentley Tavern property granted by the Bentley Tavern partnership to Mr and Mrs Dzienciol, that Warren Harrison advised Mr Dzienciol concerning the proposed loan and Wellington Street Mortgage. Further, Warren Harrison communicated in writing with the Bank before the grant of the Wellington Street Mortgage and I infer that Mr Kensitt was aware that solicitors were acting for Mr Dzienciol and other members of the Bentley Tavern partnership. He was certainly aware of Mr Weir's advisory role.

382 As to what Mr Kensitt told Mr Dzienciol and Mr Kennedy about the Bentley Tavern matters, the position is as follows. Mr Kensitt communicated to Mr Kennedy and Mr Dzienciol on a number of occasions about the need for them to demonstrate repayment capacity by supplying information about cash flow and the Lessee's capacity to make the payments under the Agreement to Lease/Lease. This is established by the Bank's diary note dated 28 September 1989, the Bank's letter dated 10 November 1989 to Messrs Dzienciol and Kennedy, the diary notes of 14 November 1989 and 23 November 1989 (which records communications with both Messrs Dzienciol and Kennedy). The cash flow forecasts and details of the Lessee's ability to pay its Lease obligations were never provided by Mr Kennedy or Mr Dzienciol to the Bank. I also find that Mr Kensitt had communicated to Mr Dzienciol and Mr Kennedy by word and his conduct in continuously refusing to assist with finance, his personal view that he was not in favour of the Bentley Tavern transaction for the Dzienciol Group.

383 In summary, my findings on these matters are that:

(a) the Bank and Mr Dzienciol intended that the primary source of the funds to repay the Loan was the Lessee's payments under the Lease;

(b) to the knowledge of Mr Dzienciol and Mr Kennedy the Bank had not positively satisfied itself that the Lessee would be able to meet the payments under the Lease (and that accordingly, the Bank had not positively satisfied itself that Mr and Mrs Dzienciol were able to service the loan);

(i) Esanda was not satisfied that the Bentley Tavern transaction partnership would be able to service a loan of $3,000,000;

(ii) Esanda had doubts that the Lessee would be able to meet the premium payment in terms of the Lease;

(iv) Esanda would reconsider the application if additional security was available and information was supplied which showed servicing ability;

(d) the Bank did not inform Mr Dzienciol or Mr Kennedy of the matters in (c);

(e) the Bank had not formed an opinion and did not have sufficient information in its possession to form an opinion on reasonable grounds concerning the Lessee's ability to perform its obligations;

(f) Mr Kensitt was of the opinion that the value attributed to the real property component of the Bentley Tavern real property in the Austrafin application may be too high;

(g) to the knowledge of Mr Dzienciol and Mr Kennedy, Mr Kensitt's personal view was that he did not favour the Dzienciol Group's involvement in the purchase of the Bentley Tavern because the level of borrowing and the nature of the business were outside the group's previous investment experience.

(h) I am not persuaded that Mr Kensitt had formed an opinion that the acquisition of the Bentley Hotel was, objectively, commercially imprudent. In any event, I am not satisfied

he had the necessary information in his possession to make an informed judgment on that matter;

(i) to the Bank's knowledge Mr Dzienciol and other members of the Bentley Tavern partnership were being advised by solicitors, Warren Harrison, and Mr Weir on matters relating to the Bentley Tavern transaction and in relation to the loan and Wellington Street Mortgage.

384 In any event, for the reasons given earlier, even if the Bentley Tavern matters are treated as proven, they do not establish that, having regard to the information available at the material time, it was an unreasonable commercial judgment for the defendants to enter into the Loan Agreement and provide the Wellington Street Mortgage.

385 Further, the Bank was subjected to considerable pressure from Mr Kennedy and then Mr Dzienciol to advance the balance of the funds required to perform their contractual obligations under the second contract of purchase. It is common cause that Mr Dzienciol threatened to take his business elsewhere unless Mr Kensitt agreed on behalf of the Bank to provide financial assistance. In the end, Mr Kensitt for the Bank agreed to provide a loan of $650,000 to Mr and Mrs Dzienciol, which they in turn advanced to the Bentley Tavern partnership to enable the partners to perform their contractual obligations. It was suggested in cross-examination that there was some opportunistic element in Mr Kensitt's conduct in advancing the moneys. I do not accept that suggestion. I find that Mr Kensitt on behalf of the Bank reluctantly agreed to provide the financial assistance which was secured by the Wellington Street Mortgage with the intention of assisting long-standing clients who were in need of and demanding such financial assistance.

386 In all the circumstances the provision of the Loan and the taking of and the terms and conditions of the Wellington Street Mortgage were fair, just and reasonable. Accordingly, the Bank's conduct in enforcing the Wellington Street Mortgage is not unconscionable.

Unconscionable Conduct - Residential Mortgage - Mr Dzienciol

387 As stated previously, the only relief which the Bank is claiming under the Residential Mortgage is possession of the residential premises. In particular, it is not claiming moneys owing by the Company/GRI partnership or moneys owing in relation to the $650,000 advance. The defendants seek to set aside the Residential Mortgage. However, it is part of the defendants' unconscionability case that the Bank took the

Residential Mortgage "to support the acquisition by the defendants of a half share in a failing import business". I deal firstly with the defendants' counterclaim to set aside the Residential Mortgage.

388 The evidence does not allow me to make any reliable assessment of the nature of the arrangement between the Company and GRI, the commerciality of the transaction from the Company's perspective, the financial or business position of GRI at the relevant time or the circumstances surrounding the advance by the Bank to the Company/GRI partnership secured by the Residential Mortgage. I decline to rely on Phillip's hearsay and incomplete evidence on this matter. Further, there is no evidence that the Bank was on notice of any relevant matter regarding GRI's financial or business predicament.

389 For the reasons already given, I have found that in late 1989 Mr Dzienciol was in the very early stages of dementia of an Alzheimer's type. There is very little evidence of Mr Dzienciol's conduct in late 1988 or early 1989 relating to the transaction in issue or generally. Based on Dr Gubbay's assessment that, save for the deterioration as a result of the heart by-pass operation Mr Dzienciol's rate of deterioration was very slow, it may be that Mr Dzienciol was in the very early stage of dementia of an Alzheimer's type in late 1988 or early 1989. However, the evidence, medical and general, does not enable me to make a finding with any confidence that Mr Dzienciol was suffering from dementia at this time. However, I am satisfied, and so find, that Mr Dzienciol was not suffering from a disability which affected his capacity in relation to the Residential Mortgage. In particular, I find that Mr Dzienciol knew and understood the nature and effect of granting the Residential Mortgage to secure the loan to the Company/GRI partnership. Mr Dzienciol's long history and familiarity with investment, financing transactions and security, and his prior and subsequent conduct demonstrated that he understood the nature and effect of a mortgage of real property.

390 I also find for the reasons already given that the Bank, by its relevant officer Mr Kensitt, had no knowledge in the requisite sense of any possibility that Mr Dzienciol was suffering from Alzheimer's disease or was otherwise unable to conserve his own interests.

391 Further, there is nothing in the evidence from which I am prepared to draw an inference of substantive or procedural unconscionability. The fact that Mr Dzienciol granted a third party security is not of itself sufficient. In any event, he had a financial interest in the Company/GRI partnership venture via the Pelco Unit Trust of which the Company was

trustee. The evidence establishes that the Company was the primary, or at least a significant, source of Mr Dzienciol's wealth.

392 In these circumstances I am not satisfied that the Bank acted unconscionably in taking the Residential Mortgage from Mr Dzienciol to secure the loan to the Company/GRI partnership.

393 The question whether the Bank is acting unconscionably in relying on the Residential Mortgage as security for the Bentley Tavern indebtedness to give rise to a right to possession of the residential premises raises different issues. The question in those circumstances is whether Mr Dzienciol understood when he gave the Residential Mortgage and when he entered into the Loan Agreement that the Residential Mortgage secured repayment of the Bentley Tavern debt.

394 In resolving the factual issues in this case, I have relied heavily on the recorded history of contact between the Bank and Mr Dzienciol. There is nothing in that history to suggest that Mr Dzienciol or Mrs Dzienciol (regardless of issues of capacity) understood that the Bentley Tavern loan would be secured by the Residential Mortgage. There was no discussion to that effect in late 1989 in the negotiations leading to the Loan Agreement (which identifies the security). Further, the history shows that if the Bank intended to rely on existing security for a new loan it would identify that fact or obtain a letter of acknowledgment to that effect from the borrowers.

395 Accordingly, I am not satisfied that Mr Dzienciol understood that the Residential Mortgage would secure all subsequent borrowings or that the Bentley Tavern loan would be secured by the Residential Mortgage or that this aspect of the transaction is fair, just and reasonable. However, in the absence of knowledge by the Bank of any special disability, relief is not available on the ground of unconscionable dealing. The defendants do not resist the Bank's claim to possession of the residential premises on any other ground.

Unconscionable Conduct - Findings - Mrs Dzienciol

396 In relation to the Wellington Street Mortgage the defendants say that Mrs Dzienciol did not understand the nature or effect of the mortgage transaction because:

(a) she did not read the mortgage document and no-one explained to her the nature and effect of such transaction;

(b) she executed the mortgage because she was requested by her husband to do so and in reliance upon his advice;

(c) she was elderly and not capable of understanding the mortgage document because she had only a limited knowledge and understanding of the English language.

397 Mrs Dzienciol's special disadvantage in relation to the Residential Mortgage is said to be the same, save there is no reference to her age.

398 The plea of the Bank's knowledge is rolled up with further matters of disadvantage. The claim in relation to both the Wellington Street Mortgage and the Residential Mortgage is that:

(a) the defendants had banked with the Bank for some years;

(b) Messrs Kensitt and Ryan knew or ought to have known of Mrs Dzienciol's very limited knowledge and understanding of English and of commercial matters and that she relied upon the first defendant absolutely in all business matters and did not have any understanding or exercise any independent judgment in respect of such business matters;

(c) Messrs Kensitt and Ryan were present when the mortgages were executed and observed that the second defendant did not read the document and the effect of it was not explained to her;

(d) Messrs Kensitt and Ryan knew or ought to have known that the second defendant executed the mortgage without any independent advice and by reason of the reliance on her husband.

399 There is no evidential basis to suggest that Mrs Dzienciol was disadvantaged in any way by her level of understanding of English in the spoken and written form.

400 Further, I do not accept that Mrs Dzienciol had limited knowledge or understanding of commercial matters or that her age had affected her understanding or judgment. Mrs Dzienciol was personally involved over the years in running a number of the businesses owned by her and her husband. Mr Dzienciol by his conduct appeared to have a higher regard for the business judgment of his wife than he had for either of his sons, Phillip and Bray. According to Mrs Dzienciol, and I so find, Mr Dzienciol discussed with her the detail of their business ventures and she was an equal partner with him in those ventures. Phillip and Bray were left to discuss relevant matters with Mr Kennedy.

401 However, I accept that Mrs Dzienciol invariably followed her husband's advice (or more likely, directions) in business matters and that Mr Kensitt was aware of Mrs Dzienciol's reliance on her husband.

402 In relation to the Residential Mortgage, there is the standard form diary note (exhibit 2/34.1) signed by Denise Scott and Andrew Lower confirming that the Residential Mortgage was given to Mrs Dzienciol and she was given the opportunity of reading it, obtaining legal advice if she so desired and that the purport of the document and her liability thereunder were explained to her in general terms. I accept the evidence of Ms Scott and Mr Lower that the diary note is an accurate summary of what occurred.

403 Mrs Dzienciol executed the Wellington Street Mortgage in Mr Ryan's presence. He gave evidence of his invariable procedure when witnessing a mortgage which is in similar terms to the standard form diary note. However, there is no diary note confirming that Mr Ryan followed his invariable procedure. I accept Mr Ryan's evidence that he followed the Bank's standard procedure in the case of the Wellington Street Mortgage. However, in my view, performance of the Bank's standard procedure would be insufficient if it was established that a customer, to the Bank's knowledge, had a special disability or special disadvantage.

404 In this case I find that Mrs Dzienciol could read and communicate effectively in English, had an understanding of and practical experience in commercial matters, had previous knowledge and experience of real property mortgages and was capable of and did understand the nature and effect of the Residential Mortgage and the Wellington Street Mortgage. For these reasons I also find that Mrs Dzienciol was under no personal special disability or disadvantage. Mrs Dzienciol's reliance on Mr Dzienciol is not itself sufficient to establish a special disability or disadvantage. However, if (contrary to my findings) Mr Dzienciol had a proven special disability known to the Bank and the Bank had knowledge of Mrs Dzienciol's reliance on Mr Dzienciol (which it did), equity would intervene to protect Mrs Dzienciol's position if the transaction was not fair just and reasonable.

405 Further, Mrs Dzienciol's claim based on the Garcia principle also fails. I have found that Mrs Dzienciol understood the nature and effect of the Residential Mortgage in relation to the loan to the Company/GRI partnership. There is no specific evidence concerning her level of knowledge of the circumstances surrounding or involvement in obtaining the loans secured by the Residential Mortgage. I am unable to reach any

level of satisfaction that she did not have knowledge of, or understand, the underlying transaction. However, I find that Mrs Dzienciol obtained a financial benefit from the advances to the Company/GRI partnership secured by the Residential Mortgage. The position is that Mrs Dzienciol was a partner in the Pells business before the Company (and Trust) was introduced into the structure. The evidence establishes that the Company (as trustee) was the primary, or a significant, generator and the source of funds from which Mr and Mrs Dzienciol built their very significant jointly owned asset base. The financial reality is that Mr and Mrs Dzienciol together had a one-third interest in the income and assets of the Pelco Trading Trust as acknowledged in their statement of assets and liabilities attached to the Austrafin application. Accordingly, I find that Mrs Dzienciol was not a volunteer in relation to the Residential Mortgage transaction.

406 I also find that Mrs Dzienciol understood the nature and effect of the Wellington Street Mortgage and the circumstances surrounding the Loan and that (even more obviously) she was not a volunteer in relation to that transaction. Accordingly, the Garcia principle does not apply to the Wellington Street Mortgage.

407 For the reasons canvassed earlier in relation to Mr Dzienciol, I am not satisfied Mrs Dzienciol understood that the Bentley Tavern loan was to be secured by the Residential Mortgage. However, as previously discussed in relation to Mr Dzienciol's position, that does not render the Residential Mortgage (or part of it) an unconscionable dealing.

408 It is also appropriate to consider the relief that ought to be granted in the event I am wrong and the Bank acted unconscionably in their dealings with Mr and Mrs Dzienciol. The Bank says the Court should not set aside the Residential Mortgage or the Wellington Street Mortgage without conditioning the order on terms that the amount of the Loan and interest thereon be repaid.

409 The question of relief was considered by Deane J in Commercial Bank of Australia v Amadio. He said (at pages 480 - 481):

"Relief against unconscionable dealing is a purely equitable remedy. The concept underlying the jurisdiction to grant the relief is that equity intervenes to prevent the stronger party to an unconscionable dealing acting against equity and good

conscience by attempting to enforce, or retain the benefit of, that dealing. Equity will not, however, 'restrain a defendant' from asserting a claim save to the extent that it would be unconscionable for him to do so. If this limitation on the power of equity results in giving to a plaintiff less than what on some general idea of fairness he might be considered entitled to, that cannot be helped ...

Where appropriate, an order will be made which only partly nullifies a transaction liable to be set aside in equity pursuant to the principles of unconscionable dealing ...

Where an order is made setting aside the whole of a transaction on the ground of unconscionable dealing, the order will, in an appropriate case, be made conditional upon the party obtaining relief doing equity."

410 In determining the relief to be granted and the extent to which restitutio in integrum is required, the Court seeks to do what is practically just between the parties and by so doing, restoring them substantially to the status quo: Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; (1995) 184 CLR 102 at 112; Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 at 472.

411 Further, the scope of the equity for rescission will be determined by the nature and extent of the conduct giving rise to the equity for rescission: Maguire v Makaronis at 472; Bridgewater v Leahy at p 493 - 494. In a case where a loan advanced by a bank secured by a mortgage was the subject of an (eventually unsuccessful) claim for equitable fraud the High Court said in Bank of South Australia v Ferguson [1998] HCA 12; (1998) 72 ALJR 551 at 555 - 556 that even if a case for rescission had been made out, there was no reason to deny the application of the requirement of restitutio in integrum which would require repayment of the loan.

412 The defendants' response is that they have a counterclaim for equitable compensation to the effect (pleaded in par 19 of the counterclaim) that as a result of the Bank's unconscionable conduct the defendants were able to enter into business transactions which would not otherwise have been possible and as a result of which they suffered significant financial loss. Paragraph 19 is not particularised. It appears to me that it is probably intended to assert that as a result of the Loan and Wellington Street Mortgage, Mr and Mrs Dzienciol were able to facilitate the performance by the Bentley Tavern partnership of the second contract

of purchase of the Bentley Tavern as a result of which they suffered loss. The defendants say the Wellington Street Mortgage should be set aside and the question whether there should be an order that the defendants repay the amount secured by the mortgage should await the determination of the defendant's counterclaim for equitable compensation.

413 There is a question whether the Court has inherent jurisdiction to award equitable compensation where a party is shown to have engaged in unconscionable conduct. Traditionally, relief in respect of unconscionable dealings takes the form of setting aside the impugned transaction(s) in whole or in part or resisting enforcement action together with such consequential orders as are necessary to achieve practical justice: Commercial Bank of Australia v Amadio; Bridgewater v Leahy. I am not aware of any case in which equitable compensation has been granted for unconscionable dealing. However, the Full Court of this Court appears to have accepted that unconscionable conduct may give rise to a claim for equitable compensation: Smith v Town & Country Bank and Ors, unreported; FCt SCt of WA; Library No 970716; 18 December 1997. The Bank did not address the legal question of whether an award of equitable compensation is available in the circumstances of this case. That is a matter which will arise if compensation becomes a live issue.

414 If I am wrong and it is the case that the Bank acted unconscionably in taking the Wellington Street Mortgage and in seeking to rely on the Residential Mortgage as an all moneys security to secure the Bentley Tavern transaction debt, I would deal with the matter in the following way. The defendants have not sought to set aside the Loan Agreement on the ground it is unconscionable (although they do seek relief in relation to the Loan Agreement in the Trade Practices claim). Rather, they appear to approach the matter by, in effect, seeking to set off the amount owing under the Loan Agreement or alternatively avoiding the restitution issues by their claim for equitable compensation, which has yet to be determined. In the event that after the determination of the damages issues it was found that moneys were payable to the Bank under the Loan Agreement or as a result of doing what is practically just, those moneys ought to be secured by the Wellington Street Mortgage and the Residential Mortgage. In the circumstances, the appropriate course would be to defer making any order setting aside the mortgages until the determination of the defendant's equitable compensation claim. In the interim, the Bank would be restrained from taking any steps to exercise its powers under the mortgages.

415 The defendants in closing gave only passing consideration to the contract and tort claims. The contract claim is to the effect that it was an implied term of the Loan Agreement that the Bank would inform Mr and Mrs Dzienciol of the Bentley Tavern matters.

416 The pleaded basis relied on by the defendants for the implied term is that it is necessary "to give business efficacy to the agreement in all the circumstances". Thus, the defendants rely on an implied term in fact, albeit without pleading all the necessary attributes to justify the implication of a term. The criteria for the implication of a term are well-known and are to be found in (inter alia) Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 347, 404 and BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266. In summary, the criteria are that the implied term must:

(b) be necessary to give business efficacy to the contract;

(e) not contradict any express term of the contract.

417 The implication of a term is based upon the supposed or presumed intention of the parties. To rely on an implied term by reference to particular facts of which it is to be assumed the defendants would say they had no knowledge is illogical. I would expect a pleading in general terms, the breach of which is proven by the particular failures relied on by the defendants.

418 Whether there is an implied term which had the effect of requiring the Bank to inform the defendants of the Bentley Tavern matters depends in the first instance on the scope of the Bank's contractual obligations. In this case the agreement is the Loan Agreement pursuant to which it advanced the Loan on the stated terms and conditions which included the provision of the Wellington Street Mortgage.

419 The defendants do not suggest (in my view correctly) that the Bank was retained to advise the defendants on matters in relation to the Loan Agreement, the Wellington Street Mortgage or the Bentley Tavern transaction. Austrafin, a licensed finance broker, was retained and had addressed issues relating to the financing and commerciality of the

Bentley Tavern transaction (including valuation evidence). The Bentley Tavern partners were represented by solicitors. The history of Mr Dzienciol's dealings with the Bank show that the commerciality of investment decisions was a matter within the expertise of Mr Dzienciol and Mr Kennedy. In relation to the Bentley Tavern transaction, Mr Dzienciol went to the Bank for money, not information or advice.

420 Further, as referred to earlier, the evidence does not establish that the Bank was in a position on the information supplied to it by the defendants (or by third parties) to form a reasonably based opinion as to the objective commercial prudence of the Bentley Tavern transaction or the ability of the Lessee to meet its obligations under the Lease. A term having the effect of requiring the Bank to inform Mr Dzienciol of the Bentley Tavern matters will not be implied when the Bank is not retained to advise and does not have the necessary information to enable it to have a full understanding of the relevant risks or form reasonable commercial judgments and opinions. Issues of this nature were considered in Ralik Pty Ltd v Commonwealth Bank of Australia, unreported; NSW SCt; 14 August 1990 per Cole J at 94 - 99.

421 In any event, even if the Bentley Tavern matters are considered in isolation and treated as proven, I find that a term which would have the consequence of requiring the Bank to advise of those matters does not satisfy the requirements that it be reasonable and equitable and necessary to give business efficacy to the Loan Agreement. Accordingly, the contract claim fails.

422 There is a complete overlap between the facts relied on by the defendants to establish unconscionable dealing and the facts relied on by the defendants to give rise to a tortious duty of care to inform the defendants of the Bentley Tavern matters.

423 The negligence claim as formulated concerns liability for omissions (as distinct from a negligent omission in the course of an activity giving rise to a duty of care). Assuming the Bank's silence on all the Bentley Tavern matters, its conduct would be actionable if the Bank was under a positive duty to act: Commercial Bank of Australia Ltd v Amadio per Gibbs CJ at 456 - 458. The question raised by the pleading is whether a duty of care arises because of the allegedly known vulnerability of the defendants: Perre & Ors v Apand Pty Ltd [1999] HCA 36; (1999) 198 CLR 180 (a case about acts, not omissions, causing economic loss).

424 However, it is unnecessary to determine this particular question because of the finding that Mr and Mrs Dzienciol did not have, and the Bank did not have knowledge of any condition which prevented Mr and Mrs Dzienciol from protecting themselves from relevant harm. In the circumstances, in particular the scope of the Loan Agreement and the matters referred to in these reasons for rejecting the implication of a contractual term, the Bank was not under a positive duty to advise Mr and Mrs Dzienciol of the Bentley Tavern matters. Accordingly, the negligence claim fails.

Trade Practices Act

425 The defendants say they had a reasonable expectation that the Bank would inform them of the Bentley Tavern matters as a result of the facts giving rise to the unconscionable dealing claim. The defendants also say that the reasonable expectation together with the failure to inform them of the Bentley Tavern matters amounted to misleading and deceptive conduct. As with the pleading of the implied term, the reasonable expectation is pleaded by reference to specific facts not allegedly known to the defendants at the time they acted.

426 The framing of the "expectation" can affect whether it is misleading or deceptive. Putting it at its most favourable for the defendants, it may be said that the defendants' reasonable expectation together with the Bank's alleged silence involves a representation that the Bank had no concerns about the Lessee's ability to meet the payments under the Lease (and thus no concerns about Mr and Mrs Dzienciol's ability to service the Loan) and no concerns about the commerciality of the Bentley Tavern transaction.

427 Insofar as the defendants' trade practices claim depends on proof of a special disability or vulnerability known to the Bank as the basis for the reasonable expectation, the claim fails. However, it remains necessary to consider whether the Bank's conduct was misleading and deceptive notwithstanding the defendants have failed to prove a known special disability.

428 As with the common law of negligence, silence can give rise to a breach of s 52 of the Trade Practices Act 1974 ("TPA") in circumstances which give rise to an obligation to disclose relevant facts: Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477. For the reasons canvassed above, the Bank was not under a duty at common law or in equity to disclose the Bentley Tavern

matters to the defendants. However, the non-existence of a duty does not mean that silence cannot in any circumstances be misleading or deceptive: Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 at 88; Demagogue Pty Ltd v Ramensky [1992] FCA 557; (1992) 39 FCR 31 at 32. Hill J in Winterton Constructions Pty Ltd v Hambros Australia Ltd [1992] FCA 582; (1992) 39 FCR 97 explained the position as follows:

"Obviously, it is difficult to see how a mere silence could, of itself, constitute conduct which is misleading or deceptive ... However, if the circumstances are such that a person is entitled to believe that a relevant matter affecting him or her would, if it existed, be communicated, then the failure to communicate it may constitute conduct which is misleading or deceptive because the person who ultimately may act to his or her detriment is entitled to infer from the silence that no danger or detriment existed."

429 Further, in other circumstances, silence may in combination with what is stated, give rise to a positive representation: Fraser v NRMA Holdings Ltd (1995) 55 FCR 452. However, what is to be expected will vary according to whether the parties are dealing at arm's length in a commercial situation in which each party has conflicting interests (Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458) or the information is supplied by a corporation to its members or shareholders in (Fraser v NRMA Holdings Ltd).

430 In the circumstances of this case, the evidence does not support an inference that the defendants had an expectation, reasonable or otherwise, that the Bank would inform the defendants of the Bentley Tavern matters. In any event, such an expectation would not in the circumstances be reasonable for the following reasons. To the knowledge of Mr Dzienciol and Mr Kennedy, the Bank was not acting in an advisory capacity. It did not have information in its possession to enable it to make a reasonably based commercial judgment as to the risk of the Lessee being unable to satisfy its contractual obligations (and thus the risk of the defendants being unable to service the Loan) or the commerciality of the Bentley Tavern transaction. There cannot be a reasonable expectation that the Bank inform the defendants of hearsay or matters of speculation. Further, the Bank (and other financial institutions) had refused to advance any funds. Mr Dzienciol had threatened to take his business away and Mr Dzienciol and Mr Kennedy were pressuring the Bank to provide the funds to enable settlement of the Bentley Tavern transaction to occur.

431 In the circumstances, the Bank did not engage in misleading or deceptive conduct as alleged.

Limitation - Contract, Tort and Trade Practices Act

432 For the sake of completeness I deal with the limitation issues that arise on the pleadings. In June 2001, I granted leave to the defendants to amend the counterclaim to include causes of action in contract, tort and for breach of the TPA. It was apparent at the interlocutory hearing that limitation issues may arise. The defendants were ordered to provide particulars of loss and damage to facilitate determination of any limitation defence if it was pleaded by the Bank. The Bank filed an amended defence to the counterclaim to raise, inter alia, limitation defences to the contract and tort claims. The grant of leave to amend a pleading cannot alter the operation or effect of a statutory period of limitation: Morgan v Banning (1999) 20 WAR 474 at 476 and 483.

433 The Court did not have jurisdiction to grant leave to amend the pleading pursuant to O 21 r 5(5) of the Supreme Court Rules. For that subrule to apply, there must be a sufficient factual overlap between the existing and proposed pleading so that the new causes of action can fairly be said to arise out of substantially the same facts as the old cause of action: Stone James v Pioneer Concrete (WA) Pty Ltd [1985] WAR 233 at 241 - 242. The primary factual basis for each of the contract, tort and trade practice claims is the Bank's alleged failure to disclose the Bentley Tavern matters. The Bentley Tavern matters were not pleaded at any time until the application for leave to amend in June 2001.

434 Under s 38(1)(v) of the Limitation Act 1935 the defendants had to commence proceedings in contract (whether by action or counterclaim) within six years from the accrual of the cause of action. A cause of action in contract accrues at the date of the breach. The breach relied on by the defendants is the failure by the Bank to disclose the Bentley Tavern matters prior to entry into the Loan Agreement. Thus, the cause of action accrued in November-December 1989. Prima facie, the limitation period expired in November-December 1995.

435 The question is whether the defendants can avail themselves of s 40 of the Limitation Act. Section 40 provides:

"If any person entitled to any such action as is referred to in subsection (1) of section thirty-eight was at the time of the cause of action accrued within the age of eighteen years or

insane, then such person may commence the same within such time as is before limited after being of full age or sane as if that was the time at which the cause of action accrued."

436 Section 40 does not apply to Mrs Dzienciol. Accordingly, her contractual claim is statute-barred. Section 40 only applies to extend the limitation period if the person was insane when the cause of action accrued. Time is not extended if the limitation period has begun to run and the person subsequently becomes disabled: Purnell v Roche (1927) 2 Ch 142 at 149; Garner v Wingrove (1905) 2 Ch 233.

437 The Limitation Act does not define the word "insane". Legislation elsewhere refers to a person being of unsound mind: Kirby v Leather [1965] 2 QB 367; King v Coupland [1981] Qd R 121. Lord Denning in Kirby v Leather said of the expression "of unsound mine" (at 383):

"... So here it seems to me in this statute a person who is 'of unsound mind' when he is, by reason of mental illness, incapable of managing his affairs in relation to the accident as a reasonable man would do. It is similar to the test where a guardian ad litem or a next friend is appointed under the new RSC 0 80 r 1. That states that a person under a disability means 'a person who by reason of mental disorder is incapable of managing and administering his property and affairs'. So here it seems to me that David Kirby was of unsound mind if he was, by reason of mental illness, incapable of managing his affairs in relation to this accident."

438 There is no material distinction between the expressions "insane" and "unsoundness of mind" for these purposes.

439 Although Mr Dzienciol was in the very early stages of an Alzheimer's type dementia in late 1989, I have found that he understood the relevant transactions and was able to protect his own interests. Accordingly, I find that Mr Dzienciol was not insane in November-December 1989. Indeed, I am not persuaded that Mr Dzienciol was insane before January 1992. Accordingly, Mr Dzienciol's, contract claim is also statute-barred.

440 A cause of action in negligence accrues when loss first occurs. However, the damage must be more than minimal: Ratcliffe v VS & B Border Homes Ltd (1987) 9 NSWLR 390. When there is one cause of action which has accrued it covers all subsequent loss and damage which is attributable to the same cause, even if that loss and damage only

manifests itself later on by stages: Darley Main Colliery Co v Mitchell (1886) 11 App Cas 127 at 132.

441 A claim for economic loss may take a variety of forms and to answer the question when a cause of action for negligence causing economic loss accrues may require consideration of the precise interest infringed by the negligent act or omission: Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 527; Hawkins v Clayton (1988) 164 CLR 539 at pp600 - 601.

442 It is the defendants' case that if the Bank had performed its duty it would not have advanced the Loan in which case the defendants say they would have been unable to complete the Bentley Tavern transaction. The defendants claim two categories of loss in their particulars. The first is the loss arising from completion of the Bentley Tavern transaction in December 1989 (which appears from the particulars to be the reliance or wasted expenses) and the second is the interest paid under the Loan Agreement from September 1991. Further, Mr Dzienciol commenced proceedings against Custom Credit in relation to the Bentley Tavern transaction in 1991.

443 Based on the defendants' formulation and particularisation of the damages claim for negligence, the tortious claim is also statute-barred.

444 I turn now to the Trade Practices Act ("TPA") issues. The defendants do not seek monetary damages or compensation under the TPA. The defendants claim relief under s 80 and s 87(1) of the TPA for a mandatory injunction requiring the plaintiff to discharge the Wellington Street Mortgage and to cancel the Loan Agreement.

445 Section 87(1) of the TPA materially provides:

"Without limiting the generality of section 80, where, in a proceeding instituted under, or for an offence against, this Part, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged ... in contravention of a provision of Part ... V the Court may, whether or not it grants an injunction under section 80 ... make such order or orders as it thinks appropriate against the person who engaged in the conduct ... if the Court considers that the order or orders concerned will compensate the first-mentioned person in whole or in part for the loss or damage or prevent or reduce the loss or damage."

446 The authority to grant relief under s 87(1) arises if two conditions are satisfied. The first is that the person claiming relief is a party to a proceeding instituted under Pt VI and the second is that the person has suffered or is likely to suffer loss or damage by conduct of another person in contravention of, inter alia, Pt V. Thus, relief under s 87(1) of the TPA is ancillary or additional to other relief which a court might grant in a proceeding under other provisions of Pt VI (although the power to grant s 87(1) relief is not dependent on the grant of relief under another provision of Pt VI): Sent v Jet Corporation of Australia Ltd [1986] HCA 35; (1986) 160 CLR 540 at 543. In this case the first condition is satisfied in that the defendants' counterclaim for a breach of Pt V of the TPA for which it is seeks relief by way of injunction under Pt VI of the TPA.

447 An applicant for relief under s 80 of the TPA for an injunction is not subject to an express statutory time limit: Multi Group Distribution Services Pty Ltd v TNT Australia Pty Ltd [2001] FCA 226; Gregg v Tasmanian Trustees Ltd (1997) 143 ALR 328 at 365. Accordingly, a claim for relief under s 87(1) ancillary to the claim for injunctive relief is not subject to an express statutory limitation period. Once there is a finding of an actual or proposed contravention of Pt V which is necessary to found an injunction pursuant to s 80 under Pt VI, then the jurisdiction to make orders under s 87(1) is enlivened if actual or likely loss or damage is found.

448 As I have not made any finding concerning damage, and in particular I have not made a finding that the defendants have suffered or are likely to suffer loss and damage by reason of the Bank's contravention of s 52, the power under s 87(1) of the TPA does not arise.

449 That leaves the question whether, if a breach was found, I would order a mandatory injunction under s 80 of the TPA in the terms sought by the defendants. The jurisdiction to grant injunctive relief pursuant to s 80 of the TPA is not expressed to be compensatory and does not depend on proof of loss and damage. Section 80 is intended to protect broad public interests. As a result, some of the traditional rules relating to injunctive relief do not always apply. For example, s 80(4) empowers the Court to grant an injunction to restrain conduct whether or not it appears that the conduct is likely to continue. In ICI Australia Operations Pty Ltd v Trade Practices Commission [1992] FCA 474; (1992) 38 FCR 248 Lockhart J said (at 256 - 257):

"Injunctions are traditionally employed to restrain repetition of conduct. A statutory provision that enables an injunction to be

granted to prevent the commission of conduct that has never been done before and is not likely to be done is a statutory enlargement of the traditional equitable principles. But this is because traditional doctrine surrounding the grant of injunctive relief was developed primarily for the protection of private proprietary rights. Public interest injunctions are different ... This does not mean that the traditional equitable doctrines are irrelevant. For example, it must be relevant to consider questions of repetition of conduct or whether it has ever occurred before or whether imminent substantial damage is likely: but the absence of any one or more of these elements is not fatal."

450 In this case the conduct complained of (the omission to advise or warn) will not be repeated. Further, this is a case about the protection of private rights in which equity would look to what is practically just. Even assuming a proven breach of Pt V of the TPA, it would not be just for the defendants to be relieved of their obligations to repay the Bank if they in fact suffered no causally related loss or damage. That matter has been deferred and cannot be answered at this stage. Accordingly, even if the defendants had been successful in establishing a breach of the TPA, I would not grant injunctive relief at this stage.

451 For these reasons, the defendants fail in their claims for unconscionable dealing, breach of contract, negligence and breach of the TPA. Accordingly, the defendants' counterclaim will be dismissed. I have found the Bank's claim proven and I propose to make orders for possession of the Wellington Street premises, the Residential premises and for payment of the moneys secured by the Wellington Street Mortgage and the Residential Mortgage. The amount of the judgment sum will be finally determined in accordance with a further Dobbs certificate from the Bank.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD -v- MOSZKO MEJER DZIENCIOL by his guardian ad litem PHILLIP DZIENCIOL & ORS [2001] WASC 305 (S)

BETWEEN : AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD (ACN 005 357 522)

MOSZKO MEJER DZIENCIOL by his guardian ad litem PHILLIP DZIENCIOL

PHILLIP DZIENCIOL as representative of the estate of the late LEAH DZIENCIOL

Costs - Personal liability for costs of guardian ad litem - Presumption of reasonableness in relation to indemnity costs

Catt v Wood [1908] 2 KB 458

Halligan v Lawson (1993) 9 SR (WA) 166

Harrison v O'Donnell [1919] WN 104

Huxley v Wootton (1912) 29 TLR 132

Koh v Tay [1999] WASC 228

Masling v Motor Hiring Company (Manchester) Limited [1919] 2 KB 538

MGICA (1992) Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236

NMFM Property Pty Ltd v Citibank Ltd (No 11) [2001] FCA 480

O'Brien v The Herald and Weekly Times Limited [1937] VicLawRp 25; [1937] VLR 135

Pryor v Hennessy & Cham [1973] VicRp 20; [1973] VR 221

Rhodes v Swithenbank (1889) 22 QBD 577

Steeden v Walden [1910] 2 Ch 393

1 McLURE J: This is the plaintiff's application for the costs of the action. I handed down my reasons in this matter on 9 November 2001 (Australia and New Zealand Banking Group Ltd v Moszko Mejer Dzienciol by his guardian ad litem Phillip Dzienciol & Ors [2001] WASC 305).

2 I foreshadowed in my reasons that I proposed to dismiss the defendants' counterclaim and to make orders in favour of the plaintiff for possession of property owned by the first and second defendant which was mortgaged to the plaintiff and a money judgment, the quantum of which was to be determined in accordance with a further Dobbs certificate from the plaintiff.

3 The matter came on again before me on 19 December 2001 in which the orders foreshadowed in the reasons were made. However, the plaintiff's application for costs was contested. The plaintiff sought the following orders:

"5. The plaintiff's costs of the action and counterclaim:

(a) be paid by Phillip Dzienciol the Guardian ad litem of the first defendant (without prejudice to any right of indemnity which he may have against the first defendant and his property) taxed:

(1) on a party and party basis for those costs incurred by the Plaintiff from 8 June 1994 to 6 March 2001; and

(2) on an indemnity basis for those costs incurred by the Plaintiff from 7 March 2001.

With certificates:

(D) that the maximum recoverable by the Plaintiff in relation to getting up (item 13) is $54,000; and

(E) for the order 38 deposition of Dr Gubbay of 8 June 2001.

(b) be paid by the said first defendant Moszko Mejer Dziencil and by and out of the said real and personal estate of Leah Dzienciol taxed on a solicitor and own client basis so that all costs incurred by the plaintiff of and incidental to the action and counterclaim (including the costs of second counsel, transcript and interrogatories) are to be allowed (irrespective of the limits of the scale) except insofar as they are of an unreasonable amount or have been unreasonably incurred.

Such costs are to be presumed to have been:

(1) reasonably incurred if they were incurred with the express or implied approval of the plaintiff;

(2) reasonable in amount if the amount was expressly or impliedly approved by the plaintiff; and

(3) unreasonably incurred, if in the circumstances of the case, they are of an unusual nature.

PROVIDED THAT the total costs recoverable by the plaintiff shall not exceed the value of the costs under paragraph 5(b) above."

4 Paragraph 5(b) relies on standard provisions in the mortgages for the payment of solicitor/client costs. The defendants opposed proposed order 5(a) and consented to proposed order (b) save for the presumptions referred to in (1), (2) and (3) thereof.

5 Phillip was appointed guardian ad litem of the first defendant, Moszko Mejer Dzienciol, by order of the Court dated 8 June 1994. The question in issue is whether a court can, and if so on what grounds, order that a guardian ad litem be personally liable for the costs which would otherwise be payable by the defendant.

6 Order 70 of the Supreme Court Rules ("SCR") deals with persons under a disability suing or defending court proceedings. Pursuant to O 70 r 2, a person under a disability must have:

(a) a next friend in order to bring or make a claim in any proceedings;

(b) a guardian ad litem to defend, make a counterclaim or intervene in any proceedings.

7 The position in relation to a next friend is clear. A next friend, although not a party to the proceedings, is personally liable for costs awarded against the plaintiff: NSW Insurance Ministerial Corporation v Abualfoul [1999] FCA 433; (1999) 94 FCR 247 at 254. Indeed, it is said that one of the purposes for requiring a person under a disability to sue by a next friend was so that there would be a person answerable to the defendant for costs: NSW Insurance Ministerial Corporation (supra) at 254. However, the principal purpose must be the protection of the rights of people with a disability.

8 The position regarding the personal liability for costs of a guardian ad litem is unclear. It was conceded by Mr Atkinson (properly in my view) that the Court has the power to award costs against a guardian ad litem. However, it was submitted that a court in the exercise of its discretion should only award such costs in exceptional circumstances such as for gross misconduct of the defence. There is some authority for that position, albeit without fully reasoned analysis: Morgan v Morgan (1865) 12 LT 199; Murray v Kirkpatrick (1940) 57 WN NSW 162.

9 There is also authority which arguably supports the proposition that the discretion is not confined to exceptional circumstances: Bolton v Bolton (1884) 28 Sol Jo 737; Vivian v Kennelly (1890) 63 LT 778.

10 The plaintiff also relied on Rutter v Rutter (1921) P 136 in support of its claim. However, that was a case in the divorce division of the English Court in which the rules describe the claimant's representative as a guardian ad litem when in fact it is the equivalent of a next friend in other divisions of the English Court ( and in this jurisdiction).

11 However, it is suggested in Seaman Civil Procedure (at par 70.2.1) that the same purposes, including personal liability for costs, lie behind the appointment of a next friend and guardian ad litem.

12 In the circumstances, it is necessary to determine this question as a matter of principle with little assistance from the authorities.

13 A next friend and guardian ad litem have features in common. A person with a disability cannot sue or be sued without a next friend or guardian ad litem respectively. In the case of a defendant with a disability where no guardian ad litem has been appointed, all steps in the action including a judgment will be taken to be irregular and set aside: Surrey Insurance Co Ltd v Nagy [1968] SASR 437 at 439; Gore-Booth v Gore-Booth (1953) 2 All ER 1000 at 1005.

14 Accordingly, the Rules entitle a plaintiff to apply to the court for an order appointing a guardian ad litem: O 70 r 5. Order 66 r 6 of the SCR makes specific provision in relation to the costs of a solicitor appointed by a court as a guardian ad litem or a solicitor who acts without a court order. The court is given a discretion to direct that the costs incurred in the performance of the duties of the office of guardian ad litem by a court appointed solicitor shall be borne and paid by either of the parties, or by one or more of the parties or out of any fund in court. The court's discretion in relation to a solicitor who acts without an order of the court is in more general terms.

15 It seems there are at least two material differences between the position of a plaintiff/next friend and defendant/guardian ad litem combination. A plaintiff has a choice as to whether or not to bring or continue proceedings with that choice the responsibility of the next friend. Further, a factor in determining whether to take proceedings is usually (albeit not perhaps in this case) the financial capacity of the proposed defendants to pay any judgment and costs awarded against them_._ On the other hand, a defendant has no real control over his or her involvement in the proceedings.

16 Further, and most importantly, it is against a defendant's interest for a next friend to be appointed (thereby enabling suit) whereas it is very much in the interests of a plaintiff for a guardian ad litem to be appointed. Indeed, in the event a guardian ad litem does not (from the plaintiff's perspective) volunteer to assume the office, a plaintiff may need to secure the services of an independent person who will no doubt seek protection in relation to costs.

17 In these circumstances, I see no reason why a guardian ad litem who is in substance and effect defending a claim should be made personally liable for costs orders in favour of a plaintiff unless the guardian has acted unreasonably, whether in the conduct of the defence or otherwise. The plaintiff does not suggest that Phillip acted unreasonably in this case.

18 However, the plaintiff says that in the particular circumstances of this case the order should be made because Phillip ran the litigation which included a counterclaim for, inter alia, equitable damages. In fact, the relief sought by the defendants in their counterclaim included:

(a) an injunction forbidding the sale of the mortgaged property;

(b) an order setting aside in equity the mortgages;

(d) a mandatory injunction under the Trade Practices Act requiring the plaintiff to discharge the Wellington Street Mortgage; and

19 It is correct that the counterclaim in form is not defensive. It does not reflect or mirror the defence. However, the court is concerned with substance not form. I am assisted on this question by the authorities relating to security for costs. Security is payable by a defendant/plaintiff by way of counterclaim where the counterclaim does not arise out of the claim made by the plaintiff. So too if the counterclaim of a defendant with a guardian ad litem went beyond the plaintiff's claim then there is no reason in principle why the guardian should not be held personally responsible for the costs of that aspect of the counterclaim.

20 In my opinion the defendants' counterclaim in this case is generally responsive (and defensive) to the plaintiff's claim notwithstanding the claims for relief and in particular the claim for equitable damages. The claim for damages was in effect to neutralise the impact of a requirement for restitutio in integrum in the event the defendants were successful in their unconscionable conduct defence (see par 411 of my earlier reasons).

21 However, if a guardian ad litem was acting in substance as a next friend because the defendant was in effect the attacker then I see no reason why in the exercise of the Court's discretion the guardian ad litem should not be made personally liable for the costs of the action.

22 The notion of a plaintiff being nominally so but really defending itself against an attack from the defendants is also well recognised in the law relating to the discretion to order security for costs. Security for costs will not generally be ordered where the plaintiff is the party attacked and is really in the position of the defendant: Willey v Synan [1935] HCA 76; (1935) 54 CLR 175 at 184-5; Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 18 ACSR 662.

23 In such cases a Court is also guided by the substance and not the form of the matter. There is usually some pre litigation act of the defendant which is the trigger for the commencement of proceedings. Thus, if a defendant serves a statutory demand under the Corporations Act, it will not be entitled to security for costs if the plaintiff debtor applies to set aside the statutory demand: Aquatown (supra).

24 The principle was also applied by Wilcox J in Amalgamated Mining Services Pty Ltd v Warman International Ltd [1988] FCA 309; (1988) 19 FCR 324. In that case Warman's solicitors wrote to a third party (QMS) complaining that QMS had been offering to supply parts made by AMS for Warman pumps thus infringing Warman's copyright in the drawings. The letter concluded by saying that unless QMS desisted, Warman would take proceedings. AMS commenced proceedings against Warman for a declaration that the threats made by Warman were unjustifiable under the Copyright Act 1968. Warman applied for security for costs. The Court rejected the claim on the basis that AMS was in a practical sense forced to take legal action. Wilcox J said (at 328-9):

"If one applies the homely test adopted by Scrutton LJ of asking who, in the litigation, was the attacker and who was the defender, I think it must be said that the first attack came in a letter from [Warman's solicitors]. Although the letter was not written directly to [AMS], it is that company which has an interest in defending and, in a commercial sense, probably has very little alternative other than to take that course."

25 There is little evidence concerning the events leading up to the commencement of the action by the plaintiff. However, it was admitted on the pleading that the third defendant was in possession of the Wellington Street premises. It is probably the case that the plaintiff had no practical alternative but to obtain orders for possession as a result of a failure to deliver up possession pursuant to the mortgages. In that sense, the plaintiff's action is responsive to the defendants' omission or refusal to deliver up possession. However, in my view that is not enough to make the plaintiff in effect the defendant. Some positive act by a defendant is required.

26 For the reasons detailed above, I refuse in the exercise of my discretion to make a costs order against Phillip. Further, I see no justification for the plaintiff having the benefit of the presumptions in items (1), (2) and (3) of proposed order 5(b). The reasonableness or otherwise of the amounts paid by the plaintiff should, in the event of a dispute, be determined without the application of presumptions. Accordingly I will make an order in terms of proposed order 5(b) save for the presumption and the proviso, which is unnecessary in the circumstances.