THE STATE OF THE RESPONDENTS' KNOWLEDGE
74 I accept the applicants' plea that the respondents knew of what was termed "the Ranaldis' Special Disadvantage". The term included the special disadvantage of Executive Bloodstock.
75 In my view, the respondents' knowledge arose, as the applicant claimed, through their close examination of the financial positions of Executive Bloodstock and Mr and Mrs Ranaldi when they considered the application for approval to the assignment of the Lease to Executive Bloodstock. Mr Gentilli, in his letter dated 13 February 1997 to the business agent said that the respondents had taken advice not only from him but from their accountants and bank manager in relation to the financial information provided on behalf of Executive Bloodstock. He recorded his clients' understanding that Executive Bloodstock had agreed to pay $195,000 plus the value of stock for the Business and that from the statement of affairs provided, it appeared that almost the whole of that would have to be borrowed. He said that his clients were concerned that Executive Bloodstock and Mr and Mrs Ranaldi might not be sufficiently financially sound to operate the Business in the long term, and sought further information. They received that further information.
76 In my view, the respondents had a particularly good appreciation of all of the main circumstances which gave rise to the Ranaldis' Special Disadvantage.
77 The respondents had a sufficiently detailed knowledge of the financial affairs of Mr and Mrs Ranaldi and Executive Bloodstock to be fixed with notice that if Executive Bloodstock did not obtain an extension of the term of the Lease it would lose about $145,000 (being the value of the goodwill of the Business) and that Mr and Mrs Ranaldi would probably have to sell their home. In short, the respondents knew that they were in a position of special disadvantage.
78 The next question is whether, in all the circumstances, by extracting the $70,000 from Executive Bloodstock as a condition of providing it with a seven year leasehold term, the first respondent engaged in conduct which was unconscionable.
79 It is useful to have regard to the genesis of the equitable principles of unconscionable conduct. That can be traced back to cases involving "catching bargains with expectants", e.g. Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125 [28 ER 82]; Earl of Aylesford v Morris (1873) LR 8 Ch App 484 and the characterisation of such conduct as constituting an equitable fraud.
80 In Earl of Chesterfield v Janssen the Lord Chancellor assembled a bench which included two Chief Justices, the Master of the Rolls and another judge to hear a case in which an injunction was sought to prevent execution on a judgment. The judgment had been entered, by a form of default, in favour of a moneylender who had procured a bond for the repayment of an advance and a penalty of 100%. The advance had originally been made to John Spencer in expectation of his inheritance of a very large fortune from his grandmother, the Duchess of Marlborough. In the result, the Court granted limited relief due to Mr Spencer's conduct when he, in effect, "rolled over" the bond after he had inherited his grandmother's fortune, and for other like reasons. The Lord Chancellor, referring to various types of fraud, at 156 [100] described one fraud recognised in courts of equity in these terms:
"… it is wisely established in this court to prevent taking surreptitious advantage of the weakness or necessity of another: which knowingly to do so is equally against the conscience as to take advantage of his ignorance: a person is equally unable to judge for himself in one as the other."
81 In Earl of Aylesford v Morris, Lord Selborne explained, at 490-491, that fraud did not mean deceit or circumvention; it meant an unconscientious use of power.
82 The characterisation of unconscionability as a species of equitable fraud can be seen in more modern times in, for example, the reasons for judgment of McTiernan J in Blomley v Ryan at 385, and those of Mahoney JA in Antonovic v Walker (1986) 7 NSWLR 151 at 163.
83 I mention equitable fraud because I think that it is helpful, when assessing particular conduct in particular circumstances, to keep in mind that if there is a scale by which to measure unreasonable behaviour by one person towards another, unconscionability is towards the extreme end of that scale.
84 Some useful guidance on this aspect can be obtained from the following passage in Deane J's reasons for judgment in The Commonwealth v Verwayen (1990) 170 CLR 394 at 441:
"In this as in other areas of equity-related doctrine, conduct which is "unconscionable" will commonly involve the use of or insistence upon legal entitlement to take advantage of another's special vulnerability or misadventure (cf. Stern v McArthur (1988) 165 CLR 489 at pp 526-527) in a way that is unreasonable and oppressive to an extent that affronts ordinary minimum standards of fair dealing. That being so, the question whether conduct is or is not unconscionable in the circumstances of a particular case involves a "real process of consideration and judgment" (cf. Harry v Kreutziger (1978) 95 DLR (ed) 231 at p 240) in which the ordinary processes of legal reasoning by induction and deduction from settled rules and decided cases are applicable but are likely to be inadequate to exclude an element of value judgment in a borderline case such as the present."
85 In Harry v Kreutziger at 241, Lambert J referred to the "single question" as being:
"… whether the transaction, seen as a whole, is sufficiently divergent from community standards of commercial morality that it should be rescinded."
86 Bryson J in Burt v Australia and New Zealand Banking Group Ltd (1994) ATPR (Digest) 46-123 may, in my respectful opinion, have set the bar a little too high (from the viewpoint of an applicant for relief) when he said (at 53,598):
"The courts enforce legal rights except in circumstances which are so far out of the ordinary course, so much an enormity and a departure from ordinary standards of conduct that the position of a person who relies on legal rights should rightly be adjudged unconscionable."
but his Honour's observation confirms that unconscionability is towards the extreme end of the scale to which I have referred above (in paragraph 83).
87 As the learned authors of the chapter entitled "Unconscionable Dealing" in "The Laws of Australia" observe at paragraph 11, whether particular conduct constitutes unconscionable dealing will be largely a matter of opinion. See also French J to like effect in Berbatis (No 2) at paragraph 124.
88 In my view, the question whether particular conduct was unconscionable is not to be answered without, at the same time, taking into account matters which might strictly be regarded as being relevant to the issue of special disadvantage. When considering the application of the equitable principles of unconscionability, the question is whether equity would restrain or otherwise grant relief against the particular conduct. That must involve looking at all of the circumstances, whether they fall into one category or another.
89 I agree, respectfully, with the observation of French J in Australian Competition and Consumer Commission v Berbatis Holdings Pty Ltd [2000] FCA 1376 at paragraph 118-119 that it is conduct in context which has to be judged, and that the context includes matters which bear on the question of the degree of special disability.
90 In this case, those matters included the fact that for many years Mr Ranaldi had been a businessman. He started his working career at "Goodyear", the tyre and rubber company, in Western Australia. His evidence was that his career with that company advanced to the stage where he had been a branch or sales manager of that business at branches in various Perth suburbs. He then went into business, in partnership with his wife, conducting two retail shops selling casual wear. He ran those businesses, which were located in shopping centres, virtually on his own, attending to all aspects of the businesses. At about the same time he established Executive Bloodstock (initially on a part-time basis) which became involved in harness racing and exporting horses to the United States. Again at the same time (in the 1980s) Mr Ranaldi worked as a sales representative for two firms of real estate agents. Then his work for Executive Bloodstock became a full-time occupation. He spent 15 years so engaged, partly based in the United States of America. My assessment of Mr Ranaldi was that he was reasonably well-versed in commercial matters. Furthermore, at the relevant time (from 21 March 1997 to the end of April 1997) Mr Ranaldi had legal advice from Mr Cockram. The respondents knew that. I regard all of these factors as being relevant not only in assessing the degree of special disability, but also to the question whether the respondents' conduct was, in all the circumstances, unconscionable.
91 I accept the evidence of the male respondents that they had very little formal education. But they were successful businessmen, and they well understood, having obtained legal advice, that they were in a strong position.
92 It should be remembered, though, that the respondents had been advised by Mr Gentilli that if they insisted upon taking vacant possession of the Premises at the expiration of the then current term, they might be exposed to expensive litigation. The individual respondents had had a taste of that some months previously when Mr and Mrs Farruggio took them to the Commercial Tenancy Tribunal. I accept Mr Ranaldi's evidence (which was the subject of a fairly contemporaneous record by Mr Cockram) that the individual respondents in March 1997 expressed their displeasure at having been involved in that earlier litigation.
93 The applicant relied to some extent on the fact that the respondents adopted the device of substituting the first respondent for them as a "statutory vehicle to overcome the unlawful conduct in the imposition" of the requirement to pay $70,000. That is, they took measures to defeat the object of the State Act which was designed to protect tenants from what the applicant described as "this form of predatory conduct". I accept that this is a relevant factor i.e. that initially the respondents made an agreement which was illegal under the State Act. They re-structured the arrangement in a manner which suited their purposes, but the extraction of the $70,000 payment was the sort of mischief which the State Act was intended to prohibit. The circumstance that the scheme was probably not in contravention of the State Act does not, in my view, preclude the Court from having regard to its character as a device to achieve legally what they had previously bargained to obtain illegally. I take this factor into account as a matter weighing against the respondents, but in my opinion, it does not sufficiently tip the scales on the question of unconscionability.
94 I think it is fair to assess the context in which the parties reached their agreement as one in which each side had legal advice and each side knew that both the individual respondents and the first respondent (by being in a position to have granted to it the leasehold term which would have been granted to Executive Bloodstock if it had exercised the Option), were in a far stronger position legally than Executive Bloodstock. However, the parties were minded to reach a negotiated settlement of their disputes. The respondents so I infer, were minded to extract the maximum cash benefit obtainable as part of the terms of settlement.
95 Another factor which I take into account is, as the respondents contended, the fact that it was Mr Ranaldi's neglect to exercise the Option which brought about the situation. The authorities establish that it is not essential, in order to find a situation of special disadvantage, that it be brought about by the party said to have acted unconscionably. But, conversely, in my view, it is relevant that Mr Ranaldi, an experienced businessman, failed to attend to this aspect of the Business. He admitted that he had been told by Mr Dalziell, before settlement, about the need to exercise the Option. Mrs Farruggio had, at much the same time, advised Mr Ranaldi to make sure he advised the Lessors of his intention to exercise the Option. Mr Ranaldi admitted in cross-examination that he had read clause 22 of the Lease and had worked out that the Option had to be exercised by 2 March 1997.
96 I think that there is also some weight in the respondents' submission that it may well have been open to them simply to resume possession at the end of the then current term. In its written submissions the applicant acknowledged that a refusal to permit an option to be exercised out of time would not in itself be the subject of complaint at law or in equity in the absence of other conduct. The bargain which Mr Ranaldi struck on behalf of Executive Bloodstock enabled the former situation to be retrieved. It enabled Executive Bloodstock to generate a profit of in excess of $100,000 during the period of nearly 12 months ended in June 1998. It also enabled Executive Bloodstock to sell the Business at the end of that period for $180,000. I infer that both sides to the compromise would have been aware of these likely financial advantages when they made the settlement arrangements.
97 Mr Ranaldi must be taken to have calculated that it was in his business interests to pay the first respondent $70,000 to regain the financial position which Executive Bloodstock had lost by his omission. He had made what could have been a very expensive mistake, whereby Executive Bloodstock could have lost about $145,000 (the value of the goodwill of the Business) and he and his wife could have lost their home. He struck a commercial settlement.
98 The individual respondents can be seen to have done the same. They chose to forego what was, in all probability, their right to retake possession at the expiration of the term of the Lease, but it was a right which, if exercised, looked to them as though it would involve further expensive litigation. Had they persisted in that course and had been successful in that litigation they would have been about $145,000 richer. Instead they settled the dispute for slightly under half that sum. The result was that Mr Ranaldi had made a $70,000 mistake instead of a $145,000 mistake.
99 It might well be thought that the respondents adopted an avaricious, opportunistic approach and struck a very hard bargain. But, in my opinion, their conduct fell short, though not far short, of being the sort of conduct which Equity would regard as unconscionable.