Child v Commonwealth Development Bank [2000] NSWCA 256 | Case summary

1 HANDLEY JA: This is an appeal by the borrower from the decision of Adams J who found for the respondent Bank and directed the entry of judgment in its favour for $404,394.49 and for possession of the properties known as "Bennetts" near Nymboida and "Sneaths" at Kangaroo Creek via Grafton over which it held security. A cross-claim by the borrower seeking damages and other relief was also dismissed. The proceedings arose out of a loan agreement dated April 1985 under which the appellant borrowed $159,000 on 12 June that year to enable him to complete the purchase of "Ewandon" near Glen Innes. 2 The appellant's defence and cross-claim raised a large number of issues but it is only necessary for the purposes of this appeal to consider the defence of non est factum and his claims under the Contracts Review Act and for relief against an unconscionable bargain. The defence of non est factum was pleaded in answer to the Bank's claim for possession of "Sneaths" but not in answer to its claim for the debt or for possession of "Bennetts". The cross-claim under the Contracts Review Act sought orders declaring the "Sneaths" mortgage void and varying the loan agreement. 3 The appellant, through his solicitor, sent an application for loan to the Bank on 31 January 1985 which sought funding to enable him to purchase "Ewandon". The application was completed by Mr Burridge of McGuren & Burridge at Grafton. An advance of $235,600 was sought and security was offered over "Ewandon" and over the appellant's existing property "Bennetts". In the course of reviewing this application, the Bank became aware that the appellant's title to "Ewandon" was dependent on a sub-division, and it decided that it would not provide satisfactory security. 4 On 13 March 1985 the Bank wrote to the appellant at Kangaroo Creek informing him that it had approved a loan of $159,000 in lieu of the $235,600 sought "following your agreement with Mr Hardy, our Regional Rural Officer Lismore. Loan terms are set out in the attached copy of application for finance". The letter stated that the Bank's security documents, including a new application for finance, had been sent to the ANZ Bank South Grafton. The appellant was asked to make an appointment with the Manager of that Bank to call and sign the documents. 5 Among other matters the letter stated that a solicitor's certificate as to title should be provided to cover the Crown Lands' portion of the property. The necessary forms for completion by the appellant's solicitor were enclosed. The appellant was asked to inform his solicitor that the Bank required "up-to-date common law searches to accompany his certificate", but the tenure and financial searches enclosed with the Bank's letter would be acceptable without further updating. 6 The altered application for finance was on a printed form which had been completed with typewriting and additional pages of typewriting had been added. Clause 4, which was typewritten, stated: "4. SECURITY Security is to be given to the Bank in such form as the Bank may require and is to comprise - (A) A Registered Mortgage by applicant over property of about 648 hectares near Nymboida NSW. (B) A Registered Mortgage by applicant over property of about 169 hectares near Kangaroo Creek, Grafton NSW. On the understanding that the aggregate amount owing under the prior charge(s) over (A) and (B) above does not exceed $35,000 or such amount as may subsequently be agreed as between the prior mortgagee(s) and the Bank". 7 The security required comprised "Bennetts" near Nymboida and "Sneaths" near Kangaroo Creek. The Bank's letter and the enclosed application for finance constituted a counter-offer which rejected the appellant's offer of security over "Bennetts" and "Ewandon" and proposed instead security over "Bennetts" and "Sneaths". Copies of this letter were also sent to the ANZ Bank South Grafton where the appellant conducted most of his banking, and to his solicitor, Mr Burridge. 8 The Bank made it quite clear in the first paragraph of its letter that it had not accepted the appellant's application for a loan of $235,600 but had only approved $159,000. Regrettably it did not make it equally clear that it had rejected the appellant's offer of security over "Ewandon" and "Bennetts" and required instead security over "Sneaths" and "Bennetts". This was made clear enough by cl 4 of the application for finance and a careful reading of the covering letter would also have revealed the change in security. The letter referred to "your agreement with Mr Hardy" but there was no evidence that this included the change in the security. Mr Hardy was not called by the Bank and his absence was not explained. 9 The titles to "Bennetts" and "Ewandon" were held under the Real Property Act, but the appellant's title to "Sneaths" was under the Crown Lands Act and hence was old system. The requirement for a solicitor's certificate as to title, and the reference to common law searches to accompany the certificate, would indicate to a solicitor who read the letter that the Bank was requiring security over "Sneaths". 10 While these references in the letter and the application for finance should have alerted Mr Burridge to the Bank's counter-offer, and would also have been sufficient to alert most people seeking Bank finance at this level, the appellant was not a usual borrower. He left school at the age of 14 or 15 after less than 4 years' formal schooling. He cannot "really read properly" but his letters indicate that he can write "in a basic manner". The Judge said that he had: "… a basic grasp of literary skills which would have been adequate for most ordinary purposes. However I accept that Mr Child would have the greatest difficulty in reading and understanding any complicated legal document and certainly the agreements for loan and mortgages which he signed. I am less confident that, had he in fact looked at the title particulars in the application for finance and mortgages, he would not have appreciated that they referred to "Bennetts" and "Sneaths"." 11 The appellant also had unusual arrangements for the receipt of his mail. He resided at "Sneaths" which did not have a mailbox by the side of the road. His mail was delivered by being thrown out on the side of the road. However this was the address that the appellant had given in his loan application and he agreed that from time to time he received letters from the Bank at Kangaroo Creek. The Judge said that it was possible that the appellant did not receive the letter of 13 March, but that the Bank acted reasonably in sending it to him at that address. 12 Mr Burridge did not recall receiving a copy of the Bank's letter of 13 March to the appellant and a copy of the application for finance which were sent to him a few days later, but the Judge inferred that he probably did receive them. On 15 April the Bank wrote again to the appellant at Kangaroo Creek, referring to its letter of 13 March, and repeated its request that he make an appointment with the Manager at ANZ Bank South Grafton to call and sign the Bank's security documents. The appellant presumably received this letter because he attended at the Bank the following day and signed the documents. On 19 April Mr Burridge wrote to the Bank enclosing a duplicate authority signed by the appellant and himself which authorised the Bank to forward the sum of $159,000 to Messrs McGuren & Burridge for the purposes of settlement. In the letter Mr Burridge said: "We assume you will be taking a Mortgage over the security of the Glen Innes property being purchased by our client and at this stage we cannot let you have particulars of title, because the plan of sub-division has not been lodged for registration. We will advise you particulars when the plan has been lodged, which we expect to occur shortly". 13 As the Judge said, this was consistent with Mr Burridge not having noticed the change in the proposed securities notified in the Bank's letter of 13 March and the revised application for finance. However Mr Burridge was aware by this time of the reduced amount the Bank had agreed to lend. In fact it is not clear that Mr Burridge was under any misapprehension at all. The original application for finance, which he had helped the appellant to complete, offered security over "Ewandon". The Bank's counter-offer required security over "Sneaths". 14 If Mr Burridge was still working on the basis of the original application, there was no reason for him to "assume" that the Bank would be requiring security over "Ewandon". On the other hand, if he was aware of the terms of the Bank's counter-offer, there would be scope for an assumption that, despite requiring security over "Sneaths", the Bank would also require security over "Ewandon". 15 The Bank received Mr Burridge's certificate as to title on 23 May. The certificate was not tendered in evidence, but the Judge inferred that Mr Burridge signed the certificate and was aware of the title particulars of the properties mortgaged. Mr Burridge was acting for the appellant on the purchase of "Ewandon" and must have appreciated that his certificate related to the title to "Sneaths" and not "Bennetts" at Nymboida or "Ewandon" near Glen Innes. The trial Judge said: "It may well be that he did not appreciate that one of the properties had been changed" but I think, with respect, that he must have overlooked the fact that Mr Burridge was acting for the appellant on the purchase of "Ewandon". The Judge however added: "It does seem somewhat strange that, in the light of the letter of 19 April, he would have signed the certificate relating to Crown land which, had he considered the matter, he should have realised was not part of the proposed security as he understood it, in respect of which (as he himself said) particulars of title could not be given because the plan of sub-division had not yet been lodged for registration".

16 The Judge also referred to the fact that on 24 May Mr Burridge again wrote to the Bank enclosing a copy of a 1939 easement granted over "Sneaths" to the Council of the Clarence River County District. The purchase of "Ewandon" was completed on 12 June. Although Mr Burridge had stated in his letter of 19 April that he would advise the Bank of title particulars when the plan of sub-division had been lodged, there is no such letter in evidence and Mr Burridge did not explain why he had not forwarded the particulars when they became available. Mr Burridge had to prepare the transfer of "Ewandon" and submit it for marking and execution. The Bank did not attend on settlement, did not take a mortgage over "Ewandon", and did not take possession of the certificate of title. 17 For some reason, which has not been explained, the Bank had sent the security documents to the ANZ Bank South Grafton and not to Mr Burridge. In his affidavit of 13 November 1998, sworn immediately before the trial which commenced on 16 November, Mr Burridge said in para 20 that if the mortgages had been provided to him before settlement of the purchase of "Ewandon" he would have witnessed the documents and explained them to the appellant. He added "I certainly would have queried the Crown law (sic) mortgage had I seen it because it was not part of the security offered". 18 Mr Burridge was not cross-examined on this paragraph of his affidavit, but he had not said in plain terms that he was not aware of the Bank's counter-offer and the change in the security. In view of the correspondence between him and the Bank his statements in para 20 of his affidavit should be read strictly literally without adding anything by way of implication or inference. Mr Burridge simply said that he would have queried the Crown law mortgage because it had not originally been offered. He may have done this simply to make sure that the appellant understood the altered basis on which the loan was being made. The paragraph does not necessarily imply any statement about his own knowledge at the time. It should not be read as asserting that he was not aware that the Bank was taking a mortgage over "Sneaths". 19 The Judge concluded that the Bank was entitled to believe that Mr Burridge was aware of the change in the securities required by its counter-offer because "the Bank took reasonable steps to notify the mortgagor of the identity of the properties to be secured by the mortgages and reasonably supposed that he was so informed or, at least, had no reason to suspect that he was not so informed". 20 The appellant claims that when he executed the mortgage documents and application for finance at the ANZ Bank South Grafton they were simply put in front of him by a Bank officer and he was asked to sign. He did not have his spectacles with him and would have found difficulty in reading the documents even if he had been able to understand them. However the Judge found that the Bank was entitled to act on the basis that the appellant was fully informed about all material matters when he came to execute the mortgages. 21 The Judge rejected the defence of non est factum saying that he thought the Bank was "innocent" and that the appellant was either himself careless or was bound by the notice given to his solicitor. Accordingly, following Petelin v Cullen (1975) 132 CLR 355 at 359-60 the defence had not been established. These findings were open on the evidence and flow from his primary findings that the Bank had acted reasonably in sending its counter-offer to the appellant and Mr Burridge and was entitled to believe that they were aware of its effect. I have not been persuaded that we can interfere with the primary findings and they fully support his decision to reject this defence. 22 Mr Leggat, counsel for the appellant, submitted that the mortgage over "Sneaths" which was signed was "radically different" (Petelin v Cullen at 360) from the mortgage over "Ewandon" that he expected to sign. The requirement that there be such a difference flowed from Gallie v Lee [1971] AC 1004 which the High Court followed in Petelin v Cullen. 23 The appellant said in evidence that he was very attached to "Sneaths" and his attitude at the time was that on no account was "Sneaths" to be involved in the security for this loan. The Judge rejected the appellant's evidence that he had said this to Mr Rawle of the ANZ Bank when he enquired about finance for the purchase of "Ewandon". The appellant did not suggest that he said this to anyone from the respondent Bank or to Mr Burridge. 24 "Sneaths" had been mortgaged to the ANZ Bank in 1976 and to the State Bank in 1981, the combined debts in February 1985 being $35,000. However on 27 May 1995 the appellant obtained additional accommodation from the ANZ Bank and the respondent Bank agreed to the priority of the ANZ Bank being increased to $40,000 from $23,000 (3/603). The debt owed to the State Bank was then $12,600 (3/614). On 14 May 1986 the respondent agreed to the ANZ Bank's priority being increased to $50,000 (3/623) and on 16 October 1989 it was increased to $70,000 (3/666). 25 Since "Sneaths" had already been mortgaged to two Banks, and the debt owed to the ANZ Bank secured on "Sneaths" was increased in 1985, 1986 and 1989, there is little reason for a court to take literally the appellant's evidence that under no circumstances was "Sneaths" to be involved in the security for the loan from the respondent Bank. The Judge did not make a finding about this part of the appellant's evidence, but appellate courts, like the rest of mankind, are entitled to rely on the principle that actions speak louder than words. No doubt the appellant wished to keep "Sneaths" unencumbered as far as possible and it was the last property he would want to lose, but clearly, if the need arose, he was prepared to mortgage "Sneaths" and to increase the debts secured on it. 26 The Judge found that when the appellant was at the ANZ Bank he knew he was signing mortgages to secure monies he was borrowing from the respondent Bank, and he knew that a mortgage enabled the lender to sell the property if there was default. The speeches of the Law Lords in Gallie v Lee [1971] AC 1004 give only limited guidance as to the differences which will make a document executed by a party "radically different" from that which he supposed he was signing. Lord Wilberforce spoke at 1026 of a document which was "essentially different in substance or in kind from the transaction intended". Petelin v Cullen (1975) 132 CLR 355 gives little assistance on this question because the difference in that case between the receipt for $50, which the appellant thought he was signing, and an extension for six months of a lapsed option to purchase his property, was radical on any view. 27 The appellant knew, correctly, that he was incurring personal liability for a loan of $159,000 which was to be secured over two of his properties but claims to have been mistaken as to the identity of one of those properties. In my judgment a sentimental preference, however strong, for one grazing property to be mortgaged rather than another to secure the same debt did not, in the circumstances of this case, make the mortgage over "Sneaths" essentially different in substance or in kind from the mortgage over "Ewandon". Accordingly I would reject the defence of non est factum on this ground as well. 28 The other grounds of appeal relate to the appellant's cross-claim for relief under the Contracts Review Act. The trial Judge found that the appellant was not aware that the security required by the Bank had been varied to substitute "Sneaths" for "Ewandon", and that in the circumstances of this case the Bank should have brought the substitution specifically to the attention of the appellant or his solicitor. The Bank was not aware of the appellant's mistake and although on the whole it had acted reasonably the Judge considered that it was not entirely "innocent". He therefore concluded that the contract was unjust in that it resulted in "Sneaths" rather than "Ewandon" being mortgaged to the Bank. 29 The Bank has not filed a notice of contention and these findings have not been challenged. His Honour held that the injustice found did not affect the Bank's claims to recover its debt and for possession of "Bennetts", but he held that justice required that the Bank's security be varied by substituting "Ewandon" for "Sneaths". Since the Court had power under the Act to impose terms and conditions on any relief it granted, the Judge made relief from the mortgage over "Sneaths" conditional upon the appellant granting a mortgage over "Ewandon". 30 The Judge's reserved judgment was delivered on 14 December 1998 and he directed the plaintiff to bring in draft minutes of order in accordance with his reasons. Formal orders were made on 4 May 1999. Order (4) was an order for possession of "Sneaths" and order (5) gave the Bank liberty to issue a writ of possession forthwith in respect of "Sneaths". However order (9) provided that orders (4) and (5) were to be vacated and the mortgage over "Sneaths" in favour of the Bank discharged if, within 28 days, the appellant gave the Bank a registrable mortgage over "Ewandon", took whatever steps may be necessary to enable the mortgage to be registered as a first mortgage in favour of the Bank, and delivered possession of "Ewandon" to the Bank to enable that property to be sold. 31 The appeal books do not contain any transcript or evidence relating to the further proceedings before the trial Judge between 14 December 1998 and 4 May 1999 and those further proceedings have not been made the subject of any ground of appeal. 32 The grant of relief under the Contracts Review Act is a two-step process. See Nguyen v Taylor (1992) 27 NSWLR 48 at 55. The first step, under s 9, involves the court finding a contract or a provision in a contract to have been unjust in the circumstances relating to the contract at the time it was made. The second step, under s 7(1), permits the court to make such orders as it considers just. It provides: "Where the court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:- (a) it may decide to refuse to enforce all or any of the provisions of the contract; (b) it may make an order declaring the contract void, in whole or in part; (c) it may make an order varying, in whole or in part, any provision of the contract; (d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that - (i) varies, or has the effect of varying, the provisions of the land instrument; or (ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument". 33 The appellant's principal submission was that the Judge's decision on the second step was vitiated because, having found that the contract was unjust, his remedial orders failed to remedy that injustice. We were informed by Mr Leggat from the Bar table that the appellant was unable to comply with the conditions imposed by the Judge for the mortgage over "Sneaths" to be discharged in exchange for a registered first mortgage over "Ewandon" because "Ewandon" was already subject to a first mortgage which the appellant was not able to discharge. However there was no evidence of these matters before the Court, and there was no evidence that these difficulties had been drawn to the attention of the Judge between 14 December 1998 and 4 May 1999. They were not even the subject of a ground of appeal. 34 Mr Leggat sought to meet these difficulties by seeking leave under SCR Pt 51 r 19 to adduce, as additional evidence, an up-to-date official search of the title of "Ewandon" and a certified copy of the registered first mortgage. He did not tender evidence of the value of "Ewandon" or the amount secured by the first mortgage. The Court rejected the tender. 35 Mr Leggat's next submission was that justice required "a robust restitutio in integrum" which would be achieved by cancelling the mortgage on "Sneaths" and requiring the appellant to repay the principal sum borrowed less any interest paid and to account for the benefits from the occupation of "Ewandon" since June 1985. The first difficulty with this submission is that the grant of relief under s 7(1) clearly involved the exercise of a judicial discretion ("… the court may, if it considers it just to do so …"). In an appeal against the exercise of such a discretion, the appellate court cannot re-exercise the discretion unless it is first established that its exercise by the trial Judge miscarried. The grounds for appellate intervention in such cases are well established. See House v The King (1936) 55 CLR 499. 36 The appellant failed to establish any errors by the Judge in the exercise of his discretion. He did not decline to grant relief, and if the appellant had been able to comply with the conditions, the relief granted would have met the injustice found. The conditional relief he granted would have reformed the transaction to make it accord with the appellant's expectations when he signed the security documents in March 1985 and when they were acted upon by the Bank in June that year. 37 This Court has held that relief may properly be granted under the Act to reform the transaction to make it conform to the expectations of the weaker party. See S H Lock (Australia) Ltd v Kennedy (1988) 12 NSWLR 482 and Esanda Finance Corporation Limited v Tong (1997) 41 NSWLR 482. There is no basis for a finding that the Judge erred in exercising his discretion in an attempt to achieve that result. The inability of the appellant to comply with the conditions of the order does not bespeak error when this fact was not brought to the Judge's attention, either during the trial, or prior to the making of his formal orders. 38 The relief sought in the form of "a robust restitutio in integrum" would in fact be quite unjust. It would deprive the Bank of interest on its loan since 1985 which it had bargained for, and require it instead to accept the unknown benefits, such as they were, of ownership of a grazing property over the same period which it had never bargained for. There is no basis in justice why the Bank should be deprived of its contractual rights to interest. The appellant knew that he was borrowing money from the Bank at interest, and knew that it was to be secured over two of his grazing properties. If the transaction had been void for any reason and the Bank had to sue for its debt in restitution it would have been entitled to interest under s 94 of the Supreme Court Act. See Goss v Chilcott [1996] AC 788, 795-6, 800. 39 Mr Leggat relied on the relief granted to the Amadios in Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 but they were guarantors. Guarantors have never been required to make restitution for benefits received by the principal debtor under the principal contract. See MacKenzie v Royal Bank of Canada [1934] AC 468, 476. 40 In the circumstances of this case the appellant's claim that the mortgage over "Sneaths" should be set aside as an unconscionable transaction does not raise any separate issues. The claim under the Contracts Review Act having failed, this claim must inevitably share the same fate. 41 The appeal should be dismissed with costs. 42 STEIN JA: I agree with Handley JA. 43 HEYDON JA: I agree with Handley JA.

Child v Commonwealth Development Bank

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Judgment (15 paragraphs)

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