Clarke v Lopwell Pty Ltd

Supreme Court of NSW|2008-05-07|Before: Hamilton J

CITATION : Clarke v Lopwell Pty Ltd [2008] NSWSC 615

HEARING DATE(S) : 21, 22 & 24 April and 7 May 2008

DECISION : That the defendant engaged in unconscionable conduct and the plaintiffs' guarantees and mortgages should be set aside.

Assad Atra t/as Atra Bros v The Farmers & Graziers Co-operative Company Limited NSWCA 24 October 1985 unreported Australia & New Zealand Banking Group v Karam (2005) 64 NSWLR 149 Barnes v Addy (1874) LR 9 Ch App 244 CASES CITED : Blomley v Ryan (1956) 99 CLR 362 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 Hobbs v Tinling (CT) and Company, Limited [1929] 2 KB 1 Scott Fell v Lloyd (1911) 13 CLR 230 Steinberg v The Commissioner of Taxation of the Commonwealth of Australia (1975) 134 CLR 640

TEXTS CITED : Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) [16-010]

Dallas James Clarke (P1) PARTIES : Juliet Jane Clarke (P2) Milk Makers Dairy Heifers Pty Limited (P3) Lopwell Pty Limited (D)

COUNSEL : J M Ireland QC and A D Crossland (Ps) R G Forster SC and P J Dowdy (D)

SOLICITORS : Patey & Murphy (Ps) Robinson Legal Pty Limited (D)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5637/04 DALLAS JAMES CLARKE & ORS v LOPWELL PTY LIMITED JUDGMENT 1 HIS HONOUR: These are proceedings in which the plaintiffs claim to set aside guarantees given by them to the defendant, Lopwell Pty Limited, of a loan by the defendant to one Glen Freeman ("Freeman") and also to set aside mortgages of properties given by the plaintiffs to support those guarantees. The claim is made on the alternative bases of general unconscionability, the Contracts Review Act 1980 ("the CRA") and the first, alternatively the second, limb of Barnes v Addy (1874) LR 9 Ch App 244. FACTUAL FRAMEWORK 2 The following facts are not contested or are easily found. 3 The first plaintiff, Dallas James Clarke, is 69 years of age. After obtaining the Leaving Certificate he attended the University of Sydney where he graduated as a Bachelor of Agricultural Science in 1961 and as a Master of Agricultural Science in 1967. He worked as a technical officer for the Dairy Husbandry Research Foundation from 1961 to 1965. The second plaintiff, Juliet Jane Clarke, is his wife. She is 68. After completing her Leaving Certificate, she also obtained a Bachelor of Agricultural Science degree at the University Sydney in 1961 and a Diploma of Education (Special Education) at Newcastle Teachers College in 1973. Thereafter she worked until 1965, first at the University Farms, Camden and then as a Unit Research Assistant for the Dairy Husbandry Research Foundation. The first and second plaintiffs are collectively referred to as "the Clarkes". 4 The Clarkes met in 1958 and married in 1964. From 1965 until the present time, they have together operated dairy farms, at Frederickton until 1969 and at Wallalong since 1969, when they purchased a property there. The farming operation has since 1994 been conducted by the Clarkes through the third plaintiff, Milk Makers Dairy Heifers Pty Ltd, of which they are the sole directors and shareholders. However, the main relevance of the third plaintiff to these proceedings is that it is the owner and the mortgagor of certain of the land in respect of which mortgages were granted to the defendant to secure obligations as guarantors of a loan by the defendant to Freeman. 5 In 1984 one Michael Unicomb ("Unicomb") became the Clarkes' accountant. Over the succeeding years he became their trusted adviser and a personal friend. It was he who in early 2003 introduced them to Freeman, who was another client of his. Their trust in and friendship with Unicomb survived until February 2008, despite the events and transactions from 2003 on that are hereafter related. 6 The Clarkes' farming properties expanded over the years. By early 2003 the farming property held by the plaintiffs was valued at between $11 million and $14 million, against liabilities of only about $3 million. However, from about 2002 the plaintiffs were experiencing cashflow problems as a result of drought and the downturn in the dairying industry. Also, in early 2003 the first plaintiff was suffering health problems. This led to Unicomb promising to pay the Clarkes $35,000 per month for three months in the circumstances discussed below: see my conclusion in 38. Two payments of $35,000 were made, but the third was not. 7 In March and April 2003, the plaintiffs entered into two transactions at the instance of Unicomb, the first with Guardian Mortgages Pty Ltd ("Guardian") and the second with the defendant. 8 On 27 March 2003, Guardian forwarded a letter embodying a loan agreement addressed to the Clarkes. The principal amount was $700,000. The plaintiffs were the borrowers, the term was three months and the interest rate was 28 per cent per annum reducing to 24 per cent per annum if all payments were made as they fell due. A copy of this letter signed by both the Clarkes is in evidence. It appears to have been faxed to Julia Koffel of Koffels Solicitors ("Koffels") on 28 March 2003, indicating that the document had been signed by the Clarkes by that date. There are a number of more formal documents signed by the Clarkes in relation to that loan ("the Guardian transaction") but they are all undated. They include a direction to pay which indicates that the total amount actually advanced was $734,871, which included various payments to Guardian, a commission of $15,000 to Paramount Mortgage Solutions and a payment to Clark McNamara Lawyers for $11,281. It also indicated that a payment of $700,000 was made "as directed by the Borrower or the Borrower's solicitor". That sum was in fact paid to the trust account of Michael Unicomb & Associates. The Clarkes received none of the money. 9 The actual mortgage document to Guardian does not appear to be in evidence. However, there is in evidence a direction to pay. This records as security for the loan "Registered Caveat" and "Unregistered Mortgage" over various properties of the plaintiffs and a fixed and floating charge over the third plaintiff. There are also in evidence two caveats lodged by Guardian to protect an unregistered mortgage dated 15 April 2003. In one caveat the mortgagors are specified as the Clarkes personally and in the other caveat the mortgagor is the third plaintiff. The statutory declaration verifying the caveat is in each case dated 23 April 2003. 10 It is to be noted that the first $35,000 was deposited into a joint cheque account of the Clarkes on 17 April 2003. 11 The second transaction in respect of which the plaintiffs executed documents in April 2003 arose from a loan agreement between the defendant Freeman as borrower and the plaintiffs as guarantors dated 28 April 2003. The borrowing by Freeman was in respect of the purchase of a failed resort in South Australia known as the Wirrina Resort ("the Wirrina transaction"). The principal of the loan was $1,473,000, the repayment date was 31 July 2003 and the interest rate was 18 per cent per month (or 216 per cent per annum) computed from 30 April 2003. The properties over which security was to be given were five properties of the plaintiffs. Guarantees of the loan agreement were signed by the plaintiffs as guarantors on 28 April 2003 and mortgages were given by the Clarkes and by the third plaintiff on 28 or 29 April 2003. There is no real doubt that the documentation was signed by the Clarkes at their home late in the evening, probably on 28 April 2003, witnessed by Unicomb and one Warren Turner ("Turner"). I accept that the Clarkes did not read the documents before signing them. It is guarantees and mortgages thus given by the plaintiffs in relation to the Wirrina transaction that the defendant seeks to enforce. 12 The $700,000 borrowed under the Guardian loan was not repaid by Unicomb to Guardian or to the Clarkes. After demand was made by Guardian on the Clarkes, they raised money from Rabobank and repaid the loan including interest on 16 December 2004. No repayment has since been made by Unicomb to the Clarkes. Similarly, in the Wirrina transaction Freeman has not repaid the loan of $1,473,000 raised by him from the defendant. Demand has been made upon the plaintiffs for payment of the principal under that loan and interest. Although demand was initially made including interest at the rate of 18 per cent per month from 30 April 2003 to 20 October 2003 the demand for interest has since been moderated to claim interest at the rate prescribed by the Rules. 13 These proceedings were originally commenced by statement of claim filed on 18 October 2004. Then, as now, the defendant was the sole defendant in the proceedings. The defendant, by its statement of cross claim filed on 16 June 2006, claimed against the three plaintiffs together with Freeman as cross defendants judgment for $1,473,000 and interest of $411,148.48. 14 The proceedings were fixed for trial, initially before the Chief Judge in Equity, on 21 April 2008. Although the trial took place commencing on that date, it took place before me. On 11 April 2008 the plaintiffs, having at last in February 2008 lost faith in Unicomb, applied to amend the statement of claim both by adding an additional cause of action against the defendant and also by adding as additional defendants Unicomb and Ross Koffel. White J determined the application for amendment on that day. Although his Honour did not deliver formal reasons for judgment, the reasons for his determination appear in the transcript of proceedings on that day. In short, his Honour allowed the amendment of the statement of claim by the addition of a cause of action. But, whilst acknowledging that it would be more desirable if the proceedings against all defendants were determined in the one trial, his Honour refused to allow the additional defendants to be joined at that time. That was because it was clear that the addition of defendants only ten days before the trial would, if permitted, have necessarily led to the adjournment of the trial. In light of the lateness of the application; the opposition of the defendant, which desired the proceedings as they relate to it to be determined without further delay; and the fact that the plaintiffs could, if desired, bring separate proceedings against the other proposed defendants at a later date, his Honour refused the application to add defendants. The proceedings therefore came on for trial before me upon a further amended statement of claim, but without any added defendant. FACTS SURROUNDING THE MARCH AND APRIL 2003 TRANSACTIONS 15 I should say at once that none of the three witnesses who gave oral evidence concerning these facts was a very satisfactory witness. They were all unsatisfactory both in their affidavit and their oral evidence. As a result, the evidence on this subject matter is unclear, unsatisfactory and conflicting. 16 Despite the considerable difficulties with the evidence, particularly the evidence of the first and second plaintiffs, a number of matters falling under this heading are clear. 17 One is that through 2002 the plaintiffs were encountering cashflow difficulties in relation to their dairy farming business by reason of drought and a downturn in prices for dairy products, so that they were having difficulty in meeting their feed bills. The first plaintiff was in favour of selling a property known as "Lonsdale" in Woerden Road, Clarence Town to increase their liquidity. The second plaintiff was opposed to this course, as that property contained high ground on to which the plaintiffs' cattle could be moved in times of flood, to which their other properties were prone. They consulted about their difficulty and their conflicting views as to the sale of "Lonsdale" with Unicomb, who urged them not to sell "Lonsdale". He promised to solve their liquidity problem if they would make their properties available as security for a limited period of three months. The promise was to pay $35,000 per month towards their feed bill for those three months. It seems reasonably clear from the Clarkes' evidence that the promise of $35,000 per month was made early in the discussions with Unicomb as to the relief of their problem. 18 The defendant contended that the Clarkes must be regarded as persons of some considerable commercial sophistication, bearing in mind their tertiary educational qualifications; their successful operation of dairy farms over some 40 years; and their accumulation of considerable assets in the course of that operation. On the plaintiffs' behalf it was, to the contrary, submitted that the Clarkes "are well educated but trusting and unworldly people. They are inexperienced in business." In my view the characterisation of the Clarkes by their counsel is much more realistic than the defendant's characterisation. Whilst acknowledging that, to succeed in dairy farming, which has not been an easy industry, particularly over recent years, the Clarkes must have possessed business skills of a particular sort, it equally seems to me that they are unworldly, bearing in mind the narrow context in which they have always operated. This view was borne out by their presentation as witnesses. That they were trusting to an unworldly extent is borne out by their continuing trust in Unicomb for years after he had led them, for little consideration, into transactions in which he did not perform as promised and that proved clearly disadvantageous to them. 19 Returning to the problems of the evidence, one serious problem in the evidence of the Clarkes is that neither of them had at first any recollection of signing the documentation relating to the Guardian transaction. This is despite the fact that signatures and initials, which they acknowledge to be theirs, appeared many times on the relevant documentation. 20 The first plaintiff's oral evidence was quite unimpressive. At times he presented as a confused old man and there were considerable passages in his cross examination where his answers were confused. At other times, his evidence under cross examination was more cogent. 21 Two affidavits of the first plaintiff were read at the trial. The first was sworn on 22 February 2007, the second on 14 April 2008. 22 There were two substantial problems with the first affidavit. The first was that the first plaintiff evinced no knowledge whatsoever of the Guardian transaction and related all conversations only to the Wirrina transaction. Thus, in that evidence, the payment of $35,000 for three months was attributed by him to the Wirrina transaction, although he says that the offer of $35,000 for three months was made in March 2003. The other problem with the affidavit was that he deposed that he was told that the offer in relation to the Wirrina property was made to Unicomb as well as Freeman and Turner. Implicit in this was knowledge that Unicomb was involved in the substantive transaction. This knowledge he subsequently repudiated, deposing that it was much later that he became aware of Unicomb's personal involvement in the Wirrina transaction. The only execution of documents that he recorded in that affidavit was at the nocturnal session late in April 2003. It was on that occasion that he said he asked Unicomb what would happen "if this scheme goes belly up" and received the answer that Unicomb "won't let it" happen. 23 Whoever prepared his second affidavit had shown him the documentation signed by the Clarkes relating to the Guardian transaction. In that affidavit, the first plaintiff places the offer by Unicomb of $35,000 per month for three months in March 2003, at a time when the first plaintiff was still pressing for the sale of "Lonsdale". He says that Unicomb said that the payments of $35,000 would be in return for making properties available as "bricks and mortar security" for three months. Thereafter the first defendant deposed that the Clarkes did receive the fax dated 28 March 2003 from Koffels and that they signed it and returned it at the request of Unicomb's office. 24 Despite the statement I have referred to in his first affidavit, that the South Australian property had been offered to Unicomb, among others, he deposed that he did not know in March or April 2003 that Unicomb had any role in any of the proposals or schemes that he spoke about, other than acting as an accountant for whatever of his clients were involved. He did not depart again from his denial that he knew of any personal involvement of Unicomb until much later. 25 He also deposed that he did not associate the proposed payments of $35,000 for three months with Freeman or any scheme in which Freeman was involved. He deposed that he was aware at the time of the later affidavit that he signed documents relating to the two separate transactions. He maintained that there was only one occasion on which he was asked to sign a bulky set of documents, but he still had no recollection of the circumstances in which the Clarkes signed the Guardian documents. It is clear from the statutory declarations verifying Guardian's caveats and from the direction to pay that the Guardian transaction was settled on 15 April 2003, before the Wirrina transaction was seriously contemplated. Furthermore, the first payment of $35,000 was paid into the Clarkes' cheque account on 17 April 2003, again before the Wirrina transaction was seriously contemplated. 26 In one of the more cogent passages in his cross examination, the first plaintiff was reasonably resolute that it was in relation to the Guardian transaction that the three payments of $35,000 were to be received. 27 Although there was some claim that Koffels acted for the plaintiffs in relation to the Guardian transaction, it is quite clear that they proffered the plaintiffs no advice and did not in any real way act for them in relation to this transaction. 28 As I have said, there seems little doubt that the Clarkes executed the documents relating to the Wirrina transaction late in the evening of 28 April 2003 and without reading the documents. Prior to their signing the documents, the second plaintiff telephoned their longstanding solicitor, Richard Murphy, who still acts for them. He advised them not to sign the documents until he saw them, but, pressured by Unicomb, they ignored his advice and signed. 29 As to the second plaintiff, she was a superior witness to the first plaintiff in that her oral evidence was given more confidently and clearly and she adhered to the recollections that she had. However, her recollections were even more patchy than the first defendant's, as illustrated by her lack of recollection concerning the Guardian documents. 30 The second plaintiff also swore two affidavits, the first on 22 February 2007 and the second on 14 April 2008. The first of those affidavits is very brief and referred only to the Wirrina transaction. She denied that the Clarkes received any financial benefit from that transaction. In her second affidavit, she deposed to expressing to Unicomb her view that "Lonsdale" should not be sold and he offered to try to find a solution. She appeared to associate the agreement to pay them $35,000 per month for three months with the Wirrina transaction. It was she who telephoned Richard Murphy, as noted above. Despite then being aware that she had signed documents relating to the Guardian transaction as well as the Wirrina transaction she still recalled only one signing session, being the nocturnal session in late April 2003 where Unicomb and Turner attended and witnessed the documents. 31 Neither was Phillip Brendan Sharkey, the principal of the defendant, an impressive witness. His beliefs were rationalised to what was necessary for him to maintain the version of facts favourable to the defendant's case. He also presented as one who believed that whatever he had done was right. He avoided answers to difficult questions. There was an arrogance displayed in his oral evidence, as by his asking questions of counsel and the manner in which he did so. His evidence was also conflicting in important regards. 32 Mr Sharkey also swore two affidavits, the first on 11 April 2007 and the second on 18 April 2008. Two things are plain from both these affidavits, as from his cross examination. The first is that the Wirrina transaction was carried out in great haste. He said that the "Clarke transaction came upon Lopwell in a rush." Although in his first affidavit he suggests that Freeman first contacted him about the Wirrina transaction on 13 April, it was only on about 24 or 25 April that the discussions moved to a serious phase and the transaction was completed on 28 or 29 April. The second is that he knew little about the Clarkes. 33 In his first affidavit Mr Sharkey deposed that he had a meeting with Freeman at his home in Neutral Bay at which Freeman informed him that Unicomb had organised for the Clarkes to provide security for the loan. He deposed that Freeman said: "Michael Unicomb, who is also an accountant, has organised for some of his clients, who are dairy farmers with a farm valued at between $11 million to $14 million to put their farm up as security. In return, we will be paying their monthly feed bill as they are going through some difficulty with the drought. They will also receive either some interest in the some [sic] land at Wirrina or an interest amount for the period of risk."

He added: "I did not make any enquiries as to why Mr and Mrs Clarke were offering their property as security, the quantum of the feed bill, how it was to be paid or from where payment was coming. I assumed that Mr and Mrs Clarke had a separate arrangement with Mr Freeman and I was content to proceed with the Wirrina Loan on this basis."

He also said that on 24 or 25 April 2003 he had a meeting with Freeman, Unicomb and Turner, at which Unicomb said: "Glenn has mentioned that you will not proceed with the loan unless there is security to cover the loan. I have some client's [sic] who are dairy farmers and who are willing to put their property up as security for the loan. I have been their accountant and friend for many years."

He said that a couple of days later he had a further conversation with Unicomb in which Unicomb said: "Because Mr and Mrs Clarke are dairy farmers they rise and retire early and are generally busy throughout the day, I will need to take the documents to them at a time that is convenient to them. Given the busy nature of their days it is also probably easier that you deal with me in relation to this matter."

However, later Mr Sharkey denied resolutely that he had met Unicomb or Turner on 24 or 25 April 2003 and said that any conversation he had with Unicomb was on the telephone. 34 In his second affidavit Mr Sharkey said that the meeting at Freeman's house did not take place until 27 April 2003 and that he did not meet Unicomb or Turner at all before the execution of the documents in the Wirrina transaction. He said that "everything took place over a short period of time, effectively 2 or 3 days around the date that the documents were executed." 35 Of the Clarkes, he said that he believed they were dairy farmers with substantial real estate and had both legal and financial advice available to them, although he deposed to no sound basis for his belief about this advice. 36 Despite having claimed in his first affidavit as set out above that he was told that the Clarkes had some sort of interest in the Wirrina project, in his second affidavit he said in the vaguest terms that he believed that the Clarkes would be remunerated for putting up their property by way of security and that terms of remuneration had been negotiated with the Clarkes. He said in cross examination that he did not give it a thought one way or another as to whether the Clarkes themselves had a commercial interest in the Wirrina project. He also recalled Freeman mentioning a monthly fee of $35,000 as being paid to the Clarkes, but did not repeat the suggestion that they had any other form of remuneration. 37 He denied at all times that he was aware that Unicomb had any personal interest in the Wirrina project until long after the transaction. He knew that Koffels were acting for Freeman. He knew that Unicomb was Freeman's accountant as well as the Clarkes'. He knew that if anyone was acting for the Clarkes it was Koffels, who had a conflict of interest because they were Freeman's solicitors. FINDINGS CONCERNING CONTESTED MATTERS 38 I make the following findings concerning Mr Sharkey's knowledge at the time the Wirrina transaction was entered into.

(1) He knew that the Clarkes were dairy farmers with valuable properties.

(2) He knew that Unicomb was Freeman's accountant and the Clarkes' accountant as well.

(3) He had not been told by Freeman and did not have any belief that the Clarkes were to have any interest in the Wirrina land or project or to receive any interest in respect of the transaction. I do not accept his evidence in his first affidavit that he was told these things by Freeman in light of his conflicting evidence set out at [33] to [36] above.

(4) It is my view that the evidence is quite unclear as to what he was told about what consideration the Clarkes were to receive for the guarantees. He said he believed they would receive remuneration, the terms of which had been negotiated with them. There may have been mention to him of a monthly feed bill or even of a monthly sum of $35,000, although I am not prepared to make a positive finding to that effect. But I find that at the time the guarantee was given he had no firm basis for a belief that the Clarkes' remuneration had been agreed or any precise knowledge of what that remuneration was. In fact, I find that the promise of the three $35,000 monthly payments was not consideration for the Wirrina transaction but for the Guardian transaction. I accept the first plaintiff's evidence in this regard, corroborated by the fact that the first payment of $35,000 was made within two days after the settlement of the Guardian transaction and before the Wirrina transaction was firmly contemplated. Any suggestion to Mr Sharkey that the payments were consideration for the Wirrina transaction was wrong.

(5) To Mr Sharkey's knowledge, the Clarkes had not had any independent financial or legal advice. He gave no real basis for believing that they had had any advice at all. The only possible sources of advice, to his knowledge, were Unicomb, who was Freeman's accountant, and Koffels, who were acting for Freeman. Neither, to his knowledge, was a possible source of independent advice.

(6) Mr Sharkey, as the representative of the lender, which controlled the situation, made no enquiry as to precisely what the consideration in favour of the Clarkes was; whether they had had any independent financial advice, bearing in mind that Unicomb was Freeman's accountant as well as the Clarkes'; whether the Clarkes had had any independent legal advice (or any legal advice at all), bearing in mind that Koffels were acting for Freeman; and no further enquiry about the personal characteristics or financial circumstances of the Clarkes, whom he had not met. The truth of the matter is that he really did not think of their interests or position at all. Yet he was prepared to accept the plaintiffs' guarantee, secured by mortgages, for $1,470,000 at an interest rate of 18 per cent per month. To any extent to which they needed $35,000 for a month for a couple of months, it should have been clear enough, even without further enquiry, that the Clarkes could have raised this amount in some more equitable way than risking their property by guaranteeing a loan at interest of 216 per cent per annum, which the defendant was to receive, obviously to its advantage.

(7) I find that Mr Sharkey was not aware until after the Wirrina transaction was entered into that Unicomb had an interest in the transaction. One may have suspicions about Mr Sharkey 's denials of this. However, there is really no basis in the evidence on which the denials can be rejected on the balance of probabilities. Even if his denials were rejected, there would be a vacuum as to the evidence on this subject and no basis on which the Court could come to the opposite conclusion that he had knowledge of that fact. "It is elementary law that disbelief of a witness does not prove the opposite of what she has asserted": per Mc Hugh JA in Assad Atra t/as Atra Bros v The Farmers & Graziers Co-operative Company Limited NSWCA 24 October 1985 unreported; see also per Griffith CJ in Scott Fell v Lloyd (1911) 13 CLR 230 at 241; Scrutton LJ in Hobbs v Tinling (CT) and Company, Limited [1929] 2 KB 1 at 21; and Gibbs J in Steinberg v The Commissioner of Taxation of the Commonwealth of Australia (1975) 134 CLR 640 at 694. CONCLUSIONS 1 Unconscionable Conduct 39 I shall deal first with the plaintiffs' claim on the basis of unconscionable conduct. The jurisdiction that is here invoked on behalf of the plaintiffs is the equitable jurisdiction in relation to what are called "catching bargains". 40 The relevant principles were expounded as follows in the High Court in Blomley v Ryan (1956) 99 CLR 362. In that case Kitto J said at 415: "This is a well-known head of equity. It applies 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."

Fullagar J said 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. It does not appear to be essential in all cases that the party at a disadvantage should suffer loss or detriment by the bargain. In Cooke v Clayworth (1811) Ves Jun 12; 34 ER 222, in which specific performance was refused, it does not appear that there was anything actually unfair in the terms of the transaction itself. But inadequacy of consideration, while never of itself a ground for resisting enforcement, will often be a specially important element in cases of this type. It may be important in either or both of two ways - firstly as supporting the inference that a position of disadvantage existed, and secondly as tending to show that an unfair use was made of the occasion." 41 Particularly apposite, in the context of this case, is what was said by Mason J in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 467: "Whether it be correct or incorrect to attribute to Mr Virgo knowledge of this possibility, the facts as known to him were such as to raise in the mind of any reasonable person a very real question as to the respondents' ability to make a judgment as to what was in their own best interests. In Owen and Gutch v Homan 4 HL Cas 997 at 1035; 10 ER at 767, Lord Cranworth LC said: '… it may safely be stated that if the dealings are such as fairly to lead a reasonable man to believe that fraud must have been used in order to obtain [the concurrence of the surety], he is bound to make inquiry, and cannot shelter himself under the plea that he was not called on to ask, and did not ask, any questions on the subject. In some cases wilful ignorance is not to be distinguished in its equitable consequences from knowledge.'

The principle there stated applies with equal force to this case. The concept of fraud in equity is not limited to common law deceit; it extends to conduct of the kind engaged in by the respondents' son when he took advantage of the confidence and reliance reposed in him to induce his parents to enter into a transaction in order to serve his ends, thereby depriving them of the ability to make a judgment as to what is in their interests.

As we have seen, if A, having actual knowledge that B occupies a situation of special disadvantage in relation to an intended transaction, so that B cannot make a judgment as to what is in his own interests, takes unfair advantage of his (A's) superior bargaining power or position by entering into that transaction, his conduct in so doing is unconscionable. And if, instead of having actual knowledge of that situation, A is aware of the possibility that that situation may exist or is aware of facts that would raise that possibility in the mind of any reasonable person, the result will be the same." 42 Also useful is the exposition of this doctrine in the Court of Appeal in Australia & New Zealand Banking Group v Karam (2005) 64 NSWLR 149. There the Court (Beazley, Ipp and Basten JJA) said at [59], [60]: "[59] The point that unconscionable conduct does not require the will to be overborne, so that the victim does not act independently and voluntarily, was restated by Gummow J and Hayne J in Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51 at 70 [36] in the following terms: '[36] The ACCC submits that the Full Court was in error to construe s 51AA [of the Trade Practices Act ] as requiring that the will of the individual in question be so overborne as to deny what was done the nature of an independent and voluntary act. That submission should be accepted. What was said by the Full Court reflects notions associated with common law duress and the defence of non est factum rather than unconscionable conduct (footnote omitted).'

[60] In Australian Competition and Consumer Commission v C G Berbatis , Gleeson CJ (at 64 [12]) stated that it was 'the inability of a party to judge his or her own best interests that was said by McTiernan J in Blomley v Ryan (1956) 99 CLR 362, and again by Deane J in Commercial Bank of Australia Ltd v Amadio , to be the essence of the relevant weakness'. Gummow J and Hayne J adopted a similar position in considering the concept of 'special disadvantage' as a necessary factor in establishing unconscionable conduct, as identified by Mason J in Commercial Bank of Australia Ltd v Amadio . Their Honours stated (at 77 [55]-[56]): '[55] It will be apparent that the special disadvantage of which Mason spoke in this passage was one seriously affecting the ability of the innocent party to make a judgment as to that party's own best interests.

[56] In the present case, the respondents emphasise that point and stress that a person in a greatly inferior bargaining position nevertheless may not lack capacity to make a judgment about that person's own best interests. The respondents submit that the facts in the present case show that [the tenants] were under no disabling condition which affected their ability to make a judgment as to their own best interests in agreeing to the stipulation imposed by the owners for the renewal of the lease, so as to facilitate the sale by [the tenants] of their business. Those submissions should be accepted.'

A similar approach was adopted by Callinan J (at 115 [184])." 43 In Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th ed, 2002) the situation was summarised as follows in [16-010]: "It will be seen that the essence of these situations is (a) parties who meet on unequal terms, (b) the stronger party takes advantage of this, (c) to obtain a beneficial bargain. When this is shown by the weaker party, the onus will pass to the stronger party to show his conduct to have been fair, just and reasonable…" 44 On the findings that I have made, the Clarkes (and through them the third plaintiff) were at a special disadvantage in that they were unable to judge their own best interests. Unicomb was a long standing and trusted adviser and personal friend. In abuse of that trust he led or pressured them into entering, for his own purposes, into 2 disadvantageous transactions, a borrowing of $700,000 from Guardian for relending to him, admittedly for some consideration, and the guarantee of the loan to Freeman at an exorbitant interest rate for no consideration. These transactions entered into on Unicomb's say so, without independent advice, bespeak an inability to judge as to what was in their own best interests. 45 Of course, not all the facts mentioned in the last paragraph were known to Mr Sharkey. He was aware, however, of the following:

(1) The haste of the transaction. (2) The exorbitant interest rate, of which the defendant desired to have the benefit. (3) That he did not have any real or precise knowledge of the consideration that the plaintiffs were to receive. (4) That the Clarkes had been introduced to the transaction by Unicomb, who was the borrower's accountant as well as their accountant. (5) That the plaintiffs had not had any independent financial or legal advice, if any advice at all. (6) That, save for their ownership of considerable property, he had no knowledge of the Clarkes' personal characteristics or financial circumstances at all. 46 In these circumstances, I am of the opinion that the defendant was aware of facts that would raise in the mind of a reasonable person the possibility that the Clarkes were in a position of special disadvantage, being unable to judge what was in their own best interests, in relation to the intended transaction. Faced with this situation, Mr Sharkey did not make any enquiries that may have elucidated the situation. He did not enquire as to precisely what remuneration the plaintiffs were to receive; he did not enquire whether they had had any independent advice; he did not follow the common practice of requiring a certificate that they had been independently advised. In the end, he gave no thought at all to their interests, but caused the defendant to make the loan at exorbitant interest on the security of the plaintiffs' guarantees and mortgages. 47 It is my view that, in doing so and in now seeking to enforce the guarantees, the defendant acted and is acting unconscientiously. In these circumstances the guarantees and mortgages ought be set aside. The cross claim ought to be dismissed. 2 The Contracts Review Act 48 In my view, the material that I have relied on as establishing the transaction with the plaintiffs as unconscionable would, in relation to the Clarkes, found a conclusion that the contract was unjust and very likely lead to a conclusion that, so far as they are concerned, the guarantee and mortgages should be set aside. The transactions were not entered into by them in the course or for the purpose of any business they carried on or proposed to carry on: CRA s 6(2). Furthermore, as they were engaged in farming, the Act would apply to them even if the transaction was in the course of or for the purpose their farming business, which it was not: CRA s 6(2). However the third plaintiff, being a corporation, is disqualified from getting relief: CRA s 6(1). In light of the conclusion that I have reached in relation to unconscionable conduct, I do not need to deal with relief under the CRA. 3 Barnes v Addy 49 Equally, it is not necessary for me to determine the plaintiffs' claims under Barnes v Addy. However, if I did come to determine them, I should find it very difficult to find, in the face of Mr Sharkey's denial, that he was aware until long after the transaction that Unicomb had an interest in the Wirrina project or that he was aware of Unicomb being under a fiduciary duty to the Clarkes, if indeed he was. In any event, I do not intend to determine the claims under these causes of action. 50 Short minutes should be brought in to give effect to my decision. Any disputed question of costs should be raised at that time.

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Judgment (30 paragraphs)

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