Commercial Bank of Australia Ltd v Amadio

On 21 March 1986 Enterprises executed in favour of AGC a deed of incoming guarantee and a mortgage of the Balmain property. The mortgage was expressed to secure monies owing to AGC under the loan deed with Ripoll and the original guarantors, the earlier deed of incoming guarantee joining, among others, Ms Fulton "and deed of incoming guarantee of even date herewith between all the above parties, with the inclusion of the Mortgagor as an Incoming Guarantor". The deed of incoming guarantee contained a proviso as follows: PROVIDED HOWEVER THAT the liability of the Incoming Guarantor not exceed an amount of two hundred and fifty thousand dollars ($250,000.00) and shall be limited to the Balmain Security to the intent that the Lender's having exhausted its rights under the Balmain Security to the maximum amount of two hundred and fifty thousand dollars ($250,000.00) as aforesaid the Additional Guarantor shall have no remaining liability in respect of the obligations of the Borrower under the Primary Security. It seems to be common ground that the effect of the proviso was that the maximum amount that could be recovered from Enterprises under those two documents was $250,000. That limitation was one proposed by Ms Fulton; she insisted on it as a condition of her willingness to have the documents executed by Enterprises. The liability of the other guarantors (under the earlier documents) was not limited. There are conflicts of evidence between Ms Fulton and Mr Hawkins and between Ms Fulton and Mr Poignand as to the circumstances in which those two documents came to be executed; once again, on the view which he took, it was unnecessary for his Honour to resolve those conflicts and he did not do so. About one matter there seems to be no dispute: Mr Poignand, on behalf of Ripoll, agreed with Ms Fulton that Ripoll would pay Enterprises an annual fee of 5% (presumably on the amount of $250,000) for providing the guarantee and mortgage. In 1987 NZI replaced AGC as financier of the retirement village project. Discussions had commenced early in the year between the controllers of Ripoll and officers of NZI. Internal memoranda of NZI reveal that by early February one feature of the transaction as proposed had prompted questions: only two of the guarantors, one being Enterprises, had provided to AGC, and were to provide to NZI, security over property in support of their guarantees. An internal memorandum of 2 February 1987 from a Mr Goran Turner to Ms Janine Middleton, the officer of NZI principally responsible for the negotiations, listed a number of "main items to be covered", among them: clarification of proposed security structure so that we understand why two investors .... support the project with their own assets; ..... The reply, by memorandum dated 4 February 1987, was: In your memo you raised the issue of Margaret Fulton and Doctor Pannikote supporting the project with their own assets while other shareholders with greater percentage of shareholding have not offered additional security. It appears that Fulton and Pannikote have an internal arrangement with John Courtney and Roger Poignand that entitles them to take a greater percentage of profit than their shareholding would normally allow. There is no evidence as to any arrangements which might have been made with Dr Pannikote, but that answer, so far as it related to Ms Fulton, (wherever it came from) was incorrect: it had been agreed that Enterprises was to receive a 5 per cent annual fee, not that it (or Ms Fulton) was to receive a disproportionate share of profit. In any event, on 17 February 1987, by a letter signed by Ms Middleton, NZI Securities Australia Ltd, apparently a related corporation of NZI, offered a facility of up to $15,000,000 to fund the refinancing and construction of the retirement village project. In due course formal documents were prepared and executed. The terms of the facility were provided, in detail, in a facility agreement between Ripoll and NZI dated 3 April 1987. Under that agreement it was a condition of the availability of the facility that certain "Security Documents" be executed and certain other documents and information provided to NZI. The Security Documents were a fixed and floating charge by Ripoll of its own assets and those which it held as trustee of the DYV Unit Trust, a joint and several guarantee and indemnity by each of the persons and companies (except a company called Proban Pty Ltd) who and which had guaranteed the AGC facility (including, of course, Ms Fulton and Enterprises) and mortgages over the land on which the retirement village was being constructed, the Balmain property and the Pannikote property which had been mortgaged to AGC. Some latitude was granted by NZI in relation to the guarantee: it was required to be provided not immediately but within fourteen days of the execution of the facility agreement (in fact, as will appear, it was provided somewhat later than that).

The guarantee and indemnity was signed by those who were required to sign it and was dated 22 April 1987. It operated as a guarantee of all monies which might become owing or payable by Ripoll to NZI and as an indemnity against any loss which NZI might suffer by reason of a failure to pay any of those monies. The guarantors were to be jointly and severally liable. There was, however, in clause 25 of the document, a limitation in relation to the liability of Ms Fulton and Enterprises: This Guarantee and Indemnity is a security for the whole of the Secured Moneys; but the total aggregate amount for which Margaret Isabel Fulton and Margaret Fulton Enterprises Pty Limited shall be liable under Clauses 2.01 and 3.01 hereof in respect of that period up to the time when demand is made on the Guarantor for payment of the Secured Moneys shall be limited to a sum not exceeding Two Hundred and Fifty Thousand Dollars ($250,000). Enterprises executed a mortgage of the Balmain property, also dated 22 April 1987 (although nothing in particular seems to turn on this, the affixing of the seal to the mortgage was attested by Ms Fulton as a director and Mr Poignand purportedly as secretary: an office which, apparently, he did not hold). The mortgage was expressed to be collateral to the other Security Documents and to secure the same monies as they did. Separate provisions made it clear that the mortgage secured those monies indirectly, via the guarantee given by Enterprises; and the mortgage incorporated the following limitation on the amount recoverable under it: This Mortgage is given as security for the whole of the Moneys Hereby Secured; but the total aggregate amount of the Moneys Hereby Secured in respect of that period up to the time when demand is made on the Mortgagor for payment of the Moneys Hereby Secured shall be limited to a sum not exceeding Two Hundred and Fifty Thousand Dollars ($250,000). It is necessary to note a number of aspects of the circumstances surrounding the refinancing and, particularly, the execution by Ms Fulton and Enterprises of the guarantee and mortgage in favour of NZI. First, AGC, which was then owed somewhat more than $7,000,000, gave Ripoll formal notice of default on 18 March 1987. His Honour referred to evidence that Ripoll had, as early as October 1986, been unable to pay instalments falling due to AGC and inferred that NZI became aware of the default at least in March 1987. There was evidence about a temporary facility sought from NZI by Reliv Pty Ltd, a company apparently owned by Mrs Poignand and having some role in relation to the project, to enable certain pressing commitments to be met. In an internal "Credit Note" supporting her recommendation that that facility be granted, Ms Middleton wrote: NZI are currently in the final stages of negotiating a 50% sell down of the facility to Rural and Industries Bank of Western Australia. Solicitors, Mallesons Stephen Jacques, have commenced documentation, which is expected to be finalised by 30/3. AGC have been told of Ripoll's move to NZI and have decided to squeeze the Dee Why Gardens project by refusing any additional funding. The purpose of this credit note is to request a $500,000 bill acceptance line to Reliv Pty Limited, a company owned by Michele Poignand, as project co-ordinator for Dee Why Gardens. Monies drawn under the facility will be used to pay consultants [sic] fees, which are currently well overdue as a direct result of AGC's belligerence. When the first drawing under the NZI facility was made on 3 April 1987, a sum of $230,000 was paid from it to Mr Poignand to discharge obligations which he had incurred to Westpac Banking Corporation so that he might meet certain construction and development costs on behalf of Ripoll. Of the amount paid on settlement by NZI to Ripoll, a further sum of $250,012.76 was applied by way of what his Honour described as reimbursement for payment of outstanding creditors. There can be no doubt that the trial judge was justified in finding that, in the early months of 1987, Ripoll had serious liquidity difficulties and that NZI knew that to be the case. Secondly, an amount of $350,000 was paid, on settlement, to NZI by way of establishment fee. The credit facility agreement provided for the payment of such a fee but did not specify its amount: that was agreed separately with Ripoll. Thirdly, Mr Hawkins acted for Ripoll on the transaction with NZI. In his dealings with the solicitors for NZI, he purported also to have some instructions from Enterprises: by letter dated 3 April 1987 to NZI's solicitors he replied to their requisitions on title in relation to the Balmain property, claiming to do so on the basis of instructions. Additionally, NZI's solicitors sent documents to him for execution by guarantors and mortgagors as well as by Ripoll and received executed documents back from him. Fourthly, one of the documents signed on behalf of Enterprises by Ms Fulton and her daughter, as director and secretary, and delivered to NZI's solicitors, was a certified extract of a board resolution of Enterprises. That resolution, among other things, purported to acknowledge the terms of the credit facility agreement and proceeded to record that it was in the best interests of Enterprises to grant the guarantee and the mortgage. Fifthly, however, though it had been proposed that NZI's solicitors would obtain from each guarantor a "Certificate of Independent Advice", in fact (for reasons which do not appear) they did not do so. Sixthly, it was contemplated that Ripoll might not, or at least might not always, be in a position to discharge from cash flow its obligations to NZI for interest and fees: the credit facility agreement made provision for the capitalisation of interest and fees. Three other factual matters should be noted. One is that his Honour found that NZI was aware both that Mr Poignand was a director and shareholder of Ripoll and a person directly interested in the success of the project and that Ms Fulton was neither a director nor a shareholder of Ripoll and was not involved, in any management sense, in the decision-making process in the carrying forward of the project. The second is that Mr Poignand gave evidence that he told Ms Middleton that he had acted for Ms Fulton, both as accountant and as adviser, for a number of years. The third is that Mr Poignand conceded in evidence that he may have been the source of the inaccurate information about the additional profit share. Trial Judge's Findings and Conclusions The trial judge made a number of particular findings in relation to what he described as material facts contended for by Ms Fulton. They may be summarised as follows: (a) Only a limited number of investors in the DYV Unit Trust provided guarantees to NZI, the identity of those who did and those who did not bearing no relationship to the relative sizes of their investments. NZI knew this; Ms Fulton did not. (b) Only two investors provided mortgages over real property securing the NZI facility. They were not selected to do so having regard to the size of their investments. Again, NZI knew this and Ms Fulton did not. (c) NZI was to receive, from its first advance to be made on settlement, an establishment fee of $350,000, Mr Poignand was to receive (as mentioned) $230,000 and Ripoll was to receive $250,012.76 to pay outstanding creditors. Once again, NZI knew this but Ms Fulton did not. (d) The obligations of Ripoll to AGC would be discharged before NZI received the guarantee, answers to requisitions in relation to the Balmain property and the executed mortgage. (In fact, as we have mentioned, the credit facility agreement explicitly contemplated this in relation to the guarantee but did not do so - though as a matter of logic it might have been expected to - in relation to the mortgage). NZI, of course, knew of this; Ms Fulton was not informed of it. (e) The Dee Why Village project was not generating a cash flow and accordingly interest and fees due to NZI would need to be capitalised for a considerable period, as Ripoll had no capacity to service the interest and fees. NZI must have known that. Ms Fulton did not. His Honour noted that the primary case advanced on behalf of Ms Fulton and Enterprises was that it was unconscionable for NZI to rely upon the guarantee and mortgage: that case was based particularly upon the reasoning of the High Court in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. His Honour added this: Other causes of action are relied upon, including statutory ones. However, as I followed the submissions, as they emerged in the course of argument, the principles governing each of the other causes of action, and the scope of the relief that might be available, were regarded by counsel for each of the parties, correctly I think, as, in the present circumstances, similar to each other in all relevant respects. It appears that in those circumstances, it is not necessary to consider the case sought to be made on those other causes of action. Attention will, therefore, be confined to the case sought to be made on the equitable doctrine of "unconscionability". His Honour identified the material in the internal memorandum, about the alleged "greater percentage of profit", as indicating knowledge on the part of NZI of facts that would raise the possibility in the mind of any reasonable person that Ms Fulton and Enterprises occupied a situation of special disadvantage in relation to the transaction, so that they could not make a judgment as to what was in their own interests (Amadio at 467, per Mason J). The knowledge on the part of NZI, contrasted with Ms Fulton's lack of knowledge of the matters referred to in the findings which we have summarised, justified a conclusion that there was, on the part of NZI, "an unconscionable dealing in the present circumstances". His Honour concluded: In the words of Fullagar J in Blomley v Ryan (1956)99 CLR 362 (at 405), an example of disability is "a lack of assistance or explanation where assistance or explanation is necessary". In the present case it is clear that Ms Fulton did not formally retain a solicitor to advise her. What she was told informally by Mr Hawkins did not amount, on any view, to proper advice on the complex questions, including questions of contribution as between co-guarantors, that might arise. Nor, it may be noted, does Mr Hawkins now suggest that it was such proper advice. In the result, Ms Fulton was, in my view, placed at such a serious disadvantage vis-ŕ-vis NZI, that prima facie, the guarantees given by her and her company, and the security given in that connection, should be set aside. The trial judge then considered the relief appropriate to give effect to the requirements of equity in the light of his findings. He concluded that it was likely that a competent legal practitioner, with full knowledge of the circumstances as they existed at the beginning of 1987, would have advised Ms Fulton that she ought to forego the 5 per cent fee in exchange for a release of the mortgage and a reduction to $25,000 of the amount for which she and Enterprises were liable under the guarantee; Ms Fulton would have been likely, his Honour found, to have accepted that advice; and such an arrangement could have been negotiated. In the result, his Honour held that the guarantee and the mortgage should be set aside as against Ms Fulton and Enterprises, but conditionally on a release of the 5 per cent fee and the execution by Ms Fulton of a guarantee to NZI, limited to $25,000.

Arguments on the Appeal; Discussion The findings of fact made by the Trial judge were not challenged, but NZI contended that they did not justify a conclusion that there was anything unconscionable about NZI's conduct in taking, or seeking to enforce, the guarantee and the mortgage. The matters identified by his Honour did not indicate that Ms Fulton suffered from a special disability or disadvantage; and, in any event, there was no finding, and no evidence, that NZI knew of Ms Fulton's lack of knowledge of the circumstances identified by his Honour as indicating a special disability or disadvantage or any basis for a finding that NZI was aware that Ms Fulton might occupy a situation of special disadvantage or of "facts which would raise that possibility in the mind of any reasonable person" (Amadio at 467, per Mason J). That was so particularly, it was said, having regard to other matters about which there was no dispute: NZI knew that Ms Fulton and Enterprises were the only investors who had negotiated a monetary limit on the security which they provided (the liability of all other guarantors, and the other mortgagor, for Ripoll's indebtedness under the credit facility was unlimited); Mr Hawkins dealt with the solicitors for NZI on the basis that, as well as acting for Ripoll, he had instructions from Ms Fulton and NZI; Enterprises was to receive a reward (albeit misdescribed) for providing security over the Balmain property; and the security offered to NZI was, in substance, equivalent to the security held by AGC, no more and no less. NZI submitted also that, if the finding of unconscionable conduct were upheld, the conditional remedy granted was inappropriate: at most, the mortgage should be set aside, leaving the guarantee to operate in accordance with its terms. Ms Fulton and Enterprises, on the other hand, submitted that the matters listed by the trial judge not only justified the conclusion that Ms Fulton (and therefore Enterprises) was subject to a special disadvantage in relation to the guarantee and the mortgage; the particular circumstances, as found, were so unusual in relation to a transaction of the kind proposed that NZI ought to have been aware of a real possibility that Ms Fulton (and therefore Enterprises) might occupy a position of serious disadvantage. We shall return in more detail to particular aspects of the circumstances to which counsel for Ms Fulton and Enterprises referred. Counsel submitted also that the primary judge's decision should be regarded as discretionary, attracting the principles stated in House v R (1936) 55 CLR 499 at 504, 505: that submission, as we understood it, extended not only to the question of the appropriate remedy, once unconscionable conduct had been found, but to the finding of unconscionable conduct itself. Ms Fulton and Enterprises raised two further matters by notice of contention:

1. His Honour ought to have found that Mr R. Poignand was the agent of the Appellant in arranging for the guarantee and mortgage to be executed by the Respondents and the Appellant was therefore liable for the misleading statements made by Mr R Poignand to the Respondents concerning the nature and effect of the guarantee and mortgage.
2. Alternatively, His Honour ought to have found that the Appellant had constructive notice of the misleading statements made by Mr R Poignand to the Respondents concerning the nature and effect of the guarantee and the mortgage, as it entrusted Mr Poignand with the responsibility of procuring the Respondents' execution thereof and was aware that he was in a position to influence the Respondents. We shall return to those two matters later in these reasons. The submission that his Honour's decision, on the basis of his findings, that NZI was guilty of unconscionable conduct should be regarded as discretionary should not, in our view, be accepted. Obviously the categories of unconscionable conduct are not closed and whether particular conduct is to be regarded as unconscionable is one on which, in particular circumstances, minds may differ. However, in Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 at 270, Samuels JA (in a judgment concerning the application of the Contracts Review Act 1980 (NSW)) said: As I read the Act the Court, having found what the circumstances were, must then "find" whether or not the contract in those circumstances was unjust. In my view, in the present case, granted the learned judge's circumstantial findings, the inference, which is what it is, that the contract to which those circumstances related was unjust, is beyond challenge. I do not consider that that conclusion either constitutes the exercise of a judicial discretion or should be regarded as if it did. ..... To my mind the finding that a contract is unjust is no more discretionary in character than a finding that an act or omission was negligent, a conclusion about which different minds may also take different views. But the fact that it may be difficult to determine a factual conclusion does not mean that it is to be perceived as inhabiting an area in which the fullest rein is to be given to the predilections of individual judges without the wholesome restraint of uniformity which the attentions of an appellate court is [sic] designed to provide. Those comments are, in our view, equally applicable to a "finding" of unconscionable conduct. There is no room for doubt about the principles to be applied. They are those explained in Blomley v Ryan, Amadio and Louth v Diprose (1992) 175 CLR 621. It is unnecessary to quote at length from the judgments in those cases; they have been much quoted and are well known. Two particular matters should, however, be mentioned. In the first place, the principles are general ones, capable of application in a wide range of cases not limited by reference to particular categories: 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-ŕ-vis the other. (Blomley v Ryan at 405, per Fullagar J). Secondly, however, the leading cases emphasise that relief is granted only to a plaintiff or applicant who was in a position, in relation to the impugned transaction, of "special" disability or disadvantage. "Unconscionable" is, after all, in its ordinary meaning a strong word: the Shorter Oxford English Dictionary, 3rd Edition, defines it as meaning, among other things, "monstrously extortionate, harsh, etc"; "showing no regard for conscience; irreconcilable with what is right or reasonable": "excessive, immoderate, inordinate". Thus, Mason J said, in Amadio at 462: I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his 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. In a somewhat different context, in his dissenting judgment in Stern v McArthur (1988) 165 CLR 489 at 503, Mason CJ warned against any tendency "to eviscerate unconscionability of its meaning" by extending it beyond "instances in which no exceptional circumstances are established". In Louth v Diprose, Deane J at 637 stated the principle as follows: It has long been established that the jurisdiction of courts of equity to relieve against unconscionable dealing extends generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party to the transaction with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that special disability was sufficiently evident to the other party to make it prima facie unfair or "unconscionable" that that other party procure, accept or retain the benefit of, the disadvantaged party's assent to the impugned transaction in the circumstances in which he or she procured or accepted it. Having examined the somewhat unusual facts, his Honour concluded at 638: The case was one in which the appellant deliberately used [the respondent's] love or infatuation and her own deceit to create a situation in which she could unconscientiously manipulate the respondent to part with a large proportion of his property. The intervention of equity is not merely to relieve the plaintiff from the consequences of his own foolishness. It is to prevent his victimization. The circumstances revealed in Blomley v Ryan, Amadio and Louth v Diprose are well known and it may be said of each case that the party seeking to set aside the transaction with which it was concerned suffered, at the time of the transaction, from a serious disability or disadvantage, in relation to the transaction, plainly evident to the other party (if that party had eyes to see) and, particularly in Blomley v Ryan and Louth v Diprose, deliberate exploitation by the stronger party of the disability or disadvantage of the weaker. Nevertheless, in none of the three cases was the decision of the High Court unanimous: in Blomley v Ryan Kitto J dissented; in Amadio, as to the application of the unconscionable conduct principles, Gibbs CJ and Dawson J dissented; and in Louth v Diprose Toohey J dissented. The circumstances of the present case, as found by the trial judge, are in our view of a different order. Although some caution is required, because no officer of NZI gave evidence, it is clear at least that NZI, a substantial commercial organisation carrying on business as a financier, agreed to provide a very substantial ($15,000,000) refinancing and construction facility for a project of which it had made some investigation. It was a project which, of its nature, would not provide cash flow for some time; the source of cash flow was to be the disposal of units in the retirement village, and units, obviously enough, could not be disposed of until they were constructed. It is common ground that Ms Fulton was aware that the project had that general character: it was presented to her as a sensible investment on the footing that, while it would not provide an income for her in the immediate future (when she was, in any event, earning a substantial income from royalties), it would be likely to provide an income in later years (when her income from other sources might have diminished). It should be inferred that NZI did not agree to provide the facility in the expectation that the project was likely to fail, leaving NZI to recover the debt due to it, to the extent that it could do so, by realising its securities. NZI knew, of course, that in the months preceding completion of the refinancing Ripoll had liquidity difficulties: the exact reasons for, and circumstances of, the refinancing do not clearly appear from the material before us, but a view about the attitude of AGC, and its consequences for Ripoll's cash flow, is evident in the NZI internal correspondence which we have already quoted. If the project was substantially incomplete at the time of the refinancing (as appears to have been the case: roughly half of the NZI facility was, after all, for construction) and AGC refused further advances, it was hardly surprising that Ripoll should experience liquidity difficulties and the fact that it did so by no means necessarily reflected upon the project's ultimate worth. That being so, it does not seem to us that NZI should have been surprised or particularly perturbed to discover that there were pressing creditors to be paid or that Mr Poignand had paid some of them and required reimbursement or that it should have suspected, having regard to those circumstances, that Ms Fulton might be in a position of disadvantage. What we have said about creditors applies equally, we think, to the question of capitalisation of interest and fees: there was no evidence that provision for capitalisation of interest and fees was unusual in a facility for a project of this kind nor, without such evidence, is there any reason to suppose that there was anything unusual about it. Similar comments may be made about the establishment fee. We may, perhaps, be permitted to know that it is not unusual for a bank or other financier to charge an establishment fee for a facility which it agrees to provide; but, in any case, there was no evidence that to do so was unusual or that there was anything out of the ordinary in the amount of the fee in fact charged. In the absence of such evidence, we do not think it is permissible to regard the charging of the fee as an unusual circumstance or one apt to place a financier on notice that a guarantor of the facility may occupy a position of special disability or disadvantage. Similarly, in circumstances where there was a clear need to pay out AGC and deal with project creditors, we do not see why the circumstance that NZI was prepared to advance about half its facility on the footing that certain of its security was to be provided only a short time later, before the balance was advanced, should be regarded as particularly surprising or, a fortiori, as suggesting anything about the situation of Ms Fulton and Enterprises as guarantors and mortgagor. It may well be that it would not ordinarily be expected that only some, rather than all, of the investors in the project would guarantee borrowings for the project, unless perhaps the guarantors were either the largest investors or those most closely concerned with the management of the project. But, if the question is whether NZI, in taking the guarantee from Ms Fulton and Enterprises or enforcing it against them, acted unconscionably, other circumstances must be taken into account. One is that what was offered to NZI was, in substance, a security "package" already held by AGC; another is there is no evidence that NZI had reason to suppose that Ms Fulton did not know who the other guarantors were: on the contrary, they were listed in a schedule to the document immediately preceding the pages on which the guarantors executed it and again on the execution pages themselves; and Ms Fulton and Enterprises had (unlike any other guarantor) limited their liability to a proportion of the total facility rather less than Nyrano's proportionate holding of units in the DYV Unit Trust. As for the mortgage, it may be accepted that it was a somewhat surprising feature of the transaction (and one which the evidence does not explain) that two guarantors only provided security over property, and NZI evidently did find it surprising. The question, however, is whether there is anything in that circumstance, taken alone or jointly with the other matters, which should have suggested to NZI that Ms Fulton or Enterprises might be in a position of special disadvantage in relation to the transaction. The mortgage given by Enterprises was limited to the same extent as the guarantee; NZI was told that Enterprises received what amounted to a reward for providing the mortgage, though it was misinformed as to the nature of the reward. In any event, it is by no means clear, in our view, that NZI should have regarded the mortgage as having the importance, in relation to the apparent position of Ms Fulton and Enterprises, which it assumed at the trial and in argument on the appeal. After all, a surety for $250,000, who provides no mortgage may discharge the liability on payment of $250,000; if, being liable to make that payment, the surety does not do so, then the surety is liable to suffer judgment followed by execution against property or bankruptcy proceedings. A surety liable to the extent of $250,000 who provides a mortgage by way of additional security for the same sum, discharges the liability and the security by paying $250,000; if the surety fails to discharge the liability when obliged to do so, then in addition to the remedies previously mentioned the surety may suffer enforcement of the mortgage. But whether the surety's liability is secured or unsecured, the surety's property is, on failure to discharge the liability, liable to be taken, by one process or another, to satisfy the claim of the creditor (and, possibly, the claims of other creditors). To put it yet another way, if the surety has the capacity to pay and does so, the surety is essentially no worse off having given the mortgage; if the surety cannot or does not pay, the existence of the mortgage adds little, if anything, of substance to the surety's difficulties. In that sense, the mortgage is more an advantage to the creditor, because of the priority it confers, than a disadvantage to the surety. Of course, giving a mortgage may result in other, less dramatic, disadvantages to the surety; particularly, the property will be less useful as security for any other accommodation the surety may wish to raise and cannot be disposed of unless the mortgage is discharged. But it is not easy to see why disadvantages of that kind should be taken as suggesting to NZI, as a reasonable financier, a position of special disadvantage on the part of a compensated surety and mortgagor who had negotiated the limit on liability for which Ms Fulton had stipulated. Reliance was placed, in submissions on behalf of Ms Fulton and Enterprises, on Mr Poignand's position (known to NZI), both as adviser to Ms Fulton and as one of the group who controlled the project and negotiated the facility with NZI. Plainly Mr Poignand was interested in the success of the project; but in that respect, of course, his interest, although larger than that of Ms Fulton, coincided with it. Although findings were made that Ms Fulton was not informed of a number of matters, there is no finding that Mr Poignand actively misled her. Such a finding would require a resolution of conflicts of evidence which, as we have mentioned, his Honour did not find it necessary to undertake. Such a finding would also have involved examination of the structure of the retirement village project, its prospects of success and, probably, the reasons for its ultimate failure. (In this connection we note that Mr Poignand claimed in his evidence that the failure had nothing to do with any deficiency in the concept but was due to external economic factors.) In any event, however, his Honour does not point to the positions occupied by Mr Poignand as a factor which ought to have suggested to NZI that Ms Fulton, or Enterprises, stood in a position of special disadvantage and we see no reason why we should take a different approach. We shall return to this aspect when considering the matters raised by the notice of contention. Some reliance was placed also on the circumstance that (as it was put) Mr Hawkins, Ripoll's solicitor, could not offer Ms Fulton or Enterprises independent advice. A principal difficulty with that, however, is that: The notion that to leave a debtor or proposed debtor to obtain the signature of a third party guarantor is enough, without more, to create the debtor an agent of the creditor and thereby bind the creditor with the knowledge of the debtor and the consequences of the debtor's conduct has been rejected in Canada, New Zealand, United Kingdom and Australia: .... (Lisciandro v Official Trustee in Bankruptcy (1996) 69 FCR 180 at 193, 194, per Cooper J). A further difficulty arises from the authorities which hold that, whatever the embarrassment inherent in the position of a solicitor who undertakes to act for both principal debtor and surety, if a solicitor purports to do so the creditor may assume that the solicitor properly advises the surety as well as the principal debtor: Bank of Boroda v Shah [1988] 3 All ER 24; Kleinwort Benson Australia Ltd v Armitage (Cole J, Supreme Court of New South Wales, 26 April 1989, unreported) at 29. Mr Hawkins purported to have some instructions, at least, from Ms Fulton and Enterprises, in addition to acting for Ripoll; it is unnecessary, however, to pursue the implications of this if there is otherwise nothing, in the facts as found, which ought to have suggested to NZI a need to enquire whether Ms Fulton or Enterprises might be in a position of special disadvantage. Similarly, though undoubtedly it would have been a sensible precaution to obtain a certificate of independent advice, NZI should not be held to have acted unconscionably in failing to obtain such a certificate in the present circumstances. In the end, therefore, there being no suggestion that NZI actually knew that Ms Fulton or Enterprises was misinformed or lacked relevant information, Ms Fulton and Enterprises, if they were to succeed, were required to establish that NZI was put on enquiry; and to establish that, they were required to show that the facts as known to NZI were such as would raise in the mind of any reasonable person a very real question as to the ability of Ms Fulton and Enterprises to make a judgment as to what was in their interests: Lisciandro at 195, per Cooper J. In our view, leaving aside the limited number of those providing guarantees and mortgages, the circumstances revealed in the evidence and relied on by the trial judge were not sufficient, for the reasons we have given, for that purpose. It was not established, in our opinion, that those circumstances were so unusual as reasonably to give rise to suspicion of disability or require enquiry. The composition of the class of guarantors, and more particularly the circumstance that there were only two mortgagors, might certainly, of themselves, be surprising and unusual. But those matters are not to be taken in isolation: NZI could reasonably have supposed that Ms Fulton at least knew who the other guarantors were, and we see no reason why they should have suspected that she might not have known that the total class of investors was larger. On the other hand, NZI knew that Ms Fulton, unlike any other of the guarantors, had negotiated a limit on her liability more (from her point of view) than commensurate with her proportionate investment. The liability of Enterprises under the mortgage was similarly limited; and the mortgage adding, for reasons which we have given, so little, in practical terms, to the detriment arising from the giving of the guarantee, we see no reason why NZI should have suspected the accuracy of the information it was given about the mortgagors' reward. We do not think it was put on enquiry that either mortgagor might occupy a position of special disadvantage. Notice of Contention The first ground in the notice of contention rests on the proposition that "his Honour ought to have found that Mr R. Poignand was the agent of the Appellant in arranging for the guarantee and mortgage to be executed by the Respondents". That ground may, in our view, be summarily disposed of. We were directed to no evidence that NZI, in any direct sense, entrusted to Mr Poignand the task of arranging execution of the guarantee and mortgage. In fact, the evidence shows that Mr Hawkins was the person to whom the documents were sent for execution and by whom they were returned. If Mr Poignand intervened in the process, there is no evidence that NZI knew that he did or anticipated that he would; NZI could hardly, therefore, be said to have authorised any such intervention on the part of Mr Poignand. Reliance was placed on a series of cases (particularly Kings North Trust Ltd v Bell [1986] 1 WLR 119 and Challenge Bank Ltd v Pandya (1993) 60 SASR 330) which appeared to extend, for the purposes of cases such as the present, the concept of agency somewhat beyond its ordinary limits. Such an extended concept of agency was, however, disapproved by the House of Lords in Barclays Bank PLC v O'Brien [1994] 1 AC 180 and by the Full Court of this Court in Lisciandro: see especially the judgment of Ryan and Drummond JJ at 187. The second ground is that the trial judge ought to have found that NZI had constructive notice "of the misleading statements made by Mr R. Poignand to the Respondents concerning the nature and effect of the guarantee and the mortgage, as it entrusted Mr Poignand with the responsibility of procuring the Respondents' execution thereof and was aware that he was in a position to influence the Respondents". This ground, in our view, must fail also. It fails, in the first place, for the same reason as ground one fails: there is no evidence that NZI entrusted Mr Poignand with the responsibility of procuring execution of the guarantee and mortgage by Ms Fulton and Enterprises: Mr Hawkins was the conduit. The stated basis on which, it was said, NZI had constructive notice of the "misleading statements" therefore fails. Secondly, the trial judge did not find that Mr Poignand had made misleading statements about the nature and effect of the guarantee and mortgage: that controversy in the evidence was left unresolved. Thirdly, while it is accepted that NZI knew that Mr Poignand was Ms Fulton's adviser, and while it may be said in a general sense that NZI might therefore have taken it that Mr Poignand (like any adviser) was in a position to influence his client, the next and necessary step, that NZI should have known that Ms Fulton was subject to undue influence or otherwise in a position of special disadvantage, does not follow and was not established.

Conclusion For the reasons we have given, the appeal should in our view be allowed. It was suggested, in that event, that the proceeding should be remitted to the trial judge for further consideration of the remaining issues. We think that is the appropriate course. A number of matters remain to be resolved. Particularly, we are not in a position to make the orders sought by NZI on its application: it may be that NZI should succeed against Ms Fulton and Enterprises, but the necessary findings have not been made and the matter should be remitted to the trial judge for that purpose. Additionally, the cross claim against Mr Hawkins remains to be dealt with; and there may be other aspects of this complex matter still outstanding. Accordingly, the orders which we propose are that the appeal be allowed; the orders made by the trial judge on 8 September 1997 set aside; and the proceeding remitted to the trial judge for hearing and determination of the outstanding issues in the proceeding. The respondents should pay the appellant's costs of the appeal and the costs of the proceedings before the trial judge, so far as they relate to the issues arising on the cross claim, the subject of this appeal. I certify that this and the preceding twenty (20) pages are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Black and the Honourable Justice Lehane

REASONS FOR JUDGMENT Davies J: This is an appeal from orders made by a judge of the Court, Beaumont J. His Honour had before him an application brought by the present respondents, Margaret Isabel Fulton and Margaret Fulton Enterprises Pty Ltd ("Enterprises"), seeking relief from guarantees of obligations due by Ripoll Holdings Pty Ltd ("Ripoll") which Ms Fulton and Enterprises had given to the appellant, NZI Capital Corporation Limited ("NZI"), and which had been supported by a collateral mortgage given by Enterprises which owns the home in which Ms Fulton lives. The guarantees were limited to $250,000 in respect of the period up to the time when demand was made. Equitable principles of unconscionable conduct and the provisions of the Contracts Review Act 1980 (NSW) were relied upon. The learned trial Judge held that it would be unconscionable for NZI to rely upon the guarantees or the mortgage. His Honour ordered that those documents be set aside on certain conditions, including the condition that Ms Fulton execute and deliver to NZI a fresh deed of guarantee in the sum of $25,000. His Honour did not find it necessary to consider the provisions of the Contracts Review Act. Ms Fulton was at the relevant time aged in her late 60s. She was an author and her company, Nyrano Pty Ltd ("Nyrano"), received substantial royalties and fees. In the later 1980s, that income amounted to several hundred thousands of dollars per annum. One set of accounts in evidence shows that Nyrano's income for the 1990 year was over $300,000. The evidence does not show, however, that Ms Fulton's means were such that money was not of concern to her. Ms Fulton's evidence shows rather that she was concerned about the transactions but that she entered into them believing that there was no risk. Since the late 1970s, a Mr R J Poignand had been Ms Fulton's accountant and investment adviser. Ms Fulton placed great weight upon his advice. In the middle 1980s, Mr Poignand became active in developing a project for the construction of a retirement village, to be known as "Dee Why Gardens". A memorandum which is in evidence dated 7 January 1986 indicates that the project was to be highly geared as the developer, Ripoll, would require 100% funding in order to undertake Stage 1 of the project and that the interest provision would be insufficient unless the project could be built and sold within 10 months. Mr Poignand was a director and shareholder of Ripoll. Mr Poignand was one of the persons principally responsible for the development. In 1985, Mr Poignand recommended to Ms Fulton that she invest in a unit trust of which Ripoll was the trustee and which had been established for the purposes of the project. She agreed to do so. Nyrano paid a cheque for $25,000 on 25 October 1985 and subsequently invested, over a period, further moneys totalling $167,000 in all. Ms Fulton did not become aware of the number of investors or of the proportion of the interest in the project held by Nyrano. Evidence given to the trial Judge was that Nyrano held only 16 out of 700 units in the unit trust, that is, 2.29% of the capital. We are not concerned with the propriety of Mr Poignand's advice to Ms Fulton to invest in the Dee Why Gardens project. The trial Judge did not make a finding of fact on all contentious issues in the case, but he did set out Ms Fulton's evidence which showed that, at some stage in 1985, Ms Fulton was asked by Mr Poignand to sign a document which he said was required for a loan to start the project rolling. The document was in fact a guarantee which referred to further advances to $3.3m to be made by Australian Guarantee Corporation ("AGC"). The document was a "Deed of Incoming Guarantee" dated 4 November 1985 whereby Ms Fulton and five other individuals joined with the original guarantors, who had been Mr Poignand, a Mr Courtney and three companies. Ms Fulton gave evidence that she did not know or understand at the time that the document was a guarantee. Whether this was so or not, Ms Fulton was so much under the influence of Mr Poignand that he was readily able to obtain her execution of this document. This transaction was patently inappropriate for Ms Fulton. It appears from the evidence that Ms Fulton gave in 1987 in legal proceedings with which we are not concerned that, at this time, she had invested $50,000 in the unit trust. No reasonable person in Ms Fulton's position, exercising a free and independent judgment, would have agreed to guarantee AGC to the extent of $3m or more. The fact that Ms Fulton executed the document clearly demonstrates her inability to protect her own interests. Only a few of the 40 investors gave this guarantee. Subsequently, in 1986, Mr Poignand asked Ms Fulton to provide security by way of a mortgage over her house at Balmain. Ms Fulton gave evidence that Mr Poignand said to her: "There is absolutely no risk. The other investors are all doing it. We should be able to clear it after about two years." Ms Fulton agreed to do so provided that a limit of $250,000 was placed on the obligation. She gave evidence that she believed this was the first time she had had to give a guarantee or a security for a loan for the Dee Why Gardens project. A Deed of Incoming Guarantee was executed, which joined Enterprises as a guarantor and limited the liability of Enterprises to $250,000 and to recovery against Ms Fulton's home. The supportive mortgage was executed by Ms Fulton. Ms Fulton remained a personal guarantor for the full amount. This transaction again was clearly inappropriate so far as Ms Fulton was concerned. Security was given by only two investors, Ms Fulton and Dr Pannikote, the latter of whom was presumably a substantial investor. The other guarantors, including Mr Poignand and Mr Courtney, did not provide security. Nor did the other investors. One can see again that Ms Fulton was unable to look after her own interests. It can be inferred from the fact that Ms Fulton was asked to give a mortgage over her home and that AGC took a mortgage limited to $250,000 that Ripoll was by this time in serious financial difficulties. Experience shows that it is in circumstances such as these that misrepresentation and breach of trust flourishes. Of course, Ms Fulton was unaware of this. She understood that all the investors were taking the same step and that there was no risk. As an inducement to Ms Fulton to grant the security over her home to ASC, Mr Poignand had offered an undertaking by Ripoll to pay a guarantee fee of 5% per annum to Ms Fulton. Subsequently, on 22 March 1988, Mr Poignand wrote on the letterhead of Ripoll: "This letter confirms the undertaking that your company [Enterprises] will receive a guarantee fee of 5% per annum payable on maturity from the 30th October, 1985."

In early 1987, Ripoll was in desperate need of additional finance. On or about 18 March 1987, AGC gave notice of default in respect of five sums totalling $451,842.97 going back to 30 October 1986. Ripoll negotiated a $15m loan from NZI. A term of the arrangement was that, with some changes, the existing guarantees and securities be provided to NZI. The trial Judge noted that, by 18 March 1987, NZI and its solicitors, Messrs Mallesons Stephen Jaques, were aware that Mr Hawkins (the solicitor for Ripoll) was indicating that Ripoll was "under extreme pressure to settle" with NZI. His Honour said: "It appears that an inference should be drawn that, as at March 1987, and, certainly before 3 April 1987, when the first draw-down under the new facility was to be made, NZI was aware that Ripoll had, at least, serious liquidity difficulties." Ms Fulton gave evidence that, early in 1987, she was told by Mr Poignand that it had been decided that the arrangements with AGC were not the best way of financing Dee Why Gardens and that a development proposal had been arranged through NZI. She was informed that this would mean transferring the guarantees and mortgage to NZI and that everyone else was transferring their guarantees and mortgages as well. Ms Fulton gave evidence that, subsequently, Mr Poignand came to her home and produced some documents. She was shown a clause which appeared to limit the liability to $250,000. Without reading the documents, she then proceeded to execute them. The only persons present at the time were Ms Fulton, her daughter and Mr Poignand. The guarantee, which was, ultimately, executed on behalf of all the previous guarantors save a company named "Proban Pty Ltd", was dated 22 April 1987. Ms Fulton and Enterprises were both guarantors. Their total liability was limited to $250,000. The liability of Enterprises was not restricted to the value of Ms Fulton's home. A mortgage over that home was executed by Ms Fulton. The finance agreement between Ripoll and NZI dated 3 April 1987 had provided for these guarantees and also for security over the land on which Dee Why Gardens was being developed and the two properties which had been secured to AGC, that is to say, security over property which was owned by a Dr Pannikote or Victor Pannikote Holdings Pty Ltd and Ms Fulton's home. Apparently the first draw-down under the loan was made on 3 April 1987, when presumably AGC was paid out. The arrangement between NZI and Ripoll that there should be two additional securities, that of Ms Fulton and that of Dr Pannikote, in addition to the Dee Why Gardens property, was odd. In Ms Fulton's case, there was a question as to why she should give a guarantee limited to $250,000, which was a negligible amount in the context of the loan of $15m plus interest, and why she should secure that undertaking on her home, when the principal persons connected with the development did not offer any like security. Ms Fulton's position contrasted with that of those principally concerned with the development and also with that of the investors generally. On 2 February 1987, in an internal memorandum, an officer of NZI sought: "Clarification of proposed security structure so that we understand why two investors (Fulton and Pannikote) support the project with their own assets; who owns the land and the improvements, who will have the rights of subsequent management etc." It is unfortunate that the officer of NZI who thereafter looked into the matter made enquiries of Mr Poignand and not of Ms Fulton. NZI had no contact with Ms Fulton and, so far as the evidence shows, made no attempt to contact her. Ms J Middleton, who made the enquiries, reported on 4 February 1987: "In your memo you raised the issue of Margaret Fulton and Doctor Pannikote supporting the project with their own assets while other shareholders with greater percentage of shareholding have not offered additional security. It appears that Fulton and Pannikote have an internal arrangement with John Courtney and Roger Poignand that entitles them to take a greater percentage of profit than their shareholding would normally allow." That answer may have been correct with respect to Dr Pannikote. Perhaps he was a substantial investor in the project. However, the answer was not correct in respect of Ms Fulton. No arrangement had been made for her to take a greater percentage of profit than her holding would have allowed. The arrangement made with respect to the guarantee fee of 5% certainly would not have justified Ms Fulton in providing security over her own home when only one other investor was putting assets at risk. The trial Judge noted the following unusual features in the transaction which, in his opinion, would not naturally have been expected and which had not been disclosed to Ms Fulton: "(i) There were only a limited number of investors in the DYV Unit Trust that were providing guarantees to support the re-finance transaction, without any relationship to the size of their respective investments; (ii) There were only two investors who were providing mortgages over real property to secure the re-finance transaction and, again, without any relationship to the size of their investments; (iii) NZI was to receive an establishment fee' in the sum of $350,000, Poignand was to receive from the proceeds of the re-finance advance the sum of $230,000 and Ripoll was to receive the sum of $250,012.76 to pay outstanding creditors. (iv) The obligations to AGC would be discharged before NZI received the deed of guarantee and indemnity, requisitions on title in relation to Ms Fulton's home and the mortgage, duly executed; and (v) The Dee Why Village project was not generating a cash flow and therefore interest and fees due to NZI would need to be capitalised for a considerable period, as Ripoll had no capacity to service the interest and fees." Although Mr Hawkins attended to all legal matters as NZI's solicitors required, including the answering of requisitions with respect to Ms Fulton's property, he did not act as solicitor for Ms Fulton. Nor did he give her independent advice with respect to the matter. Perhaps the solicitors for NZI, Mallesons Stephen Jaques, considered that Mr Hawkins was the solicitor for all the guarantors as well as for Ripoll. However, he was not and he did not say that he was. His letters to Mallesons, save one dated 22 April 1987 after the documents had been executed, were headed "Ripoll Holdings Pty Limited and NZI Capital Corporation Limited". The letters from Mallesons were headed in like terms. It appears that NZI anticipated that a certificate of independent advice would be obtained with respect to each of the guarantors. A letter dated 22 March 1988 from Mallesons to NZI indicated that Mallesons had prepared, inter alia, certificates of independent advice addressed to NZI in respect to each personal guarantor, to be given by their solicitor. Mallesons wrote to Mr Hawkins on 8 April 1987 to confirm that certain documents were required including a certificate of independent advice in respect to each guarantor, the certificate to be signed by "you", that is, Mr Hawkins. It appears from a letter which Mr Hawkins wrote to Mr Courtney on 22 April 1987 that Mr Hawkins was at that time prepared to sign the certificate in relation to each of the guarantors other than two to whom he had never spoken about the matter. However, as Mr Hawkins conceded in cross-examination at the trial, it would have been inappropriate for him to do so. He was the solicitor for Ripoll. He was not in the position to give independent advice to those who were guaranteeing Ripoll's obligations. This Court has commented more than once on the propriety of acting for two parties who have different interests. See eg., Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 at 393; Blackwell v Barroile Pty Ltd (1994) 51 FCR 347 at 359-60. Mr Hawkins did not give the certificates. The evidence does not disclose what occurred between Mallesons and Mr Hawkins. Perhaps the matter was overlooked by Mallesons and NZI. It is useful to set out a passage from the affidavit of Mr Hawkins, who deposed inter alia, in respect of the Incoming Guarantee with AGC which Ms Fulton signed: "I went through the deed of incoming guarantee with Mrs Fulton. As best I can recall, I said to her words to the effect: 'If you give a guarantee, and the lender establishes there has been a default in the loan, each of the guarantors will be liable for the amount of the loan. The amount of the loan is now 3.8 million dollars plus interest.' Mrs Fulton turned to Mr Poignand and said words to the effect: That won't happen, will it Roger?' Poignand said: `No'." Mr Hawkins did not give Ms Fulton the independent advice which she needed. One can see that Ms Fulton was entirely influenced by what Mr Poignand had to say to her and that Mr Hawkins did not act independently. Mr Hawkins was acting for Ripoll and, necessarily, did not think it proper to dissuade Ms Fulton from entering into this improvident transaction. The fundamentals of the equitable principle of unconscionable conduct were enunciated in Story's Commentaries on Equity Jurisprudence, of which the 13th Ed, para 1316, states: "The whole system of Equity Jurisprudence proceeds upon the ground that a party having a legal right shall not be permitted to avail himself of it for the purposes of injustice, or fraud, or oppression, or harsh and vindictive injury." This principle was given an impetus in the United Kingdom in Shiloh Spinners Ltd v Harding [1973] AC 691 and in this country in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. I need not cite all the relevant passages in the judgments in Amadio. It is sufficient to set out the general principle as stated by Mason J at 461: "Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience."

There are at least two elements to be considered. The first is superior bargaining power on the one hand and special disadvantage on the other. The second is the taking of an unfair or unconscientious advantage of the opportunity thereby created. The circumstances in which the principle applies cannot be definitively described. The facts of each particular case must be examined. At 462, Mason J referred to the: "... underlying general principle which may be invoked whenever one party by reason of some condition of [sic] circumstance is placed at a special disadvantage vis-a-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created." His Honour went on to say: "I qualify the word disadvantage' by the adjective special' in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his 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." One can see that Mason J emphasised that the disadvantage should be such that the party's will is over-borne by the existence of a disabling circumstance which seriously affects the ability of the party to make a judgment in his or her own interests. The same principle was referred to by Story in para 221 in this way: "In this class may properly be included all cases of unconscientious advantages in bargains obtained by imposition, circumvention, surprise, and undue influence over persons in general, and in an especial manner all unconscientious advantages, or bargains obtained over persons disabled by weakness, infirmity, age, lunacy, idiocy, drunkenness, coverture, or other incapacity, from taking due care of or protecting their own rights and interests." (emphasis added) Mason J pointed out in Amadio at 464 that it is not necessary that the circumstance which brings about the disability whereby the party is unable to make a judgment in his or her own interests be a circumstance which is created by the party with the superior bargaining power. As Mason J said at 464, the situation of special disadvantage in which Mr and Mrs Amadio had been placed was the outcome of their reliance on and their confidence in their son who, in order to serve his own interests, had urged them to provide a mortgage guarantee to the bank. So also, in the present case, Mr Poignand, who had been the trusted financial adviser of Ms Fulton, abused that trust to obtain financial gain for himself and the company Ripoll, whose affairs he was promoting. In order to achieve his ends, he undoubtedly engaged in misrepresentation which deceived Ms Fulton. Accordingly, we must consider whether NZI had knowledge of such facts as ought to have been raised in its mind the possibility that Ms Fulton had not been in a position to make a judgment as to her own interests. In Amadio at 467, Mason J put the matter in this way: "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 (1853) 4 H.L.C., at p.1035 [10 E.R.., at p.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 advantage 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." (emphasis added) One can see that, along with the general development that has been taking place with the principle of unconscionable conduct, there has been a comparable development of the relevant principle of notice. Whereas Lord Cranworth LC said in Owen and Gutch v Homan that the notice must be such as to "lead a reasonable man to believe that fraud must have been used", Mason J in Amadio said that it was sufficient that the superior party is "aware of facts that would raise the possibility in the mind of any reasonable person". At 466, Mason J put the matter this way: "It must have been obvious to Mr Virgo [the Bank Manager] as to anyone else having knowledge of the facts, that the transaction was improvident from the viewpoint of the respondents." In Amadio, Deane J, with whom Wilson J agreed, also emphasised the need for inquiry. At 479, his Honour said: "The stage had been reached at which the bank, through Mr Virgo, was bound to make a simple inquiry as to whether the transaction had been properly explained to Mr and Mrs Amadio. The Bank cannot shelter behind its failure to make that inquiry." In the 19th century, the rule as to constructive notice was strict. A person not having actual notice would not be taken to have had constructive notice unless the facts were such that the person would have had such notice unless, through negligence or other fault on his or her part, actual notice was avoided. See Spence's Equitable Jurisdiction, Vol 2, 1850, at 753-4 and Sugden, The Law of Vendors and Purchasers, 13th Ed., at 622. However, in this century, the need to make enquiry as to the facts is increasingly becoming recognised. This is in part because of the vast number of cases coming before the courts in which fraud or equitable fraud has been exercised in circumstances where companies have encountered serious financial stringencies, as Ripoll did, because of the increasing awareness of the principle of unconscionable conduct and because of the existence of statutory provisions such as the Contracts Review Act which have authorised courts to set aside or restructure transactions which have been unfair or unjust in the circumstances of the case. In the result, the obtaining of certificates of independent advice has become standard practice in transactions in New South Wales whenever securities are obtained from persons who are not the principal debtors and who would not ordinarily be looked to for the provision of security. In his evidence, Mr Hawkins conceded that, in 1987, there were Law Society rulings or guidelines concerning the provision of independent advice and the avoidance of conflicts of interests, although he could not recall the actual details. In a case such as the present, it was common practice for a financier such as NZI to seek certificates from an independent solicitor in a case such as the present where the guarantors were not the principal debtors and were only some of the investors in the project. And so also would certificates ordinarily have been required where third parties such as Ms Fulton and Dr Pannikote were required to grant security. NZI, in fact, did seek such certificates and their solicitors accepted the need for the certificates. But the matter may ultimately have been overlooked. The certificates were not provided. In the present case, NZI had the knowledge that only a small number of the investors were to give guarantees and that only two of the guarantors were to put up security for their guarantees and it realised that there was a need to make inquiry. However instead of making inquiry of the people who could have told them of the facts, NZI made inquiry of Mr Poignand or perhaps of Mr Courtney. This was precisely the same fault as occurred in Amadio where Mr Virgo, the Bank Manager, made inquiry of the son and was informed that the matter had been fully discussed with his parents. Moreover, although NZI intended that certificates of independent advice should be obtained, they were not obtained. On this issue, it may be noted that, in many cases this century, where a creditor has had notice of a circumstance which shows that the surety reposes or might repose trust and confidence in the principal debtor, it has been considered to be relevant to the determination of notice or "constructive notice", as it is is called, that the creditor has left the obtaining of the execution of the security to the principal debtor and has failed to ensure that the surety has received independent advice. Many of the cases have involved the situation where there has been a relationship such as husband and wife or parent and child from which a relationship of trust and confidence could readily be inferred. See eg. Turnbull & Co v Duval [1902] AC 429; Chaplin & Co Ltd v Brammall [1908] 1 KB 233; Yerkey v Jones (1939) 63 CLR 649; Kings North Trust Ltd v Bell [1986] 1 WLR 119; Barclays Bank Plc v Kennedy [1989] 1 FLR 356; Midland Bank plc v Shephard [1988] 3 All ER 17; Bank of Credit & Commerce International SA v Aboody [1990] 1 QB 923; Barclays Bank Plc v O'Brien [1994] 1 AC 180. However, the approach is not limited to the circumstance where such a recognised category of relationship exists. It applies wherever the facts are such that the creditor taking advantage of the security has reason to believe that the surety has entered or may have entered into the disadvantageous transaction in trust of the principal debtor and the creditor has nevertheless left the obtaining of the execution of the security to the principal debtor. See eg. Bank of New South Wales v Rogers (1941) 65 CLR 42; Avon Finance Co Ltd v Bridger [1985] 2 All ER 281; Challenge Bank Ltd v Pandya (1993) 60 SASR 330; Alderton v Prudential Assurance Co Ltd (1993) 41 FCR 435. In State Bank (NSW) Ltd v Burke (1997) NSW Conv R 55-814, Priestley JA, with whom Cole JA and Grove AJA agreed, stated the point as follows: "On this point Santow J analysed the relevant case law in some detail and came to the conclusion that `the principle of constructive notice should apply to any situation where the "surety reposes trust and confidence in the principal debtor in relation to his financial affairs" (Barclays Bank Pty Limited v O'Brien [1994] 1 AC 180 at 198) so long as the likelihood of that is or should be known to the creditor, in circumstances where the transaction of guarantee was not to the guarantor's advantage'. I agree with this. The cases justify a doctrine at least as wide as this (see amongst many other places Mason J in Amadio at 467) and possibly wider, although it is not necessary to consider the wider possibility in the present case." Of course, the point I have been discussing is not a free-standing principle. It is a matter to be considered together with all other aspects of the principle of unconscionable conduct as enunciated in Amadio. The point goes merely to the issue of notice. In Amadio itself, the Bank did not leave the obtaining of the execution of the mortgage to Mr and Mrs Amadio's son, but the bank manager who obtained the execution of the mortgage had notice of the circumstance that Mr and Mrs Amadio may have been acting under the influence of their son and he did not ensure that they received independent advice. In my opinion, the facts of which NZI was aware should have indicated to it that the guarantee and security obtained from Ms Fulton were unusual and, unless otherwise explained, improvident. In the circumstances, NZI was aware of circumstances which would raise the possibility in the mind of any reasonable person that Ms Fulton may not have been in the position to make a judgment as to what was in her interests. Accordingly, NZI ought not to have proceeded with the transaction without making inquiry of Ms Fulton or ensuring that a certificate of independent advice be obtained. Of course, a certificate from Mr Hawkins would not have been sufficient for he was not independent. But even that was not obtained. A case in which the facts have some similarities to the present is Bank of Baroda v Shah [1988] 3 All ER 24 in which third parties charged their property for a payment to the bank of moneys owed by a principal debtor. The sureties entered into the arrangement as the result of misrepresentation and undue influence exerted by one of the directors of the principal debtor. The solicitors for the principal debtor acted for the sureties in connection with the charge although they were not in fact instructed to do so. It was held that the bank was entitled to assume that the principal debtor's solicitors would act honestly and would give proper advice to the sureties if the solicitors were, as they represented, acting for the sureties. The solicitors to the principal debtor had written to the bank representing that they were acting as solicitors for the proposed sureties. In a letter of 2 June 1981, they wrote: "We now await to hear from you with the legal charge to be executed by our clients."

The solicitors for the Bank subsequently replied the next day enclosing the legal charge "for execution by your clients". The matter proceeded accordingly, the solicitors for the bank dealing with the other solicitors on the footing that they were solicitors for the sureties, as they said. Cases necessarily turn upon their own particular facts. In the present case, NZI had notice that the transaction with Ms Fulton and Enterprises was, on the face of it, unusual and called for inquiry as to its propriety. The guarantees were restricted to $250,000 in total, which suggested that Ms Fulton was not a large investor. Yet her company, Enterprises, was granting a mortgage over her home whilst most of the guarantors and investors, including those who were managing the project, did not do so. NZI therefore had notice of facts which raised the possibility that Ms Fulton had acted in trust and reliance upon some person connected with the principal debtor, Ripoll, and had been unable to make a judgment in her own interests. NZI, nevertheless, did not ensure that Ms Fulton received independent advice. It failed to obtain a certificate of independent advice and it left the obtaining of the execution of the guarantee and of the mortgage to Mr Hawkins, the solicitor for the principal debtor, Ripoll. He, in his turn, left the obtaining of the execution to Mr Poignand, who was to receive $230,000 from the advance made to reimburse him for moneys which he had earlier expended. The solicitors for NZI, Mallesons, dealt with Mr Hawkins as solicitor for Ripoll. He did not represent himself to be the solicitor for Ms Fulton and Enterprises and no enquiry was made by NZI or Mallesons about this point. No evidence was called from relevant officers of NZI or indeed from Mallesons Stephen Jaques to contradict the inferences which arise from the facts. In the result, Ms Fulton acted in reliance upon the trust and confidence which she reposed in Mr Poignand and acted under a misunderstanding of the facts induced by the misrepresentations of Mr Poignand. She was not in a position to make a judgment in her own interests. In the light of the matters I have mentioned, I am satisfied that NZI had notice in the Amadio sense of this fact. It follows that the trial Judge was correct in ordering that the guarantees of Ms Fulton and Enterprises and the mortgage be set aside. Counsel for NZI submitted that the trial Judge erred in his discretion in ordering that the guarantees be set aside. However, the guarantees were on their face strange. They called for an inquiry as to their propriety or, at the very least, a certificate of independent advice. That did not come about. In my opinion, it was entirely inappropriate that Ms Fulton or Enterprises should guarantee the obligations of Ripoll. The guarantees were improvident and disadvantageous. I see no error in the view taken by the trial Judge. A notice of contention raises the issue as to whether Mr Poignand was the agent of NZI in arranging for the guarantees and the mortgage to be executed by Ms Fulton and Enterprises. I am not satisfied that NZI was responsible for the acts of Mr Poignand. NZI and its solicitors did not instruct Mr Hawkins or Mr Poignand to obtain the execution of the guarantees of the mortgage on their behalf. The position was rather that NZI would not advance the moneys agreed to be advanced under its facility unless the conditions to that advance, which included the giving of the guarantees and the granting of the mortgage were fulfilled. NZI was not liable for the acts of Mr Poignand under principles of agency. For the reasons I have given, I would dismiss the appeal with costs. I certify that this and the preceding fifteen (15) pages are a true and correct record of the reasons for judgment of Justice J D Davies. Associate: Date: 10 June 1998 Counsel for the appellant: B.A.J. Coles QC M.A. Ashhurst Solicitor for the appellant: Holmes & Bevan Counsel for the 1st & 2nd respondents: C.J. Stevens QC T.A. Alexis Solicitor for the 1st & 2nd respondents: Rockliffs Date of hearing: 26 November 1997 Date of judgment: 10 June 1998