Was the Norman Street Mortgage "unjust" for the purposes of the CR Act?
The CR Act defines "unjust" to include "unconscionable, harsh or oppressive" (subs 4 (1)). Relief may be granted under the Act "[w]here the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made" (subs 7 (1), emphasis supplied). In determining whether a contract or contractual provision is unjust in the circumstances relating to the contract at the time it was made, the Court is to have regard to the public interest and to all the circumstances of the case (subs 9 (1)). Without affecting the generality of subs 9 (1), subs 9 (2) lists certain matters to which the Court must have regard, to the extent to which they are relevant. Subsection 9(2) includes as a factor:
"(k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party".
Subsection 9 (5) states:
"(5) In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made."
Section 15 provides:
"15. In any proceedings in which relief under this Act is sought in relation to a contract, the Court may, if it thinks it proper to do so in the circumstances of the case, and it is of the opinion that the contract forms part of an arrangement consisting of an inter-related combination or series of contracts, have regard to any or all of those contracts and the arrangement constituted by them."
The CR Act's provision for relief from unjust contracts and contractual provisions is to be viewed as part of a larger picture to which Gleeson CJ referred in Baltic Shipping Company v Dillon (1991) 22 NSWLR 1 (CA), where the Chief Justice said (at 9C), in relation to the CR Act:
"The general policy of the law is that people should honour their contracts. That policy forms part of our idea of what is just."
In Collier v Morlend Finance Corporation (Victoria) Pty Ltd (1989) ASC 55-716; NSW ConvR 55-473, Meagher JA said:
"... the circumstances would be rare indeed when a Court should, in the exercise of its duty to make a just order, deprive an innocent party of the benefit of its contract, particularly when, as here, the party seeking to have the transaction set aside does not offer terms. The lender, after all, had lent the moneys in question and the borrowers had utilised the greater part of those moneys for their own purposes in discharging a prior mortgage. In these circumstances it would seem to me to be monstrous to suggest that the Court should exercise a discretion to set aside the transaction in question so far as Morlend [the lender] is concerned." (at ASC 58,433-434, NSW ConvR 58,444)
In West v AGC (Advances) Ltd (1986) 5 NSWLR 610 (CA) ("West"), McHugh JA said (at 621 F-G):
"If a defendant has not been engaged in conduct depriving the claimant of a real or informed choice to enter into a contract and the terms of the contract are reasonable as between the parties, I do not see how that contract can be considered unjust simply because it was not in the interest of the claimant to make the contract or because she had no independent advice."
and (at 622 A-B):
"... under this Act, a contract will not be unjust as against a party unless the contract or one of its provisions is the product of unfair conduct on his part either in the terms which he has imposed or in the means which he has employed to make the contract."
The Act does not impose on a lending institution a duty to ensure that a decision to guarantee is prudent, or that the debtor is able to pay, or that the guarantor receives independent commercial advice, although if such advice is proffered the financier may become subject to a duty of care: Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 (CA) per Meagher JA at 276-7; Gough v Commonwealth Bank of Australia (1994) ASC 56-270 (NSW CA) per Mahoney JA at 58, 847 and 58,854-5; Younan v Beneficial Finance Corporation Ltd [1995] ANZ ConvR 213.
The circumstances prevailing when the Norman Street Mortgage was executed on 1 May 1984, have been recounted above. Vladimirka was a person for whom English was not her native tongue. She entered into the Norman Street Mortgage without independent advice, that is, any advice independent of the Bank and of Michael. I have already discussed and rejected her submission that she derived from the transaction no benefit or no benefit proportionate to the burden imposed by the Norman Street Mortgage. In substance, she did derive such a benefit: joint ownership with Michael of what became her home, since Norman Street was purchased substantially as a result of the Bank's loan. It is unlikely that the Bank would have lent to enable the purchase of Norman Street, if she had not joined with Michael in mortgaging it (cf Akins v National Australia Bank (1994) 34 NSWLR 155 (CA) at 174A-F per Clarke JA). Her entry into the Norman Street Mortgage was not a relevant "financial" contribution. She made none of the repayments.
Vladimirka also submits that there was an inequality of bargaining power in the transaction and that she had no opportunity to bargain. However, she could have declined to execute any of the documents. As I have said above, she does not allege that pressure was brought to bear on her or that she was tricked or deceived. On the contrary, her evidence shows that she understood what she was doing. In virtually any contractual dealing between an individual and a bank or other substantial financial institution there is an inequality in bargaining power, but this alone does not make the dealing "unjust".
I find that Zsilinszky witnessed execution of the Norman Street Mortgage in accordance with her standard practice. In any event, by 1 May 1984, Vladimirka had already entered into four mortgages, and a lease of a shop for which a guarantor had been required. It is clear from Vladimirka's own evidence that as at 1 May 1984, she understood that she was giving a mortgage over Norman Street, that the Norman Street Mortgage was to assist Michael's business by securing his indebtedness to the Bank, and that, in the event of default by Michael, the Bank would be entitled to sell Norman Street. The Bank did not engage in conduct which deprived Vladimirka of a real or informed choice as to whether to enter into the mortgage.
As noted earlier, in January 1990, when the Bank wrote to Vladimirka enclosing the twelfth and final consent, the covering letter advised her to satisfy herself that she understood the full nature and effect of her liability and urged her to obtain "appropriate advice, legal or otherwise, if [she was] at all uncertain of [her] position". It is not clear whether Vladimirka obtained independent advice at that stage or not.
The Bank submits that her evidence of the circumstances surrounding the signing of the Norman Street Mortgage and the acknowledgments is internally inconsistent. In par 9 of her affidavit sworn 11 July 1996, she said that when she attended the Bank and executed some documents, she "was not advised as to the nature of the transaction nor was it suggested to [her] that [she] should seek independent legal advice prior to signing documents which [she had then] come to learn was a mortgage in favour of the bank over [her] home" (emphasis supplied). In her later affidavit sworn 1 September 1997, she stated:
"3. I can recall I signed the mortgage [in May 1984] to help my son Michael with his business. That is what I understood when I signed the mortgage over my house. It was a town house at Concord.
4. I knew when I signed the mortgage that if Michael could not repay money lent to him by the bank that my house could be sold." (emphasis supplied)
The same affidavit also included the following paragraph:
"10. I refer to my first affidavit where I said that I could recall signing acknowledgments from time to time which my son would give me. I knew they were bank documents. I can recall that Michael was always in a hurry and he would come to me with those letters and say:
'Come on Mum sign these I need them in a hurry'.
I never asked my son what these documents were because I trusted him." (emphasis supplied)
Her earlier affidavit evidence of signing at the Bank is also inconsistent with the fact that at least three consents were mailed to her at her residence. In re-examination, Vladimirka was shown the last consent of 8 February 1990, her signature on which purported to have been witnessed by Martin Konda ("Konda"), an employee of Michael's. She said she thought she signed that last consent in Michael's office. If she did sign it there, she may or may not have been given advice by Konda as to the nature and effect of the acknowledgment.
Importantly, in my view, the evidence shows that Vladimirka believed that she did not need advice other than that of Michael, would not have gone elsewhere, would not have believed or trusted anyone whose opinion conflicted with Michael's, and would have executed the documents in any event if that is what he asked her to do, because she desired to support him in his professional and commercial activity. Indeed, I think that disclosure of any difficulty he was having in meeting the Bank's requirements would have served to strengthen, not to weaken, that desire.
Vladimirka does not assert either that the Bank or Michael put any pressure on her, or that any term of the Norman Street Mortgage itself was misrepresented to her, or that there was anything unconscionable in the terms of the transaction. That she had a limited understanding of English is, of course, not determinative: see, for example, Commonwealth Bank of Australia v Rekes (unreported, NSW SC, Giles J, 11 May 1994, at 30). A mortgage is not unjust for the reason only that it is not in the commercial interest of the mortgagor to enter into it or because the mortgagor had no independent advice. Perhaps the giving of a "purely" third party mortgage is never in the commercial interest of the mortgagor.
At no point in the period over which she signed the acknowledgments, which she understood to be linked to the Norman Street Mortgage, did Vladimirka indicate to the Bank or to anyone else that she did not consider herself to be bound by the mortgage or the acknowledgments, or that she had any complaint or grievance over the giving and taking of the mortgage or the acknowledgments.
The Norman Street Mortgage is not "unjust" for the purposes of the CR Act, unless it, or one of its terms, "is the product of unfair conduct on [the Bank's] part either in the terms which [the Bank] has imposed or in the means which [the Bank] has employed to make the contract": West at 622 per McHugh JA. In my opinion, neither of these alternatives has been made out on the evidence.
The Norman Street Mortgage was not rendered unjust by the fact, assuming it to be the fact, that the Bank knew, while Vladimirka did not, the matters particularised in par 41(xxx)-(xxxii). Those matters go to issues of Michael's creditworthiness and banking history. As already noted, the Bank had no general law duty to inform Vladimirka of those matters, and may have breached an obligation of confidence to Michael if it had done so. This consideration goes a long way to point to the conclusion that the Bank's taking the Norman Street Mortgage without attempting to ensure that Vladimirka knew of those matters is not "unjust" conduct of the Bank.
The position of Vladimirka is also not relevantly distinguishable from that of Mrs Falinski in Falinski v Commonwealth Bank of Australia (unreported, NSW CA, 6 February 1998) ("Falinski"), in which the New South Wales Court of Appeal held that her awareness of the purpose and nature of her guarantee and of her potential financial exposure defeated her claim under the CR Act, and rendered irrelevant her submission that she did not know, and was not informed, of those risks inherent in the debtor's business which were material to her exposure (at 25-26).
In my view, moreover, Vladimirka would have executed the Norman Street Mortgage and signed the acknowledgments, even if she had been fully informed of the matters particularised. In her affidavit sworn 1 September 1997, Vladimirka gives the following evidence to the contrary:
"6. I say that I would not have placed my town house at risk of being sold if I thought that there was a possibility that Michael could not repay the [Bank] and it would have to be sold. My town house was the only piece of property that I had and I would not have put it at risk of being sold if I knew the matters set out in paragraph[s] (xxx)-(xxxii)." (emphasis supplied)
Paragraphs (xxx) to (xxxii) were set out earlier. They were introduced into Vladimirka's case by means of her further amended statement of claim filed in Court on Monday 1 September 1997, the day on which she was due to enter the witness box to give evidence. The Bank submits that her affidavit evidence was considerably weakened by her cross examination. On the first day of her cross examination, 1 September 1997, Vladimirka was asked by senior counsel for the Bank, after being directed to pars (xxx) - (xxxii), whether she had ever seen those paragraphs previously. She replied that she had not. When asked whether she had seen any document with words typed on it in the same manner, again she said 'no'. The Bank submits that at that point her evidence as to what she would have done given knowledge of the matters particularised, fell away.
However, she gave further evidence on the matter in re-examination. When shown the same document by her counsel on Tuesday 2 September 1997, she said that she had seen it the preceding Saturday, 30 August. The Bank submits that this is not to the point and that her case that she would have acted differently was an afterthought, having been introduced as late as 1 September, when her third affidavit, sworn on the same day, was also filed in Court just prior to her being called as a witness. The Bank submits that between Vladimirka's first and second days in the witness box "an event happened overnight". It suggests that in an early part of her cross examination on 2 September, there was "a difference in the tenor of some of her answers". Senior counsel for the Bank asked her whether she had spoken to her son on the intervening night about the case, to which she answered 'no'. Pressed about whether she had spoken to him on the ground floor of the Law Courts Building, she said:
"My son doesn't want to discuss those things with me. He told me you have your own solicitor, you can get advice from your own solicitor but I can only tell you one thing, to tell the truth."
Her evidence was that after she returned home on the evening of 1 September, she read some papers connected with the proceeding that had been given to her by her solicitor. She said she read them to refresh her memory. The Bank submits that she would have read an account of her "what if" case, that is, her case as to what she would have done if she had known of the matters allegedly not disclosed to her. This appears to be correct: when asked what the papers were, Vladimirka said:
"It is concerning 1984 and documents that I wasn't aware of, documents concerning troubles that my son had with the [Bank] that I wasn't aware of."
It is not essential that I express a view on the Bank's suggestion that the tenor of Vladimirka's evidence changed in suspicious circumstances. I do not accept her "what if" evidence for the other reasons mentioned. I am, however, fortified in that conclusion by the lateness of the allegation, and, more importantly, by the generally unsatisfactory nature of Vladimirka's evidence in relation to it.
The Bank submits that a further reason why the Court should not accept Vladimirka's evidence that she would not have provided security to the Bank if she had known of the undisclosed matters, is that there is a tension, if not an inconsistency, between that evidence and the evidence she gave to support the case based upon the alleged misrepresentation by the Bank to Judith via Parker in July 1991. Vladimirka's evidence was that she had been prepared to cooperate in the refinancing. This would have involved offering Norman Street as security. The Bank does not dispute that she would have cooperated in the attempt to refinance to the extent of mortgaging Norman Street to a new financier, but submits that this is inconsistent with an unwillingness on her part to provide Norman Street to the Bank as security on 1 May 1984 in the circumstances hypothesized. In fact, Vladimirka did cooperate by signing the Forward and Morlend letters of offer and also urged Judith to cooperate. Vladimirka gave the following evidence in chief as to a conversation between herself and Judith in late 1991:
"In late 1991 I telephoned my daughter-in-law, [Judith]. I did so at my son's request. At this time they were living apart. I said to her, words to the effect:
'Judy, why are you not signing the papers for the refinance. This is very urgent, otherwise we are all going on the street and will lose everything'.
[Judith] replied, words to the effect:
'Mum, I have been to the Commonwealth Bank and I was talking in there and they say - 'No problem, everything is fine'. If everything is fine, why do I have to sign the refinance?'
I said words to the effect:
'OK Judy, do you believe the Bank or do you believe Milosh? Are you sure the Bank says that there is no problem?'
[Judith] then replied, words to the effect:
'Look, I have been down to see them and they tell me there is no problem and I am not going to sign any refinance papers.'
I said, words to the effect:
'Well OK Judy, if you don't want to, you don't want to.'" (emphasis supplied)
I accept the thrust of the Bank's submission on the present issue. There is no reason to assume that Vladimirka's attitude to information from the Bank would have been different earlier in 1984, when she signed the Norman Street Mortgage or subsequently when she signed the respective acknowledgments. By late 1991, she had signed twelve acknowledgments and was aware of the escalating indebtedness, its magnitude ($2,321,400), and the fact that it was secured by the Norman Street Mortgage. In 1984, on the other hand, Michael had been conducting his practice for only some two years. In 1991, Vladimirka knew that Michael was in financial difficulty with the Bank, yet she stood ready, without hesitation, to come to the rescue by again mortgaging Norman Street. This suggests it to be improbable that in 1984 or in the intervening period, when his circumstances were not so dire as they were in late 1991, she would have withheld her support.
In the light of all the facts showing her relationship and attitude to her son over the years, including her execution of two third party mortgages, twelve acknowledgments and the refinance documents, I do not accept her present assertion that had she known the matters particularised, she would have declined to execute the Norman Street Mortgage or the acknowledgments, or directed the Bank not to provide further financial accommodation to her son.