Dalton and Schaeffer as Executors of the Estate of the Late John Herman Schaeffer v Naegeli

65 Louth v Diprose (1992) 175 CLR 621; [1992] HCA 61 Magann v The Trustees of the Roman Catholic Church for the Diocese of Parramatta [2020] NSWCA 167 Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541; [2018] HCA 30 Naegeli v Dalton and Schaeffer as Executors of the Estate of the late John Herman Schaeffer [2023] NSWSC 466 Naegeli v Dalton and Schaeffer as Executors of the Estate of the late John Herman Schaeffer (No 2) [2023] NSWSC 626 Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525; [2016] HCA 28 Starceavich v Swart & Associates Pty Ltd [2006] NSWSC 960 Stubbings v Jams 2 Pty Ltd [2022] HCA 6; (2022) 399 ALR 409 Turner v Windever [2003] NSWSC 1147 Turner v Windever [2005] NSWCA 73 West v AGC (Advances) Ltd (1986) 5 NSWLR 610 Category: Principal judgment Parties: Bettina Dalton and Joanne Alison Schaeffer as executors of the estate of John Herman Schaeffer (First Appellant/First Cross-respondent)

Rasay Pty Limited (Second Appellant/Second Cross-respondent)

The Footage Company Pty Ltd (Third Appellant/Third Cross-respondent)

Patrick Naegeli (Respondent/Cross-appellant) Representation: Counsel:

M Condon SC (Appellants/Cross-respondents)

P Braham SC with C O'Neill (Respondent/Cross-appellant)

Glass Goodwin (Appellants/Cross-respondents)

Hicksons Lawyers (Respondent/Cross-appellant) File Number(s): 2023/219338 Publication restriction: Nil. Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Citation: [2023] NSWSC 466 Date of Decision: 04 May 2023 Before: Stevenson J File Number(s): 2022/122485

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

HEADNOTE [This headnote is not to be read as part of the judgment] On 30 December 2018 the respondent, Mr Patrick Naegeli (for and on behalf of the Human Enhancement Project (HEP), an unincorporated association) entered into a Cash Funding Agreement (CFA) with CRB Investment Holdings Pty Limited (CRB). Under the CFA, in exchange for HEP making a loan to CRB of $500,000 within two "banking days" of execution of the CFA, CRB agreed to make twelve monthly "revenue" payments of $500,000 each plus a final, thirteenth, payment of $500,000 (said to represent return of "the principal"). The total amount payable by CRB to HEP over a period of about 16 months, in respect of HEP's $500,000 loan, was thus $6.5 million, equivalent to an interest rate of 1,200% per annum. These terms were proposed by CRB, not Mr Naegeli. Mr John Schaeffer had been present by telephone during meetings between Mr Naegeli and Mr Charles Blinkworth, the managing director of CRB who proposed the CFA to Mr Naegeli. During the first of those meetings, Mr Schaeffer described himself as the honorary chairman of CRB and the primary judge found that, from Mr Naegeli's perspective, Mr Schaeffer had continuing involvement in the transaction and played a role in encouraging Mr Naegeli to commit to a transaction with CRB. There was also evidence that Mr Schaeffer had provided financial support to CRB, including as guarantor under an agreement in April 2018 between CRB and Bloomingville Hong Kong Limited which had some similarities to the CFA. On 31 December 2018, Mr Naegeli transferred $500,000 to CRB. The first revenue payment of $500,000 under the CFA was due on 26 April 2019. Mr Naegeli did not receive payment into the nominated bank account. CRB made no payments in the following months, leading Mr Naegeli to ask for a personal guarantee from each of Mr Blinkworth and Mr Schaeffer. Mr Schaeffer responded that he was happy to provide a guarantee and was so confident in Mr Blinkworth that he would also give Mr Naegeli a guarantee from two of his private companies, but that he believed that the payments would be made by the time Mr Naegeli had prepared the guarantee. Either Mr Blinkworth or Mr Schaeffer requested that Mr Naegeli prepare a deed of guarantee. Mr Naegeli prepared a Deed of Guarantee and Indemnity (Guarantee) which he executed on or about 18 July 2019. Mr Naegeli travelled to Sydney on 26 July 2019 and had been expecting to meet Mr Blinkworth and Mr Schaeffer, but Mr Schaeffer was present only by telephone. Mr Naegeli left the Guarantee with Mr Blinkworth, who told him that he needed time to go over the Guarantee and needed to give Mr Schaeffer an opportunity to do so as well. No payments having been made under the CFA, in around October 2019 Mr Naegeli asked Mr Blinkworth to execute the Guarantee and arrange for its execution by Mr Schaeffer. On around 29 October 2019, the Guarantee was executed by Mr Blinkworth and by Mr Schaeffer on his own behalf, and as director of two companies he owned and controlled, Rasay Pty Limited (Rasay) and The Footage Company Pty Ltd (Footage). As at that date CRB owed HEP a total of $3.5 million under the CFA. Under the Guarantee, the guarantors became immediately liable to pay that $3.5 million, and thereafter they were liable, without demand, to make payment in respect of any default under the CFA and to pay interest at 10% on any unpaid sums due under the Guarantee. Both Mr Blinkworth and Mr Schaeffer died in 2020 in unrelated circumstances. CRB made no payments under the CFA and was wound up on 14 October 2020. Mr Naegeli brought proceedings against Mr Schaeffer's executors, Rasay and Footage seeking to enforce their obligations under the Guarantee. Mr Naegeli sought judgment in the sum of $6.5 million, interest at the prescribed rate under ss 100 and 101 of the Civil Procedure Act 2005 (NSW) and costs. The defendants contended that, in procuring the Guarantee, Mr Naegeli engaged in unconscionable conduct within the meaning of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and that the Guarantee should be set aside as an unfair contract under the ASIC Act (having regard to ss 12BF, 12BG and 12BK) and/or as an unjust contract under s 7 of the Contracts Review Act 1980 (NSW). The primary judge dismissed the unconscionability claim and the other ASIC Act claims, upheld the claim under the Contracts Review Act in part, and on that account limited the damages awarded to Mr Naegeli against the executors of Mr Schaeffer (but not against Rasay and Footage) to the sum of $500,000. His Honour awarded interest on the $500,000 sum at the rate of 10% compounded daily from 29 October 2019, on the basis that the Guarantee provided for interest in those terms on unpaid sums. Mr Schaeffer's executors, Rasay and Footage appealed. By cross-appeal, Mr Naegeli contended that the primary judge erred in finding that cl 2.1 of the Guarantee was unjust for the purposes of the Contracts Review Act and in the relief ordered under that Act. By notice of contention on the cross-appeal, the appellants contended that additional factors supported the primary judge's conclusion under the Contracts Review Act. It was common ground between the parties that it was unnecessary for the Court to determine which of s 12CB of the ASIC Act, or s 21 of the Australian Consumer Law, applied in the circumstances. The principal issues in the appeal were: (i) Whether the primary judge erred in finding that Mr Naegeli did not act unconscionably within the meaning of s 12CB of the ASIC Act. (ii) Whether the primary judge erred in not setting the Guarantee aside in whole pursuant to s 7 of the Contracts Review Act. (iii) Whether the primary judge erred in finding that interest should accrue at 10% as this was not pleaded. (iv) Whether the primary judge erred in finding that cl 2.1 of the Guarantee was unjust for the purposes of the Contracts Review Act or, in the alternative, whether the primary judge should have relieved Mr Schaeffer's executors only of obligations under the Guarantee as regards payments accrued as at the date of execution. The Court (Stern JA, Ward P and Griffiths AJA agreeing) held, dismissing the appeal and allowing ground 1 of the cross-appeal: As to issue (i) (1) The primary judge's findings that Mr Schaeffer entered the Guarantee "freely, voluntarily and unhesitatingly": [388], that Mr Schaeffer must have had a general understanding that he was guaranteeing CRB's obligations under the CFA, that Mr Schaeffer must also have understood that payments had not, by then, been made under the CFA: [288], and that Mr Schaeffer understood the nature of the CFA at least in general terms: [332], are amply supported by the evidence. Those findings support the primary judge's finding that Mr Naegeli's conduct was not unconscionable within the meaning of s 12CB of the ASIC Act: [142]. (2) The primary judge erred in finding at [181], that Mr Naegeli was doubting the "creditworthiness", but not the "credibility", of Mr Blinkworth but Mr Naegeli's evidence as to this in cross-examination does not undermine his credit or reliability to any significant extent and such doubts as Mr Naegeli had as to Mr Blinkworth's credibility do not lead to a finding of unconscionability on the facts of this case: [147]-[149]. Lee v Lee (2019) 266 CLR 129; [2019] HCA 28; Fox v Percy (2003) 214 CLR 118; [2003] HCA 22, applied. (3) Conduct may be unconscionable irrespective of whether the victim is vulnerable or under a disadvantage and notwithstanding that the victim was a willing participant: [132]. If special disadvantage is relied upon, it is necessary to show not just that the "weaker" party is suffering from a special disadvantage that seriously affects their capacity to judge or protect their own interests, but also that the "stronger" party knows of the special disadvantage or of facts that would raise that possibility in the mind of any reasonable person and that the "stronger party" unconscientiously took advantage of the opportunity presented by that special disadvantage: [134]-[135]. Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; [2019] HCA 18; Stubbings v Jams 2 Pty Ltd [2022] HCA 6; (2022) 399 ALR 409; Australian Securities and Investments Commission v Westpac Banking Corporation [2022] FCA 515; Bale v Kimberley Developments Pty Ltd [2022] NSWSC 820, considered. Bridgewater v Leahy (1998) 194 CLR 457; [1998] HCA 66; Turner v Windever [2003] NSWSC 1147; Turner v Windever [2005] NSWCA 73, referred to. (4) The improvidence of a transaction does not, without more, require a defendant to a claim of unconscionability to prove that the transaction was fair, just and reasonable. No such onus rested on Mr Naegeli in this case: [136]-[139]. No inference should be drawn from the improvidence of the terms of the Guarantee that Mr Schaeffer executed the Guarantee by reason of some special vulnerability or disability, still less that this was something that Mr Naegeli knew or ought to have known: [154]-[166]. Lopwell Pty Ltd v Clarke [2009] NSWCA 165, distinguished. (5) The available evidence going to the financial position of CRB does not support a conclusion of special vulnerability on the part of Mr Schaeffer or of unconscionability on the part of Mr Naegeli: [167]-[174]. (6) There is no basis in the evidence to infer that Mr Schaeffer's trust or confidence in Mr Blinkworth was such that would support a finding of unconscionability on the part of Mr Naegeli. Mr Schaeffer's expressions of trust and confidence in Mr Blinkworth fall far short of establishing that Mr Schaeffer was, in any sense, vulnerable or unable to act in his own interests when executing the Guarantee: [175]-[178]. (7) The primary judge erred, at [401], in drawing the inference that it was unlikely that Mr Schaeffer understood the immediate and significant effect of his execution of the Guarantee: [179]-[191]. Neither the extent of Mr Schaeffer's knowledge of the Guarantee nor Mr Naegeli's conduct as regards the execution of the Guarantee support a conclusion that Mr Naegeli's conduct was unconscionable: [192]-[197]. (8) The fact of there being no consideration moving from Mr Naegeli under the Guarantee does not support a conclusion of unconscionability on the facts of this case. It is a neutral factor: [198]-[199]. (9) To the extent that the appellants contend that there is inconsistency in the conclusions of the primary judge as to unconscionability and under the Contracts Review Act, that contention must be rejected. There is clear authority that whether a contract is "unjust" within the meaning of s 7 of the Contracts Review Act involves a different standard of evaluation to that invoked in deciding whether someone's conduct concerning entering into a contract is unconscionable: [200]-[201]. Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152, applied. As to issues (ii) and (iv) (per Stern JA, Ward P and Griffiths AJA agreeing) (10) Given that different factual conclusions were reached from those reached by the primary judge, it is necessary to consider the application of the Contracts Review Act afresh. It was implicit in the matters raised on the appeal and cross-appeal that this would be necessary in the event that the various factual challenges advanced succeeded: [211]. (11) It is beyond doubt that the obligations under the Guarantee were both onerous and significant. There are, however, significant factors which weigh against a conclusion that the terms of the Guarantee were unjust in the circumstances relating to it at the time when it was made: [212]-[214]. The Guarantee was not unjust within the meaning of the Contracts Review Act: [215]. West v AGC (Advances) Ltd (1986) 5 NSWLR 610, considered. As to issue (iii) (per Stern JA, Ward P and Griffiths AJA agreeing) (12) Mr Naegeli did not seek interest in the event that he recovered the full amount of $6.5 million he sought under the Guarantee. It was thus unnecessary to determine this ground of appeal: [216]-[217]. (13) In the particular circumstances of this appeal, the appropriate order is that Mr Naegeli should not be paid interest by any of the appellants on the $6.5 million up to the date of the primary judge's orders. After the date of the primary judge's orders, interest should be paid by the second and third appellants under s 101 of the Civil Procedure Act. It is open to this Court to so order to achieve a just outcome in all of the circumstances: [219].

JUDGMENT

1. WARD P: I agree with the orders that Stern JA has proposed and with her Honour's comprehensive reasons.
2. STERN JA: This appeal arises out of a somewhat unconventional arrangement, described as a "loan" of $500,000, and effected by a Cash Funding Agreement ("CFA"), which on 30 December 2018 the respondent, Mr Naegeli (for and on behalf of the Human Enhancement Project ("HEP"), an unincorporated association) entered into with CRB Investment Holdings Pty Limited ("CRB"). The unconventional features of the CFA include that in exchange for HEP making a loan to CRB of $500,000 within two "banking days" of execution of the CFA, it required CRB, starting on the last Friday of April 2019 to make twelve monthly "revenue" payments of $500,000 each plus a final, thirteenth, payment of $500,000 (said to represent return of "the principal") within five banking days of the last payment. The total amount payable by CRB to HEP over a period of about 16 months, in respect of HEP's $500,000 loan, was thus $6.5 million. As the primary judge found, this is equivalent to interest at a rate of 1,200% per annum. Whilst those terms appear, on their face, unfavourable to CRB, it was CRB and not Mr Naegeli who proposed those terms.
3. On around 29 October 2019, pursuant to a Deed of Guarantee and Indemnity ("Guarantee"), the obligations of CRB under the CFA were guaranteed by Mr Charles Blinkworth, the managing director of CRB who proposed the CFA to Mr Naegeli and with whom Mr Naegeli primarily dealt, and also by Mr John Schaeffer and two companies he owned and controlled, Rasay Pty Limited ("Rasay") and The Footage Company Pty Ltd ("Footage"). As at that date no payments had been made by CRB, contrary to the terms of the CFA, such that CRB owed HEP a total of $3.5 million under the CFA. Under the Guarantee, the guarantors became immediately liable, without demand, to pay that $3.5 million, and thereafter they were liable to make payment in respect of any ongoing default.
4. The Guarantee and the circumstances in which it was executed are at the heart of this appeal.
5. CRB made no payments under the CFA and was wound up on 14 October 2020 with no dividend payable to creditors.
6. Mr Naegeli brought proceedings against Mr Schaeffer's executors (Mr Schaeffer died as a result of a road traffic accident on 14 July 2020), Rasay and Footage (together "the appellants") seeking to enforce their obligations under the Guarantee. Mr Naegeli sought judgment in the sum of $6.5 million, interest at the prescribed rate under s 100 of the Civil Procedure Act 2005 (NSW) and costs. In their defence, Mr Schaeffer's executors, Rasay and Footage contended that, in procuring the Guarantee, Mr Naegeli engaged in unconscionable conduct within the meaning of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") and that the Guarantee should be set aside as an unfair contract under the ASIC Act (having regard to ss 12BF, 12BG and 12BK) and/or as an unjust contract under s 7 of the Contracts Review Act 1980 (NSW).

Witness evidence before the primary judge

1. Two key witnesses, Mr Schaeffer and Mr Blinkworth, died before proceedings were issued. Thus, the only witness who had involvement in the transactions in issue was Mr Naegeli. The other witnesses were Ms Bettina Dalton, Mr Schaeffer's executor, and Mr Neil Matthews, a solicitor who had given Mr Schaeffer advice about a guarantee of obligations of CRB to a separate company in respect of a transaction unrelated to that between CRB and HEP (the "Mackeen Transaction", which is discussed further at [29] and [37]-[39] below), and whom Mr Schaeffer saw in relation to the Guarantee some six months after it was executed.
2. A number of the conversations with Mr Schaeffer and Mr Blinkworth to which Mr Naegeli deposed had been recorded by Mr Naegeli. Notwithstanding that it was common ground that Mr Naegeli could establish that recording conversations with Mr Schaeffer was reasonably necessary for the protection of his lawful interests for the purpose of the defence in s 7(3)(b)(i) of the Surveillance Devices Act 2007 (NSW), the primary judge issued a certificate under s 128 of the Evidence Act 1995 (NSW). The fact that the conversations were recorded meant that there is no dispute as to the accuracy of much of the detailed account that Mr Naegeli gave of his conversations with Mr Schaeffer and Mr Blinkworth.
3. To the extent that Mr Naegeli included evidence of conversations he had had with Mr Blinkworth, Mr Schaeffer and others in his affidavit affirmed on 2 September 2022, much of that evidence was subject to a ruling, described as the "Conversation Ruling", that it was allowed only as evidence of the fact of the conversation and not as proof of the underlying representations. The same ruling applied to much of the affidavit of Mr Matthews.

Test on appeal

1. Notwithstanding the evaluative nature of judgments as to whether conduct is unconscionable within the meaning of s 12CB of the ASIC Act and whether a contract is unjust within the meaning of s 7 of the Contracts Review Act, it is incumbent upon the appellants to demonstrate error in the findings of the primary judge: Minister for Immigration and Border Protection v SZVFW (2018) 264 CLR 541; [2018] HCA 30 at [30] (Gageler J, as his Honour then was) ("SZVFW"). The evaluative nature of the judgment does not diminish the court's task of "weighing conflicting evidence and drawing its own inferences and conclusions": Dearman v Dearman (1908) 7 CLR 549 at 564; [1908] HCA 84 (Higgins J), partly quoted in Fox v Percy (2003) 214 CLR 118; [2003] HCA 22 at [25] (Gleeson CJ, Gummow and Kirby JJ) ("Fox v Percy"), cited in SZVFW at [32] (Gageler J).
2. Whilst judgments as to whether conduct is unconscionable or a contract is unjust are evaluative, they are not matters of discretion. As Gageler J said in SZVFW, having referred to Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51; [2003] HCA 18, at [46]: "Like a common law duty of care, a statutory prohibition on conduct that is unconscionable posits a standard of conduct which, on proven facts, a person obliged to meet that standard either has met or has not."
3. To similar effect, Edelman J in SZVFW held at [151]: "a statutory provision that proscribes "conduct that is unconscionable, within the meaning of the unwritten law", is, like the doctrine of unconscionability in equity upon which it is based, not one that requires judicial restraint, at least to the extent that the evaluative exercise is not affected by the natural limitations of the appellate judge." (Footnotes omitted).
4. As to the limitations of the appellate court, in the context of considering the dismissal by the Full Federal Court of the plaintiff's challenges in that case to the primary judge's conclusions drawn from the expert evidence, in Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; [2019] HCA 18 at [217] ("ASIC v Kobelt"), Nettle and Gordon JJ said: "As was explained in Thorne v Kennedy, where a transaction is sought to be impugned by the operation of vitiating factors such as, relevantly, unconscionable conduct, it is necessary for a primary judge to conduct a close consideration of the facts; and it is equally necessary for an appellate court to assess any challenge to the primary judge's conclusions in light of the advantages enjoyed by that judge. That is because an assessment of whether unconscionable conduct has been established calls for a precise examination of the particular facts, and the exact relations established between the parties. The advantage of a primary judge in seeing the parties and estimating their characters and capacities is "immeasurable"." (Footnotes omitted).

Factual Background

1. Having regard to the evaluative character of the challenges made on appeal, it is necessary to consider the factual background in some detail. Save where identified, these matters were not in dispute.
2. The matters set out below are primarily based upon the findings of the primary judge and, where indicated, supplemented by the written and oral evidence. There are, however, two caveats to this. First, in some places the primary judge placed reliance upon the truth of words spoken by either Mr Blinkworth or Mr Schaeffer when that evidence was admitted subject to the Conversation Ruling. Second, in at least one instance the judgment of the primary judge includes parts of the evidence which his Honour had earlier rejected. Neither matter has any material impact upon the substance of the primary judge's findings or his Honour's evaluative conclusions.

The key individuals and entities

1. The key individuals involved in the relevant transactions are Mr Naegeli, Mr Schaeffer and Mr Blinkworth.
2. As regards Mr Naegeli, the primary judge found that despite having some commercial experience in a prestige car dealership, he was "a somewhat unworldly and commercially naïve person" who appeared to be "well and truly out of his depth when dealing with CRB" and was "evidently dazzled by Mr Schaeffer's apparent association with CRB": [14]. The primary judge found that "if anyone was in Mr Blinkworth's thrall, it was Mr Naegeli": [122]. As regards Mr Naegeli's credibility, the primary judge found that during cross-examination Mr Naegeli "impressed … as an honest witness, doing his best to give the best of his memory concerning events which were clearly very distressing to him": [15]. His Honour found further that there was "no reason to doubt the accuracy of Mr Naegeli's account of what happened" and that Mr Naegeli was "a reliable informant": [40]. There is no challenge to those findings.
3. HEP is an unincorporated association whose members are Mr Naegeli and his mother. HEP was established in 2013 as a "humanitarian, philanthropic, non-profit, non-government organisation": [16]. Mr Naegeli's evidence was that as his funds were in an account in the name of HEP and that was where payments under the CFA were to go, on 28 December 2018 (shortly before the CFA was executed) Mr Blinkworth suggested that the lender under the CFA should be HEP to meet "Know Your Client" requirements.
4. Before the primary judge it was accepted by Senior Counsel for the appellants that Mr Schaeffer was "a sophisticated businessman" whom the primary judge found appeared to have "acquired great wealth as a result of commercial activities": [337]. Mr Schaeffer was the chairman and major shareholder of Tempo Services, a publicly listed cleaning and security company. Mr Schaeffer was neither a director nor shareholder of CRB and did not play any day-to-day role in CRB's business but had a "longstanding business connection" and "a significant commercial association with Mr Blinkworth prior to the events with which these proceedings are concerned": [21] and [36]. The business relationship between Mr Schaeffer and Mr Blinkworth dated back to 1995, and in around 2006, Mr Schaeffer had invested $2.5 million in a security company started by Mr Blinkworth: [27]-[30].

CRB's business activities and financial standing

1. As to CRB, the true position is somewhat opaque. Both Mr Blinkworth and Mr Donald James (CRB's Director, Project Management) described CRB to Mr Naegeli when he first met them, but Mr Naegeli's evidence as to this is subject to the Conversation Ruling. Thus, whilst it can properly be relied upon to inform a judgment as to what Mr Naegeli understood CRB to do, it cannot be relied upon as evidence of the business or activities of CRB.
2. There is some description of the business and activities of CRB in Mr Niccol's various reports. According to Mr Niccol's report of 14 January 2021, CRB operated an "international project management business" and traded from 1 July 2017 to 13 October 2020. Mr Niccol explained that, whilst he had been given some documentation relating to CRB, it was likely that "significant documents relating to the Company's history" were not available to him and he was unable to obtain a backup of the email accounts held by Mr Blinkworth or Mr James. In light of that, there must be some doubt as to the extent to which the profit and loss statements and balance sheets for 30 June 2019 and 30 June 2020, which Mr Niccol prepared, represent an accurate picture of CRB at the relevant points in time. By way of example, on 24 May 2019, Mr Blinkworth sent Mr Naegeli a copy of documents which appear to evidence a letter of credit from HSBC in London of US$60 million in favour of CRB at the request of "Great Joint International Enterprises Limited UK". There is no reference to this letter of credit, or to any dealings with that company in Mr Niccol's report. It may be that this is not an authentic document. Alternatively, it may be that this is an example of a document which was not available to Mr Niccol and which may have shed light on what business operations had been conducted by CRB in the period prior to Mr Blinkworth's death. Similarly, on 28 December 2019, Mr Blinkworth sent Mr Naegeli an export permit dated December 2019 for 200 kilograms of raw gold from the Mubende District, Uganda. It may be that this had nothing to do with CRB, but in the light of this evidence and the letter of credit discussed above, the Court cannot wholly ignore the possibility that there was business that CRB, through Mr Blinkworth, was involved in but which was not recorded on the company's accounting records and thus was not available to Mr Niccol.

Bloomingville Guarantee

1. Mr Schaeffer executed the Bloomingville Guarantee on 3 April 2018 after obtaining legal advice from Mr Matthews that he should not do so. The terms of the loan to Bloomingville, as set out in the Bloomingville Guarantee, were that, in return for Bloomingville making an initial payment of €600,000, within 148 days CRB would make interest payments totalling approximately €5 million and repay the €600,000 principal sum, provided that CRB executed a contract with Mackeen. If that contract was not executed, then CRB agreed to pay €630,000 to Bloomingville by 3 May 2018. As the primary judge found, the structure of CRB's obligations to Bloomingville was similar to those in the CFA: [332].
2. Despite Mr Matthews' advice, Mr Schaeffer wanted to sign the Bloomingville Guarantee, provided that his liability was limited to €630,000: [313]-[314]. Mr Matthews gave Mr Schaeffer the wording that would be required to amend the document to include that limitation. That limitation was included in the Bloomingville Guarantee. Ultimately, as set out below, no payment was made under this arrangement and on 9 June 2020, Bloomingville brought proceedings, including against Mr Schaeffer, under the Bloomingville Guarantee.
3. The primary judge found that the fact that Mr Schaeffer was prepared to execute the Bloomingville Guarantee in the face of Mr Matthews' advice may show that "he then had confidence in Mr Blinkworth's commercial activities" and also "shows that he was capable of making his own mind up about whether or not to commit to the obligations under the Bloomingville guarantee": [318].

Mr Naegeli enters the CFA

1. Mr Naegeli had been looking for an investment and in that context was put in touch with Mr Blinkworth. He first met Mr Blinkworth on 3 July 2018 in Mr Blinkworth's office. Mr Schaeffer was present by telephone for some of that meeting: [55]. The unchallenged evidence before the primary judge was that, at that meeting, Mr Schaeffer said to Mr Naegeli: "I am the honorary chairman of CRB. I have been awarded an Order of Australia. You are very fortunate to have a chance to go into business with CRB and if you pass their criteria, I look forward to meeting you and discussing business together. If you are interested in art I can give you a tour of the Art Gallery of NSW where there is a wing named after me. That is how I have made a lot of my money, by entering into cash funding agreements with CRB. These agreements and windfalls give me the confidence to back CRB and hold my position as Honorary Chairman of CRB. There are a lot of benefits with being aligned with CRB." (Emphasis added by primary judge).
2. Relying in part upon this, the primary judge found that "Mr Schaeffer had been happy to assist in the establishment of CRB's "credibility"": [85].
3. The primary judge found that it appeared that Mr Naegeli "felt out of his depth at this meeting": [70]. Mr Naegeli's evidence was that he recalled "feeling a sense of security and prestige because of the calibre of the people involved with CRB".
4. During the 3 July 2018 meeting one of Mr Blinkworth or Mr James proposed that Mr Naegeli invest US$20 million in CRB. That proposal, which involved payments to Mr Naegeli of $500,000 per month plus return of his capital in full if he could raise the US$20 million investment, ultimately did not progress but was the subject of ongoing discussions from July to December 2018.
5. Later in July 2018, someone at CRB (Mr Naegeli thought it was probably Mr Blinkworth) gave Mr Naegeli a copy of CRB's "Corporate Profile". This included that: "… Together, the directors of CRB have over 50 years' experience in the highest levels of finance and international corporate leadership as Chief Executive Officer(s)."
6. CRB's Corporate Profile also said of Mr Schaeffer (although, as identified by the primary judge there was no evidence that Mr Schaeffer had any involvement in the creation of this document: [83]): "Mr. John H. Schaeffer AO (awarded 'Order of Australia'), Honorary Chairman Mr. Schaeffer is [sic] board member of the National Gallery of Australia Foundation, as well as a board member and Life Governor of the Art Gallery of New South Wales. He is a [sic] internationally known collector of 'Pre-Raphaelite' works of art and has a wing of the Art Gallery of NSW for his personal collection (). He has over 25 years' experience as the Chairman of several multi-national corporations with revenues in the hundreds of millions, to billions of dollars."

The terms of the CFA

1. The recitals to the CFA provide: "A. Borrower is seeking to expand economic development projects and business interests and having the required knowledge, professional and banking contacts and resources, to assist Lender in their stated business objective through the use of what is commonly referred to as Cash Funding Agreement ("CFA") and is desirous for the Lender to forward the agreed cash balance via Internal Bank Ledger-to-Ledger Transfer for the Borrower to utilize as payment and/or collateral against various transactions to be performed under the separate proprietary business strategies; and; B. The Lender represents having the required expertise, authorization, control, knowledge, professional contacts, private funds, or discretionary resources to assist Borrower in achieving the above and below stated business objective. The Lender is committed to transfer to the Borrower's receiving account, as described in ANNEX A, a minimum of $500,000 (Five Hundred Thousand AUD), will be on or before December 31, 2018."
2. Clause 1 of the CFA established a term of 16 months commencing on the date of the "Ledger-to-Ledger transfer" and terminating on the last Friday of the 16th month after the confirmed receipt of the described transfer.
3. Subclauses 2(a), (b) and (f) of the CFA are in the following terms: "2. DUTIES OF BORROWER Provided that Lender is not in breach or default of its obligations under this Agreement, Borrower agrees as follows: a) Initial Transactions - Within 10 (ten) banking days following Borrower confirmation of receiving the agreed cash deposit, Borrower shall confirm and acknowledge the initiation of the CFA Transaction(s) and proprietary business and corporate activities required to fulfill obligations and duties under this agreement. Lender understands the requirement that Borrower undertake international travel for direct execution of required banking documents to fulfill obligations and duties under this CFA. b) Guarantee of Monthly Payments - All revenue payments are guaranteed to be paid by CRB, according to the details listed in ANNEX B, through Bravura Private Wealth PTY Limited, from Westpac Bank Australia with the account details listed in ANNEX A. … f) Return of Lender's Loan - Borrower guarantees the CASH DEPOSIT will be returned, clear and unencumbered within 5 (five) banking days after the maturity date of this CFA Agreement [sic] from Bravura Private Wealth institutional account in Westpac Bank - Australia with the account details listed in ANNEX A."

The Moroccan proceedings

1. In January 2019, CRB issued proceedings in the Commercial Court of Casablanca against Mackeen in respect of the transaction for which the Bloomingville Guarantee was procured. As explained in submissions before the primary judge, those proceedings sought the return of €850,000 paid to Mackeen and damages. In Mr Niccol's report of 22 June 2022, he describes this as a potential claim for damages of €150 million. As to the Moroccan proceedings, the primary judge found: "[302] I am not in a position to make any assessment of the likely recoverability of the judgment obtained by CRB against Mackeen Holding or the prospects of CRB's likely success in the Moroccan Court. [303] However, these matters suggest that, despite the state of CRB's profit and loss statements and balance sheets, there may have been some prospect of CRB satisfying its obligations to Mr Naegeli and the Human Enhancement Project under the Cash Funding Agreement. It also appears that Mr Schaeffer knew of these matters and thought that they were "not dead"."
2. The primary judge's finding at [303] is challenged by the appellants on appeal.
3. It should be noted that Mr Niccol also reported that on 16 March 2020, judgment in favour of CRB in the sum of €850,000 was obtained in a Moroccan court against Mackeen. Solicitors in Morocco had advised that some €20,000 was required to progress to final judgment but the company could not afford to fund this. Also, the stamping of that judgment had been suspended until the finalisation of a damages claim for €150 million which CRB had brought against Mackeen and which was still pending in the Casablanca Commercial Court. Ultimately, Mr Niccol was unable to find a litigation funder to fund the Moroccan proceedings and neither of those amounts was recovered.
4. It should also be noted that, after his investigations, Mr Niccol determined not to issue proceedings for insolvent trading, notwithstanding that CRB may have been insolvent from 28 January 2020. Mr Niccol's reasoning in this regard included that there may have been an available defence of "reasonable basis to suspect that [CRB] may have been solvent due to the belief held at the time as to the recoverability of the claim against Mackeen."

CRB's default under the CFA

1. The first payment of $500,000 under the CFA was due on 26 April 2019. Mr Naegeli did not receive payment into the nominated bank account. Mr Naegeli sent an email to Mr Blinkworth on 28 April 2019 in the following terms: "… I only just noticed the first revenue payment was due on the 26th April 2019 being the last Friday of April, can you confirm whether or not this was made, I understand with all the public holidays there may have been a delay?"
2. Mr Blinkworth then asked Mr Naegeli to travel to Sydney so that Mr Blinkworth could explain the reason for the delay on the first payment. Mr Naegeli met with Mr Blinkworth and Mr William Aloisi (another director of CRB) on 15 May 2019. In evidence subject to the Conversation Ruling, Mr Naegeli said that at that meeting Mr Blinkworth showed him many contracts and said: "The reason for needing to see you in person is because everything I am showing you is classified because they are projects being conducted with governments. I have obtained approval to discuss them with you. … … As soon as any of the transactions CRB are working on come in, you will be paid and some extra advance payments too, to make up for the delays. The funds could come any day."
3. On 24 May 2019, Mr Blinkworth called Mr Naegeli and said (again this evidence is subject to the Conversation Ruling): "There is nothing to be concerned about. I will send you a number of documents which demonstrate that CRB will be obtaining access to 160 million US, 60 million of which is represented by a letter of credit issued by HSBC Bank to Barclays Bank, for the exclusive benefit of CRB as ultimate beneficiary. Once we draw down our fees of US 100 million, we will pay you $3 million in advance to make up for the late payment of the revenue. I should not really be sending you these documents but I will share them with you because I trust you."
4. Mr Blinkworth sent Mr Naegeli the documents appearing to reflect the US$60 million letter of credit, referred to above at [34]. The primary judge accepted Mr Naegeli's evidence that these documents gave him encouragement and that he believed that they were legitimate: [151]-[152].
5. There was no challenge to Mr Naegeli's evidence that throughout May and June 2019 he had about six telephone calls where he raised his concerns about the lack of security in the CFA and the lack of payments made under it: [153]. Mr Naegeli's evidence, subject to the Conversation Ruling, was that during these calls, either Mr Blinkworth or Mr Schaeffer or "sometimes both of them" said words to the effect: "There is no need for concern. CRB is involved in many significant projects. You will receive your investment in the 13 months as agreed. We should organise a meeting with you to discuss our possible investment in your other businesses. If anything ever did go wrong we will pay you from our personal funds. There was a recent article about John [Schaeffer] in May which you can find if you do a Google search for 'Domain John Schaeffer'."

Execution of the Guarantee

1. Mr Naegeli's evidence is that either Mr Blinkworth or Mr Schaeffer, he could not recall which, said that Mr Naegeli should prepare a deed and then travel to Sydney for them to execute it: [169]. Mr Naegeli said: "I then prepared the Deed after reviewing several others that either I have had prepared or which I have signed when conducting business that required such a document. I used my own experience from those arrangements to come up with something I felt protected me and because I am someone that keeps my word, I did as I was asked and did not involve any lawyers."
2. The primary judge found that the form of guarantee that Mr Naegeli prepared was "bespoke in nature": [171].
3. Mr Naegeli executed the Guarantee on or about 18 July 2019: [176]. Mr Naegeli then met with Mr Blinkworth in Sydney on 26 July 2019, and had been expecting Mr Schaeffer also to be present. As it turned out, Mr Schaeffer was present only by telephone. Mr Naegeli's oral evidence was that Mr Blinkworth told him that he needed some time to go over the Guarantee and that he needed to give Mr Schaeffer an opportunity to do so as well. Mr Naegeli understood this to mean that this was to obtain legal advice: [174]. Mr Naegeli said Mr Blinkworth again assured him that CRB was expecting some funds to be deposited into its account "before [Mr Naegeli] left Sydney so that payment could be made to [Mr Naegeli], and we could avoid the need for the [Guarantee] entirely."
4. Whilst Mr Naegeli left Sydney without the Guarantee having been executed, he continued to give Mr Blinkworth and Mr Schaeffer "the benefit of the doubt due to their professional reputations." He then became frustrated and angry upon learning that Mr Blinkworth had spent in excess of $45,000 on accommodation and flights to Hong Kong while he was still waiting for his revenue payments. He expressed this frustration to Mr Blinkworth and said that he would commence legal proceedings to recover the money he was owed. Mr Naegeli then asked Mr Blinkworth to organise the execution of the Guarantee by himself and Mr Schaeffer and said that he was beginning to doubt Mr Blinkworth's "credibility" and required a lawyer or Justice of the Peace to witness the execution: [179]. Having heard and considered Mr Naegeli's oral evidence as to this in cross-examination, the primary judge found that what Mr Naegeli meant was that he was beginning to doubt Mr Blinkworth's "creditworthiness": [181]. As set out below, this finding is challenged on appeal. Mr Naegeli's evidence (subject to the Conversation Ruling) is that at this time, Mr Blinkworth said: "If you do not trust me, it would be best that I just pay you and not include you in any future projects or assist with raising funds for your other business ventures."

The terms of the Guarantee

1. Schedule 1 to the Guarantee set out that the Guarantors were Rasay, Footage, Mr Schaeffer and Mr Blinkworth. That page of the Guarantee is initialled by each of Mr Naegeli, Mr Schaeffer and Mr Blinkworth. All other pages of the Guarantee are initialled only by Mr Naegeli and Mr Blinkworth.
2. The recitals to the Guarantee provide: "A. At the request of each Guarantor, the Beneficiary has agreed to provide financial accommodation to the Borrower pursuant to the Facility Agreement. B. In consideration of the Beneficiary providing financial accommodation to the Borrower pursuant to the Facility Agreement, each Guarantor enters into this deed and agrees to be bound by the terms of this deed."
3. Clauses 2.1 and 2.2 of the Guarantee, provide: "2.1 Guarantee Each Guarantor irrevocably and unconditionally guarantees to the Beneficiary the satisfaction and payment in full of the Obligations. 2.2 Satisfaction of Obligations If the Borrower does not pay or satisfy any Obligation in full on the due date, each Guarantor will immediately, without demand by the Beneficiary, satisfy or pay that Obligation in full."
4. "Obligations" are defined in cl 1.1 of the Guarantee as: "… all the liabilities and obligations of the Borrower to the Beneficiary under or by reason of any Finance Document and includes any liabilities or obligations which: (a) are liquidated or unliquidated; (b) are present, prospective or contingent; (c) are in existence before or come into existence on or after the date of this deed; (d) relate to the payment of money or the performance or omission of any act; (e) sound in damages only; or (f) accrue as a result of any Event of Default, and irrespective of …".
5. "Finance Document" is defined in cl 1.1 of the Guarantee as "the Facility Agreement" which is, in turn, defined as the CFA.
6. Clause 6 of the Guarantee provided for security for "the payment of the Guaranteed Money" and "the due punctual and complete performance of each Guarantor's obligations and liabilities to the Beneficiary under this deed". The property charged was "any land owned by that Guarantor, solely, jointly or as trustee of any trust, now or in the future." "Guaranteed Money" is defined in cl 1.1 as meaning: "(a) $6,500,000.00; (b) all money the payment or repayment of which from time to time forms part of the Obligations."

Events after the Guarantee was executed

1. On or around 29 October 2019, after executing the Guarantee, Mr Blinkworth called Mr Naegeli and indicated that the Guarantee was executed. Mr Naegeli's evidence (subject to the Conversation Ruling) is that Mr Schaeffer, who was also on that call, said: "Now that the Deed has been fully executed by all parties, I trust that you will not commence proceedings against CRB as this would create problems for our projects. Please put your trust in the process. We all have to remain patient as there are many projects which are about to come to fruition, which Charles will discuss with you."
2. The primary judge found, at [207], that this: "… shows, once again, how closely aligned to CRB and Mr Blinkworth Mr Schaeffer saw himself as being and how far he was prepared to go in promoting CRB's and Mr Blinkworth's interests vis-a-vis Mr Naegeli. It shows that Mr Schaeffer saw his execution of the Guarantee as an important step that CRB needed to take to dissuade Mr Naegeli from seeking to enforce his rights…".
3. After a number of requests from Mr Naegeli, Mr Blinkworth provided Mr Naegeli with a copy of the executed Guarantee on 25 January 2020. Mr Blinkworth died three days later. It was at Mr Blinkworth's funeral, on 14 February 2020, that Mr Naegeli met Mr Schaeffer in person for the first time.
4. After Mr Blinkworth's death Mr Naegeli spoke with and met Mr Schaeffer on a number of occasions. At a meeting in Sydney with Mr Schaeffer and Mr Aloisi on 22 June 2020 (which was 13 days after Bloomingville issued proceedings against Mr Schaeffer under the Bloomingville Guarantee), Mr Naegeli showed Mr Schaeffer the executed Guarantee and asked whether Mr Schaeffer remembered it. Mr Naegeli's evidence is that Mr Schaeffer responded: "These are definitely my signatures. I haven't read the fine print so I would like to take them and see my attorney."
5. On 23 June 2020 Mr Schaeffer went to see his lawyer, Mr Matthews. Mr Matthews' evidence is that Mr Schaeffer said that the signature on the Guarantee looked like his own but that he did not sign it. The primary judge found, given that there was no challenge to Dr Raiz's evidence that Mr Schaeffer signed the Guarantee and that Mr Schaeffer acknowledged that the signature was his during the meeting with Mr Naegeli on 22 June 2020, this appeared to "bespeak an inclination on Mr Schaeffer's part to give different accounts of the same events to different people": [223].

The primary judge's key findings challenged on appeal

Unconscionability

1. The primary judge rejected the appellants' contention that Mr Naegeli engaged in unconscionable conduct within the meaning of s 12CB of the ASIC Act in connection with the supply of a financial service constituted by the issuing of the Guarantee. In this regard, the primary judge relied upon the findings at [288], [292], [294], [303], [320]-[322], [328]-[329], [332]-[333] and [337]-[342].

Relief under the Contracts Review Act

1. Before the primary judge, Ms Dalton, as an individual rather than a corporate defendant to Mr Naegeli's claim, contended that the terms of the Guarantee were unjust and that for that reason, the Court should refuse to enforce it under s 7 of the Contracts Review Act. It was common ground that the corporate defendants were not entitled to relief under the Contracts Review Act.
2. The primary judge found, at [403], that in the circumstances in which Mr Schaeffer executed the Guarantee, the provisions having the effect that Mr Schaeffer became immediately liable to pay $3.5 million (being the sum then outstanding under the CFA) upon execution of the Guarantee were "unjust" within the meaning of s 4 of the Contracts Review Act. In reaching this conclusion, the primary judge relied particularly on his Honours' findings at [399]-[402] (set out at [92] above).
3. The primary judge concluded, at [409], that the appropriate order in the circumstances was that "the liability of Mr Schaeffer's estate under the Guarantee be confined to repaying the principal of $500,000 with interest to accrue of [sic] that sum at the rate of 10% per annum." In a further judgment, Naegeli v Dalton and Schaeffer as Executors of the Estate of the late John Herman Schaeffer (No 2) [2023] NSWSC 626 at [10], the primary judge ordered that, as specified in the Guarantee, interest should accrue "from day to day", that is, upon daily rests. That conclusion is reflected in Order 6 of the orders made by the primary judge on 16 June 2023: "Order that first defendants as executors of the estate of the late John Schaeffer pay interest on the sum of $500,000 at the rate of 10% per annum compounded daily commencing on 29 October 2019".

The appeal

1. The appellants advance eight, somewhat overlapping, grounds of appeal and numerous sub-grounds. In essence, the appellants contend that: 1. the primary judge erred in finding that Mr Naegeli did not act unconscionably within the meaning of s 12CB of the ASIC Act or s 21 of the Australian Consumer Law (grounds 1 to 4); and 2. the primary judge erred in finding that interest should accrue in accordance with the terms of the Guarantee, in circumstances where Mr Naegeli had not pleaded any claim for interest calculated in accordance with the Guarantee (the pleaded claim being for interest "at the prescribed rate" under the Civil Procedure Act) (ground 8).
2. I propose to deal with the grounds of appeal by reference to these two substantive issues.
3. A number of challenges to the primary judge's factual findings are advanced by both the appellants and Mr Naegeli. The appellants contend that the primary judge erred in finding: 1. at [181], that Mr Naegeli was beginning to doubt Mr Blinkworth's creditworthiness but not his credibility; 2. at [288], that Mr Schaeffer knew, at the time he signed the Guarantee, that payments due under the CFA had not been made (sub-ground 4(c)); and 3. at [303], that there may have been some prospect of CRB satisfying its obligations to Mr Naegeli and HEP under the CFA.
4. The appellants also contend that the primary judge should have found that: 1. having regard to the evidence and the finding of the primary judge, at [321], Mr Naegeli knew that the relationship between Mr Schaeffer and Mr Blinkworth involved Mr Schaeffer implicitly trusting Mr Blinkworth (sub-ground 2(h)); 2. having regard to the findings of the primary judge, at [397]-[403], that the Guarantee was an unfair contract and that the appellants were unaware of the financial consequences of their assenting to the Guarantee (sub-ground 3(a)); 3. through CRB, Mr Blinkworth was engaged in misconduct (sub-ground 3(b)); 4. Mr Schaeffer implicitly trusted and was influenced by Mr Blinkworth such that his ability to look after the appellants' interests was compromised and he wrongly believed that CRB would make the payments under the CFA (sub-grounds 3(c)-(d)); 5. Mr Naegeli was prepared to enter into any arrangement with CRB simply in order to foster his relationship with Mr Blinkworth (sub-ground 3(e)); 6. contrary to the primary judge's finding, at [181], by the time Mr Naegeli asked Mr Blinkworth to procure Mr Schaeffer's signature to the Guarantee, Mr Naegeli had either ceased to trust Mr Blinkworth or had concluded that CRB could not make payments under the CFA (sub-grounds 3(f)-(g)); 7. contrary to the primary judge's finding, at [303], CRB was insolvent at the time the appellants executed the Guarantee and Mr Naegeli had no confidence in CRB satisfying its liabilities (sub-ground 3(h)); and 8. the appellants executed the Guarantee when Mr Schaeffer was "under the influence of Mr Blinkworth" (sub-ground 4(a)). This is framed in the amended notice of appeal as an allegation of an erroneous finding having been made but is, in substance, a contention that this additional finding should have been made.

The cross-appeal

1. By amended notice of cross-appeal, Mr Naegeli contends that the primary judge erred, at [403], in finding that cl 2.1 of the Guarantee was unjust for the purposes of the Contracts Review Act. In the alternative, Mr Naegeli contends that if the Guarantee was unjust because Mr Schaeffer may not have read it and realised that it guaranteed existing defaults, the primary judge should only have relieved Mr Schaeffer of his obligations as guarantor as regards payments accrued as at the date of execution of the Guarantee.
2. In a notice of contention on the cross-appeal, the appellants seek to support the primary judge's conclusion that cl 2.1 of the Guarantee was unjust by seeking the following additional findings (without repeating the findings sought as set out at [122(1), (3)-(4), (6)-(8)] above): 1. the provisions of the Guarantee were improvident; 2. the interest rate, of itself, made the Guarantee unfair and Mr Naegeli's conduct unconscionable; 3. Mr Naegeli knew or ought to have known that Mr Schaeffer had not negotiated the terms of the Guarantee and Mr Naegeli was not prepared to negotiate the terms of the Guarantee; and 4. Mr Naegeli knew that Mr Blinkworth was motivated to procure Mr Schaeffer's execution of the Guarantee to prevent Mr Naegeli from commencing proceedings against CRB.

Credibility and reliability

1. Save as regards the challenge to the primary judge's finding at [181], no challenges are made on appeal to any findings of credibility or to the primary judge's acceptance (or rejection) of the evidence of any witness. Rather, save in that one respect, each of the challenges set out above is either to an evaluative conclusion or to an inference to be drawn from the unchallenged witness and documentary evidence.

Applicable principles

1. Section 12CB(1) of the ASIC Act relevantly provides: 12CB Unconscionable conduct in connection with financial services (1) A person must not, in trade or commerce, in connection with: (a) the supply or possible supply of financial services to a person; or (b) the acquisition or possible acquisition of financial services from a person; engage in conduct that is, in all the circumstances, unconscionable.
2. As regards unconscionability, there is no dispute that the primary judge correctly directed himself, at [277]-[282], as to the law. The nature of statutory unconscionability is helpfully encapsulated by Kiefel CJ and Bell J in ASIC v Kobelt at [14]: "The term "unconscionable" is not defined in the ASIC Act and is to be understood as bearing its ordinary meaning. The proscription in s 12CB(1) is of conduct in connection with the supply of financial services that objectively answers the description of being against conscience. The values that inform the standard of conscience fixed by s 12CB(1) include those identified by Allsop CJ in Paciocco v Australia & New Zealand Banking Group Ltd: certainty in commercial transactions, honesty, the absence of trickery or sharp practice, fairness when dealing with customers, the faithful performance of bargains and promises freely made, and: "the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or take advantage"." (Footnotes omitted).
3. The judgment as to whether conduct is unconscionable requires a focus on all the circumstances: ASIC v Kobelt at [8] (Kiefel CJ and Bell J), [83] (Gageler J), [155] (Nettle and Gordon JJ).
4. As Gageler J said in ASIC v Kobelt: "[92] … conduct proscribed by the section as unconscionable is conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience. … [93] The judgment required of a court exercising jurisdiction in a matter arising under s 12CB is a heavy one. For a court to denounce that conduct as offensive to a conscience informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society. …".

Consideration

1. By way of overarching submission, the appellants contend that it was for Mr Naegeli to demonstrate that the transaction was fair, just and reasonable, relying upon the finding of Macfarlan JA (Ipp and Campbell JJA agreeing) in Lopwell Pty Ltd v Clarke [2009] NSWCA 165 at [48] ("Lopwell") that, on the facts of that case, such an onus lay on the party benefiting from the transaction.
2. This contention can be disposed of at the outset. In Lopwell, Macfarlan JA had, at [37], directed himself by reference to the statement of Deane J in Louth v Diprose (1992) 175 CLR 621 at 637; [1992] HCA 61 that: "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. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable…".
3. Macfarlan JA's conclusion on the facts in Lopwell must be understood by reference to that authority. So understood, it is abundantly clear that the improvidence of a transaction does not, without more, require a defendant to a claim of unconscionability to prove that the transaction was fair, just and reasonable. That is consistent with the judgment of Ward P in Bale v Kimberley at [589] that: "… what is abundantly clear is that, once the requisite elements of a special disadvantage, knowledge of that special disadvantage and improvidence of the transaction are established, there is at least an evidentiary onus on the stronger party to show that the transaction was fair, just and reasonable or it may readily be concluded that the improvident transaction was procured by the unconscientious taking of advantage of that special disadvantage." (Emphasis added).
4. Given my findings below, no such onus rested on Mr Naegeli in this case.

The primary judge's finding at [181]

1. It was common ground before this Court that the challenge to the primary judge's finding at [181] was a finding affected by impressions formed as a result of seeing and hearing Mr Naegeli give evidence. It should thus not be overturned absent a conclusion that it was "glaringly improbable" or "contrary to compelling inferences": Lee v Lee (2019) 266 CLR 129; [2019] HCA 28 at [56]; Fox v Percy at [28]-[29]. Despite that high threshold, I am satisfied that the primary judge erred in reaching this finding. The inference that should have been drawn from Mr Naegeli's evidence that he was "beginning to doubt [Mr Blinkworth's] credibility" is that Mr Naegeli was beginning to have doubts as to whether he should believe what Mr Blinkworth said, but that those doubts did not extend to him losing trust in Mr Blinkworth overall and did not rise to the level that he would accept Mr Blinkworth's offer to pay him out. However, Mr Naegeli's evidence as to this in cross-examination does not undermine his credit or reliability to any significant extent (nor was any contention advanced to this effect).
2. I have reached this conclusion having regard to the fact that, in his affidavit, Mr Naegeli linked his doubts about Mr Blinkworth's credibility with his requirement that a lawyer or Justice of the Peace witness the execution of the Guarantee. That strongly suggests that Mr Naegeli's concern was that Mr Blinkworth may otherwise either not properly execute the Guarantee or seek later to contend that he had not done so. That bespeaks some concern about trust, not the adequacy of Mr Blinkworth's financial resources. Indeed, Mr Naegeli's words during that conversation, as recorded in his affidavit, make no sense if his concern was creditworthiness.
3. For the reasons set out below, however, such doubts as Mr Naegeli had as to Mr Blinkworth's credibility do not lead to a finding of unconscionability on the facts of this case.

Do the terms of the Guarantee themselves suggest unconscionability?

1. Given that the appellants' submissions rely significantly upon the improvidence of the terms of the Guarantee, it is convenient to deal with this first.
2. As set out above, the conclusion that conduct is unconscionable within s 12CB of the ASIC Act requires an evaluative judgment having regard to the particular facts, relationships and idiosyncrasies, processes and mental capacities of the vulnerable party: see eg Stubbings at [39] (Kiefel CJ, Keane and Gleeson JJ) citing Jenyns v Public Curator (Qld) (1953) 90 CLR 113 at 118-19; [1953] HCA 2 (Dixon CJ, McTiernan and Kitto JJ). Unless all of the factual context is considered in detail, little is to be gained by seeking to compare and contrast the conduct in this particular case with conduct in issue in other cases.
3. Thus, contrary to the appellants' submission the finding of Shepherdson J in Asia Pacific International Pty Ltd v Dalrymple [2000] 2 Qd R 229; [1999] QSC 2004 ("Asia Pacific") that there was equitable unconscionability in a lender inserting a term in a loan that interest would be capitalised, and then accrue at 20%, says nothing about whether Mr Naegeli's conduct in this case was unconscionable within the meaning of s 12CB of the ASIC Act. In Asia Pacific, it was found, at [58], that the borrowers were in urgent need of the loan and that advantage had been taken of their "special vulnerability". There is nothing in the evidence here to suggest that Mr Schaeffer was in a position of analogous urgent need such that the terms of the Guarantee, which on their face were seriously disadvantageous to him, were themselves indicative of special disadvantage.
4. Similarly, the case of Starceavich v Swart & Associates Pty Ltd [2006] NSWSC 960 ("Starceavich"), in which the question was whether there was a serious question to be tried in the context of an application for an interlocutory injunction, does not support a finding that Mr Naegeli's conduct was unconscionable within s 12CB of the ASIC Act. In that context, White J (as his Honour then was) held, at [55], that the terms of the contract suggested that the plaintiff's vulnerability to exploitation was "seriously arguable" as it was "seriously arguable that no-one who was not in desperate need and who understood the terms of the bargain, could rationally have agreed to the terms proffered by the defendant." Whilst White J held that "oppressive and unreasonable terms" may be both evidence of specific vulnerability and unconscionability, whether or not that is so will depend upon the facts of the case.

Does the financial position of CRB support a finding of unconscionability?

1. Contrary to the appellants' submission, the available evidence going to the financial position of CRB does not support a conclusion of special vulnerability on the part of Mr Schaeffer or of unconscionability on the part of Mr Naegeli. As is apparent from the analysis set out above at [33]-[36], it is difficult to be confident as to CRB's true financial position. Moreover, having regard to the matters set out above, notwithstanding CRB's financial position, it is apparent that Mr Schaeffer may have had personal or financial reasons for executing the Guarantee.
2. The profit and loss accounts and balance sheets prepared by Mr Niccol, as the primary judge found at [291]-[292], showed that CRB was in a "parlous" financial position, with no income, significant fees and expenses and negative total equity, including significant loan amounts owing to HEP (curiously only in the sum of $500,000 when under the CFA, at that time, $6.5 million was owing), Bloomingville, and in the 2019-2020 financial year, to Mr Schaeffer. However, as set out above, Mr Niccol's views, conveyed in his various reports, did not identify any possibility of insolvent trading before Mr Blinkworth's death on 28 January 2020. That is some three months after the Guarantee was executed. Even from that date Mr Niccol gives some credence to the possibility that there may have been a reasonable belief that CRB may have been solvent, in light of potential recovery of very significant sums in the Moroccan court. Had those sums been successfully recovered, Mr Niccol said CRB may have been solvent with a net asset position and available funds to meet liabilities. It is also the case, as set out at [34] above, that Mr Niccol clearly did not have full information about CRB's operations prior to Mr Blinkworth's death. In these circumstances, only limited weight can be given to the documents prepared by Mr Niccol as regards CRB's actual financial position.
3. Whilst Senior Counsel for the appellants submitted that Mr Niccol's views do not "speak to the different question … which is the wherewithal of CRB at the time of the execution of the [Guarantee] to pay the moneys", there is nothing to suggest that the prospect of recovery of significant sums in damages in the Moroccan proceedings increased in the period between 29 October 2019 when the Guarantee was executed and 22 June 2022 when Mr Niccol issued his final report. If anything, given that Mr Niccol identified that one cause of CRB's insolvency was the cessation of funding received from Mr Blinkworth and that his death led to a significant decline in business operations for CRB, it may be that prior to Mr Blinkworth's death it would have been more likely that the Moroccan proceedings would have been able to be funded to continue. Nor is there any evidence to suggest that in other respects the financial position was worse as at 29 October 2019 than was apparent from Mr Niccol's reports.

Does Mr Schaeffer's trust in Mr Blinkworth support a finding of unconscionability?

1. The appellants contend that Mr Schaeffer's trust in Mr Blinkworth was such that Mr Schaeffer was in a position of special vulnerability such that he could not properly look after his own interests. In this regard they rely upon the judgment in Lopwell at [47] (Macfarlan JA, Ipp and Campbell JJA agreeing) where it was held that "total reliance upon an adviser" may support a finding of special vulnerability for the purposes of unconscionability in equity.
2. This is not such a case. Whilst, as the primary judge found, it is clear that Mr Schaeffer had confidence in Mr Blinkworth's commercial acumen, which evidently arose from their business relationship, there is no evidence to support a conclusion that Mr Schaeffer was significantly reliant upon Mr Blinkworth. Mr Schaeffer's expressions of trust and confidence in Mr Blinkworth, who appears to have been something of a charismatic character, fall far short of establishing that Mr Schaeffer was, in any sense, vulnerable or unable to act in his own interests when executing the Guarantee. This is not a case in which there was any inherent inequality between the position of Mr Schaeffer and Mr Blinkworth. Indeed, the evidence suggests that Mr Schaeffer willingly made representations to Mr Naegeli as to CRB's financial position and the likelihood that Mr Naegeli would receive the money owing to him. Moreover, there is no challenge to the primary judge's finding, at [337], that Mr Schaeffer was a "sophisticated businessman" who had "acquired great wealth as a result of commercial activities." There is no basis in the evidence to infer that Mr Schaeffer's trust or confidence in Mr Blinkworth was such that would support a finding of unconscionability on the part of Mr Naegeli.
3. Still less does the evidence support a finding that Mr Naegeli's knowledge was such that he knew or ought to have known of such vulnerability on the part of Mr Schaeffer. From what Mr Naegeli was told, Mr Schaeffer was highly respected and knowledgeable, had benefited greatly from CFAs in the past, had influenced Mr Blinkworth to offer favourable terms to Mr Naegeli in the CFA and was aware of the "many significant projects" of CRB which were such as to assuage any concerns Mr Naegeli had.
4. The relationship between the main protagonists here is a far cry from the position of a trusted adviser as in Lopwell. The trust or confidence that Mr Schaeffer appeared to have in Mr Blinkworth does not support a finding of unconscionability. I would also reject the appellants' challenge to the primary judge's implicit finding, at [323], that Mr Schaeffer was not under Mr Blinkworth's influence. Whilst Mr Schaeffer clearly provided considerable support, financial and otherwise, to CRB, there is no evidence that would support such an inference as contended by the appellants. Moreover, whilst Mr Naegeli should be inferred to have been aware that Mr Schaeffer trusted Mr Blinkworth, contrary to the contention at sub-ground 2(h) of the amended notice of appeal, the evidence does not suggest that Mr Schaeffer was in Mr Blinkworth's "thrall".

Does the extent of Mr Schaeffer's knowledge support a finding of unconscionability?

As to CRB's financial position

1. I have already dealt with the issue of Mr Schaeffer's knowledge of the financial position of CRB.

As to the CFA

1. The primary judge found that Mr Schaeffer understood the nature of the CFA in general terms and there is no challenge to that finding. Whilst the appellants rely upon an email sent by Mr Aloisi to Mr Naegeli (copying Mr Schaeffer), after Mr Blinkworth's death, setting out that neither he nor Mr Schaeffer could find any "original documents", that does not say anything as to what Mr Schaeffer saw or was told of the CFA. Similarly, Mr Schaeffer's statements to Mr Naegeli during their meeting on 22 June 2020 that Mr Schaeffer had been "led astray by Mr Blinkworth" and told things by Mr Blinkworth that were "not correct", statements to which the Conversation Ruling did not apply, cannot, for the reasons set out above, be relied upon. It is apparent that Mr Schaeffer gave different accounts to different people of his involvement in the Guarantee, which cast significant doubt upon the credibility of his assertions as to the extent of his knowledge or involvement in CRB's activities or transactions. Further, that evidence must be viewed having regard to the fact that this meeting occurred shortly after Bloomingville commenced proceedings against Mr Schaeffer under the Bloomingville Guarantee. In those circumstances Mr Schaeffer may have had concerns that he could be vulnerable to being sued by Mr Naegeli also and thus may have had an incentive to be less than fulsome as to his knowledge of Mr Blinkworth's dealings.
2. It should, moreover, be inferred that Mr Schaeffer was aware of the terms of the arrangement between Bloomingville and CRB, as those terms were embodied in the same document as the Bloomingville Guarantee on which he sought legal advice. Those terms involved a return of €5 million on an initial investment of €600,000. It could be inferred that Mr Schaeffer would also have known that there were significant payment obligations imposed upon CRB under the CFA. Moreover, the fact that Mr Schaeffer limited the extent of his liability under the Bloomingville Guarantee, and had to amend the document to effect this, suggests that he was aware that CRB were, under that arrangement, liable to pay Bloomingville considerably more than the €630,000 he guaranteed.
3. Mr Naegeli's evidence was also that during telephone calls with Mr Blinkworth and Mr Schaeffer, Mr Blinkworth or Mr Schaeffer or "sometimes both of them" told Mr Naegeli that he would receive his investment in the "13 months as agreed." Whilst Senior Counsel for the appellants submitted that that suggested that Mr Schaeffer believed the money was only due at the end of 13 months, that submission should be rejected. The words used are equally consistent with knowledge that the payments were to be made within a 13 month period, which was in fact the term of the CFA. Further, Mr Schaeffer was clearly aware that there were payments outstanding under the CFA as he told Mr Naegeli that he believed that "the payments will be made" by the time the Guarantee was prepared. That shows that Mr Schaeffer was aware, by the time of execution of the Guarantee, that payments were by then already outstanding.

As to the terms and effect of the Guarantee

1. As to Mr Schaeffer's knowledge of the terms of the Guarantee, as the primary judge found, at [399], there is no evidence that the terms and effect of the Guarantee were explained to Mr Schaeffer or that he read the terms of the Guarantee prior to its execution. However, unlike the primary judge, at [400], I would not infer that Mr Schaeffer would not have read and understood the immediate and significant effect of his execution of the Guarantee. On the evidence, it is not possible to reach any clear conclusion as to whether he did, or did not, do so. Having regard to my findings at [155]-[157] and [159]-[163] above, there is also a real possibility that he determined that he would execute the guarantee without giving any careful consideration to its terms and effect because he had already decided that it was in his personal or financial interests to execute a guarantee to avert the risk that Mr Naegeli might otherwise commence proceedings or might otherwise lead to adverse publicity for CRB. His apparent confidence in Mr Blinkworth and CRB may have meant that he simply did not think the Guarantee would ever actually be called upon.
2. Mr Schaeffer was clearly a commercially experienced and, as the primary judge found, at [337], sophisticated man. He had already signed the Bloomingville Guarantee and should be taken to have been aware of the terms of that arrangement. Mr Schaeffer was thus aware that CRB was promising a very significant return on investment to Bloomingville. On that occasion, Mr Schaeffer was advised by his lawyer that the draft guarantee did not cap his liability, and the document was amended to do so. Mr Schaeffer was also aware that at least the initial proposals involving Mr Naegeli involved a return of many millions of dollars, and that payments were outstanding under Mr Naegeli's arrangement with CRB.
3. Moreover, after the Guarantee was executed, Mr Schaeffer said to Mr Naegeli that he trusted that Mr Naegeli would not then "commence proceedings against CRB". That indicates that Mr Schaeffer was aware at that time, which is roughly contemporaneous with his signing of the Guarantee, that CRB was already indebted to Mr Naegeli and that the Guarantee went to that indebtedness. It is otherwise unlikely that Mr Schaeffer would have suggested that the Guarantee was a reason for Mr Naegeli not to commence proceedings.

The absence of consideration under the Guarantee

1. The appellants contend that a conclusion of unconscionability is supported by the fact that Mr Naegeli did not provide any consideration under the Guarantee. That contention should be rejected. Mr Naegeli was told by Mr Blinkworth, during one or more conversation with both Mr Blinkworth and Mr Schaeffer, that Mr Blinkworth would enter into a guarantee provided that Mr Naegeli did not put any undue pressure on CRB "in order to give us reasonable time to focus on our trading activities." During the same conversation Mr Schaeffer also offered to provide a guarantee. Mr Naegeli was, in that context (and having regard to the background that I have summarised above) entitled to believe that both Mr Blinkworth and Mr Schaeffer considered that they had something to gain by providing a guarantee.
2. In any event, the fact of there being no consideration moving from Mr Naegeli does not, in my judgment, support a conclusion of unconscionability on the facts of this case. It is a neutral factor.

Asserted inconsistency with finding under the Contracts Review Act

1. To the extent that the appellants contend that there is inconsistency in the conclusions of the primary judge as to unconscionability and under the Contracts Review Act, that contention must be rejected. As Senior Counsel for the appellants accepted, there is clear authority that: "[w]hether a contract is "unjust" within the meaning of s 7 of the Contracts Review Act involves a different standard of evaluation to that invoked in deciding whether someone's conduct concerning entering into a contract is unconscionable within the meaning of s 51AC TPA or s 13CC ASIC Act": Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 at [165] and [169] (Campbell JA, Giles and Hodgson JJA agreeing). In that case Campbell JA concluded that the contract was not unjust in reliance upon the same factors as had led his Honour to conclude that statutory unconscionability had not been made out: at [170]. Similarly, in a case such as that now before the Court, the same facts will inform both evaluative judgments.
2. In any event, this contention was pressed only to the extent that it was contended that the primary judge's findings at [399]-[401] supported a finding of unconscionability. I have already rejected that contention.

Contracts Review Act

1. As set out above, on the cross-appeal, Mr Naegeli contends that the primary judge erred in finding that cl 2.1 of the Guarantee was unjust. In this regard, he contends that the primary judge's finding at [401] was erroneous. As set out above at [191], I agree that the primary judge erred in the inference that his Honour drew at [401]. Mr Naegeli also contends on the cross-appeal that if the primary judge is found not to have erred in his Honour's findings as to what Mr Schaeffer understood, the primary judge ought to have found that the Guarantee was unenforceable only as regards the payments that had already become due by the time that the Guarantee was executed. He contends that that would have been the appropriate order given that the injustice, as found by the primary judge, related to the immediate effect of the Guarantee as regards liability in respect of outstanding payments as at the date of execution.
2. The appellants contend that, in order to remedy the relevant injustice found by the primary judge, his Honour ought to have set aside the Guarantee in full and also contend that the primary judge's findings can be supported by further grounds set out in their notice of contention on the cross-appeal. In this regard, the appellants contend that there was clear injustice to Mr Schaeffer and that setting aside the Guarantee would not cause any disadvantage to Mr Naegeli who had entered the CFA without seeking a guarantee and who provided no consideration for the Guarantee. Further, the appellants contend that "the expectation that [Mr Naegeli] was trying, ultimately, to protect was a benefit of a contract which he had entered into out of an anxiety to retain a relationship with Mr Blinkworth." The appellants also contend, by way of notice of contention, that a number of additional factors supported the primary judge's conclusion that the terms of the Guarantee were unjust. The appellants contend that, having regard to the extent of Mr Schaeffer's liability under the Guarantee, it was incumbent upon Mr Naegeli to ensure that Mr Schaeffer appreciated the extent of that burden: Elders Rural Finance Ltd v Smith (1996) 41 NSWLR 296 at 298-9. It should be noted, however, that in that case Mahoney P at 298-9 observed that the capacity of the plaintiffs to appreciate the risks under the contract and whether they should be accepted "was limited", and there was a positive finding that one party to the contract did not understand the risks of the contract or the real implications of it in circumstances in which there was a risk under the contract that "the plaintiffs might well be financially destroyed." It was therefore a very different factual scenario from that which is before this Court.

Interest

1. Ground 8 of the amended notice of appeal relates to the primary judge's awarding of interest at the rate of 10% per annum, being the rate prescribed under the Guarantee. Senior Counsel for Mr Naegeli made it clear during the hearing of the appeal that Mr Naegeli did not seek interest in the event that he recovered the full amount of $6.5 million he sought under the Guarantee, as that sum "included a very healthy compensation for being kept out of money which was inherent in the commercial deal." He later submitted that "[i]f we are getting what we were promised, it would be inconsistent of us to also get interest."
2. It is thus unnecessary to determine ground 8 of the amended notice of appeal.
3. Interest was awarded against each of the second and third defendants at trial and there is no appeal against those orders.
4. However, interest under s 100 of the Civil Procedure Act is, of course, in the discretion of the court. In the particular circumstances of this appeal, where Mr Naegeli will as a consequence of this Court's orders receive, against all three of the defendants to his claim, what is on any view an exceptionally generous return of $6.5 million upon his initial investment of $500,000, in my judgment the appropriate order is that Mr Naegeli should not be paid interest by any of the appellants on the $6.5 million up to the date of the primary judge's orders. After 16 June 2023, being the date of the primary judge's orders, interest should be paid by the second and third appellants under s 101 of the Civil Procedure Act. Whilst this involves a variation to the orders made by the primary judge on 16 June 2023 as against the second and third appellants, in circumstances in which the appellants appealed "from the whole of the decision below", it is open to this Court to take this step in order to achieve what it considers to be a just outcome in all of the circumstances.

Conclusion

1. Neither party made any submissions as to the costs of the appeal. In these circumstances, there is no reason why the appellants should not pay Mr Naegeli's costs of the appeal.
2. For the reasons set out above, the orders that I propose are: 1. The appeal is dismissed. 2. Ground 1 of the cross-appeal is allowed and it is unnecessary to determine ground 2. 3. The orders made by the primary judge on 16 June 2023 are set aside and in lieu thereof it is ordered: 1. Judgment for the plaintiff against the defendants for $6.5 million. 2. Interest is payable from 16 June 2023 at the rates prescribed under s 101 of the Civil Procedure Act 2005 (NSW). 3. The defendants to pay the plaintiff's costs, as assessed or agreed. 1. The appellants to pay the respondent's costs of the appeal.
3. GRIFFITHS AJA: I agree with Stern JA. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 March 2024