Davey v Challenger Managed Investments [2003] NSWCA 172 | Case summary

Judgment 1 HANDLEY JA: In July 2000 the appellants, who were born in 1924 and 1930, and were widows and pensioners living in their own homes at 3 and 9 Hardy Avenue, Riverwood, agreed to guarantee a loan of $210,000 for three years from Challenger Managed Investments Ltd (the lender) to a company controlled by their children, Lynne Davey and Glen Crees (the children). They also agreed to mortgage their homes to Permanent Trustee Australia Ltd (the mortgagee) as security for the debt. 2 The appellants had no capacity to repay the debt from their own incomes. Moreover the children, who were embarking on a new business venture, and needed to borrow part of their initial capital, were in a similar position. They also guaranteed the loan, but would have little chance of repaying the debt if their company failed. 3 Unfortunately the company did fail. Although the mortgage was only granted on or about 14 August 2000, the company was in default by the following February, and notices under s 57(2)(b) of the Real Property Act were served on the appellants on 28 February. 4 The mortgagee commenced proceedings to recover possession of the properties in April 2001, and the appellants responded by defences and cross-claims, seeking relief in equity or under the Contracts Review Act. They claimed to be persons in a position of special disadvantage which should have been known to the lender and the mortgagee. These were charged with unconscionable conduct, and the contracts were said to be unjust when they were made. The appellants also claimed that they did not understand the mortgages or their practical effect, and they had not obtained independent legal advice before they had executed the security documents. 5 The action went to trial before Cripps AJ, who rejected the appellants' defences and cross-claims, and entered judgment for possession in favour of the mortgagee. The Judge found that the appellants were volunteers. They admitted signing the security documents and did not raise defences of non est factum. However, they denied that they had received any advice about the legal consequences of what they were doing. 6 The appellants saw a solicitor, Mr Grellman, on 26 and 27 July. On the second occasion he witnessed their signatures on the security documents and on certain declarations and acknowledgments. He received his instructions from Messrs Olliffe and McRae, solicitors, of Griffith, who were acting for the children. He was approached because he was the city agent for that firm and he had no connection with the lender or the children. 7 Mr Grellman made and retained extensive notes. On the first occasion he told them that the documents which were to be the subject of his advice had not been received and he asked them to return the following day. They did so and he said he spent 50 minutes explaining the documents to them and that neither said anything to him which led him to think that they had not understood his advice. 8 Each of the appellants signed a statutory declaration stating that they were one of the guarantors for the borrowers named in certain loan and security documents relating to their properties. Each acknowledged having received independent legal advice about the documents and having freely and voluntarily signed them (blue 95-6). 9 They also signed acknowledgments of legal advice which stated that they had instructed Mr Grellman to give them legal advice about the documents. The acknowledgment signed by Mrs Crees said that she had produced to the solicitor evidence of her identity in the form of a rate notice and pension card. The acknowledgment summarised the effect of the solicitor's legal advice in clauses 3(a) to (f). Clause 4 acknowledged that the solicitor had advised them that he did not profess any qualification to give financial advice and that he had advised each of them that if they had any questions about any financial aspect of the transaction they should consult an accountant or other financial counsellor before signing the documents. In paragraph 5 each stated that after receiving the above advice they had freely and voluntarily signed the loan documents. Although only the acknowledgment by Mrs Crees is included in the appeal book (94), the affidavit of John Michael Thomas of 31 August 2001 exhibited copies of certificates signed by each appellant (Ex 6, 187). 10 Each appellant also signed acknowledgments, addressed to the lender, confirming the receipt of independent advice and stated that they offered the mortgages over their properties willingly and without undue influence (97-8). 11 The security documents themselves comprised the two mortgages, a deed of loan, and a deed of guarantee and indemnity. The deed of loan was a 25 page document (112-37) which the appellants executed and also initialled on every page, but page 21 and the schedule are not in the appeal book. The deed of guarantee and indemnity (146-54) comprised 6 pages, and there were the mortgages (138-46), each of 4 pages, and the incorporated memorandum of 58 pages (17-80). 12 Mr Grellman's notes itemised nine key points as an aide memoire (90-1). It was not suggested to him in cross-examination that they were a fabrication. The key points were that the ladies were parties to the loan guaranteeing the debt of the company, if the company defaulted the lender could look to them, they could lose their homes, and if there was a short fall after the sale of the homes the lender could still pursue them, there was a significant risk, the loan was not limited to $210,000, and they were advised to keep a watch on the loan account. 13 The appellants admitted that they were asked to hand over the deeds of their homes. Mrs Davey admitted in cross-examination that it was possible that she had received the advice that Mr Grellman claimed to have given her but she could not remember it. On the other hand Mrs Crees said she distinctly remembered not receiving any legal advice, and had been simply asked to sign the documents. She denied that the meeting lasted some 50 minutes and she denied having any understanding of the legal consequences of the transaction. She said she had never given a mortgage or guarantee in her life before, but it transpired that she had mortgaged her home on 13 March 2000 as security for a loan of $100,000 for the benefit of her son (blue 1). This had to be paid off out of the subject advance (106), and as a result the company only received a cash advance of $75,219.56 from the new mortgage (106). 14 On 30 October 2000 the appellants granted further mortgages (159-62) over their homes to Australian Regional Credit Pty Ltd to secure fluctuating advances to the borrower in the nature of an overdraft facility (156-7). 15 The Judge accepted Mr Grellman's evidence and said (para 29) that he found the evidence of the appellants about their meetings unreliable. 16 On that basis he was not satisfied that the lender had engaged in any unconscionable conduct. The relationship between the appellants and the children did not give rise to a presumption of influence, and the lender had no notice, actual or constructive, of any undue influence. On this basis he concluded that the contract was not unjust for the purposes of the Contracts Review Act. 17 The appellants did not seek to disturb his Honour's primary findings but challenged his overall approach and the inferences he drew from those findings. Counsel for the appellants submitted that they had not understood the transactions. The receipt of independent legal advice did not necessarily confer immunity on the lender or answer the unconscionability argument based on what was said to be their positions of special disadvantage in relation to the lender. 18 The lender knew the ages of the appellants (93), their relationships with the persons behind the borrower (88), and that they were volunteers providing security for the children. It also knew that they were pensioners (91, 94) who had lived most of their lives in these houses (7). 19 Although the appellants submitted that they were in positions of special disadvantage this was not the case. They were not illiterate and English was their first language. They were in full possession of their faculties, and although they were elderly they were in general good health. A mortgage and a guarantee are well known transactions in the community and Mrs Crees had entered into a similar transaction for the benefit of her son only a few months earlier. 20 The transaction involved guarantees and mortgages to secure a cash advance for the benefit of the children and repayment of an existing mortgage debt in favour of another lender. As Hodgson JA said during argument, the appellants had a relationship with the real borrowers that made it reasonable for the appellants to give them assistance. The appellants had, to the knowledge of the lender, obtained legal advice which has been found by the trial Judge to be both independent and competent. As far as this lender was concerned, this was a cash advance to the company and it had no direct dealings with the appellants. If, contrary to the views expressed above, the appellants were in some position of special disadvantage, the lender did not have actual or constructive notice of this. 21 Independent legal advice was desirable, if not necessary, in this case to ensure that the appellants, who were volunteers, understood the transactions and their implications, and, with an appropriate understanding, executed the security documents freely and voluntarily. They received such advice before they executed the documents. The appellants were seen together, in the absence of the children, who were in the country. The appellants suggested that each of them should have been interviewed separately, but Mr Grellman was not aware of any conflict of interest, or even the possibility of such a conflict, and there was no need for separate interviews. 22 Mrs Crees had mortgaged her home earlier that year to secure a loan of $100,000 which was made available to her son (blue 1). Mr Grellman did not know this, and it is possible that Mrs Davey did not know this either. Mrs Crees denied the existence of this mortgage until confronted with it in the witness box. This mortgage gave her an interest in the subject transaction because it was to be paid off out of the proceeds of the new loan and as a result there may have been some conflict between the two appellants. However they have had common representation and made common cause throughout and the possibility that Mrs Davey may have had a different entitlement to relief was never explored. The existence of this earlier mortgage may affect the rights of contribution as between the appellants, and require Mrs Crees to accept a greater share of the common burden, but that question is not before the Court. 23 The children should probably never have asked the appellants to hazard their homes in this business venture, but misrepresentation or undue influence on their part have never been alleged. The age and status of the appellants as pensioners did not deprive them of the legal capacity to do what they did. If the business had been successful the children would have been launched on a business career and the mortgages would have been discharged. 24 The Court has no way of knowing how many business ventures financed by parents in this way are successful for the benefit of the community and all concerned. Courts only ever see the cases where the business has failed and the mortgages are enforced. The Court might be doing a disservice to the community if it treated age and pensioner status as disabling parents from helping their children in this way. The law has not taken that step, and under ordinary principles the appellants have no proper claim for relief. 25 Although the appellants relied on the Contracts Review Act there was in truth no separate basis for relief under it. It was not said that the terms of the contracts and mortgages were unfair, and it was not suggested that the transaction itself was unfair. This was not a case where negotiations on the terms of the contracts was either needed or appropriate. The appellants had to decide whether they would proceed with the transaction, but if they did there was nothing to negotiate. 26 If there was any unfairness the lender was not responsible for it, and had no notice, actual or constructive, of that unfairness. As a general rule the Court will not grant relief under the Act against a party who is in that position. See Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482. 27 The appeal fails and should be dismissed with costs. The orders made by Cripps AJ are therefore confirmed. 28 HODGSON JA: I agree with Handley JA. 29 GROVE J: I agree with Handley JA.

Davey v Challenger Managed Investments

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Judgment (14 paragraphs)

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