First Mortgage Managed Investments Ltd v Basil James Pittman

First Mortgage Managed Investments Ltd 3First Mortgage Managed Investments Ltd ("FMMI") is the manager of an investment scheme which obtains funds from the public and lends them on the security of first mortgage. The loans are invariably for a relatively short term, here a period of two years, and are interest only loans. 4FMMI has a series of requirements that must be fulfilled before monies are advanced and loans are completed. Those requirements are to be found in a document which was before the Court called "A Prudential Lending Manual". Mr Michael Boyce, a solicitor of the Supreme Court of Queensland and of the Supreme Court of New South Wales, was the Executive Director and Compliance Officer of FMMI. He was the key person noted on the Australian Financial Services Licence held by FMMI. His role as Executive Director and Compliance Officer involves the checking of, and advising further in respect of, credit and valuation analysis, the documentation of the loan facility and the settlement of the loan, acting in his capacity as a solicitor. It was he who approved the loan in question. 5Mr David Wilson was at all material times the Director and Lending Manager of FMMI. He had the day-to-day conduct of the file involving the loan in question. He was responsible for preparing much of the internal documentation, or else causing it to be prepared. 6It is necessary to identify the fact that there are two entities involved on the plaintiff's side of the proceedings although, the parties did not suggest that I needed to differentiate between either of the two organisations. FMMI, which is the plaintiff, is an unlisted public company established in 1999 and which, as I said above, specialises in offering first mortgage investments to investors. It holds an Australian Financial Services Licence. It raises monies from investors and then makes those monies available to be loaned to borrowers. 7The second corporate entity is First Mortgage Investments Pty Limited ("FMI") which is the mortgage manager to FMMI. It is responsible for the efficient management of the mortgages held by FMMI. The evidence suggested that the duties and responsibilities of FMI were: (a)Assessment of loan applications and issuing letters of offer; (b)Attending to credit analysis and valuation requirements for each loan; (c)The day-to-day management of the mortgages ensuring payments are made and covenants adhered to; and (d)Issuing as necessary all default proceedings to obtain recovery of outstanding monies. 8The boundary between these two corporations was, in practice, not entirely clear. 9I will refer compendiously to the organisations as "First Mortgage" unless there is a need to differentiate between them.

Basil James Pittman 10The first defendant, Basil James Pittman, was born in 1938 and has lived all of his life on a property on the Bells Line of Road at Kurrajong Heights. He is now 74 years old. 11He left school at the age of 16 and went to work locally as a gardener, flower and vegetable grower. He also worked in an apple orchard and as a builder's labourer. He subsequently became an orchardist. In 1964, he inherited one of the properties the subject of these proceedings upon the death of his mother's mother. It was subject to a life interest in favour of his mother who died on 31 January 1994. In 1965, he purchased another lot of land on the Bells Line of Road. In 1972 or 1973, together with his half brother, Rex Neil Webster, he jointly purchased another property on the Bells Line of Road which adjoined the property which he had inherited. 12He and his half brother, Mr Webster, have lived in the house on the inherited property for all of their life. They shared the house with their mother prior to her death. 13He and his brother share a room. The house has no running water. Water is available from a standing tank. They use a wood fire for their cooking needs. Although the house has an electrically operated stove and microwave, both of these are in poor condition and are not used. Photographs of the house demonstrate that it is rudimentary in its design, layout and construction. It is poorly maintained. It is adequately described as simple, plain and barely adequate accommodation. 14With the exception of a few hundred dollars in share dividends from NRMA (now Insurance Australia Group Ltd), Mr Pittman's income has been and continues to be from the sale of fresh fruit produce grown on part of his land being Lot 8. He has, and has had, at all material times relevant to this case, no other source of income. He has no superannuation. In evidence, he estimated that the combined income of Mr Webster and himself is about $30,000 gross per year. His income tax returns suggest that his income is in fact a lower figure than that. 15Mr Pittman's commercial experience has been almost non-existent. In about 1977, he obtained the loan of some money to construct three dams on his properties from an agency of the New South Wales Government. He had purchased a tractor and piece of orchard equipment by hire purchase in 1977. Although he obtained approval for a loan from the Commonwealth Bank of Australia to enable him to purchase the block of land which he jointly acquired with his brother in 1972 or 1973, he ultimately did not call upon that loan and paid cash for the land. 16He has had no borrowings prior to the events in question and the evidence does not suggest he had ever taken out a mortgage or had any commercial dealings whatsoever except for those rudimentary ones which would ordinarily arise from his occupation as an orchardist. Like his brother, he had no understanding of the complexities and risks of property development, nor of the complexities of the financing and funding of such projects. 17In giving evidence, I formed the clear impression that he was an honest and truthful witness. It is clear that his evidence was on some occasions inaccurate. I accept the submissions of counsel for First Mortgage that he had "... an imperfect recollection of relevant events". Nevertheless, I am inclined to, on the whole, accept his evidence.

Rex Neil Webster 18The second defendant, Rex Neil Webster was born in 1943 and accordingly is now 69 years old. 19He too left school at the age of 16. Although he sat for his Intermediate Examination, he failed all of his subjects and was a poor student. After leaving school, he worked as a labourer for about four years on a local orchard. He then commenced to work for the New South Wales Government in the Department of Main Roads (and it successor agencies) as a ganger. A ganger is a person who is involved in building or repairing roads. It is another name for a labourer. He held that employment for over 30 years. He is presently employed, and has been since 2003 by a company that buys and sells fresh produce. He works part-time as a labourer doing odd jobs. 20In his evidence, he described his current living arrangements as according with the description which I have given above. He notes that he has never married and then gives this description of his own capacity: "I don't tend to read very much. The only things I normally read are the Daily Telegraph, (the fishing section, the weather and perhaps the front page sometimes) and some fishing magazines. I do not read books. I would not be able to sit down long enough to read one." 21The only land that Mr Webster owns is the lot which he jointly owns with Mr Pittman. He borrowed some money from the Commonwealth Bank in order to fund that purchase. With that exception, he had never purchased any property. Prior to the relevant events in question, he had never seen a solicitor and had made only a few major purchases in his life, which essentially involved motor vehicles, a tractor and a fishing boat. He paid cash for each of these. 22The only shares that he has ever owned were, like his brother, IAG shares, which he obtained on the demutualisation of the NRMA. 23It is fair to say Mr Webster is an entirely unsophisticated and simple man who, at the time in question, had no commercial knowledge or sense at all and had had no real experience in matters of significant borrowings, mortgage transactions, securities and the like. 24He certainly had no experience in the funding for, nor the undertaking of property development. He had no knowledge of any of the risks associated with such projects. 25Mr Webster was, in my assessment, an honest witness. He had little real memory of the events. Some of his evidence was clearly a reconstruction, and it was occasionally difficult to be entirely certain which parts of his evidence were original recollections, and which parts reconstruction. As well, from time to time, in cross-examination, I had a real sense that he did not understand the question and its purport, although he proceeded to give an answer, often making concessions against his interest. Whilst, I accept the objective and contemporaneous accounts, particularly from documents, where these differ from his recollections, I generally accept his evidence.

Other relevant individuals 26It is convenient at this stage of the judgment, in introducing the parties to identify two other individuals whose conduct will form part of the narrative of the events. The first of these is Ms Margot Locke. Ms Locke was joined to the proceedings as the second cross-defendant. She filed a defence, but when the proceedings were called on for hearing she did not appear. I was informed by counsel that she had previously been represented when the matter was before the Court on earlier occasions, but that the Court had been informed that she did not intend to appear at the final hearing and that she would "...submit to any order of the Court". I have proceeded with this judgment upon the basis that as she has not appeared, any evidence that she has filed has not been read, and that the evidence about Ms Locke comes before the Court from a variety of other sources. 27Ms Locke was apparently known by a number of other names, but it is sufficient for the purposes of this judgment to maintain the reference to her as Ms Locke. 28Ms Locke came into the lives of Mr Pittman and Mr Webster in a significant way in about 1990. At that time, she rented the property adjoining the property where Mr Pittman, Mr Webster and their mother lived on the Bells Line of Road. During the time she was living on the property, she gave birth to a son. Apparently Ms Locke had a difficult experience in raising her son. This led her to become friendly with Mr Pittman and Mr Webster's mother, Ena Fairlie Webster. As a consequence, Ms Locke was a regular visitor to the house where Mrs Webster lived. 29During the very severe bushfires of late December 1993 and early January 1994, Mr Pittman, as a member of the local rural fire brigade, undertook operations involving Ms Locke's property. He came to know her somewhat better during that time of crisis. 30Ms Locke used to visit Mrs Webster regularly. She would stay for a meal about once a week. After Mrs Webster's death in January 1994, Ms Locke continued to visit regularly and share a meal with Mr Pittman and Mr Webster. They were obviously friendly. 31It appears from the evidence that Ms Locke was an apparently sophisticated, charming and somewhat beguiling woman. She engaged in land development. She operated her business affairs through a number of companies or trusts including Forest Group Pty Ltd, Skyfarm Pty Ltd, Skyfarm Holdings Pty Ltd and Total Property Developments Pty Ltd. The evidence suggests that she used a number of names to describe herself in her various business activities including Christina Locke, Margaret O'Dell, Christina O'Dell, Isobel O'Dell. As well, there appear to be a number of other bodies which could have been companies or trusts, the evidence was unclear, through which she conducted business. They included: Ribbon Master, M & M Holdings, M & J Family Trust, Remony Farm, Pecks Farm Pty Ltd and Pecks Family Trust. The evidence discloses that Ms Locke was undertaking developments of one sort or another at Valley Heights in the Blue Mountains, Springwood in the Blue Mountains, Silverdale and also near Camden in the area of the Razorback range. There may have been others. 32Ms Locke, according to the evidence of Mr Webster, which on this matter I accept, was also capable of exploitation of others who were less sophisticated than she. Having inveigled herself into the lives of Mr Pittman and Mr Webster by providing limited companionship, and some very limited assistance with domestic chores after their mother's death, some chores around the orchard and providing some signs advertising their produce for sale by the side of the road, she prevailed upon Mr Webster to undertake labouring tasks for her upon the promise that she would pay for his work. She did not ever do so. As well, she persuaded Mr Webster to advance her some money by obtaining a Citibank Visa Gold Card which was used to pay various of her expenses. Despite her promises and assurances, Mr Webster was never reimbursed for these expenses. 33As the evidence shows, Ms Locke was a woman who was prepared to lie and deceive in order to obtain money and valuable benefits to be used for her own interests at the expense of others. 34She was pushy and forceful, was persistent and demanding and, it would appear from the evidence, driven by her single purpose of enriching herself through land developments. She was manipulative, greedy and an exploiter of the vulnerable. 35Her conduct in the circumstances was thoroughly discreditable. Mr Pittman and Mr Webster were no match for Ms Locke.

Emma O'Callaghan 36Ms O'Callaghan was a witness in the proceedings. In January 2003 she started work as a paralegal with the firm Christopher M. Edwards. In January 2004, she commenced practice as a solicitor of the Supreme Court of New South Wales on a full-time basis. She worked from that time onwards for the firm which carried on practice in Richmond. Her position as a solicitor specialised in conveyancing and associated transactions. Her functions and responsibilities included the full carriage and responsibility for the completion of conveyancing transactions including sale and purchase of residential property, refinancing of commercial property, drafting and registration of commercial leases, negotiation and the drafting of commercial agreements. She regularly explained mortgage and finance documents to clients and was also involved in the checking of finance approvals. 37Christopher M Edwards had acted for Ms Locke from about 2004 onwards. Ms O'Callaghan dealt with Ms Locke personally in relation to a conveyance in late 2004. Between late 2004 and October 2006 she was instructed by Ms Locke in relation to a number of matters, predominantly conveyancing matters involving refinancing and sales of property either by Ms Locke or her associated companies. A conveyancing paralegal, Ms Martin also undertook work for Ms Locke under the supervision of Ms O'Callaghan or the principal of the firm, Mr Edwards. 38The documentary evidence of communications between Ms O'Callaghan and Ms Locke in 2006, satisfy me that Ms O'Callaghan was familiar with Ms Locke and was able to deal with her, on relatively informal terms because of that familiarity. She was in all respects, Mr Locke's solicitor. 39Ms O'Callaghan provided advice to Mr Pittman and Mr Webster with respect to their entry into the loan agreement with First Mortgage and the execution of the security documents relating to that loan agreement. She was also involved as a solicitor in giving them advice with respect to a refinance transaction which occurred in 2008. Hers was the only legal advice which Mr Pittman and Mr Webster had access to, or received, with respect to the First Mortgage transaction. 40As a witness, Ms O'Callaghan had little independent recollection of her meetings with Mr Pittman and Mr Webster. My clear impression was that she was largely reliant upon her general practice. As later analysis shows, her evidence was often inaccurate. It is necessary to approach the acceptance of her evidence with care and caution. That is not because she was a dishonest witness. On the contrary, she was manifestly honest and made concessions against her interests, but she was not a wholly reliable witness.

The Land 41The Bells Line of Road runs generally in an east-west direction across the Blue Mountains from North Richmond to Bell. In the area of Kurrajong Heights to Bilpin, the land use is predominantly rural, generally consisting of small lots, which are used for principally horticultural purposes, such as orchards, with some vegetable and flower growing areas. Roadside fruit and vegetable stalls are commonplace. 42Properties along the Bells Line of Road are bordered to the north by the Wollemi National Park and to the south by the Blue Mountains National Park. 43The land is predominantly owned by residents of long standing, mixed with city dwellers who retreat to the area for peace and quiet and bush solitude. 44The properties taken by First Mortgage as security for the loan were on three separate titles. It is unnecessary in this judgment to give the full title details. It is the policy of the Court not to do so. I will refer to the land as Lot 8, Lot 9 and Lot 23 respectively. The Lots were adjoining and had only a few buildings on them including the old home in which Mr Pittman and Mr Webster lived, which was located on Lot 8. 45Lot 8, known as the house block, was about 58 acres, or 23.66 hectares. It had a number of dams and an orchard on the property. There were two sheds. The house was described by First Mortgage's appointed valuer as built about 1900, of weatherboard and corrugated iron, which was in extremely poor condition. I have earlier described the conditions inside the house in terms of services and facilities. So poor was the house that the appointed valuer assessed it as having no value at all. 46Lot 9, known as the middle block, was about 53 acres or 21.58 hectares. It had no agricultural improvements such as a shed or an orchard. It had a very poor quality, old, two bedroom cottage on it. The appointed valuer described it as being "in extremely poor condition". 47Lot 23, known as the bottom block, was the land owned by both Mr Pittman and Mr Webster jointly. It consisted of about 63 acres or 25.55 hectares. It had two dams on it but had no buildings at all. 48It can be observed that all three secured properties were rural, relatively small holdings and without any significant infrastructure investment. The houses were in very poor condition. There was no sophisticated horticultural or agricultural enterprise being undertaken on the land. This picture, drawn from the appointed valuer's reports, was one available to First Mortgage, if the report had been read.

First Mortgage transaction 49The transaction involving First Mortgage, which it is sought to set aside, occurred in December 2006. There was a subsequent variation in February 2008. 50Before coming to a description of all of the issues, and a further consideration of the facts which arise, it is convenient to set out the events of December 2006, the terms of the mortgages and the circumstances in which they came to be signed. 51Ms Locke and First Mortgage had dealings prior to those involving Mr Pittman and Mr Webster. In those dealings, Ms Locke instructed Ms O'Callaghan to act for her. 52So far as appears from a letter dated 2 November 2006 from Christopher M Edwards to Ms Locke, the previous dealings had at least these features: (1)the amount of the loan was more than enough to pay out the previous lender the sum of $2.46M; (2)the loan was secured over four separate properties in the Bilpin and Kurrajong Heights area; (3)the outgoing lender was entirely different from the outgoing lender in the transaction involving Mr Pittman and Mr Webster; and (4)Ms Locke's solicitor, Ms O'Callaghan or her assistant Ms Martin had been dealing with First Mortgage. Thus, by 27 October 2006, when the loan was settled, First Mortgage knew that the firm Christopher Edwards was Ms Locke's solicitor. 53The particular context for the December 2006 transaction commences in November 2006. Ms Locke approached First Mortgage because she wished to arrange the refinancing of an existing facility which can be conveniently called the "Flamanda facility". 54On 1 November 2006, which was within a few days of the settlement of the previous $2.46M loan, Ms Locke sent a proposal for a further loan by email to Mr David Wilson at First Mortgage. She described it as "loan refinance of Lots 8, 9 and 10... - Bells Ln Rd, Kurrajong Heights, NSW. Owned in our private names, not a company". Further details were provided. The terms of this and further emails between Ms Locke and First Mortgage show a degree of familiarity with each other, which must have been engendered, at least in part, from the October transaction. 55Mr Wilson responded by asking whether she wanted First Mortgage to issue an offer to her. She responded affirmatively. There was further correspondence between Ms Locke and Mr Wilson about the whereabouts of an offer. On Friday 3 November 2006, Mr Wilson sent an email to Ms Locke in the following terms: "These lots, PR Data, shows them in different names, but of course that is not always correct. Please confirm that they are all in the name of Skyfarm." 56Ms Locke responded in the following terms: "Hi David, you are correct, the names will be Basil James Pittman and Rex Neil Webster. These two people are the borrowers." 57On the next business day, Monday 6 November 2006, First Mortgage issued a Letter of Offer. It was addressed to Mr Pittman and Mr Webster, and it, relevantly, included the following: "RE: FIRST MORTGAGE MANAGED INVESTMENT LIMITED PROPOSED ADVANCE TO YOU We refer to the recent submission received by us from First Mortgage Investments and wish to advise that our Company is able to make an advance to you, the principal terms and conditions of which are as follows: This offer is conditional upon receipt of part of an establishment/application/management Fee in the sum of $1,100.00 in favour of First Mortgage Investments Pty Ltd. In addition you will be required to pay a valuation fee, a quote for which we will obtain upon receipt of ALL signed documents together with your cheque for the establishment/application/management fee. We cannot process your loan until we receive BOTH the establishment/application/management fee and valuation fees. Principal $2,030,000.00 Interest Rate 15.95% reducing to 10.75% for prompt payment. Method of Payment Interest only monthly in arrears which will provide for the appropriate amount to be debited to the Borrower's Account THREE (3) DAYS PRIOR TO THE DUE DATE and shall be made to the credit of First Mortgage Managed Investments Limited - Internet Account Term of Loan Twelve (12) months from date of advancing of monies Proposed Mortgagor BASIL JAMES PITTMAN REX NEIL WEBSTER Proposed Borrower BASIL JAMES PITTMAN REX NEIL WEBSTER Guarantors (if applicable) Director and/or Shareholders of Mortgagor (if Company) Method of Payment By Bank Periodical Payment Minimum Valuation 1/ $1,200,000.00 2/ $ 750,000.00 3/ $ 950,000.00 Security 1/ Lot 8 Bells Line of Road, Kurrajong Heights (a) First Registered Mortgage over property situate at 2/ Lot 9 Bells Line of Road, Kurrajong Heights 3/ Lot 10 Bells Line of Road, Kurrajong Heights (b) Loan Agreement between the Borrower/s and First Mortgage Managed Investments Limited (the Lender) (c) First Deed of Assignment of Rentals in respect of all leased mortgaged premises.

58It is to be observed that First Mortgage made this offer without any application from Mr Pittman and Mr Webster, and without any knowledge of who they were, nor what their capacity to service the loan was. All that was required was that the land meets the minimum specified value. The offer was made solely upon the basis of First Mortgage's dealings with Ms Locke, and any information which she had provided them about the amount necessary to be borrowed, the term of the loan and the purpose of the loan. First Mortgage knew nothing of Mr Pittman and Mr Webster, but were content to offer to lend them a multi-million dollar sum. 59Having regard to the evidence up to this point in time, with respect to the First Mortgage loan and the previous loan transaction in October 2006, I would be prepared to find that by this time, First Mortgage knew of Ms Locke, had had previous dealings with her, were aware of, at least, one other of her business entities: "... in the name of Skyfarm", and had a sufficient understanding of her various business ventures for which the loan was being sought, as well as her overall financial position. 60At the end of the letter, there is provision for acceptance of the Letter of Offer which was to be signed by Mr Pittman and Mr Webster. It is in the following terms: I/We BASIL JAMES PITTMAN and REX NEIL WEBSTER HEREBY ACCEPT the principal terms and conditions set out herein and advise that the Title Reference to the above property is .................................................. and our Solicitors who will be attending to our interests in this transaction are .......................... DATED this day of 2006. .............................................................. Signature BASIL JAMES PITTMAN .............................................................. Signature REX NEIL WEBSTER

61The Letter of Offer was accompanied by two declarations under the Consumer Credit Code, and a number of other documents. 62It appears that the two declarations under the Consumer Credit Code were each signed by Mr Pittman and Mr Webster on 10 November 2006, before a Justice of the Peace, Mr Kelvin Tsui. Mr Tsui was the proprietor of Rabbit Photographics in Richmond. 63According to his evidence, the signature appearing as the witness to these documents is his. Understandably, he has no specific recollection of the occasions when he witnessed these signatures. However, he does say: "In each case ... I would not have signed as witness of the document without having the signatory or signatories on the documents that I was required to witness." 64Mr Tsui does not, in his evidence, suggest that prior to signing any documents, he requires the production to him of any documents of identification for the individuals who are signing the documents. He does not suggest that it is any part of his function to check that the person who is purportedly signing a document in a particular name, is in fact that person. 65Mr Tsui knew Ms Locke well, and used to see her once or twice a week. He says that he had witnessed a number of documents for Ms Locke over the years. He says that he did not recall the names of Mr Pittman and Mr Webster although, in 2010, when shown a photocopy of a driver's licence of Mr Pittman and Mr Webster, he said that he believed that he had met them before and that he did remember their faces. However, he was unable to describe the circumstances in which he had met them. 66The signatures of Mr Pittman and Mr Webster accepting the offer were not required to be witnessed. The signed documents were sent to First Mortgage by Ms Locke. 67Included in the signed documents were a Statement of Personal Particulars, and an Asset and Liability Statement. These provided details with respect to Mr Pittman and Mr Webster. They were completed by Ms Locke. They were undoubtedly signed by Mr Pittman and Mr Webster. However, having regard to the incorrect particulars recorded, I think it likely that the documents were signed before they were fully completed, because I think that had the particulars, which I will shortly identify, been included at the time the documents were signed, it is likely that Mr Pittman and Mr Webster would have noticed these discrepancies. This would have given rise to one or more queries and a conversation with Ms Locke. There is no evidence that this occurred. In those circumstances, I am satisfied that the Statement of Personal Particulars was incomplete at the time it was signed. 68The Statement of Personal Particulars, which was completed by Ms Locke, is false in a number of respects. They are: (a)that Mr Pittman's net weekly salary/wage was recorded as $5,000. Mr Pittman's annual income at about that time was in the order of $15,000. He had never earned $5,000 a week, or anything like that; (b)Mr Webster's weekly salary was recorded as $4,000, which was false because his annual income was, like Mr Pittman's, about $15,000; (c)the nearest relative who was not living with them was recorded as Ms Margaret Anne Locke, who was said to be their niece. Ms Locke was not a relative of theirs, nor was she their niece; (d)their solicitor and accountant was recorded as Christopher Edwards/Leanne Martin of the firm Christopher Edwards at Richmond. Mr Pittman and Mr Webster had never met Mr Edwards or Ms Martin and had never retained them to act for them (although that occurred about a month later). 69The Asset and Liability Statement was also submitted with these documents by Ms Locke to First Mortgage. It is signed by Mr Pittman and Mr Webster, although it is not completed in their handwriting. I am satisfied that they signed the document before the relevant details were inserted. I am satisfied that Ms Locke completed these details. 70The Asset and Liability Statement records that between them, Mr Pittman and Mr Webster had $18,000 deposited in the bank, and had $18,000 cash on hand. It records their ownership of the land. It records their ownership of three motor vehicles, a modest amount for furniture, and farm equipment of $50,000. 71This document, which provided information to First Mortgage about Mr Webster and Mr Pittman, stood in stark contrast to the Statement of Personal Particulars. On the one hand, the Statement of Personal Particulars presented a picture of two elderly gentlemen who had lived all of their lives on the land in question and who were said to be earning on a net basis, a little under $470,000 pa. Yet, the Asset and Liability Statement suggests that they own only a very modest amount of furniture and farming equipment of indeterminate age, three motor vehicles, one of which was 35 years old, and they only had a total of $36,000 in cash and savings. 72Since they had no liabilities, according to the Asset and Liability Statement, including any obligation to make any payment on existing loans, there was a clear discrepancy in this information. If documents were read, with a view to a rational financial assessment by First Mortgage, and obtaining any understanding of who the borrowers were, and their capacity to repay the loan, such a discrepancy ought to have raised in the mind of First Mortgage real doubts about the accuracy of the information and the probity and prudence of making the loan. 73There was a later amendment to the front page of the Letter of Offer. It appears that on 14 November 2006, Ms Locke sent a letter to First Mortgage by facsimile, which said: "Please find as follows the amended front page of the loan offer accepting the interest rate of 10.75 % and a penalty rate of 15.95% of the loan to B J Pittman and R N Webster." 74Mr Pittman and Mr Webster both deny that the signatures on the accompanying document written against the interest rate are theirs. 75I am not satisfied that they signed those signatures. The signatures do not look like, to me, the signatures at the bottom of the document. In particular, the letter 'B' in Mr Pittman's first name and the letters 'BST' in Mr Webster's name are sufficiently different from the admitted signatures of Mr Pittman and Mr Webster for me to doubt their authenticity. I accept the denial of Mr Pittman and Mr Webster that they placed their signatures on that document. I am satisfied that Ms Locke signed their names on this document. 76On 1 December 2006, First Mortgage sent a letter to Christopher Edwards, Solicitor, relating to the proposed advance to Mr Pittman and Mr Webster, and the security documents. That letter enclosed the mortgages, the Loan Agreement, a Bill of Sale, a Deed of Assignment of Rentals, and a number of other declarations. The letter provided instructions to Christopher Edwards as to the requirements of First Mortgage with respect to the execution of the documents. First Mortgage required the return of the following documents: "The above documents duly executed by all parties denoted thereon and in respect of ALL SECURITY DOCUMENTS same MUST be witnessed by the Solicitor who executes the Solicitors Certificate." 77At the time this letter was sent, Mr Pittman and Mr Webster had not instructed Christopher Edwards (or Emma O'Callaghan) to act as their solicitors. Ms Locke had dealt with the solicitors, whom she had retained on her behalf for some years. Other than in a telephone call which occurred on 1 December 2006, First Mortgage had not checked with Mr Pittman or Mr Webster directly, that Christopher Edwards was acting for them. 78There is a dispute in the evidence which it is appropriate to note here about whether there was, at about this time, a telephone conversation between Mr Wilson on behalf of First Mortgage and each of Mr Pittman and Mr Webster. Both Mr Pittman and Mr Webster deny that there was any telephone call. The telephone records suggest otherwise. Mr Wilson has made what appears to be a contemporaneous note, and gives an account in his affidavit of the conversation which he says is based on the note. 79In light of my later findings about the nature of the dealings between Ms Locke, and Mr Pittman and Mr Webster, I do not accept Mr Wilson's evidence about the content of this conversation. In particular, I do not accept that Mr Webster nominated Christopher Edwards as his solicitor, as the note suggests. On the contrary, I am persuaded that the email between Ms Locke, and Ms O'Callaghan dated 6 December 2006 which gives a contrary account of the nomination of Christopher Edwards, is the accurate version. This account is consistent with the fact that Mr Pittman and Mr Webster did not know, and had never dealt with Ms O'Callaghan, or anyone at Christopher Edwards, but both Ms Locke and Mr Wilson had. 80Ms Locke had forewarned Ms O'Callaghan that the documents would be arriving. At about 1pm on Friday 1 December 2006, which was the date the documents were sent by First Mortgage, Ms Locke sent an email to Ms O'Callaghan in the following terms: "Hi Emma, First Investment Mortgages will be sending through loan docs for Basil Pittman and Neil Webster, that may reach you on Monday. If they do, we would like to see you for an hour on Tuesday morning at say 10-11am or, or if you receive them on Tuesday, then either late Tuesday afternoon or Wednesday morning at 10-11am. The loan sum will be used to pay out the existing mortgagee and fund the final works of the subdivision at Razorback. The loan drawdown is to be $650,250 to Flamanda Pty Ltd, some rates to June 07, balance to Forest Group Pty Ltd. Let me know when this turns up." 81The terms of this email suggest that there was a comfortable pre-existing relationship between Ms Locke and Ms O'Callaghan. They also suggest that Ms O'Callaghan had a reasonable degree of familiarity with Ms Locke's property dealings. The terms of the email, although written by Ms Locke, also suggests that Ms O'Callaghan was familiar with other business entities and enterprises of Ms Locke. 82Equally, the terms of this and any previous emails did not suggest, either to First Mortgage or to Ms O'Callaghan, that either or both of Mr Pittman and Mr Webster had any legal, or equitable, interest in any of Ms Locke's property projects. They were not identified as joint venturers, nor having any financial share at all. Their role, and their apparent willingness to offer all of their land, including their home, as security for Ms Locke's property ventures was unexplained, and unexplored. 83It is convenient to note here that, I am satisfied that the fact was that, at no time, did either of Mr Pittman or Mr Webster have any financial interest in the property development projects. They were not joint venturers with Ms Locke. They were not given any financial reward from the projects. They had no role to play in the projects (except when Mr Webster did a limited amount of unpaid labouring work on a subdivision in the Blue Mountains area, unpaid and for a short period). They had never been to the Razorback area, and knew nothing at all about the nature and size of the projects, their financial viability, the financial risks involved, the extent of borrowings for the project and the anticipated returns. They knew nothing of Ms Locke's own financial position, nor her capacity to service the loans. 84A little after that time, but still on 1 December 2006, Mr Wilson of First Mortgage sent an email to Ms Locke, the subject of which was "Perpetual tenancy". He said: "don't forget to get this off the title please." 85As a consequence of this email, on Sunday 3 December 2006, Ms Locke sent an email to Ms O'Callaghan and her colleague Leanne Martin in the following terms: "Hi Emma and Leanne, There is a interest registered on the title of Lot 8, one of the items in the Second Schedule that relates to a life interest, to Daisy Pittman. Daisy is deceased and some thirty years ago. This needs to be removed from the title and urgently. Can you arrange this, i.e. speak to them at the Land Titles Office. It is an oversight by them as when it was transferred to Basil Pittman after her death, it should of been automatically removed. They are helpful at the LTO about this. I have dropped in a certificate." 86On Wednesday 6 December 2006, Mr Pittman and Mr Webster attended at the offices of Christopher Edwards, where they were seen by Ms O'Callaghan. I will return to the detail of this conference in due course, but it was during this conference that all of the relevant transactional documents were signed.

The Loan Transaction 87In addition to the terms and conditions set out in the mortgage documents, it is appropriate to record the details of the loan transactions. 88The three lots of land which were being taken as security by First Mortgage were each valued for First Mortgage, in the following amounts, as at November 2006: Market Sale Forced Sale Lot 8 $1,030,000 $910,000 Lot 9 $ 790,000 $700,000 Lot 23 $ 970,000 $850,000 Total $2,790,000 $2,460,000

These valuations were prepared on a "cleared, fenced and watered basis". That was because of the instructions which the valuer received. The valuer noted that buildings on the various lots were in poor or very poor condition and added little to the value of the properties. 89As well, the valuer noted that "... the residential property market is past its peak in this area. Recent increases in interest rates may affect property values and selling periods in this area". 90The principal of the loan was said at one time to be $2,030,000. The interest rate was 15.95 per cent, which was reduced to 10.75 per cent if interest was paid on time. Some of the documents signed by Mr Pittman and Mr Webster also describe the principal sum borrowed as $1.9 million. I am satisfied that ultimately, the sum borrowed was the lower amount of $1.9 million. 91The Disbursement Statement dated 18 December 2006, which was prepared by First Mortgage, noted that disbursements, made from the drawdown of $1.9 million, amounted to: (a) First Mortgage for fees and performance $52,685 (b) First Mortgage for 1 year's interest in advance $204,250 (c) Payments to or on behalf of Flamanda Pty Ltd (the outgoing lender) $1,172,563 (d) Rates and miscellaneous expenses $2,262 $1,431,760

The balance of the loan monies was disbursed to one of Ms Locke's companies, named Total Property Developments Pty Ltd. The sum paid to Total Property Developments Pty Ltd was $468,240. 92The evidence satisfies me that none of the loan monies were paid to Mr Pittman or Mr Webster. The amount paid for rates was for their benefit because it relieved them of their obligation to pay the rates themselves. 93The term of the loan was 2 years. Interest for the first year was prepaid. The monthly interest that would need to be paid in second year of the loan from December 2007, was, if the payment was made on time, $17,021. It can be observed that one month's interest payment exceeded the annual income of either of Mr Pittman and Mr Webster. 94In summary, the advance by First Mortgage to Mr Pittman and Mr Webster had the following essential features: (a)The loan sum was about 72% of the valuation obtained by First Mortgage on a market basis. The rate was about 80% on a forced sale basis. (b)Those valuations recognised and revealed that the market for the sale of the security properties was past its peak and was likely to be slow. (c)The interest payments were unaffordable for Mr Pittman and Mr Webster, whose total annual income could not have paid two month's interest payments. (d)Neither Mr Pittman, nor Mr Webster, had, apart from the secured land, any other assets which could have been used to pay the loan.

6 November 2006 - Conference with Ms O'Callaghan 95The mortgage and other documents which were required to be signed by Mr Pittman and Mr Webster were sent directly by First Mortgage to Christopher Edwards. They arrived on the afternoon of 5 November 2006. 96The documents were first produced to Mr Pittman and Mr Webster at the conference which occurred the following morning at about 10am. 97It is clear that the firm Christopher Edwards had previously acted for Ms Locke and for some period of time. Ms O'Callaghan deposed to the fact that Ms Locke had been a client of the firm since late 2004 and that between that time and October 2006, she had been instructed by Ms Locke in relation to a number of matters which were predominantly conveyancing matters, including refinancing and selling of property owned by Ms Locke or her associated companies. Ms Leanne Martin, a conveyancing paralegal, also assisted in looking after Ms Locke. 98Ms O'Callaghan says that during her dealings with Ms Locke, she was never aware of the extent of her developments or the detailed financial arrangements place regarding those developments. I have no reason to doubt that evidence, although it is equally clear, as I have earlier said, that she had a degree of familiarity with Mr Locke's business entities and her affairs generally. 99It was Ms O'Callaghan's understanding on the morning of 6 December 2006 prior to that meeting, that neither of Mr Pittman or Mr Webster were going to derive any financial, monetary or other benefit from the loan, which was being made by First Mortgage. 100It appears that the meeting took somewhere between half an hour (according to Mr Pittman and Mr Webster) and about an hour (according to Ms O'Callaghan). There is no contemporaneous note of the precise length of the meeting. 101As the covering letter from First Mortgage records, there were nineteen separate sets of documents required to be either signed by, given to, or acted upon by Mr Pittman and Mr Webster, or Ms O'Callaghan. 102Ms O'Callaghan described the way in which she went about the conference in her evidence. Having carefully read her affidavit and listened to her evidence, I am persuaded that she has little, if any, accurate recollection of what happened in this conference, but honestly believes that she followed her usual procedure in explaining documents to Mr Pittman and Mr Webster, and providing the documents to them to be signed. Her evidence is, I am satisfied, largely a reconstruction. I do not regard it as generally accurate. 103Ms O'Callaghan agreed that it was not possible in the space of time allocated for this conference, for Mr Pittman and Mr Webster to have read the entirety of the loan agreement. It follows from that answer, which I accept, that it was not possible for them to have read in their entirety all of the other documents which were forwarded by First Mortgage to Ms O'Callaghan. This conclusion is fortified by the fact that neither Mr Pittman nor Mr Webster were good readers. Mr Webster's evidence about his reading ability suggests that he was simply not capable of reading these documents, even if given an extended period of time. 104The conclusion is also fortified by the fact that the Memorandum of Mortgage which was filed in the Land Titles Office, the terms of which were incorporated into each of the three impugned mortgages, was not available to Ms O'Callaghan. She did not know, for the purposes of this transaction, what those conditions were, none was a copy provided to Mr Pittman and Mr Webster. No explanation was, or could have been given to them about its contents. 105Even if Mr Pittman and Mr Webster were accomplished readers, having regard to the volume and content of the material with which they were being confronted for the first time in that conference, it would not have been possible for them to have read, let alone absorbed, the content of those documents. Much less would it have been possible for them to get any real understanding of the documents, from reading them, having regard to their limited capacity for reading and their limited intellectual capacity for understanding the content of these rather complex documents. 106The only information given to Mr Pittman and Mr Webster was that provided by Ms O'Callaghan, in the context of what they had been informed of, by Ms Locke, before they went to the meeting. 107It is also relevant to note that, so far as can be determined from the documents which were tendered, the bundle of documents which Ms O'Callaghan had before her at the conference, consisted of over one hundred pages and so far as can be determined, Mr Webster and Mr Pittman were required to sign their names on the various documents on over thirty occasions each. Ms O'Callaghan had to witness their signatures, formally by signing her name, on over thirty-five occasions. In addition, during the course of the conference, it was necessary for Ms O'Callaghan to, when completing the identity checking process, obtain documents of identity from Mr Webster and Mr Pittman, have those documents photocopied, certify the copy as being an accurate copy of their identity documents, and return those identity documents to them. 108Additionally, as is obvious from a number of the documents, Ms O'Callaghan had to complete various parts of the documents which were otherwise blank. Ms O'Callaghan also had to undertake a number of searches for the purpose of dealing with the encumbrance of a life estate on the title. 109Ms O'Callaghan did not prepare a separate diary note of all that occurred during this conference. She did not prepare any diary note recording the terms of any advice which she gave. However, during the conference, she completed, and observed, Mr Pittman and Mr Webster place their signatures on a pro forma document, which had been sent to her by First Mortgage, which was entitled "Acknowledgment of legal advice by proposed borrower". In cross-examination, Ms O'Callaghan initially accepted that this document was intended to, and did, record advice that she gave to Mr Pittman and Mr Webster. However, as the complete cross-examination demonstrated, the document recorded advice which could not have applied to this transaction, and which would could not have been, and, as Ms O'Callaghan ultimately accepted, was not given by Ms O'Callaghan to Mr Pittman and Mr Webster. It would be unreliable to accept this document as any form of a contemporaneous file note. 110Paragraph 3 of the "Acknowledgment" is in the following terms: "3. The advice given to me by my solicitor included that:- (a) by signing the loan documents I will be liable for regular payments of interest and repayment of the amount of the loan at the due date; (b) if I fail to make any payment on time, the lender can charge a higher rate of interest, and the lender's costs of rectifying that failure; (c) if I fail to comply with any of the terms and conditions of the loan documents including the obligation to pay principal and interest, the lender can sue me personally; and the lender may take possession of my property; and after notice, sell my property to recover the amount owing together with interest and other costs including solicitor's costs, the costs of selling the property and the costs of maintaining the property; and if the proceeds of the sale of my property are insufficient to satisfy the debt to the lender, the lender can sue me for the deficit, and (d) the additional obligations, rights and remedies set out in the loan documents if the Consumer Credit Code applies; (e) that I am/we are satisfied that our obligations to you will not adversely impact on our ability to meet all my/our other financial obligations (including living expenses) as and when they fall due; (f) that I/we confirm that I/we can comfortably afford all repayments resulting from this loan without incurring substantial financial hardship; (g) by making a Statutory Declaration verifying the giving of the advice I am making a statement having the force of an Oath which can be relied upon by the lender." 111In her affidavit, Ms O'Callaghan deposes to the fact that she gave the advice set out in that paragraph, paragraph 3, of the document. But she could not have and I do not accept that she did. In subparagraph (a), the advice purports to be that there would be regular payments of interest. Mr Pittman and Mr Webster were not making any payments of interest, let alone regular ones, at all. The loan did not require regular payments of interest for the first twelve months, because that interest was pre-paid. 112Subparagraph (e), namely that the borrowers informed Ms O'Callaghan that they were satisfied that their obligations under the proposed borrowing would not adversely impact their ability to meet all of their financial obligations, including living expenses, could not possibly have been, and was not, said by Mr Pittman and Mr Webster to Ms O'Callaghan. 113Subparagraph (f), which refers to assurances given by Mr Pittman and Mr Webster to Ms O'Callaghan could not have been said during the conference. The fact was that neither Mr Pittman nor Mr Webster could not "comfortably afford all repayments". They did not know what the amounts of the repayments were and they did not give any such assurance to Ms O'Callaghan. 114Ms O'Callaghan in cross-examination agreed that whilst she may have read out these paragraphs to Mr Webster and Mr Pittman, she did not draw their attention to the fact that they could not possibly have given those undertakings or declarations to the lender. She agreed it was incumbent on her to draw that fact to their attention, and that she did not do so. In light of these concessions, properly made, I do not accept Ms O'Callaghan's evidence in chief that she in fact read all of these matters out to Mr Pittman and Mr Webster. In those circumstances, I cannot be satisfied that she gave the legal advice set out in this Acknowledgement. On the contrary, I accept Mr Pittman and Mr Webster's evidence that little or no advice about the transaction was given to them by Ms O'Callaghan. 115The significant change in the evidence, between Ms O'Callaghan's affidavit and the answers that she gave in cross-examination in respect of this document, and other events during the conference, lead me to the view that the conversations set out by Ms O'Callaghan between paragraphs 35 and 65 of her principal affidavit are likely to be unreliable and I do not accept her evidence about them. There are a number of reasons for this. 116First, it is unlikely that the reason said to have been given by Mr Pittman and Mr Webster to Ms O'Callaghan for not seeing Mr Mitchell, a previous solicitor, was that they did not want to go to Katoomba to sign documents. They had in fact done so on many occasions. The reason they were seeing Ms O'Callaghan was that Ms Locke had made arrangements with First Mortgage to send the documents to Ms O'Callaghan. There was never a suggestion that Mr Pittman and Mr Webster would see anybody other than Ms O'Callaghan with respect to these documents. The allegedly proffered reason did not reflect the fact, and there was no reason for, nor was it suggested to either of Mr Pittman or Mr Webster, that they lied to Ms O'Callaghan about this apparently inconsequential fact. 117Secondly, Ms O'Callaghan, in her affidavit in paragraph 36, says that she was handed a copy of the loan documents either by Ms Locke immediately before the meeting, or Mr Pittman and Mr Webster at the meeting. Clearly, as the emails and correspondence show, and as Ms O'Callaghan ultimately accepted in cross-examination, this was not correct and that her firm had the documents prior to the conference and it was she who produced them to Mr Pittman and Mr Webster. There is no evidence to suggest that Ms Locke was ever in possession of the documents prior to that conference. 118Thirdly, in paragraph 38 of her principal affidavit, she purports to recall a conversation with Mr Pittman and Mr Webster to the following effect: "EOC: Have you seen these documents before? Pittman: Yes. Margot showed them to us. EOC: Have you had a chance to read through them? Pittman: Yes. We flicked through them." 119This conversation could not possibly have happened. It does not reflect the fact of the documents being in the possession of Ms O'Callaghan's firm. It does not reflect the fact, as Ms O'Callaghan ultimately agreed in cross-examination, that it was she who produced the documents and showed them to Mr Webster and Mr Pittman for the first time. Nor is it likely that Mr Pittman would ever have said that he flicked through the documents having regard to his limited reading capacity. 120Fourthly, in paragraph 39 of her principal affidavit, Ms O'Callaghan records a statement by either Mr Pittman or Mr Webster in response to her question: "EOC: That's a lot of money, what is it for? Pittman/ Webster: Margot needs it to complete the subdivision at Razorback. EOC: So Margot is using all of this money for the subdivision? Pittman: Yeh, that's right ..." 121As is manifestly apparent from the disbursement statement dated 6 December 2006, prepared by First Mortgage and signed by Mr Pittman and Mr Webster in Ms O'Callaghan's presence, not all of the money was going to Ms Locke to complete the subdivision at Razorback. On the contrary, the disbursement statement on its face demonstrates that other borrowings are being repaid, and purportedly the balance of funds were being paid to Mr Pittman and Mr Webster. Although this is not what ultimately happened, the document then available was inconsistent with the verbal account, but on her evidence, Ms O'Callaghan did not identify the discrepancy, nor seek any explanation for that significant discrepancy. 122Fifthly, Ms O'Callaghan knew that one of the requirements of First Mortgage was that at settlement, they be provided with a discharge of the Flamanda mortgage. Unless Ms O'Callaghan knew that the Flamanda mortgage related to the Razorback subdivision, she could not without question or comment have accepted this remark as accurate. She does not recall any such question or comment. 123Sixthly, in paragraph 45 of her principal affidavit, Ms O'Callaghan deposes to a conversation to the following effect, having obtained a copy of the title searches of the real property during the conference: "EOC: There is a life estate to Daisy Anne Pittman and Ena Fairlie. What's that all about? Pittman: Daisy was our grandmother. Ena was our mother. We are half brothers. She had a life estate. She died some time ago. The land is ours now. EOC: That needs to come off title in order for the new mortgage to be registered. ..." 124The terms of Ms O'Callaghan's affidavit in paragraph 43, describe the lead up to this conversation. She records her observations: "On the search of folio 8/..., I noticed a dealing, G143185. I conducted a search of dealing G143185 ... I noticed that the dealing related to a life interest involving Daisy Ann Pittman and Ena Fairlie". 125These two paragraphs suggest that Ms O'Callaghan found out for the first time, having obtained the title searches, about the existence of the life estate. However, as the emails demonstrate, Ms O'Callaghan was on notice of the dealing and the life interest before the meeting with Mr Pittman and Mr Webster. On 3 December 2006, Ms Locke had sent her an email noting the interest on the title, the fact that it was a life interest to Daisy Pittman, who was deceased and had been for some time. Ms Locke also notified Ms O'Callaghan of the requirement that the dealing be removed from the title. 126Further, on the afternoon of Tuesday 5 December 2006, at about 2.45pm, Ms O'Callaghan sent an email to Ms Locke which included the words "have ordered the search also to remove Daisy from the title". As well, in an email sent at a little after 8.30am on 6 December 2006 by Ms Locke to Ms O'Callaghan, Ms Locke said: "In relation to the Life Interest on the title of Lot 8 DP..., the name is Daisy Anne Pittman." 127The dealing G143185 is entitled "Application to be registered under the Real Property Act (s 94) as Proprietor by Transmission". It records the fact that Daisy Anne Pittman, a widow of Kurrajong Heights, claims to be entitled "for an estate (in fee simple)" with respect to land held by the late Clement Pittman, also of Kurrajong Heights. The application notes that: "I declare that no other person is within my knowledge entitled to any estate or interest in the said land, except as follows: Ena Fairlie has the right to reside in the homestead erected on the land and the use of the flower garden around the house during her life as set out in the deceased's will ..." 128As a consequence of this Application, on 6 December 1954, Daisy Anne Pittman was registered as the proprietor of the land. In substance, what this dealing recorded, was a life estate in favour of Ena Fairlie over a limited part of the land, namely the house and its immediate curtilage, the registered proprietor of which was Daisy Anne Pittman. 129In those circumstances it is highly unlikely for a solicitor reading that dealing, as Ms O'Callaghan says she did, to have said to Mr Pittman and Mr Webster, words to the effect, with respect to Daisy Pittman, that "[t]here is a life estate here to Daisy Anne Pittman" as she deposes in her affidavit. The dealing did no such thing. Nor does the dealing which is an Application for Registration by Transmission, sit comfortably with the description used, namely, "... the dealing related to a life interest ...", used by Ms O'Callaghan in so far as it relates to Daisy Pittman who was not getting a life estate at all - on the contrary, she was taken the whole of the land as the new registered proprietor. For these two reasons, I do not accept the accuracy of Ms Callaghan's evidence of the particular conversation. 130In light of all of the foregoing, I do not accept the accuracy of Ms O'Callaghan's evidence as to the nature and content of the conversations which she had with Mr Pittman and Mr Webster on 6 December 2006, and as she has deposed in her affidavit. As I have earlier said, much of the affidavit is a reconstruction. 131As a consequence, I generally accept the evidence of Mr Pittman and Mr Webster as to what took place during this meeting. 132Of interest, is that Ms O'Callaghan does depose to the fact that the first documents signed by Mr Pittman and Mr Webster were the loan documents, followed by them signing the mortgage documents. Ms O'Callaghan then says she would have turned to the statutory declarations pursuant to the Consumer Credit Code, and, after explanation, they were then entered into by Mr Pittman and Mr Webster. 133The terms of the Consumer Credit Code declaration contains this phrase: "3. I/we declare that this declaration was executed prior to me/us entering into the Mortgage and associated documents." 134And an Acknowledgement, also signed during the conference on 6 December and addressed to First Mortgage, contains this statement: "I/we Basil James Pittman and Rex Neil Webster confirm that the two (2) Statutory Declarations pursuant to the Consumer Credit Code were executed by me/us PRIOR to executing any other security documents between ourselves and FIRST MORTGAGE MANAGED INVESTMENTS LIMITED...." 135If the sequence of events deposed to by Ms O'Callaghan is correct, then these documents were in truth signed in her presence by Mr Pittman and Mr Webster in circumstances where the declarations were manifestly untrue. It is unlikely that Ms O'Callaghan would have permitted Mr Pittman and Mr Webster to have signed false declarations. 136I do not accept the evidence of Ms O'Callaghan of the sequence of the signing of the documents. I think it more likely than not that, having regard to the contents of the declarations, they would have been executed before signing the loan and the mortgage. 137Lastly, a further reason to regard Ms O'Callaghan's affidavit evidence as inaccurate, is that in paragraph 66 she asserts that Mr Pittman and Mr Webster took a copy of the documents they had signed with them when they left the offices of Christopher Edwards. In cross-examination she accepted that she had no clear recollection of Mr Pittman and Mr Webster leaving with copies of the documents, and that it was possible that Ms Locke took with her copies of the documents and not Mr Pittman and Mr Webster. 138I think it more likely than not, in light of Mr Pittman and Mr Webster's evidence on this point, which I accept, that they did not take any documents away from the officers of Christopher Edwards and that all documents were provided directly to Ms Locke. 139In the result, there is little of Ms O'Callaghan's evidence which I can accept in preference to that of Mr Pittman and Mr Webster as to the substance of the advice which was or was not given. 140The essence of Ms O'Callaghan's account in her affidavit is that she gave comprehensive, appropriate and independent advice. Mr Pittman and Mr Webster denied receiving any legal advice at all, nor any financial advice. 141Ultimately, in cross-examination, Ms O'Callaghan agreed that she had failed to give advice, which a prudent solicitor would have given to Mr Pittman and Mr Webster, on the following matters, namely: (a)the absence of any written agreement, or documentation recording any obligations or arrangements between them and Ms Locke; (b)the absence of any form of security being given to them by Ms Locke to protect their interests; and (c)most particularly, that there was no benefit at all in entering into the transaction, and that it was contrary to their interests to enter into it. 142Ms O'Callaghan was asked these questions with respect to the conference of 6 December 2006, and she gave these answers: "Q. Now, the failure by you to give the various legal advices, that you accepted from me a prudent solicitor would have given in this case, had the consequence that Mr Pittman and Mr Webster entered into this transaction, correct? A. Yes. Q. And it also had the consequence that a very substantial benefit was conferred on Ms Locke and/or her companies? A. Yes. Q. And your failure to give that advice advanced her interests, correct? A. Yes, correct. Q. And disadvantaged the interests of your clients, Mr Pittman and Mr Webster? A. Yes." 143Ms O'Callaghan also agreed with cross-examining counsel that any legal advice which she gave to Mr Pittman and Mr Webster was not independent of Ms Locke, because of the pre-existing relationship between the firm Christopher Edwards and Ms Locke. No doubt, also the interests of Ms Locke in this particular transaction meant that the advice was not independent. 144She also agreed that the result of her failure to give such advice as she ought, was that in the transaction Ms Locke's interests were preferred to the interests of Mr Pittman and Mr Webster. She said that this was unintentional. 145Mr Pittman and Mr Webster both gave evidence about the conference. Mr Pittman and Mr Webster first learned that the conference was to happen on the evening before, 5 December 2006, when Ms Locke came to their house to share a pizza. All they knew was what Ms Locke told them when she said to Mr Pittman and Mr Webster: "I need you to sign some documents tomorrow for the transfer of the loan to FMI. Meet me in Richmond at 9.30 tomorrow morning." 146At that stage, Mr Pittman and Mr Webster were not given any detail as to whom they were going to see, nor what the documents were that they had to sign. They were not provided with a copy of the documents. They were not provided with any detail of the financial investments of Ms Locke or the use to which the monies being raised was to be put. They were not told that a much larger sum was being borrowed than was necessary to "transfer the loan" to First Mortgage. 147On the next morning, Mr Pittman and Mr Webster met Ms Locke at a café in Richmond where they had a cup of coffee and something to eat. They went from there to the offices of Christopher Edwards. They met with Ms O'Callaghan. In the course of that conference, they were provided, for the first time, with the documents. 148It is Mr Webster's recollection that Ms Locke was present throughout the conference. Ms O'Callaghan denies that Ms Locke was present. I accept the evidence of Mr Webster on this issue. I am satisfied that she was there to ensure that the documents were all signed so that the transaction would proceed. She also was there to take away and keep, for her records, the copies of the documents. She was also there to deal with any queries raised by either Mr Pittman and Mr Webster.

Loan and Mortgage transaction 149The loan and mortgage transaction of November 2006 had the following features: (a)the loan agreement was in a standard form produced by First Mortgage; (b)Mr Pittman and Mr Webster were named as borrowers; (c)the loan amount was $1.9M; (d)the interest rate was 15.95 per cent which was reduced to 10.75 per cent if instalments were paid on time, and if there was no default in the repayment of the loan; (e)the entire loan was due to be repaid two years after the loan was drawn down; (f)the security provided included the three first registered Mortgages over the property of Mr Pittman and Mr Webster; a Bill of Sale over all of their plant and equipment, chattels and machinery in and about the mortgaged properties; a Deed of Assignment of rentals in respect of one of the mortgage properties and according to clause 17.1 of the Loan Agreement, as further security, the borrowers by the execution of the Loan Agreement charged "all freehold and leasehold interest in any land or any part of any land, which the Borrower is the registered proprietor or lessee or which the Borrower may acquire". (g)the mortgages secured the Deed of Loan. Each form of mortgage called up Memorandum No.7514585Y, filed with the Department of Lands; (h)each mortgage was collateral to and interdependent with the Loan Agreement and the mortgages given over the other parcels of land. 150The terms of the loan actually being made included the pre-payment of interest for a period of 12 months. This meant that some of the provisions about timely payment, and default, were inapplicable until the second year of the loan. 151The Loan Agreement appeared to be one carrying a fixed repayment sum and a fixed rate of interest. However, clause 6 of the Loan Agreement dealt with increased costs and required the borrower to compensate the lender on demand if the lender determined that a "directive" directly or indirectly increased the lender's costs of providing the loan, reduced any amount received or receivable by the lender or the lender's effective return in connection with the loan, or reduced the lender's return on capital allocated to the loan, or its overall return on capital. 152In short, the borrower agreed to underwrite the lender's return on capital to ensure that the lender received the return on capital fixed by the terms of the Loan Agreement. 153The "directive" was defined in clause 21 of the Loan Agreement to mean: "a law, an official directive, or request having the force of law, and an official directive, request, guideline or policy with which financiers carrying on business similar to the lender generally comply." 154It can be observed that the definition of a directive is very broad indeed. It incorporates industry guidelines or policy with which lenders generally, but not mandatorily comply. In short, the borrower was underwriting the financial return to the lender. This was not a feature drawn to the attention of Mr Pittman and Mr Webster. 155The mortgages which were entered into were in a familiar form. They were all monies mortgages which were secured only over the land of Mr Pittman and Mr Webster. They did not refer to, nor were they interdependent upon any mortgage of any land owned by Ms Locke or one of her associated entities.

The defendants' state of mind in December 2006 156The defendants, Mr Pittman and Mr Webster, gave evidence about what they knew and understood and the state of their minds generally in December 2006, at the time when the various mortgages and other related documents were signed. 157The context in which to understand their evidence, and make findings that are relevant, is that of their general learning and education, or lack of it, their lack of commercial understanding and limited capacity to read, let alone understand, documents. Reference has been made to these personal features earlier in this judgment. 158Additionally, the clear context was, regardless of what the documents themselves said, that the loan was being sought by Ms Locke for the purposes of her property development activities, in particular the subdivision taking place at Razorback, and it was Ms Locke, or one of her companies, which was to receive the entirety of the proceeds of the loan, in excess of the component for refinancing the existing borrowings. Mr Webster and Mr Pittman were not to, and did not, receive any sum of money at all from First Mortgage. 159An issue in the proceedings was whether, and if so to what extent, Mr Pittman and Mr Webster obtained a benefit from the loan and mortgage. It will be necessary to consider that in more detail and make findings about it in the context of what relief, if any, is to be granted to Mr Pittman and Mr Webster. First Mortgage however did not suggest that any benefit which it contended Mr Pittman and Mr Webster received, was constituted by the receipt into their personal accounts of any of the funds raised by the loan made in December 2006 by First Mortgage. 160As is by now apparent, there is a conflict in much of the evidence between Ms O'Callaghan and Mr Pittman and Mr Webster as to what was said during the meeting, as to whether Ms Locke was present, and the nature and the extent of the explanation given about, and the understanding of Mr Pittman and Mr Webster about, the documents which they signed. 161I have already pointed out that I do not accept Ms O'Callaghan's evidence given in chief in a number of respects. Similarly, I do not accept all of the evidence of Mr Pittman and Mr Webster. However, much of it was given, I thought, honestly and I did not detect any intentional attempt by Mr Pittman or Mr Webster to embellish or exaggerate their evidence. Their recollections of course, are far from perfect. As well, their evidence may suffer, in explanations which they give, from their general lack of commercial sophistication and understanding of some of the concepts involved in the transaction. 162In cross-examination both of them, I thought, made admissions against their interests. Those admissions have to be examined carefully because of the potential for a misunderstanding by the witnesses of the time at which they had particular knowledge, or the time at which they had a particular understanding, because it is quite clear that by the time they came to give evidence, they had a far greater knowledge of what had transpired. 163As I have said, on the morning prior to going to the meeting with Ms O'Callaghan, having been informed the afternoon before that it would be necessary for them to attend at the solicitors, Ms Locke, Mr Pittman and Mr Webster met at a café before seeing Ms O'Callaghan. 164Mr Pittman said in his affidavit of 15 February 2011, at paragraph 25, that during the meeting in the café, Ms Locke had said to he and Mr Webster something to this effect: "If there is any problem, my subdivision property will be sold first and only then, would the bank then need to take your properties. There is nothing to worry about, because that will never happen and, in any case, my properties will cover any amount needed to pay the bank." 165Both Mr Pittman and Mr Webster gave evidence, which I accept, that their understanding was that Ms Locke was responsible for repaying the money, that they were not the borrowers, that Ms Locke's property was secured to support the loan and that, at best, they were providing a security which was not the first security to be called upon by the bank, and further the security was being provided in circumstances where it was most unlikely to be called upon. 166Both Mr Pittman and Mr Webster, who gave evidence to this effect in their affidavits, which I accept, did not understood that they were the only borrowers on the First Mortgage loan, they did not understand that they had the obligations on the First Mortgage loan to which I have earlier referred. They did not know that Ms Locke was not a party to the loan, nor that she was not liable to First Mortgage with respect to the particular loan. They did not understand that Ms Locke had no legal obligations to do any of the things which she promised them she would do. 167It is clear that neither of them understood that they were the borrowers. They each had an understanding that their property was being used as security, in effect of last resort, but their understanding was a long way from that which an average person would understand about all of the ramifications and conditions of this particular loan transaction and the mortgages which were to secure the loan. They did not have the benefit of appropriate advice to assist in their understanding. 168Mr Pittman thought that, with respect to the First Mortgage loan, Ms Locke would be arranging for the payout of it and that, in a worst case circumstance, if Ms Locke did not abide by her commitment to pay out the loan, he understood that First Mortgage could take his land. But the context for this understanding was, based upon such reassurance and blandishments which Ms Locke had given them, that he believed that there was no realistic prospect of the security being called upon, and that Ms Locke would be responsible for and was capable of, attending to all of the obligations to First Mortgage. Mr Pittman had no concept, or belief, that there was any real risk that his property may be taken by First Mortgage. 169Mr Webster specifically rejected the proposition that his understanding in December 2006 was that First Mortgage could sell his land without first resorting to Ms Locke's land. Mr Webster understood that the land was being mortgaged to First Mortgage, but not that Ms Locke had no legal obligations with respect to the loan and mortgage. On the contrary, he understood that Ms Locke was legally obliged to repay the funds in full. He did not comprehend that he was a borrower. 170Neither Mr Pittman nor Mr Webster read through the documents. Time was not sufficient, and their education was inadequate, as were their reading skills. They were given no understanding of the nature and effect of these documents, nor the substance of the transactions prior to signing the various documents. 171They did not know of the interest rate on the loan, and both denied that Ms O'Callaghan had explained to them the rate of interest. I accept their denials particularly having regard to the fact that interest was being prepaid, that is, deducted by First Mortgage from the capital sum of the loan, and they were not to get any of the monies from the loan. There was no good reason why they needed to know the interest rate on the loan, unless and until the loan expired without repayment of the principal, or else it fell otherwise into default. It is for that reason that I do not think that Ms O'Callaghan explained what the interest rate was, and I do not accept her evidence to that effect. 172Both Mr Webster and Mr Pittman knew sufficient of the concept of a mortgage and a security that if a loan was ultimately in default, a lender "...could take possession of [the] property and sell the property to recover the amount owing ...". But that understanding was, in the context of this loan, and the information which they had, seen by them as theoretical only, or entirely hypothetical and not, in reality, remotely likely to happen. Based on what they had been told this was not an unreasonable view for each of them to hold. 173Of importance to these conclusions about the state of mind of Mr Pittman and Mr Webster, was the fact that Ms Locke was present throughout the only discussions about the loan and mortgage. Her presence would have inhibited Mr Pittman and Mr Webster from freely asking questions of Ms O'Callaghan, and would also, I am satisfied, providing ongoing comfort and reassurance to them of the extent of her involvement. 174To complete an understanding of the state of comprehension of Mr Pittman and Mr Webster at the time of signing the First Mortgage transaction document in 2006, it is necessary to consider whether, and if so how, that understanding is complemented by a series of previous loan and mortgage transactions involving Ms Locke's property developments which had taken place over a period of about 12 years leading up to the First Mortgage transaction.

Previous Mortgages 175The impugned transaction with First Mortgage was not the only occasion when Mr Pittman and Mr Webster had provided their properties as security for Ms Locke's property transactions. It appears that those dealings commenced in early 1994. 176It is to be recalled that Mr Pittman and Mr Webster's mother died on 31 January 1994. It was she who was quite friendly with Ms Locke. After their mother passed away, Ms Locke visited Mr Pittman and Mr Webster. Mr Pittman gave evidence in his affidavit of 3 September 2010 at paragraph 21 that a conversation to this effect took place: "Locke: There is a subdivision development I am doing at Springwood. My ex-boyfriend Godfrey is not involved anymore. I need some money to continue the development. Can you assist me by mortgaging your property? There is nothing to worry about. You are not going to lose anything. There is no risk, as I will make all the repayments out of the profits from the development. There will be sufficient monies left over from the subdivision to repay the loan. I will pay the interest. You won't lose anything and it's all safe." 177This request, according to Mr Pittman, was delivered in a somewhat forceful manner, and was accompanied by a request for an immediate response. Mr Pittman and Mr Webster discussed the matter and thought that it was appropriate to help Ms Locke. When this was conveyed to her, she responded by telling Mr Pittman and Mr Webster that she needed them to sign some documents for the mortgage "... tomorrow". 178Mr Pittman and Mr Webster were taken by Ms Locke to see a solicitor called John Vaughan, whom they had not previously met. 179It is clear from the evidence of Mr Pittman, which I accept, that both and he and Mr Webster trusted Ms Locke, believed what she had told them and made no enquiries of her about the financial details of the development, nor the precise details of what was involved in their provision of security. It was Ms Locke who chose the solicitor whom they visited. It was Ms Locke who organised all of the documents, and it was Ms Locke who attended in a day-to-day sense to all of the dealings with the lenders. 180Thus, viewed from the perspective of Mr Pittman and Mr Webster, at least in these early days, their involvement was limited to agreeing to provide security to Ms Locke upon the basis that she had explained, and attending to sign documents in the presence of a solicitor, whom she had chosen, and with which documents both she and the solicitor were apparently familiar. 181Before identifying the transaction which occurred in September 1994, it is clear from the cross-examination of Mr Pittman, that, with respect to this development, he knew that there may be a risk if Ms Locke could not repay the loan because there was a shortfall on the sale of the Springwood subdivision. But, even then, the knowledge was very vague and based upon what they had been told. The risk to their property was properly and reasonably regarded by Mr Pittman and Mr Webster as entirely hypothetical. 182This knowledge has to be considered in the context of the lack of commercial knowledge and sophistication of Mr Pittman and Mr Webster. The following exchange in cross-examination demonstrates, so it seems to me, that whilst Mr Pittman was able to articulate some sense of a hypothetical risk involving the proffering of his property as security, he could not understand the real nature or extent of that risk, or the steps that a prudent person might take before exposing themselves to that risk. 183In cross-examination, this exchange occurred: "Q. Sir, you knew didn't you, that Margot Locke might have a problem repaying the loan if there was a shortfall in the sales from her subdivision development at Springwood, isn't that right? A. Yes. Q. And you knew that if there was a shortfall in the sales, that your and Mr Webster's land would be at risk, isn't that right? A. It would be at risk, yes. Q. So you knew didn't you, it was important for you to consider whether the development at Springwood would be successful or not, isn't that right? A. I did not know that. Q. Well, you knew that your property would be at risk if the development was unsuccessful, isn't that right? A. Yes. Q. So, it was important, wasn't it, before going into any transaction involving mortgaging your property, for this development to have a look at the question of whether the development would be likely to be successful, isn't that right? A. No. Q. Well, why do you say no? A. Because it was supposed to be covered by the amount of the turnover. Q. What was the turnover of the development? A. I have no knowledge of what was the financial situation of the whole thing. Q. How do you know it was supposed to be covered by the turnover? A. Well, I was told in the beginning that it would be. Q. What were you told about that? A. That there was enough security in the development to pay for the lot. Q. Are you saying that Margot Locke said to you there will be enough security in the Springwood development to repay the loan, is that right? A. That was right. ... Q. What steps if any did you take to try to work out how much risk you would be taking mortgaging your properties? ... Q. In 1994? A. I did not look, I don't think, at any of those risks. Only that we knew that if we didn't pay, or somebody didn't pay, Margot didn't come up with enough money out of the subdivision, then we might be at risk." 184On 26 September 1994, Ms Locke took Mr Pittman and Mr Webster to see Mr Vaughan, a solicitor. There is little evidence about this particular transaction. It appears from the mortgage that the principal sum borrowed was $172,500. This is apparent from the stamp duty imprint on the mortgage. The mortgagee was National Mutual Trustees Ltd. The mortgagors were Mr Pittman and Mr Webster in respect of Lot 8. However, curiously, the only registered proprietor of Lot 8 was Mr Pittman. Mr Pittman and Mr Webster were the joint registered proprietors of Lot 9. 185Clause 37 of the mortgage provides that the mortgage is collateral to a loan agreement of the same date. That loan agreement is not in evidence. Accordingly, the precise terms of it, including the identity of the principal borrowers, the identity of any guarantors, and whether any other security was being offered with respect to the monies advanced on mortgage, are unknown. 186It is also not possible to tell the period of the loan (or mortgage) and the interest rate, save to say that clause 4 of the mortgage provides for the payment of interest at a rate "... equal to the aggregate of four per cent (4%) per annum and the rate (expressed as percentage per annum) determined from time to time by the mortgagee to be the cost to the mortgagee of funding the Outstanding Monies ...". 187Although the evidence is scant about what occurred in Mr Vaughan's office, I am satisfied that Ms Locke was present during the meeting, there was a relatively brief reference to the documents, and some parts of them may have been read out. But equally, it is clear that no thorough or complete explanation was given which was sufficient to bring home either to Mr Pittman or Mr Webster, the real nature of a mortgage and the real risks involved in providing a mortgage as a third party proffering security for the commercial business of another. 188There is no suggestion that Mr Pittman and Mr Webster paid for the services of Mr Vaughan as a solicitor. I would be prepared to infer that the probabilities are his fees were paid by Ms Locke. 189It appears that this mortgage was discharged, and the debt seems to have been paid out, in or about 24 March 1995. In other words, it appears that the loan from National Mutual was for a short term, and it was entirely repaid to the satisfaction of the lender, and without reason for Mr Pittman and Mr Webster to be concerned. 190Not much is to be drawn from this transaction. Mr Pittman and Mr Webster obtained no financial benefit from it. It was a short-term transaction in which both Mr Pittman and Mr Webster accepted that there might be some ultimate risk, but that they trusted Ms Locke and accepted her assurances that, in reality, there was no risk to them. They had a little personal knowledge of this subdivision because Mr Webster did some labouring work on it. If anything, the effect of this transaction would have been to create a sense of trust in the minds of Mr Pittman and Mr Webster with respect to Ms Locke's proposals and her promises. After all, everything that she had promised them had come to fruition. No financial risk had fallen in. 191One parcel of their three lots had been provided as security. Ms Locke had said that it was for a short period of time and that she would be responsible for the repayment of the loan and all interest on it. They attended for a short, somewhat perfunctory, meeting with Mr Vaughan, who was Ms Locke's chosen solicitor. Having signed the documents, the matter proceeded smoothly and required no further attention from them. 192The sum involved was a relatively small one. Only a part of their land was at risk. 193In all of those circumstances, I draw the conclusion that the consequence of this transaction was to provide a basis in reality, for their continuing trust of Ms Locke, and the lack of advertence on their part to the real risks involved in providing land as a security for Ms Locke's property ventures. 194There was nothing about this transaction that merited, in effect, on the part of Mr Pittman and Mr Webster, a second thought. All it did was to make them less conscious of, or attuned to the reality of the risks involved in providing security for Ms Locke. 195The second transaction occurred in October 1994. This transaction, which it will be necessary to describe in more detail shortly, involved a company called Forrest Knoll Nominees Pty Ltd, which was renamed Obelisk Securities Pty Ltd in May 1996, lending very significant sums of money at high rates of interest to Ms Locke for a period of about three years. Over that period, after the initial mortgage was entered into, there were seven variations, the effect of which generally was to increase the principal sum, adjust the period of the loan, and impose the then ruling interest rate, which sometimes represented an increase and sometimes represented a decrease. 196According to the documents, the first set of mortgages were entered into on 6 October 1994. With respect to Lot 8, the mortgage indicates that it secured a loan of $910,000 for a period of six months, at an interest rate of 25 per cent per annum, which was reduced to 14.25 per cent if the interest was paid monthly, and on time. The mortgage indicated that it was collateral with mortgages over Lots 9 and 23 with the mortgagors being Mr Pittman and Mr Webster, and Mr Pittman, respectively. The mortgages were also collateral with mortgages given by Ms Locke in respect of two entirely separate lots of land, Lots 305 and 306. 197It appears from the documents and evidence that Forrest Knoll Nominees Pty Ltd, the mortgagee, was a lending entity associated with Mr Roland Gridiger, a solicitor. 198It appears from the mortgage, that Mr Pittman's signature, and that of Mr Webster as well, was witnessed by Gary Holzman, who was at the time a solicitor in practice in the city of Sydney. 199So far as it is possible to tell from evidence, each of the subsequent variations to the initial Forrest Knoll mortgage happened in very similar circumstances. The essential features were: (a) Ms Locke attended to all of the dealings with Forrest Knoll, in terms of what the variations were to be. Such expenses as were necessary to be paid (as opposed to being taken from the loan funds) were paid by her; (b) Ms Locke gave only very short notice to Mr Pittman and Mr Webster of the need for them to attend in the city to sign documents. This was usually only a day before they needed to sign documents. (c) The meetings with Mr Holzman were generally short. Mr Holzman simply ensured that they signed all the correct documents in the correct place, but neither Mr Pittman nor Mr Webster left the conferences with any clear understanding provided by Mr Holzman of the true effect of those mortgages. I accept Mr Pittman and Mr Webster's evidence to that effect; and (d) Mr Pittman and Mr Webster did not pay for Mr Holzman's advice. They were not sent any account from him for his fees. They did not appreciate that he was a solicitor whose purpose was to give them the benefit of advice which was independent from Forrest Knoll, and Ms Locke. 200Although their recollections differed as to whether they saw Mr Holzman in the offices of Roland Gridiger or in a nearby office, it is clear that Mr Pittman and Mr Webster had no prior dealings with Mr Holzman, and that they were referred to him by Mr Gridiger. Neither Mr Pittman nor Mr Webster paid any account for their attendance upon Mr Holzman. 201The evidence does not suggest that Mr Holzman had any understanding of the transactions underlying the mortgages, nor any understanding of the purposes of the loan or of Ms Locke's business. The evidence of Mr Pittman and Mr Webster, which I accept, was generally to the effect that Mr Holzman spent little time with them, gave little, if any, explanation as to the contents of the documents, although he did read out some parts of them. 202Neither Mr Pittman nor Mr Webster left any of the conferences with Mr Holzman with a clear understanding, provided by him, of the true effect of these mortgages. 203I set out below a table of the various variations to the Forrest Knoll mortgages that were entered into. It can be seen by way of observation that the sum of money increased over time so that ultimately the sum owing by Mr Pittman and Mr Webster to Obelisk Securities, which was formerly Forrest Knoll Nominees, was $1,650,075. Date Mortgagee Mortgagor Dealing number Principal sum Period of Time Higher % Rate Lower % Rate Date Discharged 06.10.94 Forrest Knoll Nominees Pty Ltd Pittman U700466V $910,000 6m 25 14.25 24.11.98 (5522756C) 06.10.94 = Obelisk Securities Pty Ltd from May 1996 Pittman/Webster O131863F 06.10.94 Pittman U700467T 23.03.95 Forrest Knoll Nominees Pty Ltd Pittman O131865B $1,355,000 4m to 23.07.95 25 16 24.11.98 (5522756C) 23.03.95 - 1st variation Pittman/Webster O131864D 23.03.95 Pittman O131866Y 31.07.05 Forrest Knoll Nominees Pty Ltd Pittman O939329X $1,597,575 10 m to 23.05.96 19.25 14.25 24.11.98 (5522756C) Undated - 2nd variation Pittman/Webster O441935C 6m to 23.01.96 Undated Pittman O441936A 6m to 23.01.96 Undated Forrest Knoll Nominees Pty Pittman/Webster O939330P 4m to 23.05.96 19.25 14.25 24.11.98 (5522756C) - 3rd variation Pittman O939328A 23.05.96 Obelisk Securities Pty Ltd (formerly known as Forrest Knoll Nominees) Pittman 2207738N $1,650,075 4m to 23.09.96 18.5 13.5 24.11.98 (5522756C) - 4th variation Pittman/Webster 2207739L Pittman 2207740C 18.10.96 Obelisk Securities Pty Ltd Pittman 2557067F $155, 000 3m to 18.01.97 25 20 Pittman/Webster 2557065K Pittman 2557063P 18.10.96 Obelisk Securities Pty Ltd Pittman 2557066 6m to 23.03.97 17.5 13.5 24.11.98 (5522756C) - 5th variation (of original Forrest Knoll mortgage) Pittman/Webster 2557064M Pittman 2557062R 23.03.97 Obelisk Securities Pty Ltd Pittman 2929982Y 6m to 23.09.97 17.5 13.5 24.11.98 (5522756C) - 6th variation 24.03.97 Obelisk Securities Pty Ltd Pittman/Webster 2929981B 6m to 23.09.97 17.5 13.5 24.11.98 (5522756C) - 6th variation 18.10.97 Obelisk Securities Pty Ltd Pittman/Webster 2557064M 6m to 23.03.97 17.5 13.5 24.11.98 (5522756C) - 7th variation

204Objectively viewed, and with the benefit of hindsight, it would appear that from the time the first mortgage was entered into in October 1994, such was the requirement for capital funding of the property developments of Ms Locke, including funding the interest component of borrowings, that the capital required from this lender, effectively doubled. As well, very high interest rates were being paid. The interest rates, varied from 25 per cent for the first mortgage and variation, to 17.5 per cent at the time of the last variation. These rates were reducible to 16 per cent, 14.25 per cent and, ultimately, 13.5 per cent. 205The interest rates were undoubtedly high. The length of loans was short, varying between three, four and six months. The inability of Ms Locke to discharge the loans by reducing the capital demonstrated that all was not well with her property projects in the sense that either sales were not occurring, or had been delayed. Equally, it is possible that such proceeds of sale as were being obtained, were being used by Ms Locke for other purposes personal to her, at the expense of Mr Pittman and Mr Webster. 206Since neither Mr Pittman nor Mr Webster knew, or appreciated, any of these matters, and the Court has not received any details, in evidence, of the extent of Ms Locke's property developments, it is not possible to form a conclusion with respect to either of these options. 207It is sufficient to note however, that the financial risks were obviously increasing, the exposure to default was getting greater as the capital sums increased, the need to roll over the loans for short periods increased, and there was little or no relief from the continuing high interest rates. 208As well, in addition to the original loan and the variations, it appears that on 18 October 1996, a fresh mortgage was entered into, in which an additional $155,000 was borrowed, presumably to pay interest, for a period of three months at an interest rate of 25 per cent which was reducible to 20 per cent if paid on time. 209Ultimately, all of the Forrest Knoll mortgages were discharged on 24 November 1998. There was no threat to, or call upon, Mr Pittman and Mr Webster with respect to these borrowings. 210I am left with the firm conclusion that there was little, if anything, about these various mortgage and variation transactions, which gave Mr Pittman and Mr Webster any real understanding of the reality of the risks that they were facing, the obviously deteriorating financial position of Ms Locke, and the true notion of the legal obligations which they were exposed to. On the contrary, I am satisfied that, for Mr Pittman and Mr Webster, the frequency and regularity of the transactions, accompanied by a relatively routine and somewhat perfunctory exercise involving Mr Holzman, at the time the documents were signed, would have created a sense of comfort, and a sense of inevitability, by which I mean that they seemed to conclude that what was happening was normal, without risk, and that which was to be expected. 211There is nothing about these transactions which would have helped their understanding of the later risks which were being assumed in the first mortgage transaction. If anything, these transactions would have lulled Mr Pittman and Mr Webster into a false sense of security and comfort about the risks involved in the subsequent transactions.

Flamanda Loan 212In November 1998, Ms Locke shifted her borrowings from the Forrest Knoll/Obelisk Securities group to a series of contributory lenders for whom Mr Neville Jones and Mr Don Heath were the active principals. The loans which were made to Ms Locke and companies in her group, and to Mr Pittman and Mr Webster, were made by a variety of companies, Flamanda Pty Ltd, S C Heath & Sons Pty Ltd and Moranon Pty Ltd, and a series of other individuals and organisations. It will be convenient to refer to these loans as the Flamanda loans without being specific about the identity of the lenders. 213The correspondence and dealings between Ms Locke and the lenders occurred through Mr Neville Jones. The solicitor for Flamanda was initially Mr David Rex. Later, Wiltshire Webb Solicitors acting for other lenders within the Flamanda group of contributors. 214The initial loan was made on 24 November 1998, in the principal sum of $660,000, at the rate of 13 per cent per annum reducible to 10 per cent if paid on time. The mortgagors were recorded with respect to Lots 8 and 23 as Mr Pittman and with respect to Lot 9, as Mr Pittman and Mr Webster. The mortgage recorded that the mortgages were made in respect of a loan of $660,000 from the mortgagees "at the request of Margaret Anne Locke of 22 Pittmans Road, Kurrajong Heights (Guarantor) testified by her being a party hereto ...". 215At the time these two mortgages were entered into, the pre-existing mortgages to the Forrest Knoll/Obelisk Securities group were all discharged. 216As the table below shows, there was only one variation to the Flamanda mortgage, which occurred 12 months after it was initially entered into, when the principal sum was increased from $660,000 to $720,000. The interest rate remained the same. Date Mortgagee Mortgagor Dealing number Principal sum Period of time Higher % rate (pa) Lower % rate (pa) Date discharged 24.11.98 Flamanda Pty Ltd, Harrison Fawcett Davison, Shirley Dawn Davison Pittman 5522780F $660,000 6m to 23.05.99 13 10 Discharged 14.12.06 Pittman/Webster 5522757A Discharged 07 and 15.12.06 Pittman 5522780F Discharged 07 and 15.12.06 05.05.99 "Flamanda" Pittman 6133568W $720,000 6m to 23.11.99 13 10 - 1st variation Pittman/Webster 6133567Y Pittman 6133568W 09.11.06 Moranon Pty Ltd and SC Heath & Sons Pty Ltd Pittman Not to exceed $500,000 Discharged 15.12.06 Pittman/Webster Pittman

217On 9 November 2006, a further mortgage, by way of a second mortgage was entered into by Mr Pittman and Mr Webster by which their land was also mortgaged to Moranon Pty Ltd and S C Heath & Sons Pty Ltd. The sum secured was not to exceed $500,000. 218Accordingly, other than the signing of documents in November 1998 and November 1999, Mr Pittman and Mr Webster were not involved in any of the further financing arrangements, which it will be necessary to summarise, until the period in November 2006 and following. 219In November 1998, Ms Locke took Mr Pittman and Mr Webster to the office of Mr David Rex, a solicitor in Katoomba, who was acting for the Flamanda Group. They were then driven to see Mr Reg Mitchell, a solicitor in the Katoomba area of the Blue Mountains. Mr Mitchell was suggested to them by Mr Rex, because Mr Rex properly declined to witness the signatures of Mr Pittman and Mr Webster or to give them any advice. 220According to the evidence of Mr Pittman, when they went to see Mr Mitchell, apparently without any real forewarning, Mr Mitchell had to telephone Mr Rex on a number of occasions to obtain the full details about the documents which were being signed and the underlying transaction. 221The meeting between Mr Pittman, Mr Webster and Mr Mitchell took place in the presence of Ms Locke. Mr Pittman described Ms Locke as being quite pushy and very insistent. He said in his affidavit that: "I didn't feel as though I had any choice other than to sign the documents." Mr Pittman said the only advice he received from Mr Mitchell was to the effect that it should be alright to sign the documents. 222The cross-examination of Mr Pittman elicited evidence which suggested that his recollection of the detail of this meeting may not have been as clear is it appeared in his affidavit. Nevertheless, it does appear and I accept that he felt he had no option but to execute the documents as Ms Locke required. He received no monies from the Flamanda loan. So far as he was concerned, it was Ms Locke's obligation to pay the loan and the interest which accrued on it, and that his land was not at any real risk. 223The evidence does not enable me to find that Mr Mitchell gave any thorough explanation to Mr Pittman and Mr Webster about their obligations. Since Ms Locke was in the room whilst such advice as he gave was delivered, it is unlikely that he gave any real advice, independent of Ms Locke, to enable Mr Pittman and Mr Webster to rationally assess the position in which they found themselves. The explanation he gave, did not result in Mr Pittman and Mr Webster having any real understanding of the true nature and affect of the transactions, and, in particular, the risks which they were assuming. 224On 5 May 1999, Mr Pittman and Mr Webster signed a Variation of Mortgage for each of the two previous mortgages, which had the effect of increasing the capital to $720,000 and extending the term of the loan to 23 November 1999. There is no witness to these signatures of either Mr Pittman or Mr Webster on these variations. So far as the mortgagees are concerned, the variations are signed by their solicitor Mr David Rex. 225Mr Pittman had no recollection of signing the variations, but concluded that it had been signed in Mr Rex's office. It is clear from the evidence, that neither Mr Pittman nor Mr Webster received any legal advice at the time these variations were entered into. 226Curiously, although the Flamanda loan was due to expire on 23 November 1999, it seems to have continued until discharged by the entry into the First Mortgage loan. Although Mr Pittman had a recollection of other variations being entered into, there was no evidence before the Court of any such variations. I am not prepared to find that there were any. The probabilities are, that in the absence of those documents, the loan simply was permitted to continue, and various payments of interest were made and received from time to time. 227This is confirmed by the picture presented in the correspondence of Ms Locke's dealings with Flamanda, including taking out borrowings and the like, which are contained in documentary evidence. It will be necessary to review some of those documents separately. 228As I have noted earlier, a second mortgage was entered into on 9 November 2006. It seems that on that occasion further mortgage documents were signed in the presence of Mr Mitchell. Mr Pittman is unable to give any useful evidence about what occurred, other than that he does not recall any real advice being given to him with respect to the documents. It does seem that no further monetary advance was made at the time of this mortgage to Ms Locke or any of her companies. 229The best evidence of how the second mortgage came about is to be found in a letter written by Mr Jones on 11 October 2006 to Ms Locke, in which Mr Jones says: "Lucy Motta advises that she'll be sending, by express post this coming Friday, original 2nd mortgage guarantee documents directly to Pittman and Webster for their signature, and also yours, before a solicitor. At the same time she will send a copy to you for your records. Regarding your email received on 9 October, we will not consider an extension to the end of the January before: ... (5)We receive back the above signed guarantee; (6)We see what our position is by recalculating the figures in our letter of 5 October to allow for the additional two months interest from 30 November ... There is also the situation with respect to the interest that is owed on the 1st mortgage on Pittman & Webster from 1/8/06. It is important that this interest be brought up to date from any figure that you receive from either refinancing or selling Remony farm" 230The circumstances to which I have adverted in shortly describing the Flamanda series of loans do not enable me to find, and I do not find that Mr Pittman and Mr Webster gained any true understanding of the nature and effect of the loan and mortgage transactions and the real risks of what their exposure was in undertaking these transactions in underwriting Ms Locke, with the provision of the security of their home and property. 231Putting it in a slightly different way, the involvement of Mr Pittman and Mr Webster in the Flamanda loans, did not make them any better educated about the provision of mortgage security for a third party's property development activities, and did not to do anything to displace their lack of sophistication about the commercial realities of these matters. 232By the time of the First Mortgage transactions, they remained entirely unsophisticated, and poorly informed about what was entailed in what they were being, once again, asked to do.

The financial position of Ms Locke 233Although Ms Locke was not called as a witness, there is some material which provides a picture, although incomplete, of her financial position leading up to, and at the relevant time. 234In April 1998, Ms Locke, through the entity "Total Property Development", wrote to Mr Gridiger outlining some of the details of her projects, seeking an extension of her mortgage by a period of three months, and summarising her position as follows: "In summary, all projects that I have undertaken are performing extremely well, however, just a little slower than I had originally expected." 235It is apparent from the terms of this letter that even if Ms Locke is to successfully sell the properties in the subdivisions which she was undertaking, she would end up by reducing rather than completely repaying her mortgage debt. 236The response from Gridiger & Co to Ms Locke indicated that the lenders would agree to her request for an extension of the mortgage period providing that her debt was capitalised at a little under $780,000 and interest would accrue on that sum at the lower rate of 13.5 per cent. 237Ultimately this proved unacceptable and Ms Locke was required to seek funds elsewhere. 238In July 1998, Ms Locke wrote to Mr Rex, solicitor, at Katoomba, making a proposal for a loan. She indicated to him that she was currently undertaking two subdivisions at Hazelbrook, one at Kurrajong Hills and one at Silverdale. 239Having set out the details of the various subdivisions, Ms Locke said that each of the subdivisions was being undertaken with a person she named as Terry Leonard, who was "funding the development cost and has a share in the profits, between thirty to fifty per cent of the nett [sic] returns". The evidence does not reveal anything about Mr Leonard or his financial status. There was no evidence about what security, if any, he offered, nor what contribution, if any, he made to the actual costs of the various development projects or the ultimate shortfall, if any. 240By 2000, Ms Locke had fallen into arrears with mortgage loans. A facsimile to her dated 19 September 2000, on the letterhead of Flamanda Pty Ltd, noted that a number of cheques for the payment of interest had been dishonoured. It appears from that facsimile that Ms Locke was responsible for the repayment of three loans, each of which had different securities. They were: (a)"Remony Farm" : $568,000 (b)"Mount View" : $ 49,492 (c)"Pittman & Webster" : $625,000 The total of these sums is $1,242,492. 241By December 2000, Ms Locke's position seems to have further deteriorated. In a letter dated 22 December 2000, addressed to Flamanda, on the letterhead of Forest Group Pty Ltd, she said: "Unfortunately, my cash flow is presently depleted due to the slowness of the subdivision at Razorback to sell and the drain paying the fees to get it to completion. Included in this subdivision is a substantial house that when sold will pay out most expenses. It is anticipated by late January, 2001 the house will have been sold and my cashflow will have improved dramatically. ... I am very sorry about this position and plead with you to allow me the time to pay the interest owing in January 2001. After January, I will have corrected the problems in my cashflow and will have regular payments." 242This statement needs to be contrasted with that which Ms Locke made to Mr Pittman and Mr Webster nearly six years later, in November 2006, about the success of the Razorback development. 243By June 2001, in another letter to Flamanda from the Forest Group Pty Ltd, dated 28 June 2001, it appears that it was necessary for Ms Locke to borrow $50,000 "... to pay the $32,249.44 of interest for Pittman & Webster and the balance to be used to pay for the development costs, of Lot 504". This was a reference to a lot in Silverdale. 244In a letter of 2 July 2002 from Flamanda to Ms Locke, the various matters associated with Ms Locke's subdivisions are canvassed. It is unnecessary to recount all of these details. However, what is plain is that Ms Locke is not intending, notwithstanding the sale of more than sufficient land to do so, to repay the loan which Mr Pittman and Mr Webster had in their names of $625,000 from Flamanda but rather she was going to repay other borrowings for which they were not at risk, but for which she, or entities associated with her, were at risk. 245A document from Flamanda Pty Ltd suggests that Ms Locke, as at November 2002, had her own property and her subdivision properties with an estimated sale value of $4,252,000 with mortgages for which she was responsible at $3,105,000. 246Curiously, Flamanda included the property of Mr Pittman and Mr Webster as part of Ms Locke's "property portfolio" and valued their properties at $1.5 million. Quite how the lender could regard Mr Pittman and Mr Webster's property as part of Ms Locke's portfolio is not disclosed by the evidence. I would be prepared to infer that that must be because of what they were told by Ms Locke. If that is so, then what the lender was told was inaccurate. 247Correspondence in February 2003 suggests that in addition to the previous figures noted, that Ms Locke may also have had some loans through a corporation known as the Eclipse Prudent Mortgage Corporation Ltd. However, the detail of this is not revealed in the evidence. 248By February 2004, it appears that Ms Locke's position had deteriorated. According to a letter sent by Flamanda to her, as at 12 February 2004, she had loans totalling $6,012,000 outstanding, most of which were at interest rates of between 10 and 16 per cent. The letter says: "The total interest payable to have you square at end November 2004 is $490,210.77." 249On 13 September 2005, Mr Jones, who was the controller of the Flamanda loans, sent a letter to Ms Locke attempting to set out her position. It records that she had borrowings of $8,860,000. In a letter of 9 October 2005, from Mr Jones to Ms Locke, it appears that she is in default of interest payments and that projected sales of lots would still mean that she was in default of her interest and mortgage payments by the end of the year. 250In 4 December 2005, Mr Jones wrote to Ms Locke indicating that unless significant payments were made by 31 December 2005 or else, at the latest, by 15 January 2006, action would have to be taken to call up the mortgages. 251On 5 November 2006, Mr Jones again sent a facsimile to Ms Locke dealing with an aspect of her financial position. The facsimile indicated that with respect to borrowings over a property at 77 Old Bells Line of Road, that Ms Locke was indebted for mortgage principal and interest in a sum of a little over $625,000. As well the facsimile asks where Ms Locke intends to "find funds to pay Pittman and Webster interest on first mortgage loan". The facsimile notes that interest has been outstanding since 31 July 2006, and that with respect to a further $500,000 loan which seems to have been secured by the second mortgage over Mr Pittman and Mr Webster's property, interest had been outstanding since 30 September 2006. 252The facsimile also asked about the projected date of settlement of one of the lots in a subdivision. 253A follow up facsimile on 18 November 2006, from Mr Jones to Ms Locke, records that the loan with respect to 77 Old Bells Line of Road at Kurrajong had been in default because interest had not been paid for over a year. Mr Jones noted that Ms Locke "... must urgently make some arrangement as to bringing interest up to date." 254None of this correspondence makes any reference to the loan which was in existence in October 2006 for $2.46M, which was initially with Provident Capital until refinanced with First Mortgage. 255This necessarily incomplete picture which was not disclosed to Mr Pittman and Mr Webster shows a financial position which was apparently deteriorating and doing so consistently over a number of years. It shows regularly, and for lengthy periods, that Ms Locke was in default in respect of interest obligations for loans which she had initiated. 256The picture revealed about Ms Locke's financial position stands in marked contrast to the content of her assurances which she gave Mr Pittman and Mr Webster shortly before they signed the First Mortgage loan transaction documents. I have set out the substance of that conversation at [165] above. In particular, it is quite clear that the assurance that "...my properties will cover any amount needed..." was a complete lie. As well, contrary to Ms Locke's assurance that there was "...no need to worry...", there was every good reason, having regard to Ms Locke's unrevealed financial position, for Mr Pittman and Mr Webster to be very worried, about the risk of the sale of their property being a very real one which was likely to come to fruition.

2008 - Refinance and additional Borrowing 257On 26 November 2007, Ms Locke sent an email to First Mortgage. It was untrue. It said: "I have spoken to both Basil Pittman and Rex Neil Webster and they are seeking a variation of the mortgage to increase the principal sum to $2,250,000 for a further term of 6 months." 258Mr Pittman and Mr Webster had not spoken to Ms Locke on this subject, nor had they requested a variation to the mortgage to increase the principal sum, nor an extension for an additional term. 259Ms Locke's email went on to deal with questions of whether a new valuation would be required, the cost of it and to remind First Mortgage of the security. 260A few days later, Ms Locke sent a follow up email, seemingly because no response had been received. This email was in the following terms, addressed to Mr David Wilson: "Hi David, Would you look at the email I sent to you to you on behalf of Basil Pittman and Rex Neil Webster regarding the variation of mortgage for a loan principal amount increase of $280,000. As both Basil and Rex are out farming most of the day, your reply to this can be forwarded to me ..." 261Eventually, on 30 November 2007, Mr Wilson sent an email to Ms Locke in these terms: "Yes. What is there [sic] program from here? What is their exit strategy?" 262Within an hour or so, Ms Locke had responded with another email, the content of which was manifestly untrue. She said: "David, They intend to list for sale Lot 23, in January 08, by realising the sale price of $1,050,000 from that property, reduce the loan and then continue with the loan at a lower principal sum, until they have sold off the middle lot, being Lot 9, half way through mid next year. Regards, Margo" 263Mr Pittman and Mr Webster had no plans at that time to sell any of their property whatsoever. Ms Locke had simply invented an answer to suit her need for refinance and to provide information to First Mortgage which it required to satisfy its lending requirements. 264On 4 December 2007, First Mortgage sought a quote from a valuer to undertake valuations of the properties of Mr Pittman and Mr Webster. On 12 December 2007, Hausfeld Johnson, the firm of valuers, which had previously provided a valuation to First Mortgage on each of the three lots of land undertook a further valuation of the land. 265Lot 8 was valued at $1,080,000, which was $50,000 higher than the valuation which had been undertaken in November 2006. 266The comments which formed part of the valuation, recorded in identical terms to the valuation of 2006, that the property market was past its peak in the area. Nothing was included in this valuation to explain why, notwithstanding this continuing phenomenon, the land had apparently increased in value. 267Although Lot 9 was apparently valued at the same time, the contents of that valuation were not tendered in evidence. Lot 23 was valued at $1,000,000. Again, no explanation was included as to why this property had increased in value, notwithstanding the apparent fact that the market had passed its peak. 268Although the valuation for Lot 9 was not tendered in evidence, a First Mortgage checklist, which was part of the evidence, records the valuation described as $835,000. This was higher by $45,000 than the previous valuation. 269On 9 January 2008, a typed letter was sent by facsimile from a facsimile address commonly used by Ms Locke but purporting to be sent by Mr Pittman and Mr Webster, to First Mortgage. It included the following: "Dear David, Re: Variation of loan for Lots 8, 9 and 23 DP 751629 We wish to extend the term of our loan for a period of 6 months and increase the loan sum to $2,050,000. The advance will be used to pay loan, legal costs and pay interest in advance. Presently we are improving the properties and require an extension so that we will be in a position to reduce the loan principal sum, by the sale or refinance of the properties, as our exit strategy. We wish to have the loan document sent to our solicitor, Christopher Edwards, of Suite 9, 209-211 Windsor Street, Richmond, NSW 2753, ph 0245 886 237, fax 0245 783 191." 270I am satisfied that neither Mr Pittman nor Mr Webster sent this letter. They did not know that it had been sent. The letter was written by Ms Locke, and sent by her from her own facsimile machine. Again, the content of it, in particular the second paragraph, was manifestly untrue. 271On 24 January 2008, First Mortgage sent a letter to Christopher Edwards, solicitor, with respect to this further advance. In substantial part, it read: "We confirm that we are agreeable to extend/vary the advance on the following basis: 1. The loan shall be increased $2,025,000. 2. The loan shall be extended to 15 December 2008. 3. The interest rate is to be 16% per annum reducing to 11% per annum for prompt payment. 4. You are required to execute the within documents and return same to our office within seven (7) days. 5. You are required to provide such other particulars as we may require. Please note that it is necessary for you to attend upon a solicitor with the enclosed documents in order for the solicitor to explain the effect of such documents to you and thereafter the solicitor is required to complete and execute the Solicitor's Certificate as enclosed." 272The letter then enclosed a series of documents. It noted that First Mortgage required "evidence Lot 23 listed for sale". 273No explanation is offered in the evidence as to why this letter, which in its terms ought to have been addressed and sent to Mr Pittman and Mr Webster directly, was in fact sent to Christopher Edwards, Solicitor. Had it been sent directly to Mr Pittman and Mr Webster, there is at least some better prospect, than that which existed, of a greater knowledge on their part of what in fact was happening. 274A disbursement statement provided by First Mortgage shows that the additional drawdown, over and above the existing loan, was in the order of $125,000, which was substantially spent on the payment of First Mortgage's invoice for professional fees, establishment fees, bank charges, valuation fees and the like. As well, the additional funds went to pay interest, which was due on 15 January, and the payment of further interest in advance. The loan was eventually drawn down on 19 February 2008. Interestingly, although the request for the extension was said to have come from Mr Pittman and Mr Webster, the original disbursement statement dated 24 January 2008 showed that the balance of the new loan was to be paid to one of Ms Locke's accounts in the name of Total Property Development. 275On 4 February 2008, Mr Pittman and Mr Webster attended upon Ms O'Callaghan at Christopher Edwards Solicitor's office. It will be necessary to deal with the substance of what happened in the course of this meeting. 276For present purposes, it is clear that Mr Pittman and Mr Webster signed some documents during the course of that conference. 277On 5 February 2008, Christopher Edwards wrote to Ms Locke a letter which confirms that Christopher Edwards regarded themselves as acting for Ms Locke and not for Mr Pittman and Mr Webster. It was written by Ms O'Callaghan, and was in the following terms: "Dear Margo Basil James Pittman and Rex Neil Webster advance from First Mortgage Managed Investments Limited Property: 1727, 1767 and 1807 Bells Line of Road, Kurrajong Heights. We understand that you wish us to act on your behalf in relation to the refinance of the above property. We enclose our Costs Agreement in duplicate. Please sign the copy where indicated and return same to this office in the enclosed self-addressed envelope and retain the original for your records." 278A similar letter was not sent to either Mr Pittman or Mr Webster. I conclude that Ms O'Callaghan did not regard the firm as being retained by them. 279On 8 February 2008, a standard form Statement of Personal Particulars, which was required by First Mortgage, was apparently signed by Mr Pittman and Mr Webster. It recorded Ms Locke as their nearest relative, although it left the description of the relationship uncompleted. It recorded the names of their solicitor and accountant as Christopher Edwards/Emma O'Callaghan. 280Mr Webster and Mr Pittman both denied signing this document. Having viewed their signatures on that document, I am satisfied that I should accept their denials. On the probabilities, the document was signed by Ms Locke. 281A part of this refinancing process included some telephone conversations directly between Mr Wilson of First Mortgage and Mr Webster and Mr Pittman. 282Mr Wilson wrote emails, apparently shortly after each of these conversations. These emails provide a reasonably contemporaneous account of what was said in the conversations. 283It is convenient to set out the conversations in the email. On 13 February 2008, it is apparent that Mr Webster telephoned Mr Wilson and had a conversation with him. Mr Webster says he was asked by Ms Locke to ring Mr Wilson, although he was not certain why that was so. 284The file note completed by Mr Wilson is in the following terms: "Rex rang and I went through the increase with him. He didn't believe that the loan was increasing, just rolling over with Margot paying the interest. He believed that Margot was paying the interest from the start of the loan. I asked him if he had taken these to his solicitor, and he advised me that Margot was with him, that she was talking to the solicitor about horses. He stated the solicitor didn't explain the loan to him, he wasn't sure that they were the borrowers. I went through the previous CAR on file and told him that on the 1/12/06 when I asked him where to send the documents for Independent Legal Advice he told me to send them to Christopher Edwards, he confirmed this to be correct. I also told him that the reason for the loan was to assist finish a subdivision called Ridgeback. He corrected me and told me it was Razorback. He confirmed this to be true as well. The problem is that Margot had never been in touch with them or advised where the developer was at over the past 12 months. I told him that the loan expired in December and that interest had not been paid from that date. He said he understood Margot was paying the interest. I confirmed that she isn't and has never. I told him that he needed to roll this over and catch up with repayments. He said he would ring Margot and come to some arrangement. It was never and is not now their intention to sell any of their property." 285I am satisfied in light of my earlier findings that it was not Mr Pittman or Mr Webster who, in 2006, had suggested that Christopher Edwards was their solicitor, that when this note records an apparent agreement by Mr Webster that he had nominated the firm, that what Mr Webster was on the probabilities agreeing to, in this conversation, was that Christopher Edwards had acted as the solicitor on the previous transaction. 286On the following day there was a telephone conversation with Mr Pittman. 287Mr Wilson's note of that telephone conversation is as follows: "He advises that he has spoken to Rex. He didn't understand the interest arrangement, but was aware that the loan and the mortgage were in their names. He also advises that they ... this loan was to have been paid from Razorback subdivision sales and they were promised some money on top, he said that he would now be happy to just get the loan repaid. Razorback has been completed to them and they were selling blocks. I told him that he has 2 million reasons to ensure he became proactive and pursued information on the exit strategy for this loan. They have spoken to the lawyer and have not been given any information. I told him that if the loan increase we have here were to proceed then after the period interest was paid in advance there would not be equity to keep paying and they would need to pay the monthly interest themselves. I told Basil that the conversation we were having was to position him to get his exit strategy in place, FMI were being proactive in giving them a chance to chase the equity promised and to pay the loan back. He understands that the loan has expired and that it is in default. His immediate response was to get the loan drawn and cover their position and they will sort the other out with Margot. I told him that I wanted a letter signed by him and Rex when they are comfortable with their exit strategy, requesting we draw the loan. They haven't a fax machine but will post this to us, when Rex and he agree. He thanked us for pointing these matters out to him and Rex, and committed to pursue the Razorback funds." 288Having observed MR Pittman and Mr Webster, on the one hand, and Mr Wilson, on the other hand give their evidence, and taking into account their respective knowledge of and familiarity with loan transactions and mortgages, I am satisfied that these notes don't adequately record the dynamic nature of the conversations. The probabilities are that Mr Wilson did most of the talking. It was he who initiated discussion about subject matters. The probabilities are that Mr Pittman and Mr Webster would have answered mono-syllabically, and when told something would tend to agree whether they understood what was being said or not. I am not persuaded that these conversations reveal that either of Mr Pittman and Mr Webster had any real knowledge of what had happened, or what was going on. 289It appears, in handwritten letter of 14 February 2008, that Mr Pittman wrote on behalf of himself and Mr Webster the following to Mr Wilson: "In reply to phone conversation with requistion [sic] in writing for the extension of loan to pay INT etc. Could you please extend the loan for the period on the extension to give us more time." 290This letter confirms my findings about the content of the conversations. Clearly, Mr Pittman did not have any clue at all about the sum being borrowed, the length of time, or the interest rate proposed. None of these details was referred to or hinted at. Yet this was after, both he and Mr Webster had attended the offices of Ms O'Callaghan to have the loan explained to them, and to gain an understanding of the transaction and the risks involved. The conference with Ms O'Callaghan achieved no such result. 291It appears that the variation was finalised on 19 February 2008, in circumstances where the entirety of the advance was used to pay fees and charges levied by First Mortgage, two interest payments which were in default and four future interest payments. 292A Deed of Variation, which had been originally signed on 4 February 2008, was redated 19 February 2008. It is not clear by whom the document was redated. 293On 5 May 2008, Ms O'Callaghan wrote to Ms Locke enclosing an account for the firm's costs for the work dealing with the refinance. Curiously, the letter is addressed "Dear Mr Pittman" but otherwise does not seem to have come to Mr Pittman's attention. Mr Pittman did not pay the costs. 294It is clear that by the middle of the year, interest had fallen into arrears and as a consequence, on 23 July 2008, various enforcement notices were sent by First Mortgage to Mr Pittman and Mr Webster. A notice pursuant to s 57(2)(b) of the Real Property Act 1900, and pursuant to s 111(2)(b) of the Conveyancing Act 1919 recorded the default as being a failure to pay interest which was due on 15 July 2008.

Conference with Ms O'Callaghan on 4 February 2008 295Ms O'Callaghan in her affidavit does not record any contact with either Mr Pittman or Mr Webster prior to meeting them on 4 February 2008 at 10am in her office. She does record that she received the letter from First Mortgage to which reference has been made above. 296Similarly with the meeting in 2006, Ms O'Callaghan does not have any file note of what actually occurred during the course of this conference. 297For reasons largely similar to those with respect to the earlier conference, I cannot accept Ms O'Callaghan's evidence as to what was said in the course of this conference. The documents, although less in number that in 2006, were nevertheless extensive and complex. Mr Pittman and Mr Webster were not shown them before the conference, they had no opportunity to read them carefully during the conference. I have no doubt that the discussion about the documents, and the underlying transaction, was at best, perfunctory, particularly because the transaction was an apparently routine refinance. 298Both Mr Pittman and Mr Webster say that Ms Locke was in the room whilst this conference occurred. The account which Mr Pittman gave Mr Wilson within a few days of this conference occurring, recorded that Ms Locke was in the room. I accept that she was. Ms O'Callaghan, did not recall Ms Locke being in the room, but accepted that it was possible that she was. 299In those circumstances, it was not possible for Ms O'Callaghan to have given any independent legal advice to Mr Pittman and Mr Webster. After all, she regarded Ms Locke as her client. It was Ms Locke to whom the Costs Agreement was addressed. It was Ms Locke to whom the account was sent. On the probabilities, it was Ms Locke with whom arrangements were made for the conference to take place by Ms O'Callaghan's assistant. Ms Locke was Ms O'Callaghan's client and had been for some years. 300In those circumstances, I am not persuaded that I can find any real or substantive advice was given at all. I think the probabilities point to the fact that Ms O'Callaghan merely saw her role as being to witness the various documents which were sent by First Mortgage to her firm with the covering letter to which I have earlier referred. The fact that this was a refinancing exercise reinforces that this was the probability. 301Mr Pittman gives evidence of a discussion in Ms O'Callaghan's presence in which Ms Locke exhorted Mr Pittman and Mr Webster to sign the statement of particulars even though it included figures with which they were not comfortable. Such was Ms Locke's desperation at this stage, I am satisfied that such a discussion took place in front of Ms O'Callaghan. 302As well, Ms O'Callaghan records that she was told that the subdivision would be completed. If this is so, then on the probabilities it was Ms Locke who told her that and not Mr Pittman and Mr Webster. 303In the result, this variation was entered into by Mr Pittman and Mr Webster without the benefit of any independent legal advice or explanation of the documents. The contents of the two telephone conversations with Mr Wilson which took place a little over a week or so after this conference, make it plain that neither Mr Pittman nor Mr Webster had any real understanding of this transaction. And what was plain to First Mortgage, contrary to assurance given to First Mortgage by Ms Locke, was neither Mr Pittman nor Mr Webster had any intention of selling their property. 304They should have had the benefit of independent legal advice about the transaction and the document which led to them having an understanding of the transaction. After all, that is what a solicitor was meant to tell them. Ms O'Callaghan did not.

Conduct of First Mortgage 305The conduct of this loan by First Mortgage is able to be established from the evidence of Mr Wilson and Mr Boyce, the internal documents and then measured against the Prudential Lending Manual. 306The Prudential Lending Manual records, amongst other things, the minimum safeguards required to protect the assets of the First Mortgage Scheme. All directors and staff were obliged to adhere to the policies and guidelines in the manual. It is appropriate to call attention to particular relevant parts of it. 307Part 3 of the Manual, which is entitled "Pre-settlement Requirements", records the prudential guidelines which include: (a)Serviceability: The manual requires for self-employed people, recent income tax returns and the last issued tax assessment. It records that additional information may be necessary. In short, the manual requires independent evidence that the borrowers can service the loan and have sufficient surplus monies on a monthly basis, or "... have a commitment exit strategy". These requirements relate to all regulated contracts/consumer credit code loans. There was no requirement of any of these matters for an investment/business loan. (b)Evidence of purpose: The manual requires evidence of the purpose for an investment/business loan to be obtained by a manager. This evidence includes independent documentary evidence which was to be annexed to a statutory declaration to be executed by the borrower; (c)Credit Analysis Report: The manual requires a manager to obtain an asset and liability statement, and a statement of personal particulars for all "mortgagors, borrowers and guarantors". 308Part 13 of the Manual, which is entitled "Interest Rate Pricing and Products," makes provision for the nature and type of loan. It records that for loans for which rural (or vacant) land is being offered as security, the loan facility was to be an interest only facility, secured by registered first mortgage, with a maximum loan to value ratio of 70%. The part also provides that the maximum amount loaned would be $1.5 million, for a minimum of 12 months and a maximum of 3 years. 309The Manual also makes it clear that for loans which are not subject to the Credit Code, that First Mortgage does not require any of the further documents: (i)Personal tax returns; (ii)Company financial statements and tax returns (unless the loan to value ratio required them); (iii)Personal or company background; (iv)Demonstrated serviceability. 310The manual acknowledges, as did Mr Wilson from First Mortgage in his evidence, that the methodology set out in the manual, determined the prudence of a loan. Mr Wilson accepted that an important element of prudential lending was that risks were clearly identified and dealt with appropriately, at least, from the perspective of the lender. 311Mr Wilson in his evidence acknowledged a number of breaches of the manual in respect of the 2006 loan to Mr Pittman and Mr Webster. They were: (a)The application for the loan was not received from either the borrower or a financial broker; (b)There was no record made in the credit analysis report noting the "borrower's exit strategy"; (c)Letter of offer of the loan was not sent to the borrower - it was sent to Ms Locke. 312Mr Wilson, whose answers to many questions in cross-examination, seemed overly defensive, and often evasive, confirmed with respect to the loan to Mr Pittman and Mr Webster, that First Mortgage regarded the completion and sale of the development lots as being the first source of repayment, although he claimed that First Mortgage had no information at all about the development, including the number of lots, their anticipated date of completion, their actual completion and their sale. He agreed that the statement of assets and liabilities provided by Mr Pittman and Mr Webster did not include as an asset any share in any of the developments which he understood were being undertaken, and which he claimed were being undertaken by them as joint venturers. 313Mr Wilson was asked about the capacity of Mr Pittman and Mr Webster to repay the loan. It is to be recalled that in the financial material provided by First Mortgage, Ms Locke has falsely recorded, on behalf of Mr Pittman and Mr Webster, that their combined income, net, was of the order of $450,000. It is also to be recalled that the borrowing was a little under $2 million and was for a period of 12 months. 314Mr Wilson gave this evidence: "Q. ... I am suggesting to you that merely because Messrs Pittman and Webster are recorded as having been able to earn a combined income of $450,000 means that, on the basis of that income alone, they wouldn't have been able to repay a $2 million loan in anything like 12 months? A. Correct, that's why it was rolled." 315The second part of the answer relates to a point in time well after the loan was made. What is clear from this answer is that on the material which First Mortgage had, albeit false, they did not expect and could not have expected Mr Pittman and Mr Webster to be in a position to repay the loan in accordance with its terms. The position that it was impossible for Mr Pittman and Mr Webster to repay the loan was much clearer if their actual income was taken into account. 316A little earlier in the cross-examination, the same topic was raised with Mr Wilson. He gave this evidence: "Q. So, how was it that, even on a combined annual income of $450,000, that you would have taken comfort in relation to their ability to repay $1.9 million in one year? A. The loan documentation limits a loan to 12 months, at that stage we review it. Many, many loans get rolled over until people can pay that back. So it is harsh and unconscionable to expect somebody to pay it back on the due date. We do many loans for 12 months, but we do roll them over and we did that." 317It seems that First Mortgage proceeded on the basis that the subdivision at Razorback, at least, was a joint venture between Ms Locke on the one hand, and Mr Pittman and Mr Webster on the other. Mr Wilson agreed that at no time was there any document, nor any reference in a document, which related to, or recorded that, the subdivision being conducted by Ms Locke was a joint venture, or, to use another term favoured by First Mortgage, a shared development, with either or both of Mr Pittman and Mr Webster. 318Mr Wilson asserted in his evidence that First Mortgage proceeded on the basis that it was a joint venture solely because of what he was told by Mr Pittman and Mr Webster in telephone conversations which he said that he had on or about 1 December 2006. 319Importantly, Mr Wilson accepted that if the purpose of the loan "... didn't fit in with what we thought was appropriate, we would not have done the loan". 320The two telephone conversations which were said to be the basis for the conclusion that Mr Pittman and Mr Webster were engaged in a joint venture of land subdivision, do not allow such a conclusion to be rationally drawn. 321It is apparent from the conversation, as set out in Mr Wilson's affidavit, the terms of which he adhered to in his cross-examination, that although he had no document prior to the conversations suggesting that the subdivision and development project was a joint venture, it was he who first suggested that there was a joint venture to Mr Pittman and Mr Webster. However, the contemporaneous file note to which I have earlier referred, contains nothing which suggests that the phrase joint venture was used, nor that there was any basis for concluding what any such joint venture involved. I do not accept that First Mortgage had any basis from either of these conversations to draw a meaningful conclusion, upon which to base the provision of a very large loan, that Mr Pittman and Mr Webster were engaged in a joint venture property development with Ms Locke. 322This is not a sufficient basis for First Mortgage to have relied upon as identifying the purpose of this business loan. It did not comply with the lending manual. Particularly as, so far as the evidence demonstrates, there was no basis for any conclusion that the subdivision was a joint venture. 323As well, I am satisfied that there was no material available to Mr Wilson which enabled him to conclude that the development would be completed within the 12 months of the loan, and hence, the loan could be repaid. The basis for this satisfaction is twofold. First, as he ultimately accepted in cross-examination, there was no basis in either of the two conversations for such a conclusion. Secondly, he accepted that there was no document with which he was provided that would support such a conclusion. This was of particular importance because in his affidavit Mr Wilson deposed to the fact that the application for a loan was viewed on the basis that the "shared development" was "...to be completed prior to the expiry of the loan". 324In his affidavit dated 27 October 2010, Mr Wilson said: "The application...was viewed and processed as a business investment land sub-divisional project which was a shared development and was to be completed prior to the expiry of the loan..." Ultimately, Mr Wilson conceded, and the evidence demonstrated, that this basis of processing of the loan by First Mortgage was fundamentally flawed. It was flawed because the development was neither shared nor a joint venture, and it was also flawed because there was no basis in any of the documents provided or conversations which Mr Wilson had, which would have enabled him to conclude that the development was to be completed prior to the expiry of the loan. In other words, through its own lack of attention to its own prudential processes, First Mortgage entered into this transaction on a basis of an intentionally unexplored and effectively unlimited risk profile. 325Accordingly, I would conclude that there could have been no reasonable belief, on the part of First Mortgage, that there would have been sufficient funds to repay the loan prior to the expiry of it other than from the sale or other realisation of the secured property of Mr Pittman and Mr Webster. It is to be remembered that these properties were the only assets of value and sole residence, and sole source of income, for Mr Pittman and Mr Webster. 326So far as First Mortgage was concerned, the substance and contents of the documents seemed to matter very little. The fact that the documents existed, and had been completed, and apparently witnessed by a solicitor, took prominence. It seems a number of examples will suffice to support this conclusion that providing the "checklist" of documents and necessary steps was completed, and the loan to value ratio was adequate, the loan was approved to proceed. 327On the one hand, the statement of particulars provided by Mr Pittman and Mr Webster in 2006 indicated that each was earning net $250,000 and $200,000 per annum as self employed farmers or orchardists. On the other the documents disclosed that neither Mr Pittman nor Mr Webster were registered for GST. In 2006 GST registration was mandatory if a self-employed person was earning over about $60,000 per annum, as the documents showed that Mr Pittman and Mr Webster were. 328This inconsistency led to this exchange in the evidence of Mr Wilson: "Q. So, they either told you a lie about what they were earning or they were cheating on their tax? A. Correct. Q. Neither of those alternatives troubled you sufficiently to make any enquiry? A. Correct." 329Another example deals with the relationship of Ms Locke. The documents provided to First Mortgage recorded that Ms Locke was Mr Pittman and Mr Webster's niece, and was their closest living relative. Mr Wilson knew from at least 7 December 2006, which was before the loan was made available, that Ms Locke was not their niece and that she was not their closest living relative. He knew that the documents which he had, to the extent to which they recorded these facts, were false. He made no enquiries about that and did not regard it as a matter of concern that there were lies contained in the application documents submitted to him. 330A third example is this. Mr Wilson confirmed that he knew in 2006 that the loan funds were going to be used to progress a development project involving Ms Locke, who was apparently the developer. He knew that Ms Locke was not recorded with respect to the First Mortgage loan as a borrower or a guarantor, nor was she the provider of any security to First Mortgage for this loan. First Mortgage did not seek any security from Ms Locke and relied entirely upon the security of Mr Pittman and Mr Webster's land even though there was no basis, had he turned his mind to it, to conclude that Mr Pittman and Mr Webster were involved in the land development being undertaken. Nevertheless he proceeded upon the basis that Mr Pittman and Mr Webster were involved in the property development. 331The position was substantially the same in 2008. Again, Mr Wilson seemed entirely unconcerned about the content of the documents with which he was being provided. 332At least prior to making available the further advance in 2008, Mr Wilson: (a)knew that the contents of the documents were false insofar as they continued to record Ms Locke as the closest living relative of Mr Pittman and Mr Webster; (b)knew that the asserted "exit strategy" contained in an email from Ms Locke to Mr Wilson that Mr Pittman and Mr Webster intended to list Lot 23 for sale in January 2008, to realise a sale price of $1.05 million and to use the entirety of the proceeds to reduce the loan until approximately mid-way through 2008 when Lot 9 would be sold and the proceeds used to reduce the loan, was false; (c)did not ascertain any information about the progress of the subdivision, the number of lots in it, and the stage which it had reached by the time the further monies were advanced; (d)knew that Mr Webster did not believe that he had received any advice at all about the loan which was being made; (e)knew that Mr Webster had no idea what was happening in relation to the development, at least over the last 12 months, and that it was not Mr Webster's intention, nor that of Mr Pittman, now and had never been their intention, to sell any of their property. 333Mr Wilson agreed in evidence that in the telephone conversation he had with Mr Webster in 2008, that it was apparent that Mr Webster did not know the reason for the loan that was to be made. He agreed that he had to tell Mr Webster the reason for the loan. He also agreed that it was he who suggested to Mr Webster that rather than refinancing the loan from another source, that it would be rolled over, the debt increased for the purpose of paying interest in advance and arrears of interest brought up to date. 334It is necessary in considering First Mortgage's conduct to understand the issues associated with the loan. Mr Wilson agreed in evidence that with respect to the loan to Mr Pittman and Mr Webster there were in substance two risks for First Mortgage. The first was a type of risk typical to property development, namely that the development would not realise sufficient funds to enable the repayment of the loan. The second was one with respect to Mr Pittman and Mr Webster personally, namely whether they had any legal right or enforceable entitlement to the proceeds of the sale of the development such that the loan could be repaid from the proceeds of the sales of the subdivided lots. Mr Wilson agreed that so far as either of those risks were concerned, in the circumstances prior to the loan being in 2006, and prior to it being extended in 2008, First Mortgage had no material whatsoever which enabled it to assess either of those two risks, and make a determination of the prudence of the loan. 335In particular, with respect to the risks arising from the lack of any demonstrated legal interest which Mr Pittman and Mr Webster had in the proceeds of the sales of the subdivision land, Mr Wilson accepted that it was a risk which First Mortgage identified and determined, consciously, that they would not deal with that risk at all. 336Mr Boyce, a solicitor, was the other individual who gave evidence in First Mortgage's case. He was doing so in his capacity as Executive Director of First Mortgage. It was he who gave the final approval to the loan being made to Mr Pittman and Mr Webster. He did so, amongst other things, on the basis that Mr Wilson had already been through the file, had attended to everything that was required, and had also signified his recommendation for approval, or approval, on the file. 337It is clear from Mr Boyce's description of what he was doing that, as I have earlier found, the substance and content of the document or the documents which were received, was not nearly as important as the fact that all of the requisite documents were apparently completed and signed and were on the file. He gave this evidence: "Q. And so it was your job, on your evidence, to check off everything was OK? A It was my job to see that they were in the file, completed and executed, and they were." 338Mr Boyce went on to say that what was of particular importance was that the purpose of the loan was for the property venture at Razorback, and that the interest was being paid in advance. He regarded everything else as secondary. He said: "Q. If you had any query ... whatsoever, it was quite open to you to raise those queries with the borrowers? A. It was, but then you have got to come back to the purpose of the loan. The loan was to be involved in a joint venture at Razorback. And the facility provided that interest would be provided 12 months in advance. So, my primary purpose of the payment of the loan was the interest that was provided in advance, and this could be regarded as a secondary purpose." 339In the context in which he was asked that question, it seems quite clear that Mr Boyce did not regard the details of the serviceability of the loan by Mr Pittman and Mr Webster as being of any importance to First Mortgage. As well, he was of the view, which as I have earlier pointed out, was not open on the material which was available to First Mortgage, that Mr Pittman and Mr Webster were engaged in a joint venture with Ms Locke by way of a subdivision at Razorback. 340Mr Boyce was not concerned to substantiate the purpose of the loan. He gave this answer: "The purpose, I don't believe is for us to find out, are the borrowers protected in what they are wanting to do, that is why we send them to a solicitor who adequately explains everything to them." 341Mr Boyce accepted that at no time in either 2006 or 2008, when considering either of the loans to Mr Pittman and Mr Webster, did he have any information at all about the Razorback development other than its general location. He did not know when the project was to be completed or whether there would be any sales within the 12 month period following the 2006 loan. Indeed, Mr Boyce was unable to say that there was anything in his file which was able to give him any comfort at all that the so-called Razorback development was not an entirely fictitious development. In other words, First Mortgage undertook no due diligence or checking at all with respect to the property development project into which the loan funds were apparently being paid, and which, according to Mr Wilson's assessment, was the primary source of repayment of the loan. 342The only explanation on the evidence which is available as to why First Mortgage treated the development at Razorback in this somewhat cavalier fashion is that they were content to provide funds by way of a loan which were, on the valuations conducted, adequately secured over Mr Pittman and Mr Webster's property, and which provided for the payment of their interest in advance for the first year, and for which they would also receive their appropriate fees and commissions and the like, at the commencement of the loan from the loan funds, being advanced. 343I had the clear impression from Mr Boyce's evidence that First Mortgage regarded the role of the independent solicitor as being of critical importance to the integrity of the loan. On more than one occasion, he made mention of the fact that the documents had been signed in front of an independent solicitor who had provided advice. For example, in one answer he gave, he said: "I was satisfied when the documents came back and they had seen their solicitors and signed it up, that they had been properly advised."

344As a matter of their ordinary approach, First Mortgage seemed to place principal importance on two factors: (a)The obtaining, independently of the borrower, of proper valuations of the security properties; and (b)The completion of the relevant documents, which process, so far as documents emanating from the borrowers was concerned, was overseen by an independent solicitor whose advice to the borrowers was also relied upon by First Mortgage. 345It seems that whilst First Mortgage accepted that it was open to it to make further enquiries, particularly about the purpose of the loan and the use to which the loan monies were to be put, at least in the circumstances of this case, it chose not to inform itself of any of those details. 346In light of all the evidence of Mr Wilson and Mr Boyce about First Mortgage's approach to lending and the evidence which I have accepted in this case, I have reached the following conclusions: (a)In a number of respects, First Mortgage did not comply with its own Prudential Lending Manual and standard procedures; (b)In undertaking an assessment of the risks to First Mortgage of this particular lending transaction, First Mortgage undertook no prudential check on the property development project being undertaken by Ms Locke, the beneficiary of the loan funds, to establish whether it was capable of providing a sufficient source of funds to repay the loan; (c)Notwithstanding that it was obvious that information contained in the document submitted to it was obviously untrue or incorrect, in material respects, First Mortgage took the view, apparently on the basis that a solicitor would be witnessing various documents, and providing independent advice, that it did not need to concern itself, or make enquiries about the obviously untrue and incorrect material; (d)First Mortgage suggested that it advanced the loan on a basis that Mr Pittman and Mr Webster were borrowing the money to be invested in a joint venture property development project, the joint venture being with Ms Locke. It had no material from which to be satisfied that there was any joint venture involving Mr Pittman and Mr Webster. It did not see the need to, nor did it make any attempt to, be satisfied as to the truthfulness of this basis for making the loan. Its only source of information was Ms Locke, with whom First Mortgage, according to Mr Wilson, had previous dealings. (e)First Mortgage did not itself make any assessment of the capacity of the borrowers to repay the loan, except by the obtaining of valuations of the security properties. It chose to rely on the independent solicitor "...looking after their interests..."; (f)First Mortgage knew that Mr Pittman and Mr Webster did not receive any part of the loan funds, and that after repayment of the existing loan, all excess monies went to Ms Locke's company. (g)First Mortgage proceeded in making the loan on the basis that, whatever be the solicitor's involvement in making the loan, they were appropriately protected by the security properties. In short, the only risk mitigation strategy engaged in by First Mortgage was to take the securities over Mr Pittman and Mr Webster's property which they would realise when necessary if default occurred. 347These conclusions applied to both the initial loan in 2006 and to the variation which occurred in 2008.

The Litigated Issues 348Mr Pittman and Mr Webster defend the proceedings and seek relief on their cross-claim against First Mortgage essentially on four bases: (a)there was no contract entered into between First Mortgage and Mr Pittman and Mr Webster because they were not provided with, and did not sign, any document other than the signing pages of the loan agreement and the First Mortgage mortgages; (b)the loan agreement and First Mortgage mortgages were unjust within the meaning of the Contracts Review Act 1980; (c)First Mortgage engaged in unconscionable conduct contrary to the provisions of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987; and (d)First Mortgage engaged in unconscionable conduct in accordance with the general law. 349With respect to each of these defences, and legal bases for a claim for relief, it is convenient to set out my understanding of the legal principles which apply, and deal with the submissions advanced by the parties. 350The first ground pleaded was that there was no contract entered into because the signatures of Mr Pittman and Mr Webster did not appear on anything other than the signing pages of the loan agreement and mortgages. This is entirely a question of fact which will be considered together with and not separately from the remainder of the issues.

Contracts Review Act 1980 351The Contracts Review Act was described by McHugh JA in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 621 as: "... revolutionary legislation whose evident purpose is to overcome the common law's failure to provide a comprehensive doctrinal framework to deal with 'unjust' contracts." 352Section 7 of the Contracts Review Act is the principal provision which enables relief to be granted by the Court. It is in the following terms: "7. Principal relief (1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following: (a) it may decide to refuse to enforce any or all of the provisions of the contract, (b) it may make an order declaring the contract void, in whole or in part, (c) it may make an order varying, in whole or in part, any provision of the contract, (d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that: (i) varies, or has the effect of varying, the provisions of the land instrument, or (ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument. (2) Where the Court makes an order under subsection (1) (b) or (c), the declaration or variation shall have effect as from the time when the contract was made or (as to the whole or any part or parts of the contract) from some other time or times as specified in the order. (3) The operation of this section is subject to the provisions of section 19." 353As is apparent, the central provision in s 7 deals with a finding that a contract or a provision of a contract was unjust. 354In reaching a determination that, in any given matter, that is the case, the Court is obliged to have regard to the matters set forth in s 9 of the Contracts Review Act. 355It is in the following terms: "9 Matters to be considered by Court (1) In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of: (a) compliance with any or all of the provisions of the contract, or (b) non-compliance with, or contravention of, any or all of the provisions of the contract. (2) Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include the following: (a) whether or not there was any material inequality in bargaining power between the parties to the contract, (b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation, (c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract, (d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract, (e) whether or not: (i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or (ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented, because of his or her age or the state of his or her physical or mental capacity, (f) the relative economic circumstances, educational background and literacy of: (i) the parties to the contract (other than a corporation), and (ii) any person who represented any of the parties to the contract, (g) where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed, (h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act, (i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect, (j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act: (i) by any other party to the contract, (ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or (iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract, (k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and (l) the commercial or other setting, purpose and effect of the contract. (3) For the purposes of subsection (2), a person shall be deemed to have represented a party to a contract if the person represented the party, or assisted the party to a significant degree, in negotiations prior to or at the time the contract was made. (4) In determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made. (5) In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made." 356A contract may be unjust: (a)because of the way it operates in relation to the claimant, or because of the way in which was made or both: McHugh JA in West at 620; (b)because it contained substantive injustice arising because of its terms, consequences or its effects are unjust; (c)because of procedural injustice which arises because of the unfairness of the methods used to make it; (d)even if it is not unconscionable, harsh or oppressive; or else (e)a contract may be unjust even though circumstances that give rise to that injustice are not known the other party: Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 at 277; Nguyen v Taylor (1992) 22 NSWLR 48 at 71 per Sheller JA; Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 at [94]-[96]. 357Two distinct steps are involved in applying the Contracts Review Act. In Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153, Brereton J said at [51]: "... The first is whether the contract was unjust in the circumstances in which it was made, having regard to the factors referred to in s 9. This is a conclusion of fact, albeit one of ultimate fact involving a broadly based value judgment. ... The second which arises only if the first resolved in the affirmative, is whether any and if so what relief should be granted; this involves the exercise of a judicial discretion ..." See also Antonovic v Volker (1986) 7 NSWLR 151 at 154-155 per Samuels JA and Kirby P agreeing; Beneficial Finance at 270E per Samuels JA; Khoshaba at [34]-[40] per Spigelman CJ, [106]-[111] per Basten JA; Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; (2008) 77 NSWLR 205 at [85]-[87] per Campbell JA (Hodgson and McColl JJA agreeing). 358In other cases, particular elements have been found that have contributed to the consideration of whether the particular contract was unjust. These have included: (a)the purpose for which the loan is obtained is a relevant circumstance within the meaning of s 7: Khoshaba at [70] per Spigelman CJ, [104] per Basten JA; (b)the fact that a lender was willing to lend on the value of the security alone and was indifferent to the purpose of the loan is a matter of significant weight: Khoshaba at [82] per Spigelman CJ,[104] per Basten JA; Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; (c)whether the financier was "innocent" of the cause of the unjustness: Khoshaba at [96] per Spigelman CJ; (d)indifference to the ability of the borrower to service the loan: Spina v Permanent Custodians Ltd [2009] NSWCA 206 per Young JA at [89]-[90]; (e)the failure to follow guidelines conceived by the lender themselves: Khoshaba at [90] per Spigelman CJ; (f)the fact that the borrowers had a poor educational background with limited schooling, or else were completely uneducated or illiterate were factors regarded as being able to be taken into account: see Elkofairi at [53] per Santow JA; Fast Fix Loans Pty Ltd v Samardzic [2011] NSWSC 19 at [91] per Hoeben J; Riz at [2]; (g)the fact that borrowers may be commercially inexperienced may be relevant; see Fast Fix at [91] per Hoeben J; Khoshaba at [129]-[130] per Basten JA; (h)a failure to obtain independent advice, or for a lender to recommend the obtaining of independent advice, may be relevant: Fast Fix at [95] per Hoeben J; Khoshaba at [75] per Spigelman CJ; (i)pressure to enter into the loan in an artificially limited time by the real beneficiary of the loan: Fast Fix at [92] and [98] per Hoeben J. 359There is of course a need to keep firmly in mind the countervailing issue which is that there is a strong public interest in promoting certainty in commercial transactions and in holding people to the bargain which they sign. As Gleeson CJ said in Baltic Shipping Co Limited v Dillon (1991) 22 NSWLR 1 at 9: "... [t]he general policy of the law is that people should honour their contracts. That policy forms part of our idea of what is just".

Parties' submissions 360First Mortgage submitted that Mr Pittman and Mr Webster, prior to entering into the 2006 loan, knew what a mortgage was, knew that they were the borrowers under the loan being advanced by First Mortgage, knew that Ms Locke was not guaranteeing the loan and that, at least, in broad terms knew what the usage of the loan monies was, in that it was partly to refinance existing loans, and partly to provide funds to complete the Razorback development, and, finally, that Mr Pittman and Mr Webster knew that if loan repayments were in default the lender could sue them including selling their land. 361First Mortgage submitted that Mr Pittman and Mr Webster, therefore, knew all of the important details of the transaction prior to executing the loan and mortgage documentation, and accordingly there could not be any injustice to the defendants on account of any relevant ignorance or misunderstanding on their part as to the terms of the contractual arrangement into which they were entering. 362First Mortgage also submitted that a factual finding ought be made that Mr Pittman and Mr Webster benefited in two ways from the 2006 loan, namely: (a)the repayment of the Flamanda loans in the amount of $1.17M which was a liability to which they were subject; and (b)the use of the money in order to finance, or further finance, the Razorback development was also of benefit to them because it enabled Ms Locke to repay the principal of the loans and also that there was said to be a significant financial reward being provided to them. 363First Mortgage submitted that to the extent that a breach of its lending guidelines was to be found in the present case, such a breach would carry little, if any, weight. 364First Mortgage called in aid the extensive history of the mortgages which had been entered into from 1994 through to 2006, and submitted that this demonstrated that the defendants, Mr Pittman and Mr Webster, had a good understanding of what they were doing and their support for Ms Locke had a long term and proper basis. 365In short, First Mortgage, submitted that the total of the facts, matters and circumstances did not justify a conclusion that the loan transaction was unjust. On the contrary, First Mortgage submitted that the defendants had entered into the transaction with open eyes as to the nature of the transaction, the consequences of mortgaging their land, the size of the transaction and they were not in any way tricked, misled or pressured into agreeing to the loan. As well, First Mortgage submitted that it was under no obligation to undertake the sort of analysis of the risks involved the loan transaction which, in cross-examination, it was put that it should have done. 366Finally, First Mortgage submitted that notwithstanding their background and education, both the defendants were very experienced in entering into financial transactions with respect to Ms Locke's developments, and that whatever be the position in 1994, by 2006 they were not financially unsophisticated people but had experienced more loan and mortgage transactions relating to Locke than an average person would engage in during the course of a lifetime. 367First Mortgage also pointed out that such legal advice as the defendants did receive was entirely independent of it. First Mortgage made extensive submissions on what relief, if any, ought be granted. 368Mr Pittman and Mr Webster submit that the Court ought determine the claim under the Contracts Review Act for relief in advance of all other claims and defences: Spina at [24] per Young JA. 369Mr Pittman and Mr Webster submitted that by reason of the following factors, the Court ought find that the contract, by way of the loan transaction,, was unjust at the time it was made, and that it would be unjust now for that loan agreement to be enforced. They submitted that as a consequence, relief ought be granted: (a)there was a clear and material inequality of bargaining power as between First Mortgage and Mr Pittman and Mr Webster; (b)there was no direct benefit to Mr Pittman and Mr Webster arising from the loan agreement other than the payment of a relatively small amount of council rates; (c)the sole beneficiary of the loan agreement was, to the knowledge of First Mortgage, Ms Locke and neither Mr Pittman nor Mr Webster had any financial interest in the property development project or projects in respect of which the finance was sought; (d)the properties, the subject of the First Mortgage transaction, were the sole source of income and home of Mr Pittman and Mr Webster; (e)by reason of their age, their limited financial means, their limited education, their little or no commercial experience and very small combined income, relief ought be granted; (f)having regarding to the conditions of loan agreement upon which the mortgage was based, there was no prospect that Mr Pittman or Mr Webster would ever have sufficient funds to service the interest repayments, let alone repay the principal by the due date. The only means by which, in the particular circumstances of this case, First Mortgage could ever recover the loans from Mr Pittman and Mr Webster was by selling their land. The loan transaction did not give access to the subdivision proceeds, nor did Mr Pittman or Mr Webster have any legal right to access those proceeds; (g)the role played by Ms Locke including negotiating for the loan (and the 2008 variation), in combination with First Mortgage nominating Christopher Edwards as the solicitors, sitting in on the conferences where advice was given, providing Mr Pittman and Mr Webster with little notice of the need to attend upon the solicitors, making promises about repayment which could never be enforced, and making false representations to First Mortgage in order to secure the loan, were all factors which meant that the contract and its terms were unjust; (h)the fact that the legal advice which Mr Pittman and Mr Webster received was wholly inadequate and completely deficient including the fact that the practical and legal effect of the documents they were being asked to sign was not explained to them, they were not provided with a copy of the mortgage memorandum, or indeed any of the documents which they had signed and the relatively short period of time occupied for explanation of the documents was inadequate, resulting, in short, in Mr Pittman and Mr Webster receiving no adequate independent advice about the prudence of the transaction; and (i)First Mortgage failed to comply with its own lending guidelines in respect of the loan agreement and the mortgages. 370They submitted that by reason of one or more, or all of these factors, the Court would conclude that the loan agreement was unjust. 371Mr Pittman and Mr Webster went on to submit that it was plain that First Mortgage was not an innocent party with respect to the factors upon which it relies. 372I am satisfied that each of the First Mortgage loan in 2006, and the variation of it in 2008, of which the mortgages over Lots 8, 9 and 23 were a direct consequence, were unjust and the time they were made, and that it would be unjust now to enforce them. I have reached that conclusion for the following reasons: (a)there was a material inequality in the bargaining power between First Mortgage and Mr Pittman and Mr Webster because First Mortgage determined all of the terms and conditions of the loan, and did not permit of any negotiation whatsoever. The only bargaining power which Mr Pittman and Mr Webster, at least in theory, had, was to decline to enter into the transaction; (b)there was not, at or prior to the time the contract was made any negotiation at all about the terms of it. Mr Pittman and Mr Webster were presented with a "fait accompli" because it was Ms Locke who had approached First Mortgage and who dealt with First Mortgage. She had determined the sum of money required, the interest which was acceptable and the period of the loan in a proposal which was put to First Mortgage. That proposal was accepted. There was no negotiation at all by Mr Pittman or Mr Webster. Nor could it be said that Ms Locke's participation was negotiation on their behalf, or as their agent, since they did not know of the negotiations or what was occurring; (c)it was not reasonably practicable for Mr Pittman and Mr Webster to negotiate for or reject provisions of the contract. This arose in a number of ways including that they only learnt of the transaction at the last moment, they did not have the opportunity of reading the documents with sufficient time, having regard to their level of education and their capacity to read, because First Mortgage sent the documents directly to the lawyers, Christopher Edwards, who had not been nominated by either Mr Pittman nor Mr Webster and also because the Memorandum of Mortgage was not included in any of the documents. Mr Pittman and Mr Webster had no opportunity at all to attempt to negotiate for any alteration of the provision of the agreement; (d)neither Mr Pittman nor Mr Webster were, having regard to their age, their lack of formal education, their lack of commercial sophistication, and their limited capacity to read and comprehend the complex multiple-page documents, written in highly technical terms; able to reasonably protect their own interests; (e)clearly, the difference between First Mortgage and Mr Pittman and Mr Webster in terms of their relative economic circumstances, and their sophistication meant that First Mortgage was in a demonstrably superior and entirely dominant position which was not ameliorated, in the circumstances of this matter, by Mr Pittman and Mr Webster obtaining any legal (or accounting) advice of any real substance at all, let alone advice which was independent of Ms Locke; (f)whilst legal advice which was independent of First Mortgage was obtained, that advice was: (i)wholly inadequate in content; (ii)not independent of the true financial beneficiary of the loan, Ms Locke, which was known to First Mortgage; (iii)was not provided in circumstance which were conducive to its proper appreciation; (iv)could not have been provided, and was not provided, in a way which met First Mortgage's minimum requirements. The advice was not adequate because it did not explain the provisions of the loan transaction, nor the mortgages and their legal and practical effect. Neither Mr Pittman nor Mr Webster, according to contemporaneous evidence, had a clear understanding that they were the borrowers, and that Ms Locke was not legally bound to make any repayments, nor that their land could be sold by First Mortgage without first resorting to all of Ms Locke's assets. 373As is also obvious, and a factor entitled to significant weight, in the circumstances which exist here, the properties which are subject to the mortgage constitute the home and orchard of Mr Pittman and Mr Webster. It is their sole source of residence and income.

The commercial setting, purpose and effect of the contract 374The purpose of the contract was to fund Ms Locke's property development endeavours. The effect of the contract was to make Mr Pittman and Mr Webster the underwriters of those endeavours to the extent of the sum of money borrowed. The setting, or the circumstances in which the contract was made, did not suggest that there was any good reason why Mr Pittman and Mr Webster would underwrite Ms Locke's property development activities to the extent which they did. Nor was there any compelling reason why they would do so. Although there were suggestions in the evidence that they were to receive some benefit, I am not satisfied that that was so. Nothing was proved in the evidence which provided any firm basis for such a conclusion. 375The understanding of Mr Pittman and Mr Webster, that Ms Locke was the person responsible for the repayment of the debt and the interest was not matched by the legal effect of the loan agreement, nor the legal consequences contained in the mortgages, upon which First Mortgage intended to rely. First Mortgage recognised that it was both foreseeable, and probable, that they would need to rely on their full legal rights contained in the agreement and mortgage, namely, selling Mr Pittman and Mr Webster's land. 376There are additional features which make the loan agreements unjust. These features include: (a)the financial structure of the loan. First Mortgage well knew that Mr Pittman and Mr Webster could not repay the loan except by the sale of the secured property (or else through the voluntary, and unenforceable, payment, by Ms Locke, of the proceeds of sale of the property developments being undertaken by her. Given that the only certain method of repayment of the loan was by the sale of the properties owned by Mr Pittman and Mr Webster, the effect of such loan and its terms upon such sale was to completely deprive Mr Pittman and Mr Webster of all of their assets. This was because the loan to value ratio was about 70 per cent, but if there was to be a forced sale, by which expression I take it to be that the mortgagee required a sale to be made without regard to the state of the market from time to time, then the loan to ratio value was close to 80%. The consequence of was that, with an interest rate for timely payment of interest at a little under 11 per cent, and a higher rate at 16 per cent, the entire equity in the properties of Mr Pittman and Mr Webster would be removed by the accumulation of a minimum of about one year's interest after default, and a maximum of two year's worth of interest after default. (b)There was a difficulty with the latter proposition, to which I have earlier referred, namely the payment by Ms Locke of the proceeds of sale of her subdivision, which was the alternative said by First Mortgage to be the "primary exit strategy", which was that Mr Pittman and Mr Webster did not know anything about the financial position of Ms Locke, the extent of her developments, her other borrowings and what properties, if any, she owned which had equity in them and which were or were not secured. As well, as First Mortgage knew there was no legal obligation upon Ms Locke to make any repayments of the loan at all. First Mortgage also had no specific detail of, and chose not make any enquiries about, the nature and extent of the subdivision and the financial position of Ms Locke. (c)the failure by First Mortgage to comply with various provisions of the lending manual to which I have earlier made reference, which is of some, but limited weight in the circumstances; and (d)neither Mr Pittman nor Mr Webster received any direct financial benefit from the loan. They were not to receive any part of the funds to spend for their own purposes, nor did they in fact receive, nor were they intended to receive, any benefit at any later point in time. They were in a position analogous to a third party guarantor.

Unconscionability 377The defendants rely upon unconscionability either as a consequence of the statutes to which reference has been made earlier, or as a consequence of the general law. 378In Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 at [4], Mason J said: "It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct. As Fullagar J said in Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 at p 405: 'the circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity in body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other..." And at [6]: "It is not to be thought that relief will only be granted in a particular situation as mentioned by their Honours. It is made plain enough, especially by Fullagar J, that the situations mentioned are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applied whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstances is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know the existence of that condition or circumstance and of its effect on the innocent party." 379The defendants rely upon these principles as being called up in the factual circumstances of this case. It is clear that the Contracts Review Act provides for a broader base for the finding of unjustness. 380Since, as I have explained, I am satisfied that the contract is unjust as that term is used in the Contracts Review Act, there is no further profit to be gained by determining whether or not it was also unconscionable. This approach is consistent with authority: Spina at [28] per Young JA. 381The position under the other statutes is no different.

Relief 382First Mortgage submits that even if the Court were persuaded that the contract was unjust, relief would not necessarily follow, and if it did, the Court would need to take into account all benefits which Mr Pittman and Mr Webster received from the loan from First Mortgage. 383First Mortgage submitted that any relief which the Court would grant, assuming it were minded to grant relief, would not involve setting aside the mortgage, the loan agreement and 2008 Deed of Variation, but rather the Court would vary those documents to reduce the amount owing to a sum of $1,172,713.04 which equal to the sum which was applied to discharge the Flamanda loan, plus interest on that amount from the date of drawdown. First Mortgage submits that this sum was a direct benefit to Mr Pittman and Mr Webster because it discharged an existing liability and removed an encumbrance which existed over their land. 384As well, First Mortgage submits that the sum of $200,000 received by Mr Pittman and Mr Webster by way of a settlement reached with the legal firm Christopher Edwards, which was a third cross-defendant in the proceedings, in accordance with a Deed of Settlement, is a direct benefit which must be taken into account. 385Finally, First Mortgage submits, and Mr Pittman and Mr Webster agree, that a direct benefit was received in the sum of $4,349.20 which was paid for council rates directly from the First Mortgage loan funds. 386First Mortgage also submitted that such rights as Mr Pittman and Mr Webster claimed, in their cross-claim against Ms Locke, were a benefit, although First Mortgage conceded that there was no evidence as to the value of those rights. 387Putting it in a summary fashion, First Mortgage submitted that the appropriate relief, in a practical sense, which the Court ought grant, assuming it was otherwise persuaded to grant relief, would be confined to setting aside the mortgage over Lot 8, which was the parcel of land upon which the house in which Mr Pittman and Mr Webster resided, and the orchard stood, and capping the debt due to the plaintiff as the net amount yielded by the sale of Lots 9 and 23. 388Mr Pittman and Mr Webster, on the other hand, submit that the Court would grant the relief sought in its totality and would not restrict the relief by reference to the sum paid by First Mortgage to discharge the Flamanda loan. They submit that nothing that they received in any real or substantive sense constituted a benefit, including the discharge of the Flamanda loan. They submit that, in summary, each of the previous financial transactions was unjust in the circumstances, and was capable of being set aside under the Contracts Review Act. 389It is necessary to examine the relevant legal principles upon the issue of the identification of, and the nature of a benefit to which the Court ought have regard.

Legal principles 390The grant of relief, where a court finds a contract to have been unjust, is conditioned initially, by the terms of the Contracts Review Act, which provides that a court may take any of the actions listed in s 7(1)(a)-(d): "... if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result ..." 391Davies J in Bank of Western Australia v Tannous [2010] NSWSC 1319 at [33], said of the consequences of section 7: "33. One of the considerations in the exercise of that discretion involves a consideration of any benefit that the borrowers obtained as a result of the unjust contract. That is why, in the ordinary case, the discharge of a pre-existing mortgage by the payment of part or all of the proceeds of the loan agreement held to be unjust, would result in an order that ultimately required repayment of that sum to the new lender." 392However, as his Honour went on to make plain, this result does not necessarily, much less automatically, follow. At [34] - [35], he said: "34. If it can be shown that the pre-existing liability was itself unenforceable, or unjust in whole or in part, the discretionary order made in respect of the unjust contract sued upon would take account of that unenforceability or unjustness ... 35. No doubt the borrowers in such a case will lead evidence suggesting reasons that the pre-existing mortgage/loan agreement was unenforceable or unjust, and that the discharge of that arrangement by the incoming lender was not a benefit to the borrowers for that reason. One can envisage also that the incoming borrower [sic] may need to counter that evidence, by calling evidence from the outgoing mortgagee/lender to answer the claim of unenforceability or unjustness ..." 393I understand the last sentence in [35] to refer not to an incoming borrower adducing evidence, but rather the incoming lender doing so. 394In Elkofairi, Santow JA considered the question of benefit from a transaction which was otherwise liable to be set aside. His Honour said at [98]: "When a transaction is set aside for unconscionability or fraud, such order may be conditional on the repayment of any unwarranted benefit. The remedy to redress the effect of unconscionability should do no more than the minimum necessary to do so. The Court thereby seeks to achieve "practical justice"." 395His Honour noted the use of the expression "unwarranted benefit" in both the High Court of Australia and the Full Court of the Federal Court of Australia to describe the concept to which he was referring. 396The phrase "unwarranted benefit" is a short hand expression which describes the concept that having regard to what occurred in the impugned transaction and having regard to the position which courts of equity historically adopted in seeking to achieve what is practically just, the party who or which obtains relief against a transaction or obligation must do equity. As the High Court of Australia said unanimously in Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; (1995) 184 CLR 102, at [28]: "Thus, unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party obtaining an unwarranted benefit at the expense of the other." 397This approach was followed in Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482. 398The Court of Appeal considered a similar case in St George Bank Ltd v Trimarchi [2004] NSWCA 120. The trial Judge, Dunford J, had found that the funds advanced by St George had been used to pay out an earlier mortgage from National Mutual. The National Mutual funds had been used to pay out a Westpac Mortgage. Dunford J held that the National Mutual mortgage was an unjust contract that would have been liable to have been set aside. 399Mason P, in the Court of Appeal, noted at [20] that the mortgages granted to Westpac were third party mortgages in which there was no direct financial benefit to the mortgagors. He held that the fact that the St George mortgage had discharged an earlier mortgage from National Mutual was not conclusive against a grant of relief: see [24]. 400At [25], the President said: "The Act requires separate attention to be given to the transaction being sought to be enforced and the "justness" of that contract. Simply because the money advanced by St George went to discharge the earlier mortgage transaction involving National Mutual did not mean that relief had to be withheld, a fortiori where the respondents were effectively guarantors of their son's primary obligation, to the knowledge of the appellant through Mr Briggs; where the earlier transaction was tainted as regards the respondents; and where one element of the unjustness of the present transaction was the absence of independent legal advice as to the respondents' rights to challenge the National Mutual loan or financial advice as to the consequence of committing to the St George Bank transaction..." 401Accordingly, it is necessary to examine, in light of the submissions by First Mortgage, whether the Flamanda loan, which was being repaid, was an unwarranted benefit. Mr Pittman and Mr Webster submit that it was not a benefit because the Flamanda loan was itself an unjust loan and was liable to be set aside. 402As is apparent from an earlier discussion in this judgment, this question, namely whether the Flamanda loan was an unjust loan, cannot be considered in isolation from the earlier mortgage transactions. 403It needs also to be kept in mind, with respect to the earlier mortgage transactions, that even though Mr Pittman and Mr Webster are shown as borrowers, there is no suggestion that in any of the earlier mortgages, they received any monies directly from the loan funds to be used for their own purposes. Rather, it is clear from an examination of the substance of each of those transactions that the monies were to be used by Ms Locke in or one or other of her property developments, in none of which Mr Pittman and Mr Webster had any legal interest, or any right to the profits, or a part of them. 404In reality, and in substance, the properties of Mr Pittman and Mr Webster were being used as security for Ms Locke's property development activities. They were in an identical position, as a matter of substance, to that of a third party mortgagor. That is, a third party, with no interest in the relevant business, and who does not receive any funds, but who proffers a security to support borrowings by another. 405The comments of Mason P with respect to the position of a third party mortgagor, as seen in Trimarchi, are applicable to the position of Mr Pittman and Mr Webster in each of the various transactions. 406As Santow JA points out persuasively in Elkofairi at [90]ff, the terms of loans and guarantees often blur the distinction between borrows and sureties so that both became principal debtors, or co-debtors. In the context of the particular transaction there relevant, his Honour said at [96]: "The relevance of this analysis....is to support the proposition that, when resorting...to the wider doctrine of unconscionability, here in granting relief to the wife...the fact that the transaction is in the strict sense not one of guarantee need not provide an insuperable obstacle to relief...Each circumstance must be taken into account in looking at all of the circumstances, to see if indeed it would be unconscionable for the lender to enforce the rights against the wife." 407In truth and in substance here, the position of Mr Pittman and Mr Webster in respect of all transactions involving First Mortgage, the Flamanda loans and the Forrest Knoll/Obelisk Securities loans, is more akin to third party mortgagors, namely individuals proffering their land as security for a loan to a different individual or entity for use in a project in which the mortgagors have no interest, and no ability to control.

Features of earlier loans 408I have concluded that the earlier loans were also unjust. I have reached that conclusion for these reasons: (a)Mr Pittman and Mr Webster had the same personal features to which I have earlier drawn attention; (b)they received no direct financial benefit from the loans. They had no legal or other right to claim in the proceeds of any of the property subdivisions of Ms Locke. They were in substance third party mortgagors; (c)they were not entitled to any fee or sum of money for offering their land as a security; (d)they had no real or substantial knowledge of Ms Locke's property dealings in the financial sense, and hence were unable to make, even with expert accounting or financial advice, any real assessment of the risks involved in proffering their land as a security (or else being the borrowers); (e)they received no independent legal advice which explained in any clear way what the true effect of the transaction was; (f)by reason of the lack of warning given by Ms Locke of the need to attend at solicitor's offices, the limited information they were given about what was going to happen, often the volume of material with which they were confronted and had to deal with, the fact that they did not know who the solicitors were, let alone choose them, and Ms Locke's presence in the room, they were not able to exercise any real independence in considering the terms of the loan, including whether or not to enter into it; (g)the amount of the sums of money borrowed, the absence of any demonstrated ability to repay the sums from anything other than the sale of their properties, the fact that the properties were their sole residence and earning source, and in many cases, the very high interest rates being charged, all combined to mean that such equity as they did have, would evaporate very quickly. 409These were on any view, mortgages which were not financially manageable by Mr Pittman and Mr Webster, they could only ever escape the liabilities which they took on, by the sale of the properties, and only then, if the properties were sold promptly and if the real estate market was sufficiently viable for the sales to occur at a proper price. In short, the realistic alternatives if the loans were not "rolled over" which events depended entirely on Ms Locke's activities and efforts, was that the secured properties were to be sold. 410These features of themselves are sufficient to warrant a finding that each of the earlier loans was unjust. 411I am comforted in that finding by the failure by First Mortgage in the course of its case, notwithstanding the evidence given by Mr Pittman and Mr Webster about how the signing of these mortgages came about, and notwithstanding the terms of the mortgages, to call any of the earlier witnesses to the mortgages, including the solicitors who were said to have given independent advice to Mr Pittman and Mr Webster. Nor did they call Ms Locke, who could have given evidence about the circumstances in which each of these loans were made. 412In those circumstances, I make the finding of unjustness based upon an acceptance of the evidence of Mr Pittman and Mr Webster, which is largely uncontradicted, and the objective facts observable from the terms of the mortgage. 413In summary, I conclude that since the earlier mortgages were in substance third party mortgages, and they had the features to which I have drawn attention, that they were unjust within the meaning of the Contracts Review Act and accordingly, the fact that the First Mortgage moneys went to repay, at least in part, the Flamanda loan which itself replaced earlier loans, was not an unwarranted benefit to the defendants, Mr Pittman and Mr Webster, because each of those loans was unjust, and because of that conclusion, I am satisfied that the entry into those earlier loans did not constitute a financial benefit to Mr Pittman and Mr Webster. It follows that the discharge of the loans, by incoming lenders, ultimately, First Mortgage, did not amount to any benefit to Mr Pittman and Mr Webster of a kind which necessitates any consideration in the terms of the relief which is to be granted.

Was the settlement a benefit? 414Mr Pittman and Mr Webster on 11 April 2011, entered into a Deed of Settlement and Release with Christopher Edwards, who a cross-defendant in the proceedings, and also with Ms O'Callaghan. The purpose of the Deed was to settle the proceedings brought by way of a cross-claim by Mr Pittman and Mr Webster against Christopher Edwards. 415The recitals to the Deed adequately capture a summary of the cross-claim. The recitals said: "F. [Mr Pittman and Mr Webster] each allege that [Christopher Edwards] acted in breach of contract with [them] in breach of fiduciary duty, and/or in breach of [Christopher Edwards] duty of care owed to each of [Mr Pittman and Mr Webster] and knowingly participated in the breaches of fiduciary duty by [Ms Locke] ..." 416The Deed was recited that, Mr Pittman and Mr Webster "... agreed to accept $200,000 inclusive of all claims, interest and costs in full and final settlement of the proceedings against [Christopher Edwards]." It further recites that Mr Pittman and Mr Webster would agree "... to a verdict in favour of [Christopher Edwards] with no order as to costs ..." 417As the pleadings show, Mr Pittman and Mr Webster claimed compensatory damages, plus interest and costs, for the causes of action based on tort and also in contract. The settlement sum is a single indivisible amount which is unallocated between compensatory damages, interests and costs. It is non-specific as to which cause of action it relates to, or if more than one cause of action, which one or more causes of action it relates to. 418I would infer, with some confidence, having regard to the matters with which this judgment has dealt, that the settlement represented a compromise between the maximum amount that Mr Pittman and Mr Webster thought could be recovered in the action, and the risk that they may not succeed in proving any liability in Christopher Edwards, or else, if they did, but failed against First Mortgage, of having no, or else only a small, claim for damages. 419The concept of financial benefit is one which usually derives from a determination of whether, and if so to what extent, the lender's funds were paid to the borrowers who are seeking relief on a Contract Review Act claim, or alternatively, if no monies were paid to them, whether the payment resulted in a financial benefit other than a direct payment to the borrowers. 420Here, the receipt of $200,000 represents damages, interest and costs in respect of a claim based on cause of action in tort, for breach of contract or breach of fiduciary duty which arose, not from the making of the loan and the payment of monies by First Mortgage, and the disbursement of the loan monies, but rather from the antecedent conduct by a person, Christopher Edwards, or his employee Ms O'Callaghan, which conduct was not dependent upon the funds being made available by First Mortgage. 421Whilst it is correct that without the offer of the loan from First Mortgage, Mr Pittman and Mr Webster would not have come into contact with Christopher Edwards, and the claim for damages was one which, assuming it proceeded to a contested hearing, fell for assessment in a way which depended upon the outcome of the proceedings between First Mortgage and Mr Pittman and Mr Webster, it is nevertheless hard to see that the settlement represents a financial benefit, let alone one which derives from the loan. 422There are a number of arguments which favour the view that the settlement does not amount to a benefit. First, a significant part of the sum would represent a reimbursement of the legal costs incurred by Mr Pittman and Mr Webster in pursuing Christopher Edwards as part of these proceedings. 423Second, even if Mr Pittman and Mr Webster were wholly or substantially successful in their defence of First Mortgage's claim, or in the pursuit of their cross-claim against First Mortgage, it remained open to them to claim by way of damages from Christopher Edwards, a sum equal to the amount of legal costs on an indemnity basis, which were unrecovered from First Mortgage, but which were nevertheless incurred, because the proceedings were defended or the cross-claim brought by Mr Pittman and Mr Webster acting reasonably and in mitigation of the damages claim against Christopher Edwards. This component of costs is likely to be not insubstantial. 424Third, even if the whole of the payment is later to be notionally allocated in damages and interest, that does not necessarily equate to a financial benefit. Rather, it merely represents the monetary value, or perhaps a part of the monetary value, of the chose in action which is constituted by the claim in tort, breach of contract or breach of fiduciary duty. There is no element of a benefit or bonus in that comparison. 425Fourth, no authority was cited by counsel for First Mortgage which enunciated any legal principle for the conclusion which First Mortgage urged on the Court, nor was any authority cited by way of a factual example of where a similar finding had been made by a court. 426There are a number of arguments, which, on the facts of this case, favour a conclusion that the funds paid over, or at least part of them, represent a benefit to Mr Pittman and Mr Webster which ought to be paid to First Mortgage. 427First, because it is likely that the whole sum will not be accounted for, by legal costs, even on an indemnity basis, and if Mr Pittman and Mr Webster are to be released of their obligations to First Mortgage under the loan transactions, then at the end of the day, Mr Pittman and Mr Webster having been placed in the position of having no obligation to First Mortgage, their land free from any encumbrance, all of their legal costs paid in full, would then have a sum of money which would be a complete bonus or financial advantage from the transactions. 428Second, the equitable principle of practical justice means that because Mr Pittman and Mr Webster ought to "do equity" to obtain what in substance equates to equitable relief, then retaining a "profit" or "bonus" would not be an example of doing equity, and the "profit" or "bonus" ought be accounted for to First Mortgage by Mr Pittman and Mr Webster. 429Third, the separate claims against First Mortgage and Christopher Edwards, whilst distinct claims or causes of action were sufficiently close or interconnected that the monies paid by Christopher Edwards should be regarded as an integral part of the claim made against First Mortgage. 430In the result, I favour the view that as the task which the Court is embarking upon is an attempt to achieve practical justice, and if the relief granted against First Mortgage restores Mr Pittman and Mr Webster to the position they were in before the loan transactions were entered into, then any excess of the sum after the proper deduction for legal costs and expenses should be paid to First Mortgage. 431I conclude that that part of the $200,000 remaining after a proper deduction for legal costs, received by way of a settlement of Mr Pittman and Mr Webster's claim against Christopher Edwards, is a financial benefit to which the Court ought have regard in fashioning the relief which is to be granted.

Relief - conclusion 432In all of the circumstances, to do justice between the parties, I am satisfied that Mr Pittman and Mr Webster should be relieved of their obligations under the 2006 Loan Agreement and the 2008 Variation with First Mortgage, and should have consequential relief with respect to the registered mortgages. 433I have come to that view, having regard to the fact that I have found the Loan Agreement and the Deed of Variation to be unjust. It follows that the consequential dealings by way of mortgage are also unjust, and relief needs to be granted which deals with these encumbrances. 434As a consequence of this unjust contract, Mr Pittman and Mr Webster were exposed to the consequences of the default on the loan (and the 2008 variation), but this is not something which they understood, nor were they equipped by education, life experience or independent advice in the circumstances then prevailing, to be able to understand the nature and essence of the obligations arising from the loan. 435On the other hand, as First Mortgage well knew, this was in fact, and in substance, a loan to Ms Locke (or perhaps one of her associated corporate entities) for the purpose of providing funding for her property development activities which, of their nature, were likely to carry a significant degree of risk. First Mortgage knew that the only possible source for the repayment of the loan, other than by selling the secured properties, was from the proceeds of sale and realisation of the subdivided parcels. It knew that there was no legal obligation on Ms Locke to make any payments to it, nor to Mr Pittman and Mr Webster so as to enable them to make the payment of interest and the repayment of the capital of the loan. 436It considered that the absence of these legal obligations presented a risk to it, which was a very significant one in my judgment, and it knew that the only recourse would be to sell the secured properties thereby depriving Mr Pittman and Mr Webster of their only home and their principal source of income from farming and orchard keeping activities. It decided it would do nothing to address, let alone ameliorate, this risk. 437In substance, First Mortgage took the chance that the loan which was to be used for property development would be repaid from the proceeds of that property development. In so acting, it made no enquiries, except perhaps of Ms Locke, and then only in the most cursory way, to establish the prospect of any likelihood that the subdivision would provide a sufficient financial return. It was, at least, cavalier in its attitude, perhaps even reckless, as to the repayment of the loan other than from the sale of the secured property. 438There is nothing unjust in my opinion in First Mortgage bearing the full financial consequences of the risk which it took. After all, the reason why they are now proceeding against Mr Pittman and Mr Webster and the secured properties, is to recover the financial consequences of that risk. 439It is appropriate that Counsel formulate for the Court the orders, which are suggested ought to be made. The orders which the Court makes will need to provide for a judgment in favour of Mr Pittman and Mr Webster on First Mortgage's claim against them, appropriate relief with respect to the setting aside of the Loan Agreement and the Deed of Variation, and the mortgages, subject to a payment by Mr Pittman and Mr Webster of $4,349.20 by way of reimbursement for council rates, and accounting to First Mortgage by Mr Pittman and Mr Webster for the excess of the settlement funds, calculated after proper deduction for all of the costs which they incurred in conducting the proceedings against Christopher Edwards and the unrecoverable indemnity costs component, if any, of these proceedings. 440As well, counsel for Mr Pittman and Mr Webster will need to consider what orders, if any, are required, in light of the findings, to dispose of the cross claim against Ms Locke.

Costs 441In the ordinary course, since Mr Pittman and Mr Webster have been successful, First Mortgage would be obliged to pay their costs. However, if agreement cannot be reached between the parties on this issue, I will allow the parties an opportunity to make submissions.

Orders 442I make the following orders: 1. I order that the parties confer with a view to reaching agreement as to the orders which ought be made to give effect to these reasons; 2. In the event that the parties are unable to agree, then each party is to file a set of short minutes of order for all of the orders sought, including any order as to costs, together with an outline of submissions in support of those proffered orders on or before 4pm, 22 November 2012; 3. Any submissions in response are to be filed and served by 4pm 29 November 2012; 4. Adjourn the proceedings for hearing on the short minutes to 9.30am 6 December 2012.

Amendments 18 December 2012 - Removed [36] and following paragraphs renumbered. Minor amendment renumbered [347], [386] and [440] 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: 18 December 2012