E.4.3 Procedural Injustice - Stage One Findings
113 Although contention 2(a) is expressed as being limited to an allegation of bad faith, the Fuges further contend that even if the bar of bad faith is not reached, the culmination of this conduct amounts to the contract having been entered into in unjust circumstances. As I noted above, I will therefore consider the allegation against the lower bar of demonstrating that the methods used to achieve the HOA were unjust. While the submissions were divided into dealing with the allegations set out in 2(a) individually, when considering the issue of unjust contracts, it is more suitable to consider the alleged circumstances and actions taken by the parties together in order to conduct a "normative evaluation of the totality of the relevant circumstances": Nemeth at [96].
114 As noted above, the Fuges' overarching submission is that they were unjustly "railroaded" into agreeing to the HOA. Anthony Fuge described the mediation as "lambs to the slaughter": T248. It is submitted that the Bank prepared a draft HOA prior to the mediation, which they then required the Fuges to sign and never intended on compromising in any way. The Bank is said to have taken advantage of the Fuges in the way particularised in the Schedule and acted in bad faith such that it should be considered the contract was entered into in unjust circumstances.
115 As to the events leading up to the mediation, what occurred is not entirely pellucid. On 9 May 2014, Mr Bogan circulated to the parties a "Pre-Mediation Conference Notice/Agenda". On or around 15 May 2014, a teleconference call took place between the mediator, a representative of the Bank and Mr Jay, the representative of the Fuges. On 10 June 2014, Mr Bogan distributed a copy of a Mediation Agreement, and a draft HOA that was said to have been discussed during the call. What the evidence then discloses, is that on 16 July 2014, Mr Daniel Zabow (a solicitor for the Bank) emailed Mr Bogan a "Heads of Agreement with CBA's proposed amendments incorporated", stating the "agreement presupposes that agreement will be reached for either a sale of the secured properties, or that a refinancing will occur". Neither the Fuges, nor their representative appears to have been copied in to this communication. The Bank notes that this amended version left the dates for compliance blank. In response to this email, Mr Bogan replied "looks like a great improvement and as a draft I'm quite happy with it".
116 For reasons I will explain below, the Bank's unilateral provision of a draft HOA was less than ideal given the existence of the now-repealed s 11AA of the FDMA. The section is considered below in more detail, but it provided that it is the mediator who "must personally prepare for the consideration of the parties" a document setting out the main points of agreement at the time it appears to a mediator that the parties have, or are about to, agree.
117 The fact that the Bank provided the draft to the mediator in advance of the mediation does not, in and of itself, suggest the Bank or its representative were acting in bad faith. The email did note that the draft was subject to agreement actually being reached. It should be noted that s 11AA only imposes an obligation on the mediator and not the Bank. The precise reason as to why the draft HOA was provided to the mediator and not the Fuges is unclear, however, it is more likely than not a good faith attempt by the Bank's solicitors to assist in setting out the parameters of what the Bank regarded as the "framework" of any likely agreement. It follows I do not consider the draft HOA was provided for some malign purpose.
118 Further, I do not consider that the preparation of the draft document necessarily demonstrates the Bank went to the mediation with a closed mind: Aiton at 268-269 [156]. I consider the evidence only goes so far as establishing that the Bank came to the mediation prepared with a draft of an agreement that it considered safe-guarded its interests and achieved the desired outcome of recovering the money owed. The draft HOA did not have the various deadlines filled in, and perhaps more importantly, it included a separate section (which was subsequently removed) which set out an option as to re-financing. From the evidence adduced as to how the mediation went, it seems to me that the more likely conclusion is that the document did not end up changing significantly during the course of the mediation because beyond articulating an initial position that the Fuges not repay any of their debts in the immediate future save for interest, the Fuges did not put any counter-offers or attempt to negotiate any changes to the agreement.
119 As to the evidence of what occurred on 17 July 2014, the mediation commenced between 9.30am and 10am with an "opening session" during which both parties were able to explain their positions. Anthony Fuge gave evidence that during that session he explained his offer was that the loans be rewritten such that they were to pay "interest only" on the loans for a few years, to see if they could "get the ball rolling again" or refinance. His evidence was that this proposition was "flatly refused" by the Bank. Anthony Fuge gave evidence that the representatives of the Bank said words to the effect of "you are going to have to sell". Additionally, Matthew Fuge gave evidence that he did not recall what exactly was said during the opening statement of the Bank, but recalled that Mr Maxwell "was attempting to morally destroy" the Fuges, and there was no attempt to conciliate.
120 Mr Maxwell's evidence was that the draft HOA was never presented to the Fuges as some final and only offer, and prior to the mediation he had expected that a range of alternatives would be put forward by the Fuges and considered by the Bank. His evidence was, however, that "there wasn't a lot forthcoming" from the Fuges during the mediation. Mr Maxwell also gave evidence that during his initial opening, he had indicated that he had looked over the financial documents of the business and asked the Fuges how they proposed to meet their ongoing liabilities. The Fuges were said to have responded by indicating they were in the process of trying to get a refinance with ANZ Bank. Mr Maxwell then replied with words to the effect of "unfortunately, in these circumstances, a refinancing may prove difficult and you may need to consider other options including a potential sale of the farm".
121 After the luncheon adjournment, at around 1.30pm, the draft HOA document was produced for the Fuges to consider. The Fuges' evidence is that they had "some time" with the document in a break-away room with Mr Jay. As to the discussions that took place, Matthew Fuge's evidence was that he asked his brother "do you really want to sign this", and Anthony Fuge replied: "I don't think we have any other choice". Anthony Fuge's evidence was that they spent the time in the room mostly trying to work out how they could fund the debt and refinance. There is no evidence that the Fuges sought to negotiate or indicated disagreement with anything in the HOA once they returned. The mediation concluded around 4pm after the Fuges signed the HOA.
122 As to the Fuges' chosen representative, Mr Jay, it would be unfair for me to make any finding about his competence. Mr Jay was not called as a witness by either party. The Fuges asserted that Mr Jay was unqualified and incompetent. Beyond this bare allegation, no further assistance or evidence was provided. Although I think it is fair to conclude the conduct of the mediation on behalf of the Fuges was maladroit, there may be a number of reasons why this occurred, and nothing leads me to the conclusion that Mr Jay acted contrary to the instructions given to him by the Fuges.
123 What is highly regrettable is that the Fuges did not choose to retain a solicitor to represent them or to brief counsel at the mediation. Although how Mr Jay contributed at the mediation is unclear, had a lawyer been present, the likely scenario is that the parties would more likely have had a genuine negotiation as to how a refinance could be achieved. The choice not to retain a solicitor, however, does not equate to the Bank taking advantage of the Fuges. There is no evidence the Bank knew or should have known that Mr Jay was not qualified nor up to the task, as the Fuges have alleged. Matthew Fuge agreed during cross-examination that he had been aware they could have had a lawyer present if they had wished. Evidence was also adduced that prior to the mediation, the Fuges were sent a "farm debt mediation kit" which provided information regarding the mediation. As part of that information, it is suggested that farmers might retain a lawyer, and specific information is provided as to the process by which one might retain a certified representative to attend the mediation. Anthony Fuge indicated that he had known the mediation kit encouraged legal representation, however it appears as though Mr Jay was not retained through that process. Mr Jay had been recommended to Matthew Fuge by a family friend before there was any talk of a mediation.
124 Regarding the mental state of both Fuges, Matthew Fuge gave evidence that he had flown overnight from Hong Kong to Sydney in the jump seat and had not slept, which I accept. In his first affidavit, Matthew Fuge stated that "[u]pon arrival … we were met by David Bogan… Daniel Zabow and Matthew Maxwell. These men asked me how I was and when did I arrive. I informed them that I had flown overnight and explained to them what a jump seat was, I also informed them that accordingly I had not slept": at [36]. This statement was not the subject of cross-examination, however, in his affidavit evidence, Mr Maxwell denied Matthew Fuge ever communicating to him his sleep-deprived state or demonstrating any physical signs of exhaustion throughout the day.
125 Irrespective as to whether this comment was made, it really is not determinative of anything. It is not in dispute that at no point did either of the Fuges ask for assistance or an adjournment. I am not satisfied that even if he had communicated his sleep-deprived state, that this would provide any adequate foundation for a finding that the Bank was aware of the extent of any impairment and there is no suggestion in the evidence that the Bank took advantage of it. I am comforted in reaching this conclusion in knowing that an experienced mediator was present who did not consider it necessary to intervene or require Matthew Fuge to rest before continuing the mediation.
126 As to the general position of the Fuges at the mediation, I accept the Fuges' evidence that the experience was intimidating and somewhat overwhelming. This is unsurprising. Both of the Fuges appear to have appreciated the importance of the mediation, and the reality of how the outcome of the mediation might affect the future of their farming business and Properties. Although Anthony Fuge claims to have felt like he had been "railroaded", the Fuges did not give any specific examples as to how this was the case, how the Bank flatly refused their offer, or how it was that they were made to feel that they were unable to negotiate.
127 Contention 2(c) was said to be the existence of "fatal defects" in the s 8 Notice and the s 11 notice.
128 The Fuges first submitted that if the Livestock Mortgage was fraudulently made then the s 8 Notice served by the Bank on 21 February 2014 is void. This argument has been summarised above at E.1. Relevantly, it will be remembered, Mr King accepted during argument that an invalid s 8 Notice would not act as a statutory bar to recovery, and the point must be made in relation to some larger unconscionability or unjustness argument. This argument can be disposed of shortly by reason of my finding above that the Livestock Mortgage was entered into validly.
129 Secondly, an argument was made that the ss 8 and 11 notices were invalid for a separate reason. The consequences said to flow from this invalidity is twofold: (a) the mediation would have proceeded on an incorrect statement as to the debts, and the reliance upon that incorrect calculation would have undermined the mediation making the HOA an unjust contract; and (b) there would be a statutory or equitable bar to recovery of the debts, by reason of the requirement that enforcement action can only validly be taken in respect of a valid "farm" mortgage. I will deal with the second argument at J.4 below, in relation to the Bank's cross-claim.
130 Dealing then with the only relevant argument - the reliance upon an incorrect statement of debt - it is said that the amount of $130,000 advanced to the Fuges on 14 May 2009 (as an Agribusiness Line of Credit facility) was used to fund Anthony Fuge's divorce settlement, and was therefore not a "farm" debt as provided for under the FDMA. The s 8 Notice, in summarising the relevant debts, is said to have incorrectly included this $130,000. The Bank then later applied to the NSW Rural Assistance Authority for a certificate pursuant to what was then s 11(1) of the FDMA (since replaced by s 14(2)(3)), which was then issued on 11 August 2014 (s 11 Notice). Section 11(1) was in the following terms:
(1) The Authority must, on the application of a creditor under a farm mortgage, issue a certificate that this Act does not apply to the farm mortgage if:
(a) the farmer is in default under the farm mortgage, and
(b) no exemption certificate is in force in relation to the farm mortgage, and
(c) the Authority is satisfied that:
(i) satisfactory mediation has taken place in respect of the farm debt involved, or
(ii) the farmer has declined to mediate, or
(iii) 3 months have elapsed after a notice was given by the creditor under section 8 and the creditor has throughout that period attempted to mediate in good faith (whether or not a mediation session or satisfactory mediation took place during that period).
131 It is clear from the terms of s 11(1), that an invalid s 11 Certificate, could have had no immediate consequence for the validity of the HOA, being a document created subsequent to a mediation taking place.
132 With respect to the s 8 Notice argument, the way in which this purported misstatement of debts "undermined" the mediation was not explained during the hearing. It was not explained why the inclusion of the 2009 facility in the s 8 Notice was invalid at law, beyond the assertion that the purpose of the loan relates to a "divorce settlement". The focus of its relevance in the Fuges' closing written submissions, appeared to relate solely to its utility as a defence to the cross-claim. Further, it was not explained how this inclusion amounted to procedural injustice. Presumably the supposed injustice was that the Fuges entered the mediation under the impression that a larger amount of money was owing, than in fact was owing. The difficulty is that no suggestion has been made that the 2009 facility was not in fact owing. The issue taken by the Fuges is that it may have been owing, but it was not a farm debt. If this is the case, the only immediate consequence is that it would not be the subject of any of the relevant protections offered by the FDMA. While this might be relevant on some technical point as to the validity of the s 8 Notice, as noted above, it has been accepted by Mr Fuge that this cannot affect the validity of the HOA.
133 I have chosen to deal with contention 2(d) as the last of the procedural injustice concerns given real issues arise from its consideration, and it cannot be considered in isolation from the substantive injustice concerns. Contention 2(d) relies upon an alleged breach of the now-repealed s 11AA of the FDMA, which, at the relevant time, required the following:
11AA Heads of Agreement
(1) If it appears to a mediator that a farmer and a creditor who are parties to a mediation have agreed, or are about to agree, on an issue between them, the mediator must personally prepare for the consideration of the parties a document setting out the main points of agreement on the issue.
Note. Failure to comply with this section may result in the withdrawal of the accreditation of a mediator (see section 12 (3)).
(2) If the parties are satisfied that the document sets out the main points agreed on by them during, or within 24 hours of the end of, a mediation, the parties may enter into Heads of Agreement by signing the document.
Note. Under section 17 (3A), a person representing a party to a mediation must have written authority to enter into Heads of Agreement.
(emphasis added)
134 Section 11AA was introduced into the FDMA by the Farm Debt Mediation Amendment Act 2002 (NSW). The purpose of the provision is clear: to ensure that an agreement is drafted by an independent mediator, which accurately and faithfully records the agreement reached (or about to be reached) between the parties. The second reading speech of the amending Act confirms this purpose: CIC Insurance Limited v Bankstown Football Club Limited (1997) 187 CLR 384 at 408 (Brennan CJ, Dawson, Toohey and Gummow JJ). More specifically, the second reading speech makes it clear the section was designed to give farmers the bargaining power which they lacked with their creditors. The section was introduced in response to a recognition that far from the "early days" of one-page agreements, it had become common practice for farmers to be faced with complicated, legalistic documents and to ensure that the mediators would be given the role of preparing the HOA documents, which would be a document developed as the parties agreed on points throughout the mediation.
135 The section, which has since been repealed, created a positive personal duty on the mediator to form a view, that is, reach a state of mental satisfaction, that the farmer and creditor have agreed or are about to agree an issue. Once that state of satisfaction is reached, then the mediator was to prepare personally a draft document for the consideration of the parties. Regrettably, that is not what happened here.
136 I have summarised the evidence as to the circulation of various drafts of the HOA prior to the mediation at [115] above. As to what occurred at the mediation, during cross-examination Mr Maxwell agreed to the proposition that the pre-drafted document was then populated and edited on the mediator's computer during the course of the mediation. In his affidavit evidence, Mr Maxwell explained that after each party gave their openings, the parties separated into their own meeting rooms and he prepared a proposed regime for the sale of the Properties which was later put to the Fuges, "first by [Mr Maxwell], and then by the mediator": at [40].
137 I am conscious of the absence of Mr Bogan and there is no reason to believe that he did not perform his role in a way he considered appropriate and in a way that he believed assisted the parties. For all I know, his actions may have reflected common practice. Having noted this, the evidence demonstrates what occurred was unsatisfactory. If the mediator had carried out his role as required by s 11AA, it seems to me that it would have been necessary for there to be some real attempt to engage with the Fuges and get to a point where the mediator understood what it was that the Fuges actually wanted. Or at the very least, the process would have facilitated the parties discussing each relevant deadline, with the paction being documented once agreement was reached, or was about to be reached. As it happened, it appears that except for the opening of the mediation, the Fuges retreated to their room and had no real active engagement with the process.
138 One of the benefits of the regime mandated by s 11AA is that if a mediator is personally required to engage in the process of forming a view as to whether a consensus has, or is about to be agreed, and is then required to document it, this role requires an engagement with the parties to ensure the agreement reflects their wishes and represents a bargain acceptable to them. This is undermined when a mediator passively accepts a document prepared by one of the parties prior to the mediation which is then the subject of "population" of details, or minor alteration, and is then presented for signature.
139 As noted above, it seems likely that the refinancing section of the draft HOA was removed after it became apparent that the Fuges had not prepared a refinancing plan. Despite this, I have no doubt at all that it was refinancing that the Fuges wanted. They had no desire to sell the Properties except as a very last resort, an intention that may have been more apparent if the agreement had been prepared as contemplated by s 11AA. I return to this important point below.
140 As to the details that were "populated" during the mediation, it is unclear whether they were the subject of any negotiation at all, or whether, as appears to be the case from Mr Maxwell's affidavit, Mr Maxwell inserted the dates as he saw fit, which was then presented in the form of a final document to the Fuges. It is in this way that any procedural injustice occasioned by a lack of compliance with s 11AA by Mr Bogan (participated in by the Bank providing the draft) is interrelated with the substantive injustice concerns I now turn to consider.