Kranz & Anor v National Australia Bank Ltd [2003] VSCA 92

Kranz & Anor v National Australia Bank Ltd [2003] VSCA 92 - VSCA 2003 case summary — Zoe

[28]

"In the second case, that where the wife agrees to become surety at the instance of her husband though she does not understand the effect of the document or the nature of the transaction, her failure to do so may be the result of the husband's actually misleading her, but in any case it could hardly occur without some impropriety on his part even if that impropriety consisted only in his neglect to inform her of the exact nature of that to which she is willing blindly, ignorantly or mistakenly to assent. But, where the substantial or only ground for impeaching the instrument is misunderstanding or want of understanding of its contents or effect, the amount of reliance placed by the creditor upon the husband for the purpose of informing his wife of what she was about must be of great importance. If the creditor takes adequate steps to inform her and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp some material part of the document, or, indeed, the significance of what she is doing, cannot, I think, in itself give her an equity to set it aside, notwithstanding that at an earlier stage the creditor relied upon her husband to obtain her consent to enter into the obligation of surety. The creditor may have done enough by superintending himself the execution of the document and by attempting to assure himself by means of questions or explanation that she knows to what she is committing herself. The sufficiency of this must depend on circumstances, as, for example, the ramifications and complexities of the transaction, the amount of deception practised by the husband upon his wife and the intelligence and business understanding of the woman. But, if the wife has been in receipt of the advice of a stranger whom the creditor believes on reasonable grounds to be competent, independent and disinterested, then the circumstances would need to be very exceptional before the creditor could be held bound by any equity which otherwise might arise from the husband's conduct and his wife's actual failure to understand the transaction. (Cf Bank of Victoria Ltd. v. Mueller [1925] VicLawRp 74; [1925] VLR 642 at 649, per Cussen, J.) If undue influence in the full sense is not made out but the elements of pressure, surprise, misrepresentation or some or one of them combine with or cause a misunderstanding or failure to understand the document or transaction, the final question must be whether the grounds upon which the creditor believed that the document was fairly obtained and executed by a woman sufficiently understanding its purport and effect were such that it would be inequitable to fix the creditor with the consequences of the husband's improper or unfair dealing with his wife."

[30]

"The principles applied in Yerkey v. Jones do not depend upon the creditor having, at the time the guarantee is taken, notice of some unconscionable dealing between the husband as borrower and the wife as surety. Yerkey v. Jones begins with the recognition that the surety is a volunteer: a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee. It holds, in what we have called the first kind of case, that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her. To hold, as Yerkey v. Jones did, that in those circumstances the enforcement of the guarantee would be unconscionable represents no departure from accepted principle. Rather, it `conforms to the fundamental principle according to which equity acts, namely that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct.' It will be seen that the analysis of the second kind of case identified in Yerkey v. Jones is not one which depends upon any presumption of undue influence by the husband over the wife. As we have said, undue influence is dealt with separately and differently. Nor does the analysis depend upon identifying the husband as acting as agent for the creditor in procuring the wife's agreement to the transaction. Rather, it depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction, and the creditor being taken to have appreciated that because of the trust and confidence between surety and debtor the surety may well receive from the debtor no sufficient explanation of the transaction's purport and effect. To enforce the transaction against a mistaken volunteer when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable." (Footnotes omitted, emphasis added.)

[42]

"These considerations point forcibly to the conclusion that there is no rational cut-off point, with certain types of relationship being susceptible to the O'Brien principle and others not. Further, if a bank is not to be required to evaluate the extent to which its customer has influence over a proposed guarantor, the only practical way forward is to regard banks as `put on inquiry' in every case where the relationship between the surety and the debtor is non-commercial. The creditor must always take reasonable steps to bring home to the individual guarantor the risks he is running by standing as surety. As a measure of protection, this is valuable. But, in all conscience, it is a modest burden for banks and other lenders. It is no more than is reasonably to be expected of a creditor who is taking a guarantee from an individual. If the bank or other creditor does not take these steps, it is deemed to have notice of any claim the guarantor may have that the transaction was procured by undue influence or misrepresentation on the part of the debtor. Different considerations apply where the relationship between the debtor and guarantor is commercial, as where a guarantor is being paid a fee, or a company is guaranteeing the debts of another company in the same group. Those engaged in business can be regarded as capable of looking after themselves and understanding the risks involved in the giving of guarantees. By the decisions of this House in O'Brien and the Court of Appeal in Credit Lyonnais Bank Nederland NV v. Burch [1996] EWCA Civ 1292; [1997] 1 All ER 144, English law has taken its first strides in the development of some such general principle. It is a workable principle. It is also simple, coherent and eminently desirable. I venture to think this is the way the law is moving, and should continue to move. Equity, it is said, is not past the age of child-bearing. In the present context the equitable concept of being `put on inquiry' is the parent of a principle of general application, a principle which imposes no more than a modest obligation on banks and other creditors. The existence of this obligation in all non-commercial cases does not go beyond the reasonable requirements of the present times. In future, banks and other creditors should regulate their affairs accordingly."

[99]

"Was the embargo to hold the shares initially for six months?---No, the embargo was initially for about two or three months, the only - the embargo changed, was that the price had to go from 50 cents to 60 cents. After the price went to 60 cents you were able to sell, is that right?---Once - either the 60 cents or the three months, whichever elapsed. In other words, if the price went to 60 cents before the three months I'd have to wait the three months. Before - - -?---It was either one or the other, so if the price went to 60 cents, say, in one month I couldn't sell, I'd have to wait three months. If the price went - if the three months elapsed and the price hadn't gone to 60 cents I was able to sell then. Sorry, I'm a bit confused as to those conditions. You'd have to wait for three months irrespective of the price then?---No, no, if the price got to 60 cents, all right - - - You had to wait?---I had to wait effectively three months, that was the whole transaction. Two to three months was the deal but that was in consultation with the people at First Pheonix. When could you sell - what happens if - you wouldn't know if the price got to 60 cents within the three months until the three months - - -?---We anticipated - we anticipated the price of the share going to a dollar. If it didn't reach the 60 cents were you able to sell before the three months?---If the price didn't go to 60 cents, no, because I would have to wait the three month period. And if it did go to 60 cents you still had to wait for the three month period?---Correct. So it didn't matter what price this share went to, you had to wait three months?---Correct. So there was no conditions, it was a simple three month embargo?---It was negotiable because as the price from 50 cents to 60 cents was negotiable, the other part was negotiable as well. HIS HONOUR: Well, I don't follow that. Where does it ever say it was negotiable? What you've told us is that you couldn't sell until three months had elapsed?---That's right. Well, what was negotiable?---With the vendors, that if I wanted to sell it I would approach them and, like, the price was varied from 50 cents to 60 cents, I had the opportunity to try and sell some if the right moment - if the right opportunity arose, especially if you were trying to do a private sale to an individual investor. One time the Pratt group was interested in buying that line of shares, sir. Was the bank ever informed about that?---Yes, sir."

[123]

There was, I think, no basis for the allegations that the transaction was a blatant case of insider trading, that the bank was aware that Lefkovic was unscrupulous and capable of concealment, or that the bank was party to Lefkovic's attempts to conceal his personal involvement in the principal transaction. In so far as the bank regarded the transaction as speculative and unusual, the departure from the usual was that the bank rarely permitted share traders to borrow to purchase shares (an understandable reluctance particularly in light of the recent share market difficulties of 1987). Kranz was well aware that Tom Lefkovic's intention was to buy shares, that this was speculative and that the price of shares might rise and fall substantially. The fact that the amount of the loan was increased later to $335,000 to include interest is a matter of which Kranz was clearly informed. The bank was obviously aware that Tom Lefkovic was very anxious ("desperate" was the adjective used in argument) to complete the transaction quickly, but that urgency was not caused by the bank, rather it was a product of the insistence by the vendor of the shares that the transaction be settled by 4 p.m. on 28 August. On the judge's findings the bank's officers had never met either Kranz or the Muhlbauers before they met to sign the transaction documents on 28 August. All of them then signed each document. It would have been no easy matter for the bank's officers (particularly Haag, who handled the transaction) to insist that the guarantors be given independent advice that day, since to do so might well have meant delaying the parties' execution of the documents beyond the time when the vendor was insisting the transaction was required to be closed, and thus causing the whole transaction to collapse. Furthermore there is authority that there is in general no obligation upon the financier to ensure that the third party has independent legal advice before giving security in support of the debtor.[42] The bank's motivation for assisting in the transaction (Brooke's friendship with Tom Lefkovic and the bank's wish not to force the Lefkovics into the sale particularly of their mother's property) does not in my view bear significantly on this issue. [43]

At a glance

Court

Decision date

Before

Source

Judgment (163 paragraphs)

Parties