Lopwell Pty Ltd v Clarke & Ors

CATCHWORDS: EQUITY - unconscionable dealing - guarantors under a special disability by reason of dependence on advice of longstanding accountant - interest of accountant in transaction unknown to guarantors - disability of guarantors sufficiently evident to financier - exorbitant interest rate

Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51 Attorney General of New South Wales v World Best Holdings Ltd [2005] NSWCA 261; (2005) 63 NSWLR 557 Barnes v Addy (1874) LR 9 Ch App 244 Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457 Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 CASES CITED: Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 Friend v Booker [2009] HCA 21; (2009) 83 ALJR 724 Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621 Lumbers v W Cook Builders Pty Ltd (in liquidation) [2008] HCA 27; (2008) 232 CLR 635 Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583 Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315 Visnic v Sywak [2009] NSWCA 173

Lopwell Pty Ltd (Appellant) Dallas James Clarke (First Respondent) PARTIES: Juliet Jane Clarke (Second Respondent) Milk Makers Dairy Heifers Pty Ltd (Third Respondent) Glen Arthur Freeman (Fourth Respondent)

COUNSEL: P Kulevski (Appellant) J M Ireland QC/R Marshall/A Crossland (1st, 2nd and 3rd Respondents)

SOLICITORS: Robinson Legal (Appellant) Patey & Murphy (1st , 2nd and 3rd Respondents)

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT MEDIUM NEUTRAL CITATION: Clarke v Lopwell Pty Ltd [2008] NSWSC 615

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40291/08 SC 5637/04

IPP JA CAMPBELL JA MACFARLAN JA

FRIDAY 14 AUGUST 2009 LOPWELL PTY LTD v CLARKE & ORS Judgment 1 IPP JA: I agree with Macfarlan JA. 2 CAMPBELL JA: I agree with Macfarlan JA. 3 MACFARLAN JA:

Nature of Case and Conclusions 4 In this case, a married couple who operated a dairy farm agreed to guarantee a substantial loan made by a financier to a third party. They did so in reliance on the advice of their long-standing and trusted accountant who introduced the transaction to them and who, unbeknown to them, had an interest in the project for which the funds were borrowed. The couple did not receive any benefit from the transaction. 5 My conclusion is that the primary judge was correct in finding that, by reason of their complete reliance upon their accountant, the couple were subject to a special disability of which the financier took unconscientious advantage and that the guarantees should be set aside as an unconscionable bargain. 6 The combination of a number of circumstances known to the financier should have raised the possibility in the mind of the financier that the guarantors were not in a position to protect their own interests and were not having them protected by an independent adviser. Of particular significance was the interest rate of 18 percent per month which, even without the compounding effect provided for by the relevant loan agreement, equated to 216 percent per annum.

Factual Circumstances 7 The first respondent ("Mr Clarke") was born in 1938. He obtained Bachelor and Master of Agricultural Science degrees at the University of Sydney in the 1960s. The second respondent ("Mrs Clarke") obtained a Bachelor of Agricultural Science degree from Sydney University at the same time as Mr Clarke. She subsequently completed a Dip Ed (Special Education) course at Newcastle Teachers' College. The Clarkes were married in 1964. From 1965 to 1969, they operated a dairy farm at Frederickton, New South Wales. 8 Since 1969 they have operated a dairy farm at Wallalong, New South Wales. This has occurred since 1994 through a family company which is the third respondent on the appeal. Mr and Mrs Clarke are the sole directors and shareholders of that company. 9 In 1984, Michael Unicomb became the Clarkes' accountant and acquired a detailed knowledge of their financial affairs. As the primary judge held, "the Clarkes' farming properties expanded over the years" and "by early 2003 the farming property held by [them] was valued at between $11 M and $14 M, against liabilities of only about $3 M" (Judgment [6]). 10 By about 2001, the Clarkes were experiencing cash-flow problems. They discussed selling one of their properties to ease those problems. Mr Unicomb advised against it and, according to Mr Clarke's evidence, said "[i]f you retain ownership of the property then you'll be in a position [to] borrow money on the security of the property to ease your cash flow problems". This led to a proposal being made by Mr Unicomb to the Clarkes in early 2003 that they "make [their] properties available as security" for borrowings. There were two transactions organised by Mr Unicomb into which the Clarkes entered in March and April 2003. 11 The first involved a proposed borrowing by them of $700,000 from Guardian Mortgages Pty Ltd pursuant to a loan agreement dated 27 March 2003 (the "Guardian transaction"). The term of the loan that came to be made was three months and the interest rate was 28% per annum, reducing to 24% per annum if payments were made as and when they fell due. The amount advanced was in fact $734,871 which included various payments to Guardian, commission to Paramount Mortgage Solutions and a payment to lawyers. The balance of $700,000 was paid into the trust account of Michael Unicomb & Associates, Mr Unicomb's firm. The primary judge held that the Clarkes received none of this money (Judgment [8]). Security over various of the properties of the respondents was given to support the loan. 12 The second transaction (the "Wirrina transaction") involved the Clarkes guaranteeing and, with their company, mortgaging properties as security for a loan by the appellant ("Lopwell") to Mr Glen Freeman in connection with the proposed purchase by him of a failed resort in South Australia known as the Wirrina Resort. 13 The Loan Agreement dated 28 April 2003 and signed by the Clarkes, Lopwell and Freeman provided as follows: (a) The principal sum was $1,473,000. (b) The term of the loan was three months. (c) The rate of interest was expressed to be "18 per centum per month by due date, otherwise a surcharge of 0 per centum per month". 14 Interest was to be paid monthly in advance with the first payment to be made on the date of the agreement. It was further provided: "… If the loan is repaid before the repayment date, interest shall be calculated on a daily basis up to and including the date the loan is repaid. The Borrower must pay a minimum of one month's interest provided the Borrower, or associated company, is successful in the tender to purchase the business and assets known as Wirrina Resort. If the Borrower or associated company is not successful in this and the funds are returned by Hall Chadwick the interest charge is 5% or calculated on a daily basis at 18% per month, whichever is the greater." (Blue Appeal Book 74T-X) 15 Interest was to be paid on such part of the principal sum as was from time to time outstanding "and on all other moneys covered by this Loan Agreement". Lopwell accepted on the appeal that this provision would have a compounding effect with interest being payable upon interest, at least once default occurred in the payment of interest. 16 Mr Freeman warranted that the Principal Sum had been borrowed exclusively for business purposes. There was no other provision as to the use of the funds. 17 Security was identified as five properties owned by the Clarkes or their family company. 18 The loan from Guardian was not repaid upon the due date. After demand was made on the Clarkes, they borrowed elsewhere and repaid the loan to Guardian, together with interest. 19 Freeman did not repay to Lopwell the loan of $1,473,000. This led eventually to the commencement by the Clarkes and their company on 18 October 2004 of the present proceedings by which they seek to avoid the guarantees and mortgages given by them. By its amended cross-claim filed in the proceedings, Lopwell claimed judgment against the Clarkes and their company for the amount of $1,473,000 together with interest. 20 The affidavit of Mr Phillip Sharkey of 11 April 2007, filed on behalf of Lopwell, gave details of the amount outstanding under the Loan Agreement as follows:

Interest from 1 June to 31 March 2007 at a daily rate of $8,716.13 (18% per month) = 1048 days x $8,716.13 = $9,134,504.20

Less 1 months payment of interest in advance $265,140.00

Total Outstanding pursuant to Loan Agreement $10,342,364.00" 21 Lopwell however made it clear at first instance and on appeal that it did not press its claim for interest at the rate specified in the Loan Agreement but claimed interest at the rate usually awarded under s 100 of the Civil Procedure Act 2005. In his affidavit Mr Sharkey said that the amount outstanding on this basis was $1,886,497.40.

The Primary Judge's Factual Findings 22 Hamilton J found the evidence as to the circumstances in which the Guardian and Lopwell transactions were entered into "unclear, unsatisfactory and conflicting" as a result of his view that none of the three witnesses, Mr and Mrs Clarke and Mr Sharkey, were satisfactory witnesses. 23 The principal findings made by his Honour were as follows. 24 When the Clarkes discussed their cash flow problems with Mr Unicomb, "he promised to solve their liquidity problem if they would make their properties available as security for a limited period of three months. The promise was to pay $35,000 per month towards their feed bill for those three months" (Judgment [17]). Despite the fact that the Clarkes "must have possessed business skills of a particular sort" in light of their dairy farming experience, "they were trusting to an unworldly extent" (Judgment [18]). 25 Mr Clarke's recollection was deficient and "at times he presented as a confused old man" in the witness box (Judgment [20]). 26 The documentation relating to the Wirrina transaction was signed by the Clarkes at their home late in the evening, probably on 28 April 2003, witnessed by Mr Unicomb, and also by Mr Warren Turner who was involved with Mr Freeman in the Wirrina Resort proposal. The primary judge held that the Clarkes did not read the documents before signing them (Judgment [11]). On that evening, Mr Clarke said to Mr Unicomb "what if this scheme goes belly up?", to which Mr Unicomb answered "That won't happen, I won't let it" (Judgment [22]). In cross-examination, Mr Clarke described his statement as being "I hope this doesn't go belly up or you're deceiving me". 27 In his first affidavit Mr Clarke did not refer at all to the Guardian transaction. After apparently later being shown documents relating to that transaction, in his second affidavit he gave evidence of an offer by Mr Unicomb to provide the Clarkes with $35,000 per month for three months to March 2003, that is, prior to the Guardian transaction. A payment of $35,000 was received by the Clarkes on 17 April 2003. The only other payment they received was an amount of again $35,000 on 30 June 2003. In evidence apparently accepted by his Honour, Mr Clarke said that he did not "associate the proposed payments of $35,000 for three months with Freeman or any scheme in which Freeman was involved" (Judgment [25]). He continued to have no recollection of the circumstances in which the Clarkes signed the documents in respect of the Guardian loan. 28 Before signing the Wirrina transaction documents late on 28 April 2003, Mrs Clarke, to the knowledge of Mr Clarke, "telephoned their long standing solicitor, Richard Murphy, who still acts for them. He advised them not to sign the documents until he saw them, but, pressured by Unicomb, they ignored his advice and signed" (Judgment [28]). Mr Sharkey, who was the officer of Lopwell responsible for the transaction, was not aware that this conversation occurred. 29 Mrs Clarke was aware that she had signed documents relating both to the Guardian and Wirrina transactions but could only recall one signing session. She associated the agreement of Mr Unicomb to pay the Clarkes $35,000 per month with the Wirrina transaction (Judgment [30]). 30 Mr Sharkey did not impress the primary judge as a witness. His Honour found that he rationalised his beliefs "to what was necessary for him to maintain the version of facts favourable to [Lopwell's] case" and that his evidence was conflicting in important respects (Judgment [31]). He said that it was clear from Mr Sharkey's affidavits that the Wirrina transaction was carried out in great haste and that Mr Sharkey knew little about the Clarkes (Judgment [32]). 31 The judge made the following findings concerning Mr Sharkey's evidence: "35 Of the Clarkes, he said that he believed they were dairy farmers with substantial real estate and had both legal and financial advice available to them, although he deposed to no sound basis for his belief about this advice.

36 Despite having claimed in his first affidavit … that he was told that the Clarkes had some sort of interest in the Wirrina project, in his second affidavit he said in the vaguest terms that he believed that the Clarkes would be remunerated for putting up their property by way of security and that terms of remuneration had been negotiated with the Clarkes. He said in cross examination that he did not give it a thought one way or another as to whether the Clarkes themselves had a commercial interest in the Wirrina project. He also recalled Freeman mentioning a monthly fee of $35,000 as being paid to the Clarkes, but did not repeat the suggestion that they had any other form of remuneration.

37 He denied at all times that he was aware that Unicomb had any personal interest in the Wirrina project until long after the transaction. He knew that Koffels [solicitors] were acting for Freeman. He knew that Unicomb was Freeman's accountant as well as the Clarkes'. He knew that if anyone was acting for the Clarkes it was Koffels, who had a conflict of interest because they were Freeman's solicitors." 32 As to Mr Sharkey's knowledge at the time the Wirrina transaction was entered into, the primary judge made the following findings which to some extent summarised matters to which he had earlier referred: "(1) He knew that the Clarkes were dairy farmers with valuable properties. (2) He knew that Unicomb was Freeman's accountant and the Clarkes' accountant as well. (3) He had not been told by Freeman and did not have any belief that the Clarkes were to have any interest in the Wirrina land or project or to receive any interest in respect of the transaction. I do not accept his evidence in his first affidavit that he was told these things by Freeman in light of his conflicting evidence set out at [33] to [36] above. (4) It is my view that the evidence is quite unclear as to what he was told about what consideration the Clarkes were to receive for the guarantees. He said he believed they would receive remuneration, the terms of which had been negotiated with them. There may have been mention to him of a monthly feed bill or even of a monthly sum of $35,000, although I am not prepared to make a positive finding to that effect. But I find that at the time the guarantee was given he had no firm basis for a belief that the Clarkes' remuneration had been agreed or any precise knowledge of what that remuneration was. In fact, I find that the promise of the three $35,000 monthly payments was not consideration for the Wirrina transaction but for the Guardian transaction. I accept the first plaintiff's evidence in this regard, corroborated by the fact that the first payment of $35,000 was made within two days after the settlement of the Guardian transaction and before the Wirrina transaction was firmly contemplated. Any suggestion to Mr Sharkey that the payments were consideration for the Wirrina transaction was wrong (5) To Mr Sharkey's knowledge, the Clarkes had not had any independent financial or legal advice. He gave no real basis for believing that they had had any advice at all. The only possible sources of advice, to his knowledge, were Unicomb, who was Freeman's accountant, and Koffels, who were acting for Freeman. Neither, to his knowledge, was a possible source of independent advice. (6) Mr Sharkey, as the representative of the lender, which controlled the situation, made no enquiry as to precisely what the consideration in favour of the Clarkes was; whether they had had any independent financial advice, bearing in mind that Unicomb was Freeman's accountant as well as the Clarkes'; whether the Clarkes had had any independent legal advice (or any legal advice at all), bearing in mind that Koffels were acting for Freeman; and no further enquiry about the personal characteristics or financial circumstances of the Clarkes, whom he had not met. The truth of the matter is that he really did not think of their interests or position at all. Yet he was prepared to accept the plaintiffs' guarantee, secured by mortgages, for $1,470,000 at an interest rate of 18 per cent per month. To any extent to which they needed $35,000 for a month for a couple of months, it should have been clear enough, even without further enquiry, that the Clarkes could have raised this amount in some more equitable way than risking their property by guaranteeing a loan at interest of 216 per cent per annum, which the defendant was to receive, obviously to its advantage. (7) I find that Mr Sharkey was not aware until after the Wirrina transaction was entered into that Unicomb had an interest in the transaction. One may have suspicions about Mr Sharkey's denials of this. However, there is really no basis in the evidence on which the denials can be rejected on the balance of probabilities. Even if his denials were rejected, there would be a vacuum as to the evidence on this subject and no basis on which the Court could come to the opposite conclusion that he had knowledge of that fact. "It is elementary law that disbelief of a witness does not prove the opposite of what she has asserted": per Mc Hugh JA in Assad Atra t/as Atra Bros v The Farmers & Graziers Co-operative Company Limited NSWCA 24 October 1985 unreported; see also per Griffith CJ in Scott Fell v Lloyd (1911) 13 CLR 230 at 241; Scrutton LJ in Hobbs v Tinling (CT) and Company, Limited [1929] 2 KB 1 at 21; and Gibbs J in Steinberg v The Commissioner of Taxation of the Commonwealth of Australia (1975) 134 CLR 640 at 694." (Judgment [38]).

The Primary Judge's Decision 33 The primary judge found that the guarantees and mortgages in favour of Lopwell ought to be set aside upon the ground that Lopwell "acted and is acting unconscientiously". Thus, in so far as the transaction involved the giving of guarantees and mortgages by the Clarkes and their company, the transaction was a "catching bargain" falling within the principles referred to by the High Court in Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 and Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447. 34 The judge's reasons were as follows: "44 On the findings that I have made, the Clarkes (and through them the third [respondent]) were at a special disadvantage in that they were unable to judge their own best interests. Unicomb was a long standing and trusted adviser and personal friend. In abuse of that trust he led or pressured them into entering, for his own purposes, into 2 disadvantageous transactions, a borrowing of $700,000 from Guardian for relending to him, admittedly for some consideration, and the guarantee of the loan to Freeman at an exorbitant interest rate for no consideration. These transactions entered into on Unicomb's say so, without independent advice, bespeak an inability to judge as to what was in their own best interests.

45 Of course, not all the facts mentioned in the last paragraph were known to Mr Sharkey. He was aware, however, of the following: (1) The haste of the transaction.

(2) The exorbitant interest rate, of which the defendant desired to have the benefit.

(3) That he did not have any real or precise knowledge of the consideration that the plaintiffs were to receive.

(4) That the Clarkes had been introduced to the transaction by Unicomb, who was the borrower's accountant as well as their accountant.

(5) That the plaintiffs had not had any independent financial or legal advice, if any advice at all.

(6) That, save for their ownership of considerable property, he had no knowledge of the Clarkes' personal characteristics or financial circumstances at all.

46 In these circumstances, I am of the opinion that the defendant was aware of facts that would raise in the mind of a reasonable person the possibility that the Clarkes were in a position of special disadvantage, being unable to judge what was in their own best interests, in relation to the intended transaction. Faced with this situation, Mr Sharkey did not make any enquiries that may have elucidated the situation. He did not enquire as to precisely what remuneration the plaintiffs were to receive; he did not enquire whether they had had any independent advice; he did not follow the common practice of requiring a certificate that they had been independently advised. In the end, he gave no thought at all to their interests, but caused the defendant to make the loan at exorbitant interest on the security of the plaintiffs' guarantees and mortgages." 35 The judge said that in light of his conclusions in relation to unconscionable conduct he did not need to deal with the claims for relief under the Contracts Review Act and those invoking the principles in Barnes v Addy (1874) LR 9 Ch App 244. An application to file on the appeal a Notice of Contention permitting the respondents to rely upon these bases of claim in the alternative to the unconscionable conduct ground was withdrawn. They accordingly do not arise for consideration on the appeal.

Principles relating to Unconscionable Dealings 36 Gleeson CJ in Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51 referred at [13] with approval to the description by Kitto J in Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 of what Kitto J described as the "well-known head of equity" concerned with unconscionable bargains: "It applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands" (at 415). 37 Deane J in Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621 described this head of equitable jurisdiction as follows: "It has long been established that the jurisdiction of courts of equity to relieve against unconscionable dealing extends generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party to the transaction with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that special disability was sufficiently evident to the other party to make it prima facie unfair or 'unconscionable' that that other party procure, accept or retain the benefit of, the disadvantaged party's assent to the impugned transaction in the circumstances in which he or she accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable … " (at 637; see also Brennan J at 626). 38 More recently, in Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315, five members of the High Court referred to the relevant "governing equitable principle" being "concerned with the production by malign means of an intention to act" (at [23]). Their Honours emphasised that it is wrong to suggest that "sufficient foundation for the existence of the necessary 'equity' to interfere in relationships established by, for example, the law of contract, is supplied by an element of hardship or unfairness in the terms of the transaction in question, or in the manner of its performance" (at [26]). This approach was echoed by Spigelman CJ in Attorney General of New South Wales v World Best Holdings Ltd [2005] NSWCA 261; (2005) 63 NSWLR 557 where his Honour said: "Unconscionability is a well-established but narrow principle in equitable doctrine. It has been applied over the centuries with considerable restraint and in manner which is consistent with the maintenance of the basic principles of freedom of contract. It is not a principle of what 'fairness' or 'justice' or 'good conscience' requires in the particular circumstances of the case" (at [120]). 39 His Honour went on to quote the observation of Deane J in Muschinski v Dodds [1985] HCA 78; (1985) 160 CLR 583 that "the rule of ordered principle […] is of the essence of any coherent system of rational law" (at 616). The risk that by proceeding at too high a level of abstraction in the application of equitable principles an outcome will be produced "which is no more than an idiosyncratic exercise of discretion" was adverted to by four justices of the High Court in Friend v Booker [2009] HCA 21; (2009) 83 ALJR 724 at [47]. Likewise, in Lumbers v W Cook Builders Pty Ltd (in liquidation) [2008] HCA 27; (2008) 232 CLR 635, four justices of the High Court emphasised the need to descend from a high level of abstraction in the application of principles such as that of unconscionability to the detail of the circumstances of the case alleged to attract the principle (at [75]; see also Visnic v Sywak [2009] NSWCA 173 at [35] per Spigelman CJ). 40 Further, in rejecting the proposition that the concept of unconscionability is able to be applied as if it were equivalent to what was "fair" or "just", Spigelman CJ in World Best Holdings emphasised that the concept "requires a high level of moral obloquy" (at [121]). 41 Against the background of these general considerations, I turn to consider the application of the principle of unconscionability to the circumstances of the present case. In so doing, I note the comment in the plurality judgment in Tanwar that whilst the term "unconscionable" is used in many authorities, the more accurate term is "unconscientious" (at [21]).

Whether the Clarkes laboured under a relevant Disability 42 In Amadio, Mason J referred to the necessary "disabling condition or circumstance" as "one which seriously affects the ability of the innocent party to make a judgment as to his own best interests" (at 462). In the same case, Deane J said that: "The adverse circumstances which may constitute a special disability for the purposes of the principles relating to relief against unconscionable dealing may take a variety of forms and are not susceptible to being comprehensively catalogued. In Blomley v Ryan, Fullagar J listed some examples of such disability: 'poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary'. As Fullagar J remarked, the common characteristic of such adverse circumstances 'seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other'" (at 474-5). 43 In Louth v Diprose it was held that the respondent's infatuation for the appellant led to emotional dependence by the respondent upon the appellant and "was such as to put the appellant in a position of influence with respect to his actions" (at 642 per Dawson, Gaudron and McHugh JJ). The appellant's conduct in taking advantage of that dependence was held to be unconscionable. 44 In Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457, an uncle was found by the majority of the High Court to have an emotional dependence on or attachment to his nephew ([115, 122]), of which the nephew took advantage. The majority, Gaudron, Gummow and Kirby JJ, emphasised that the primary judge's conclusion that the uncle had "the capacity then to know what he was doing and to make informed decisions about the disposition of his property" was no answer to the claim to set aside the transaction (at [118]). They pointed out that "even with respect to the doctrine of undue influence, as distinct from that dealing with unconscionable conduct, equitable principles may be invoked to set aside a gift where a donor is perfectly competent to understand and intend what he or she did" (at [118]). 45 More recently, in ACCC v CG Berbatis Holdings Pty Ltd, Gleeson CJ referred with approval to earlier statements that "the essence of the relevant weakness" is the "inability of a party to judge his or her own best interests" (at [12]: see also at [55] per Gummow and Hayne JJ). 46 In their dealings with Mr Unicomb, the Clarkes were labouring under a special disability falling within the ambit of these principles. Mr Unicomb had been the Clarkes' accountant for close to 20 years and had a detailed knowledge of their financial affairs. As Mr Clarke said in evidence, he and his wife trusted Mr Unicomb implicitly. He was "their trusted adviser and a personal friend" (Judgment at [5]). On his advice, they signed the Loan Agreement as guarantors and executed mortgages over their properties. They did so without reading them and without ensuring that they would receive consideration for their role in the transaction. They relied upon Mr Unicomb's assurance that he would not let Mr Freeman's scheme go "belly up" (see [26] above). Their trust in Mr Unicomb was such that under pressure from him (see [28] above) they ignored the advice of their solicitor to delay executing the security documents until they spoke to him. The primary judge's description of them as "trusting to an unworldly extent" (see [24] above) was well warranted. 47 It is clear from the authorities cited above (see [42-45]) that a relevant "special disability" need not arise out of "sickness, age, sex, infirmity of body or mind, drunkenness [or] illiteracy" (these being some of the examples given by Fullager J in Blomley v Ryan: see [42] above). Complete dependence upon a trusted adviser for financial advice can be just as much a disability for this purpose as the emotional dependence in Louth v Diprose and Bridgewater v Leahy. The question to be answered is whether, by reason of their total reliance upon an adviser who was, unbeknown to them, not independent, the Clarkes were not in a position to protect their own best interests. That they entered into this transaction gave rise to an inference that this question should be answered in the affirmative. There was a sound basis in the evidence for the primary judge's finding that the relevant transactions "entered into on Unicomb's say so, without independent advice, bespeak an inability to judge as to what was in their own best interests" ([44] of the Judgment quoted in [34] above). 48 In these circumstances the onus was cast upon Lopwell to show that the transaction was "fair, just and reasonable" (see [39] above). It did not discharge this onus as the evidence demonstrated that the transaction was clearly improvident from the Clarkes' point of view. Whilst the Guardian and Wirrina transactions were preceded by an assurance by Mr Unicomb that he would solve the Clarkes' liquidity problems if they made their properties available as security for a limited period (see [10] above), the manner in which Mr Unicomb would do this was not clearly identified, and, according to the primary judge's findings, the promise which was made of three $35,000 monthly payments was not consideration for the Wirrina transaction but for the Guardian transaction (see Judgment 38 quoted in [32] above). This meant that the Clarkes were without any agreed consideration to be derived by them from their participation in the Wirrina transaction. Objectively speaking, the risk to them was enormous. They had no control over the borrower, Mr Freeman, nor any knowledge of his ability to repay the loan which they guaranteed and for which they provided security. The loan bore interest at such an extraordinarily high rate (see [14-15] above) that default by the borrower could lead to the amount outstanding ballooning very quickly from $1,473,000 to many millions of dollars. 49 The relationship between Mr Unicomb and the Clarkes was not prevented from giving rise to a relevant special disability by the fact that it may also have constituted a fiduciary relationship or one giving rise to a presumption of undue influence. There is a degree of overlap between the concepts of unconscionability, breach of fiduciary duty and undue influence, the overlap between principles of unconscionability and undue influence being referred to by Brennan J in Louth v Diprose at 626-8. It is clear however that the concepts are not mutually exclusive. Circumstances may fall within more than one of those concepts. 50 The fact that the Clarkes received advice from Mr Murphy in a telephone conversation late on 28 April 2003 (see [28] above), does not indicate that they were not subject to the relevant "special disability". On the contrary, their rejection of Mr Murphy's advice confirms their dependence upon Mr Unicomb's advice. As the primary judge put it, it was pressure exerted by Mr Unicomb that led to Mr Murphy's advice being ignored and the documents being signed by the Clarkes (see [28] above).

Whether Lopwell took advantage of the Clarkes' Special Disability 51 On the basis of the evidence adduced in these proceedings (to which it should be noted Mr Unicomb was not a party), Mr Unicomb took advantage of the Clarkes' trust in him to procure their involvement in a transaction in which he was, unbeknown to the Clarkes, personally interested. 52 The relevant question for present purposes, however, is whether Lopwell, rather than Mr Unicomb, took advantage of the Clarkes' special disability. Lopwell left it to Mr Unicomb to obtain the Clarkes' signatures following Mr Unicomb's request that Mr Sharkey deal with him, and not Mr and Mrs Clarke. However, the fact that it did not have any direct communications with the Clarkes is not decisive. To find that Lopwell took advantage of the Clarkes' special disability it is not necessary to find that Lopwell engaged in active persuasion. If Lopwell had, or should have had, relevant knowledge or suspicion of the disability (an issue to which I will shortly come), its taking of the benefit of the transactions sufficed. As was said by the majority in Bridgewater v Leahy, the relevant equity may "be enlivened not only by the active pursuit of the benefit [which the transaction] conferred but by the passive acceptance of that benefit" (at [122]). 53 I turn then to the question of whether Lopwell had, or should have had, sufficient knowledge or suspicion of the Clarkes' special disability to attract the unconscionability principle. 54 In Commercial Bank v Amadio, Mason J said that, in the absence of the defendant having actual knowledge of the plaintiff's special disability, it is sufficient that the defendant is aware of the possibility that the plaintiff is not in a position to make a judgment as to what is in his own interests "or is aware of facts that would raise that possibility in the mind of any reasonable person" (at 467). His Honour had referred earlier to the facts in that case being such as would have raised in the mind of any reasonable person "a very real question as to the [Amadios'] ability to make a judgment as to what was in their own best interests". In the same case Deane J asked whether the special disability was "sufficiently evident to the bank to make it prima facie unfair or 'unconscientious' of the bank to procure [the Amadios'] execution of the document of guarantee and mortgage in the circumstances in which that execution was procured" (at 477). He referred to the bank officer being "put on inquiry" by what he knew (at 479). In Louth v Diprose, Deane J put the requirement in substantially the same terms when he referred to the need for the "'special disability' [to be] sufficiently evident to the other party to make it prima facie unfair or 'unconscionable'" for that party to rely upon the transaction (at 637). The plurality judgment in Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 said that in Amadio "it was unconscionable for the bank to enforce [the mortgage and guarantee] because the bank's employee had shut his eyes to the vulnerability of the respondents and the misconduct of their son" (at [30]). 55 Lopwell submitted that the authorities, such as the recent decision of the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89, particularly at [171-188] dealing with the knowledge required to attract the second limb of Barnes v Addy [1874] 9 Ch. App. 244, that is, assistance with knowledge in a dishonest and fraudulent breach of trust, describe the type of knowledge required before a finding of unconscionable conduct can be made against a person. However those authorities state principles developed in a context different from the present. One notable difference in the underlying principles is that, unlike the position with unconscionability, a finding of liability under the second limb of Barnes v Addy does not require a finding that the defendant received a benefit from his or her conduct. Another difference is that the conduct with which the second limb of Barnes v Addy is concerned is dishonest or fraudulent, rather than unconscionable, conduct. These differences may well warrant a higher level of knowledge being required in the context of Barnes v Addy than is the case with unconscionable conduct. Whether this is so or not, consideration of those authorities in this case may, as was said in the plurality judgment in Garcia v National Australia Bank, "distract attention from the underlying principle: that the enforcement of the legal rights of the creditor would, in all the circumstances, be unconscionable" (at [39]). I accordingly do not consider it of assistance to examine decisions concerned with the second limb of the rule in Barnes v Addy. 56 Was the Clarkes' disability "sufficiently evident" to Lopwell in the sense to which Deane J referred in Louth v Disprose (see [37] above)? I agree with the primary judge's conclusion that it was. The relevant knowledge which Lopwell had through Mr Sharkey, was summarised by the judge in paragraph [45] of his judgment (see [34] above and also the judge's mo re extensive description of Mr Sharkey's knowledge quoted in [32] above). 57 The first aspect of Lopwell's knowledge to which his Honour referred was that of the "haste of the transaction". Mr Sharkey's first meeting with Mr Freeman, Mr Unicomb and Mr Turner concerning the transaction occurred on the evening of Sunday 27 April 2003 (the earlier date given in Mr Sharkey's affidavit was corrected in the course of his oral evidence). The structure of the arrangement was discussed and agreed at that meeting. Mr Sharkey appreciated that the transaction was urgent, with there being an imminent "drop dead date". He could not recall what that date was but it is apparent from other evidence that it was Wednesday 30 April 2003, which was the date upon which the transaction was in fact completed. The transaction documents were prepared on Monday 28 or Tuesday 29 April 2003 and were, with Mr Sharkey's knowledge, taken by Mr Unicomb to be signed by the Clarkes on 29 April 2003. The haste involved in the transaction, and in particular in the obtaining of guarantees and mortgages from the Clarkes, was a factor which would have pointed in the mind of a reasonable person in the position of Mr Sharkey against the likelihood of the Clarkes having had the opportunity to give proper consideration to, and having obtained proper advice in relation to, their entry into the transaction. Particularly is this so when Mr Unicomb had given to Mr Sharkey as a reason for Mr Unicomb taking the documents to the Clarkes, the fact that the Clarkes were very busy each day conducting affairs on their dairy farm. 58 The second aspect of Lopwell's knowledge was what the primary judge described as the "exorbitant interest rate". This description was well warranted. The interest rate of 18 percent per month was an extraordinarily high one. Even on a simple interest basis, it equated to 216 percent per annum. On a compounding basis, which was what the Loan Agreement provided for (see [15] above), the amount outstanding after a year, if default occurred, would be in excess of a multiple of seven of the original principal (assuming interest was calculated on monthly rests). Counsel for Lopwell agreed at the hearing of the appeal to a calculation demonstrating this. On this basis, if the borrower defaulted, the amount outstanding would be in excess of $10,000,000 after a year, as compared to the original loan amount of $1,473,000. 59 The Statement of Claim squarely alleged that the interest rate specified in the Loan Agreement was "unconscionable and excessive". Yet Lopwell's evidence did not seek to dispel the common sense inference that this was indeed so. It was apparent from Mr Sharkey's evidence that he had had significant experience in financing and had significant knowledge of the market place. He described Lopwell's business of borrowing and on-lending funds in some detail but did not attempt to justify the interest rate applicable to the present transaction by comparing it to rates charged in the market, or even to rates charged by Lopwell in other transactions. Lopwell recognised the exorbitant and unreasonable character of the interest rate by not seeking to rely upon it in these proceedings but instead to claim only interest calculated at the rate usually awarded by the court (see [21] above). 60 The interest rate is in my view the most important of the factors relied upon by the primary judge. Its incorporation in the Loan Agreement had the potential to impose such an extraordinary and onerous burden upon the Clarkes as guarantors and mortgagors that a reasonable person in the position of Lopwell cannot have failed to suspect that the Clarkes were not aware of, or at least not properly advised as to, this interest rate and the transaction as a whole and were therefore for some reason, the precise details of which were unknown, disabled from looking after their own interests. 61 This conclusion is reinforced by the other factors to which the primary judge referred, namely: - That Mr Sharkey "did not have any real or precise knowledge of the consideration that the [Clarkes] were to receive". - That Mr Sharkey knew that "the Clarkes had been introduced to the transaction by Unicomb, who was the borrowers' accountant as well as their accountant". - That Mr Sharkey knew that the Clarkes "had not had any independent financial or legal advice, if any advice at all"; and - That Mr Sharkey, save for knowing that the Clarkes owned considerable real property, "had no knowledge of the Clarkes' personal characteristics or financial circumstances at all" (at Judgment [45]: see [34] above). 62 Further comment needs to be made on the question of independent advice referred to by the primary judge. The advice given to the Clarkes by Mr Unicomb was not independent because Mr Unicomb had a personal interest in the transaction and also because he acted for the borrower, Mr Freeman. Lopwell, through Mr Sharkey, knew of Mr Unicomb's lack of independence. Whilst the primary judge was not satisfied that Mr Sharkey knew of Mr Unicomb's interest in the project (see [32] above), he did hold that Mr Sharkey knew that Mr Unicomb was acting for both the borrower and the Clarkes (see [34] above). 63 The only solicitors who may, to Mr Sharkey's knowledge, have been acting for the Clarkes were Koffels. However, he knew that that firm acted for Mr Freeman and was not therefore in a position to give independent advice to the Clarkes (Judgment [37] quoted in [31] above). It was correct therefore for the primary judge to conclude that Lopwell was not aware of the receipt by the Clarkes of any independent financial or legal advice and made no inquiry as to whether they had. 64 Belief on the part of Lopwell, based on solid foundations, that the Clarkes had had independent advice may have prevented the characterisation of Lopwell's conduct as unconscionable because in those circumstances it might well have been able to be said that Lopwell was ignorant of any relevant disability on the part of the Clarkes. The absence of such a belief does not of course, of itself, justify the finding of unconscionable conduct. However, in the context of the other matters of which Lopwell was aware, it is a factor pointing in that direction. I refer in particular to the extraordinarily high interest rate which was specified in the Loan Agreement signed by the Clarkes as guarantors. The inclusion of that interest rate of itself gave rise to a strong inference that the Clarkes' interests were not being protected, either by themselves or by any advisor acting on their behalf. The inference was not negated by any belief on the part of Lopwell that the Clarkes had received independent advice, or by any other factor.

Whether the transaction should be set aside 65 Lopwell submitted that even if it were found to have taken unconscientious advantage of a special disability of the Clarkes, it should still succeed in recovering the principal sum, together with interest at Court rates, from the Clarkes. It relied upon the principle that equitable relief will only be granted to the minimum extent necessary "to prevent the stronger party to an unconscionable dealing acting against equity and good conscience by attempting to enforce, or retain the benefit of, that dealing" (per Deane J in Amadio at 480). Lopwell's contention was that, at most, the objectionable part of the transaction was the contractual interest rate, that Lopwell was not seeking to recover interest at that rate and that it was not in these circumstances appropriate that any relief be granted in favour of the Clarkes. 66 This approach may have had some merit if the Clarkes had received the principal sum, or some part of it. However, they were only guarantors and received none of it. Further, on the findings of the primary judge they did not receive any other consideration in respect of their entry into the Wirrina transaction. Indeed, there was not even any promise of consideration, except a vague assurance given earlier by Mr Unicomb that he would solve their cash-flow difficulties. In these circumstances, it cannot be inferred that if the Clarkes had not been labouring under a special disability they would have entered into the transaction anyway if the interest rate had been a reasonable one. In my view, the position here, so far as the transaction with the Clarkes is concerned, is as Deane J found the position to be in Amadio: "the whole transaction should properly be seen as flowing from the special disability which was evident to the bank and as being unfair, unjust and unreasonable" (at 481). 67 I should add that the Orders of the primary judge left unaffected the transaction so far as it related to the borrower, Mr Freeman. This was appropriate, apart from any other reason, because Mr Freeman was not a party to the proceedings. It was only the rights of Lopwell against the guarantors and their properties that were affected by the Orders.

Conclusions and Orders 68 For these reasons I consider that the primary judge was correct to have declared that Lopwell acted unconscientiously in procuring the guarantees and mortgages from the Clarkes. As a result, the appeal should be dismissed with costs.

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