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.