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[1999] SASC 265
Supreme Court of SA
1999-07-02
Original judgment source is linked above.
The application sought a further $110,000 to re-equip and re-stock the Hutt Street delicatessen. The note states that the Becharas told the bank that the monthly repayments for these loans totalled $8,432 and that the plaintiffs assisted in the payment of these outgoings. They sought a total of $490,000 and offered as security the stock of the Bechara delicatessen and the Hutt Street delicatessen as well as a mortgage over Tony Bechara's house at 390 Regency Road, Prospect, a mortgage over the Becharas house property at Hampstead Gardens and a mortgage over the Micarones' house properties at Blair Athol and Prospect. The bank refused the application.
On 22 March 1992 Tony Bechara, his father and Mr Micarone put an amended proposal to the Commonwealth Bank but that, too, was declined. The proposals on 17 March and 22 March both indicate that Mr Bechara and Mr Micarone were aware of the financial difficulties. It would have been apparent to them that default on the loans would result in the securities being realised with the consequent loss of some or all of their properties. Both proposals to the bank display an understanding by Messrs Micarone and Bechara of the need to proffer security and the consequences of default. Mr Trussell, the manager of the St Agnes branch of the bank, gave evidence that he had spoken to Mr Bechara on at least six earlier occasions about defaults by Tony Bechara.
As we note in the next few paragraphs, it was not until April 1992 that all the plaintiffs and their children met to discuss whether to re-open the Hutt Street delicatessen. The fact that Mr Bechara and his son made the initial approach to the Commonwealth Bank shows that at least they both supported the proposal. Mrs Bechara's deference to her husband would have meant that she would have agreed to the loan if the bank had been willing to make the loan. The fact that Mr Micarone was present on the second visit to the bank on 22 March suggests that he too was willing to agree to it. The objective fact of the presence of Mr Micarone and Mrs Bechara at the meetings at the Commonwealth Bank shows a greater involvement than they were willing to admit.
When the St Agnes branch of the Commonwealth Bank refused the proposals for restructuring the loans, Tony Bechara approached Adelaide Finance Agency Pty Ltd ("Adelaide Finance") with a similar re-financing proposal. He dealt with a Mr Hartley from that company. He discussed the proposal in some detail with Hartley, offering all the properties of both families as security. He provided Hartley with valuations and the financial statements prepared by Frost. The financial statements referred to an anticipated recovery of $450,000 from the insurance claim. Hartley told him that it might be possible to provide funds.
In April 1992 Tony Bechara arranged a meeting at the Micarone home. The meeting was attended by the Micarones, the Becharas, Tony and Amelia Bechara, Marisa Micarone and Frost. The purpose of the meeting was to discuss the re-opening of the Hutt Street delicatessen and the re-financing proposal. The meeting discussed those topics as well as the financial situation of Tony, Amelia and Marisa and the insurance claim. It was contemplated that the proceeds of the insurance claim would be used towards repayment of the new loans. A good deal of the explanation was provided by Frost. He suggested that re-opening the delicatessen would assist the insurance claim. Eventually, the Micarones and Becharas agreed to support the re-financing proposal and the re-opening of the Hutt Street delicatessen. This was to be the first re-financing transaction.
As the trial judge found, Frost attended the meeting to advance the interests of Tony Bechara, who was then in considerable financial difficulty. Frost told the plaintiffs that the insurance claim was worth $400,000 and that this would resolve the financial crisis. The plaintiffs were not told that there was any doubt about recovery or that the claim had been disputed. Tony Bechara and Frost of course knew that the claim dishonestly stated the turnover at Hutt Street but did not disclose that to the plaintiffs. The Micarones were also told that, once the claim was paid, their liability would be discharged first so that their properties would be released first. The Micarones did not immediately agree to the re-financing proposal and the proposal to re-open Hutt Street. Some time later, Frost again met Mr and Mrs Micarone and repeated the arguments he had advanced at the meeting in April, including the payment of the insurance claim and the use to which the proceeds of the claim would be put. The trial judge found that the comments made by Frost about the insurance claim and the confidence he expressed in Tony Bechara's business influenced the Micarones and the Becharas to agree to the first re-financing.
Hartley arranged the first re-financing. The restructuring involved discharging existing loans and entering into new lending arrangements. The first re-financing transaction was not a single loan but a series of loans. The new loans were provided by five financiers and involved six separate loans. Three of those loans were organised by Mr Swincer and were referred to as "the Swincer loans". They were loans made by private individuals. Two other loans were made by Australian Guarantee Corporation Limited ("AGC") and the remaining loan was made by Credential Acceptance Corporation Pty Ltd ("Credential"). A meeting was held on 1 May 1992 at Hartley's office at Adelaide Finance so that the application forms in relation to the Swincer loans could be signed. It was attended by all of the plaintiffs, Tony and Amelia Bechara and Marisa Micarone. Hartley explained the components of the Swincer loans. He explained the amounts involved, how the proceeds were to be applied, the interest rates, the security to be taken, and the consequences of default stating that the properties taken as security would be sold to recover outstanding monies. It is apparent that the plaintiffs were relying on the proceeds of the insurance claim to discharge the greater part of their obligations. The plaintiffs provided some of the security for the loans. The details appear in a moment.
A number of documents relating to the first re-financing were executed in the presence of Mr Chehade, a justice of the peace, who was known to Mr Bechara. Mr Belperio witnessed the execution of the mortgages and guarantees granted by both the Micarones and Becharas to Credential and to AGC. This was Belperio's first association with the plaintiffs in relation to their borrowings.
The Credential documents were executed at Valley View on 17 June 1992 and the AGC documents at Prospect on 20 July 1992. The Micarones and Becharas, Tony and Amelia Bechara and Marisa Micarone were all present on both occasions. The trial judge accepted the evidence of Belperio that on both occasions he explained the nature of the documents to the Micarones and the Becharas. He also warned them as to the danger of entering into transactions of this nature, explaining that on default the properties would be sold. At some stage in the course of the meeting at Valley View, Mr Micarone asked Belperio for his opinion of the insurance claim. Belperio replied that he was not an insurance lawyer and he could not comment on the claim. He said they should refer to the lawyer handling the matter and, if they had any concerns, they should seek independent advice. He said Mr Micarone appeared uneasy or disappointed with the answer. Mr Micarone's question is further testimony to the reliance being placed by the plaintiffs upon the insurance claim as a means of repaying the loans.
The security for these loans were the three house properties owned by the plaintiffs and the Regency Road property owned by Tony and Mary Bechara. The plaintiffs believed they were guarantors but they had a personal liability as mortgagors. The borrowings totalled $512,035. The transactions were completed in June and July 1992. The lenders, the amount advanced on each loan and the security are shown in the following table.
Second mortgages over Blair Athol and Prospect properties.
Third mortgages over Blair Athol and Prospect properties
The loans and the security for both loans are shown for each family in the following table:
* Ennio and Linda Micarone (Gladstone Road and Blair Athol)
Tony and Amelia Bechara had in March 1992 purchased a house property at 36 Grant Avenue, Salisbury Downs, for $85,000. They borrowed $81,216 secured by a mortgage to the Commonwealth Bank. It was not included as part of the security for the first re-financing. However, it formed part of the security for the Perpetual loan.
Given the issues as between Perpetual and the plaintiffs and as between Belperio and the plaintiffs, it is useful to review the position immediately prior to the first re-financing and the reasons for it. At that time, the Micarones had granted mortgages over both their house properties and the Becharas had granted a mortgage over their Hampstead Gardens property as security for loans made to Tony and Amelia Bechara and Marisa Micarone. In addition, the plaintiffs were assisting in payment of interest to the lenders.
The situation then existing as to the Hutt Street delicatessen and the loans was summarised in a letter dated 28 October 1993 written by Frost to the Australian Government Solicitor concerning taxation problems of Amelia Bechara and Marisa Micarone.
"The premises were not able to be reoccupied until July, 1992. The setting up of the new Hutt Street Deli proved to be a financial disaster as the turnover struggled to achieve a level which would cover the associated fixed costs. The business did not achieve $4,000.00 turnover at any time during the reestablishment period, where as before the fire the turnover was around $12,000.00, the business had to be closed in April, 1993. The borrowings related to the reestablishment are still outstanding and the sale of the plant and equipment was sold at auction for approximately $10,000.00. Set up costs borrowed were $60,000.00.
After the fire the payments to Citibank ($2320.17 per month) and other payments to outstanding creditors were maintained by borrowings from friends and family, until they could no longer borrow to meet the payments. At this time, borrowings were the only source of funds as they did not have any income. At this stage it became necessary to re-finance to fund the continuance of the claim against the insurers. The insurers were refusing payment of the policy on certain grounds.
Re-financing was arranged through a private funder in April, 1992. Other family loans had to be incorporated into the borrowings to have enough equity for the funder to advance the required funds. The total borrowings were $521,531.95 and monthly payments were $7,899.00 per month. The borrowings included $60,000.00 required to refit Hutt Street Deli for the reopening and, hopefully, enough money to carry though and keep payments up to date until the insurers agreed to a settlement. Also included was settlement and brokerage fees of $28,996.35."
All of the plaintiffs knew that Tony Bechara was in financial difficulties and that the businesses could not service their outgoings, in particular, the several loans. Before the meeting in April 1972 Mr Micarone and Mr Bechara had both known that default had been made on the Citibank loan and that money had been borrowed from the Commonwealth Bank to provide a fund to service that loan. Mr Micarone knew that his two properties were at risk. He was prepared to borrow $30,000 to meet one year's instalments. It is reasonable to infer that Mrs Micarone and Mrs Bechara through their husbands were also aware of the defaults before the April meeting. Mr Micarone and Mr Bechara also knew that the Commonwealth Bank had twice refused a re-financing proposal.
All of the plaintiffs had acceded to the proposal to enter into the first re-financing to re-open the Hutt Street delicatessen. That decision was made conscious of the fact that a substantial sum would have to be borrowed to renovate the shop, re-fit it and re-stock it. Thus, at a time when severe financial difficulties were already being experienced, the plaintiffs decided to participate in a decision which required further funds to be borrowed. In fairness to the plaintiffs, it must be acknowledged that they were heavily influenced by the misrepresentations made by Frost. Their reliance on Frost was based on the fact that he was an accountant. It must also be added that the plaintiffs' decision was very much affected by their belief that at least $400,000 would be recovered on the insurance claim. It would be fair to state that they saw everything hinging on the proceeds of that claim which would enable repayment of a substantial part of the moneys borrowed.
In the case of the Becharas, this was but another instance of their willingness to continue to provide financial assistance to their eldest son. That support was provided notwithstanding a poor record of financial mis-management in the past. Despite his past failings, his parents continued to support him. In the case of the Micarones, they believed that they had no alternative, given that the default on existing borrowings would, in all likelihood, mean that they would lose their houses. They also saw it as a means of supporting their children. As Mr Micarone said in evidence, it was the only way out.
The decision to re-open Hutt Street and to borrow further funds was obviously critical for the plaintiffs. They were agreeing to an increase in the total amount borrowed. All of the plaintiffs had already agreed to permit their properties to be used as security for existing loans by Citibank, ANZ Bank and other lenders. They continued to permit their properties to be used as security. In short, the plaintiffs continued to provide financial assistance to their children by providing their properties as security in the hope that the businesses would be able to trade their way out and relying heavily on the successful recovery of some $400,000 on the insurance claim. The decision to borrow must also have been influenced by the risk and consequences of default, as funds could not be provided from any other source.
Part of the proceeds of the first re-financing was used to pay existing loans associated with the Hutt Street delicatessen. Some money was spent on re-opening the shop and some creditors were repaid. Mr Micarone was re-paid $30,000 approximately for monies he had lent to Tony Bechara.
The Hutt Street delicatessen was re-opened on 6 July 1992. Trade was poor. Takings did not exceed $3,500 per week. These figures did not improve and it ceased trading in April 1993. Despite its poor trading revenue, Tony Bechara and Frost told the plaintiffs that the business was good and was picking up.
The re-financing did not resolve the financial difficulties and repayments for the new loans fell into arrears. Some of the lenders began issuing notices of demand. It seems that none of the plaintiffs knew of these notices. The trial judge found that from the time of the first re-financing Tony and Amelia Bechara and Marisa Micarone and their businesses were in serious financial difficulty.
Mr Mahony, the solicitor originally instructed to handle the insurance claim, was replaced by another solicitor, Mr Scragg. On 21 August 1992, Mr Scragg issued proceedings to enforce the claim. The insurer defended the claim. Ultimately, on 21 June 1993, on the morning of the trial the claim was settled in the sum of $202,000. At no time were any of the plaintiffs informed of the difficulties with the claim.
Tony Bechara frequently discussed the financial situation with Frost. They discussed re-financing the businesses yet again. Frost advised him that there would have to be a further re-financing in order to reduce the amount of the monthly repayments. Tony Bechara made enquiries through finance brokers. One of those brokers was Capital Link Australia Pty Ltd ("Capital Link") and Tony Bechara dealt with Mr Peter Finnimore of that company. He saw him in September 1992. Finnimore told Tony Bechara that, if the re-financing proposal was to succeed, all existing loans would have to be repaid. He also requested the financial statements of the businesses and said that new valuations would be necessary. Finnimore also spoke to Frost on a number of occasions on the telephone and obtained financial statements from him. He was told of the insurance claim for $450,000 (Frost had inflated the anticipated recovery to the higher amount) and that settlement was expected in March 1993, an unjustifiably optimistic assertion given that the insurer was defending the claim. Tony Bechara then arranged for Finnimore to meet his parents and the Micarones.
It was arranged that Finnimore should speak separately to the Micarones and the Becharas. Finnimore saw Mr Bechara at his house and explained the re-financing proposal and its terms. He stated the amount of the loan and the rate of interest and said that the loan would be secured by a first mortgage over the five properties. Mr Bechara said that he wanted the Micarones' properties discharged first when the insurance claim was paid. In his evidence Mr Bechara said that Finnimore told him that he would endeavour to arrange a loan which would save interest. Mr Bechara said this seemed to be a good scheme for Tony, Amelia and Marisa and he agreed to it. The trial judge said that he was not prepared to find that Mr Bechara gave approval for Finnimore to proceed but that he agreed with the concept. This is a curious finding given the evidence of Mr Bechara that he agreed to the scheme because it seemed to be a good one for Tony, Amelia and Marisa. Furthermore, the Becharas later signed the application for finance and all relevant documents relating to the Perpetual transaction. The Becharas' evidence shows that they were induced to enter into the transaction because of the reduced interest payments and the representations concerning the insurance recovery.
A short time after seeing the Becharas, Finnimore saw the Micarones. Tony Bechara was also present. He explained the proposed transaction in much the same way as he had explained it to Mr Bechara. Mr Micarone asked whether his properties would be released when the insurance claim was paid. He said that the interest payments would be less. It is apparent from the findings made by the trial judge that both Mr Bechara and Mr Micarone understood the implications of what was proposed and that they relied heavily on the reduced interest payments and on recovering $400,000 from the insurance claim. Mr Bechara had said that he wanted the proceeds of the insurance claim to be applied first in repayment of the loans secured over the Micarone properties. Mr Micarone made the same request.
Tony Bechara and Frost visited the Micarones at their home twice to discuss the re-financing. Tony Bechara spoke about the re-financing and Frost said that the money to be recovered on the insurance claim had increased to $500,000. The increase was said to be the result of an increase in expenses. Bechara and Frost encouraged the Micarones to enter into the re-financing saying that the transaction would enable interest payments to be reduced and, when the insurance claim was recovered, the securities offered by the Micarones would be discharged. Tony Bechara and Frost visited them on a second occasion some time after Finnimore had been to see them. They were then told that money had been found and they could "do a re-financing". The judge found that the representations that the insurance claim would result in payment of the order of $500,000 and Micarone properties would be released first when the proceeds of the claim were obtained were made in order to encourage the Micarones to take part in the second re-financing.
Frost also visited Mr Bechara on a number of occasions leading up to the second re-financing. The trial judge held that the immediate attraction which the re-financing held for Mr Bechara was the reduction in the monthly payments of interest. He also held that Frost's continuous statements about the value of the insurance claim caused the Becharas to agree to the re-financing transaction. Mr Bechara saw the successful pursuit of the insurance claim as essential to the achievement of a satisfactory financial position for his son and daughter-in-law. As the trial judge observed, it is obvious that all of the plaintiffs relied heavily on the recovery from the insurance claim.
Finnimore prepared a finance application. It identified the proposed borrowers as Tony and Amelia Bechara, Marisa Micarone, Mr and Mrs Micarone and Mr and Mrs Bechara. Finnimore submitted the application to International Financing & Investment Pty Ltd ("I F & I"), another finance broker.
I F & I is a company with operations in several States. Its business was described as "mortgage origination, mortgage management, and finance broking". Mortgage origination is the business of finding suitable borrowers for a particular lender. Mortgage management involves managing a loan for a lender after the loan has been made, the fee being a proportion of the interest rate. I F & I had an arrangement with the Bank of Melbourne whereby it acted as a mortgage originator for the Bank. If it found a lender for a borrower, it charged the borrower a fee. It did not charge the lender a fee. In effect, the fee from a lender would be the fees associated with managing the loan after it had been accepted. I F & I submitted the application to the Bank of Melbourne, which refused the application. The application was re-submitted to the Bank, which again refused it on 13 October. An application was then made to the R & I Bank which, on 23 October, also refused it.
On 23 October 1992, after the refusals from the Bank of Melbourne and the R & I Bank, I F & I approached Perpetual through Perpetual's agent Puma Management Ltd ("Puma"). I F & I prepared a formal application which set out, among other things, details of the proposal, the securities which were being offered, and stated the purposes of the loan. The application was accompanied by approvals for loans totalling $664,000 from a mortgage insurer, Commercial Union Australia Mortgage Insurance Corporation Ltd ("CUAMIC"). It had initially been proposed that there would be separate loans for that amount. I F & I did not inform Puma that the Bank of Melbourne and the R & I Bank had refused the application.
On 3 November 1992 Puma informed I F & I that it was prepared to approve the application. The approval was subject to CUAMIC insuring the transaction. On 16 November 1992 CUAMIC issued a cover note. The terms of the application changed but nothing turns on that fact. I F & I did not speak to any of the borrowers before the loan was approved except Tony Bechara, who had rung to enquire as to the progress of the application. It accepted at face value the statements of assets and liabilities of individual borrowers which had been presented in the application provided by Finnimore. Eventually, on 25 November 1992, a formal offer to lend $640,000 was made to the applicants, the seven members of the Micarone and Bechara families. It was a single loan to all seven and the loan was secured by mortgages over the five properties. On 3 December 1992 they all signed an acceptance of the offer. Belperio witnessed their signatures. The loan was to be secured by a registered first mortgage over the five properties mentioned earlier, that is to say, the two house properties owned by the Micarones, the house property owned by the Becharas, and the house property owned by Tony and Amelia Bechara, and the house property owned by Tony Bechara and his sister Mary. The loan was to be insured by CUAMIC. Finnimore did not have any contact with Perpetual or Puma at any stage. The transaction with Perpetual was handled entirely by I F & I.
Mortgages and other documents were prepared and were executed by all of the applicants on 15 December 1992 at the Micarones' home at Prospect. Belperio witnessed their signatures. Because of a misunderstanding which we will later explain, Belperio was not then requested to provide certificates of independent legal advice. Nevertheless, Belperio explained the nature and effect of the documents to all seven of the borrowers. We will deal with this meeting in greater detail when examining the claims against Belperio.
After the mortgages had been executed and returned to Puma's solicitors, Puma directed that certificates of independent legal advice be obtained. The direction was given to Puma's solicitors on 21 December 1992. On the same day, the certificates were delivered to Belperio, who completed them and returned them on the same day. Belperio did not contact the plaintiffs before signing them. He said that he had read them and satisfied himself that he was able to certify as accurate the statements they contained.
Settlement was due to occur on 22 December 1992. However, it was delayed because the borrowers were unable to provide Puma with credit references from one of Tony Bechara's creditors. It was a term of the loan that the borrowers provide Puma with satisfactory re-finance reports from Citibank, Prudential, Commonwealth Bank and Australian Guarantee Corporation Limited ("AGC"). Satisfactory reports were provided from all but AGC. The borrowers could not, therefore, meet the conditions precedent to the grant of the loan. Puma then asked CUAMIC if it was still prepared to provide mortgage insurance despite the absence of a clear credit reference from AGC. CUAMIC said that it would. Puma then considered whether it should proceed with the transaction. Eventually it decided to do so but imposed additional conditions on the borrowers. The conditions were set out in a letter dated 4 January 1993 from Puma to I F & I. The conditions were
(1) that the insurance claim concerning Hutt Street be settled within 10 days of the completion of the lending transaction; and
(2) that, upon payment of the insurance claim, the loan to valuation ratio be reduced to 75% by the lodgment of $70,000 to be held on deposit with Macquarie Bank Limited with Perpetual having a right to set off that fund against any default.
The borrowers agreed to the conditions. Puma's solicitors then prepared extensions of the mortgage with these additional conditions and sent them to the borrowers for execution.
The documents were executed at a meeting of all borrowers with Belperio on the evening of 17 January 1993. Belperio explained the terms and effect of the documents. He witnessed the execution of the documents and then signed certificates of independent legal advice. We will refer in greater detail to the events of that meeting when discussing the issues in the appeal by Belperio. Settlement of the transaction took place on 28 January 1993.
By early April 1993 the borrowers were in default of the loan agreement. They had failed to deposit the sum of $70,000 as required by the extension of the mortgage. Tony and Amelia Bechara sold their property at 390 Regency Road, Prospect on 22 July 1993 for $128,000. That was one of the properties which had been mortgaged as security for the loan by Perpetual. Perpetual agreed to discharge the mortgage on certain conditions including a condition that the proceeds of sale be used to reduce the loan. The amount of the loan was reduced to $472,500. The interest rate was, however, increased by one per cent per annum. These changes were effected by the execution of a second extension of the mortgage in mid September 1993. The signatures of the seven borrowers were witnessed by Mr Peter Scragg. Not long after, the borrowers were again in arrears and ultimately, in July 1994, Perpetual commenced proceedings to obtain orders for possession of the four remaining properties.
Some reference has already been made to the role of Mr Frost in inducing a belief in the plaintiffs as to the value of the insurance claim and the state of Tony Bechara's businesses and to his role in persuading them to enter into the two re-financing transactions. It is necessary to note his involvement in more detail.
Mr Frost has practised as an accountant since 1980. He first met Tony Bechara in 1989 when Tony Bechara asked him to act as his accountant. Frost, at Tony Bechara's request, had inspected the Hutt Street delicatessen before it was purchased and had given financial advice relating to the purchase. In 1990, at Tony Bechara's request, he prepared some interim financial statements for the year ending 30 October 1990 so that Tony Bechara could borrow funds to purchase equipment for the delicatessen. As already noted, Frost acted as Tony Bechara's agent in persuading the plaintiffs to enter into the first and Perpetual re-financing transactions.
After the fire in the Hutt Street delicatessen, Frost was asked by Tony Bechara or Mr Mahony, the solicitor then handling the insurance claim, to prepare financial statements in respect of the business for the purposes of the claim. Many of the relevant records had been destroyed and it was necessary to obtain information from banks, creditors and other external sources in order to reconstruct the accounts. Frost prepared accounts for the year ended 30 June 1991 and a further period to 28 July 1991.
When reconstructing the accounts, Frost carried out a number of trial balances. Initially, he estimated total sales for the year ended 30 June 1991 to be $450,324.16. Subsequently, Tony Bechara asked him to adopt a total sales figure of $624,000 for the year. Frost acceded to the request with no better justification than an assertion by Tony Bechara that turnover was of the order of $11,000 to $12,000 gross per week. These amendments produced a new profit in an amount of $107,605.84. That represented a gross profit ratio of approximately 28 per cent. The gross profit ratio was based on the comparison of gross trading profit with sales. As part of the process of reconstruction, a handwritten journal was prepared in which an entry was made reducing purchases of stock by $95,000. The effect of this was to increase both the gross and the net profit of the business by a similar amount. It increased the net profit to over $199,000. This represented a gross profit ratio of about 45 per cent, considerably higher than the earlier ratio of 28 per cent.
The trial judge found that Frost was prepared to alter the figures at Tony Bechara's insistence to produce as high a profit as possible. He found that, when he was preparing the reconstructed accounts, Frost realised that Tony Bechara was acting dishonestly in relation to the claim. The judge acknowledged that an accountant must rely on information provided by the client but he found that Frost had done more than that and had become involved in a process of preparing accounts to suit a clearly dishonest client. He said:
"I appreciate that in many respects an accountant is reliant on information given by his or her client and that this is particularly so where very few accounting records exist. This was a point made by Mr Frost on a number of occasions during his evidence. However it is another thing for an accountant to become involved in a process of preparing accounts by means of manipulating figures to suit the transparent motives of a clearly dishonest client. I have little doubt that this is what occurred in the present case. The usual disclaimer in relation to accounts which was also relied upon in the present case cannot absolve an accountant from the consequences of knowingly co-operating in an exercise of this nature."
The trial judge found that the evidence led at the trial convinced him that the more important financial accounts prepared by Frost were false and misleading and that Frost was fully aware of that fact. He found that the accounts were formulated following discussions between Tony Bechara and Frost, some of those discussions taking part while trial balances were being performed on Frost's computer. He found that Frost knew that the accounts were to form the principal basis for the insurance claim while knowing the amount of the claim could not be supported by truthful and reliable evidence. There was no disclaimer to the financial statements or any other indication that they were anything other than a true and fair view of the turnover. There was no hint at all that the turnover had been inflated. Frost's culpability concerning the financial statements is emphasised by the fact that he signed a statutory declaration verifying them.
We have reviewed the evidence. It entirely supports the findings made by the trial judge. There was other evidence which demonstrated that Frost was prepared to produce accounts to support whatever result Tony Bechara wished to achieve. That evidence is recited in the reasons of the trial judge and it is unnecessary to repeat it. The judge relied on that evidence in forming his conclusions and it clearly reinforces them.
Frost's activities also included advising Tony Bechara in relation to financing the businesses. He assisted in the failed approach to the Commonwealth Bank. He asserted to the bank that the recovery on the insurance claim would be about $400,000. He also induced the plaintiffs to believe that the recovery would be at least $400,000, later increasing the representation to $450,000 and then to $500,000. The manner in which he did so may be briefly summarised.
Frost was involved in persuading the plaintiffs and enter into both the first and second financing transactions and to re-open the Hutt Street business. He was present at the meeting at the Micarone home in April 1992 when the proposal for the first re-financing was presented to the plaintiffs. In his evidence Frost said that he had gone to the meeting at Tony Bechara's request, that he knew that Tony Bechara wanted him to explain the proposal, and he agreed that it was quite possible that Tony Bechara wanted him to convince the others to participate in their re-financing, although he understood his role was to answer questions. The trial judge found that Frost's role at that meeting was intended to be far more important than merely answering questions. He found that he was present to advance Tony Bechara's financial interests and went to the meeting with the purpose of persuading the plaintiffs to provide their properties as security.
At the meeting, Frost was asked a number of questions about the insurance claim and the likely recovery. The trial judge found that Frost was aware that the plaintiffs saw the fire insurance claim as crucial to their decision to provide further security. It offered a much more obvious resolution to their financial difficulties than the hope that the Hutt Street business, if re-opened, would generate sufficient funds along with their other income to enable the proposed borrowings to be serviced.
The judge found that Frost had no compunction in expressing confidence in the insurance claim for the plaintiffs to financiers and to others. He did not give any indication that there were any difficulties inherent in the claim. The judge found that Frost advised the plaintiffs that the claim would lead to a pay-out in the vicinity of $400,000 and this would resolve the immediate financial crisis. The evidence provides strong support for these findings with the trial judge. We agree with them. We also agree with the finding that Frost "was aware that a claim for the amount sought on the basis of the accounts which he prepared was, in large part, no more than a sham."
Frost later visited the Micarones to explain the first re-financing transactions. He advanced similar arguments to those at the earlier meeting and reiterated the likely recovery on the insurance claim.
Frost provided the financial information which was included in the application made through Adelaide Finance for what resulted in the first re-financing. It stated that the anticipated recovery on the insurance claim was about $450,000. There was nothing which justified the increase of $50,000.
As already mentioned, after the Hutt Street delicatessen had re-opened in July 1992, trading was very poor. Tony Bechara and Frost had frequent discussions about his overall financial position. Frost advised Bechara that it would be desirable to arrange a further re-financing in order to reduce the amount of the monthly repayments of interest. That advice resulted in Tony Bechara contacting Mr Finnimore at Capital Link. Finnimore asked for financial statements of the business. At Tony Bechara's request, Frost prepared the statements. They were effectively the same statements as had been presented in support of the insurance claim. No alteration was made to reflect the poor trading actually being experienced at Hutt Street.
Frost was aware that lenders and other creditors were pressing Tony Bechara and he assisted him in conducting the finances as well as helping to placate the lenders. He also knew that the insurer had denied liability and the proceedings had been commenced to recover the claim.
Frost and Tony Bechara twice visited the Micarones when the proposed loan from Perpetual was under consideration. As already mentioned, the trial judge found that Frost told the Micarones that the insurance claim would result in recovery of the order of $500,000 and that their properties would be released first when the proceeds from the claim were obtained. He found that the statements were made in order to encourage the Micarones to take part in a second re-financing. On the first occasion, the Micarones asked why the claim had been increased to $500,000. The explanation was that it had increased because of the length of time which had passed since the claim. Frost also had a number of discussions with Mr Bechara senior in the period leading up to the second re-financing. The trial judge found that Frost's continuous statements about the value of the insurance claim had caused the Becharas to agree to the re-financing because they relied on his statements concerning that claim. The judge found that although Mrs Bechara did not speak with Frost about the insurance claim after the meeting in April 1992, her decisions were influenced by what he had then stated the likely recovery to be. Frost also induced Mr Bechara to agree to the second re-financing by explaining that less interest would be paid and the monthly repayments would be lower.
Frost's dishonesty concerning the turnover of the Hutt Street delicatessen and the likely recovery on the insurance claim is emphasised by the following facts. The insurer had instructed Mr B Ellery, a chartered accountant, to examine the claim and, among other things, to make the turnover of the delicatessen. On 16 November 1992 the solicitors for the insurers sent a copy of Mr Ellery's report to Mr Scragg, the solicitor acting for Tony Bechara on the insurance claim. On the same day Scragg discussed the report with Frost. Mr Ellery's report was very critical of the financial statements prepared by Frost. He estimated that the turnover was considerably less than that calculated by Frost. This obviously had enormous significance to the successful outcome of the claim. It certainly raised real questions whether as much as $400,000 would be recovered. However, at no time, did Frost disclose the existence of this report or its contents to the plaintiffs.
To summarise, Frost and Tony Bechara reinforced in the minds of the four plaintiffs the impression that the insurance claim would be successfully resolved in amounts in excess of $400,000 and that the moneys would be used to discharge the liabilities they were being asked to undertake. Frost assisted in encouraging the plaintiffs to accept that Tony Bechara's business interests were in a sound state. This caused the plaintiffs to continue to provide financial support to Tony Bechara in circumstances where they had nothing to gain and a considerable amount to lose. Frost knew of the perilous situation of Tony Bechara's finances immediately prior to the execution of the Perpetual mortgage and the unreliable basis upon which the insurance claim had been made. Frost not only represented that the insurance claim was for the amount of $400,000, but added that the claim had merit, a claim which he knew could not be justified.
The judge also found that Tony Bechara continually badgered all four plaintiffs throughout these unhappy events. He put pressure on them at different times to assist in what were, for the most part, his financial difficulties. He lied to them frequently about the state of his business affairs and what he was going to do with the various amounts of money which were borrowed. However, the Micarones gave evidence that they did not believe or trust him. They only accepted what he said because it was supported by Frost.
The trial judge concluded by making the following findings concerning Frost:
* That Frost had collaborated with Tony Bechara in the preparation of financial statements for the Hutt Street delicatessen which both must had known had no foundation in fact.
* Those financial statements gave every indication that they could be relied upon. There was no hint of their unsatisfactory nature.
* The statements were used to support a claim in excess of $400,000.
* Frost and Tony Bechara reinforced in the minds of the plaintiffs the impression that the insurance claim would be successfully resolved with the recovery of $400,000 that the monies would be used to pay off the liabilities which they were being asked to undertake.
* Frost also assisted in encouraging the plaintiffs to accept that Tony Bechara's business interests were in a sound state. This further encouraged the plaintiffs to support Tony Bechara.
* Frost was well aware of the perilous situation of Tony Bechara's finances immediately before the execution of the Perpetual mortgage and of the unreliable basis upon which the insurance claim had been made.
* Frost knew that the claim for $400,000 could not be justified.
* That the plaintiffs relied on the representations made by Frost and those representations induced them to enter into the Perpetual transaction.
In their statement of claim against Frost, the Micarones' claimed damages at common law which we understand to mean damages for deceit, the full amount payable by them under the mortgages to Perpetual, and costs and interest. The Becharas claimed damages both at common law (which we also infer means damages for deceit) and for negligence, an indemnity for both the first re-financing transaction and the Perpetual transaction, and costs and interest.
The basis of the claim by the Micarones for moneys payable in respect of the mortgage granted by them and the claim for indemnity by the Becharas in respect of the mortgage granted by them is not entirely clear. The jurisdiction of a court of equity to grant an indemnity would appear to be limited to a suit for specific performance and there it would appear to be limited to compensation for defects in title. It is difficult to see how such claims for relief have any relevance in this action: see McDermott, Equitable Damages pp228 and 229.
Before reviewing the issues in each appeal, it is useful to stand back and take an overview of the steps leading to the Perpetual transaction. For the Micarones, the Perpetual loan was in essence the last of a series of three borrowing transactions to assist their daughters in the Hutt Street delicatessen. The first in the series were the initial loans following the purchase of the delicatessen. They were the loans from Citibank and later the Commonwealth Bank totalling some $202,000. The second was the re-financing arranged through Adelaide Finance. For the Becharas, it represented the last of a number of borrowing transactions into which they had entered to assist Tony Bechara in his business ventures. They had borrowed at least $172,000 before they were involved in the re-financing through Adelaide Finance. Immediately prior to the re-financing through Adelaide Finance, the amount of the borrowings by the Micarone and the Bechara families totalled at least $378,000.
The re-financing arranged through Adelaide Finance comprised seven separate loans. There was a limit to the financial exposure of each family to the amount of the loans and any outstanding interest and other costs associated with the loans. Reference to the tables in par 37 above shows that the exposure of the Micarones under the mortgages was $228,000, that the exposure of the Becharas was $107,000, and that the exposure of Tony and Amelia Bechara was $106,000. Each of those three family groups had an additional exposure in respect of the Credential Acceptance loan which was in excess of $70,000. The total amount borrowed under the Adelaide re-financing was $512,035. However, the financial arrangements of the three families were so mixed with one another that in all likelihood default by one would affect others.
The decision to re-open the Hutt Street delicatessen was critical in that it involved borrowing an amount sufficient to repair, refit and restock the shop. This substantially increased existing borrowings.
When the plaintiffs entered into the re-financing arranged by Adelaide Finance, they were aware of past defaults under existing loans. The interest due under those borrowings could not be paid unless the Hutt Street business prospered and traded at least as well as it had before the fire and unless the principal sum borrowed was substantially reduced by a successful recovery of $400,000 on the insurance claim. The families knew that, if the interest payments could not be paid, there was every likelihood that the house properties would be sold upon default. It was also necessary for Tony Bechara's businesses (the Bechara delicatessen and the Valley View fish shop) to prosper to pay the interest and other outgoings. The plaintiffs were relying on the insurance claim to repay the greater part of the loan.
The misrepresentations and deceit by Tony Bechara and Frost were very instrumental in inducing the plaintiffs to enter into the Adelaide Finance transaction. Those misrepresentations concerned three matters, re-opening the Hutt Street delicatessen, the insurance claim and the continued success of Tony Bechara's ventures. Once the plaintiffs had entered into the Adelaide Finance transactions, they were committed to repayments of interest totalling at least $6,170 per month. However, the insurance claim did not settle promptly. Unbeknown to the plaintiffs the Hutt Street delicatessen was not trading at all well and Tony Bechara's businesses did not produce income sufficient to pay the interest. The plaintiffs were locked into the Adelaide Finance loans. They knew that the Commonwealth Bank had declined their earlier request for a loan. They saw the Perpetual loan with its reduced interest payments as their only hope pending the successful recovery of the insurance claim.
The decision to re-open Hutt Street and enter into the re-financing with Adelaide Finance had the effect of exposing the plaintiffs to the risk of losing their house properties on default. The borrowings secured by mortgages granted by Mr and Mrs Micarone totalled some $263,000. Their two house properties were worth about $303,000. The value of the Becharas' house property at Hampstead Gardens was about $110,000. The borrowings secured by that property were at least $107,000. Thus default on the Adelaide Finance loans would almost certainly result in the plaintiffs losing their respective house properties and the plaintiffs knew that fact.
The amount borrowed in the Adelaide Finance transaction was $512,035. It increased to $640,000 in the Perpetual loan for the following reasons. In March 1992, Tony and Amelia Bechara had purchased the house property at Salisbury Downs for $85,000. They borrowed $81,216 from the Commonwealth Bank, the loan being secured by mortgage over the property at Salisbury Downs. The property was taken as security by Perpetual and that involved discharge of the existing mortgage to the Commonwealth Bank thus increasing the indebtedness to Perpetual by some $82,000. In addition, there were substantial establishment fees on the Perpetual loan amounting to some $27,000. Finally, interest was due in respect of the Adelaide Finance loans and that amounted to some $18,000.
The result of the Perpetual loan was that each of the borrowers was jointly and severally liable for the whole of the debt of $640,000. Thus, the cap upon the liability of each of the plaintiffs was removed. In addition, the principal sum increased to accommodate the loan of almost $82,000 borrowed by Tony and Amelia Bechara in order to purchase their house at Salisbury Downs.
In short, the plaintiffs were induced to enter into the Adelaide Finance loans and to re-open the Hutt Street delicatessen because of the misrepresentations of Tony Bechara and Frost. Once locked into that loan, they could not afford the payments of interest. They knew of the consequences of default. They were at risk of losing all of the house properties. The Perpetual loan offered reduced interest payments which provided them with a means of avoiding default pending the successful recovery of the insurance claim. Their hopes as to the insurance claim were based on the deceit of Frost and Tony Bechara. This predicament was caused by the deceit and misrepresentations of Frost and Tony Bechara.
The trial judge held that the statements concerning the insurance claim carried with them a representation of an existing fact, namely, that the claim for the amount of $400,000 was valid. He, therefore, held that as the plaintiffs had relied on Frost's representations as to the insurance claim of the state of Tony Bechara's business interests, the plaintiffs were entitled to relief at common law and under the Misrepresentation Act 1972. The judge held that they were entitled to relief in respect of both transactions. The judge has not expressly stated that Frost is liable for deceit but his reasons, when read as a whole, indicate that it is his decision. Furthermore, in the paragraph immediately preceding the conclusion, he refers to "the serious nature of the allegations in the statement of claim" and stated that the plaintiffs had to discharge the standard of proof referred to in Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336, comments which indicate that he was treating the claim against Frost as the claim for deceit. Further, damages at common law for misrepresentation in these circumstances could only be a claim for deceit. The effect of the trial judge's findings are that Frost knowingly made these false representations without any belief as to their truth: see Derry v Peek [1889] UKHL 1; (1889) 14 App Cas 337.
Section 7 of the Misrepresentation Act has a wide operation. Frost was Tony Bechara's agent in the dealings with the plaintiffs. Tony Bechara was a party to the contract with Perpetual. The representations were, therefore, made by Bechara as a person acting for another party to the contract and are thus actionable pursuant to s7 of the Misrepresentation Act. It was submitted that the plaintiffs claim must fail because they had not pleaded fraud. However, that contention is answered by the fact that in the circumstances of this case the claim for damages at common law for misrepresentation was plainly a claim in deceit for the reasons which have already been expressed. Furthermore, the conduct of the trial indicated the nature of the claim. There was no question in the course of the trial on behalf of Frost as to the nature of the claim against him. The Becharas' claim related to both the first and the Perpetual re-financing transactions. The Micarones had not included a claim in respect to the first re-financing transaction in their statement of claim. They were, however, entitled to recover damages in respect of the Perpetual transaction.
The grounds of Frost's appeal may be summarised in these terms:
* That the judge had erred in holding that the financial statements he prepared were misleading and a breach of his duty of care to the plaintiffs.
* That the judge had erred in holding that he had represented that the plaintiffs would receive $400,000 from the insurance claim and that it was reasonable for the plaintiffs to rely on that representation.
* That the judge had erred in holding that the plaintiffs were induced into entering into the re-financing transactions by the representations that they would receive $400,000 from the settlement of the insurance claim.
* That the judge had erred in finding that the misrepresentations were actionable.
* That the judge erred in holding that Frost was liable to contribute to 90 per cent of the damage as the plaintiffs had not acted on his advice.
There are also a number of grounds which concern the assessment of damages, issues which for the moment can be put to one side. We will return to them.
A substantial part of the argument advanced on Frost's appeal was directed to showing that the plaintiffs had suffered no loss in entering into the Perpetual transaction. That submission was based in part on the fact that the Perpetual transaction resulted in a substantial saving of interest. Those submissions might bear on the assessment of damages but they do not affect the trial judge's conclusion that Frost had made misrepresentations to the plaintiffs concerning the insurance recovery and those misrepresentations had induced the plaintiffs to enter into both the Perpetual transaction and the first re-financing transaction.
The judge found that Frost was a most unsatisfactory witness and rejected most of his evidence where it conflicts with that of the plaintiffs. In his notice of appeal, Frost complains that the judge failed to give adequate reasons for rejecting his evidence in this way. We do not agree. The judgment contains a number of reasons, all of which are persuasive and should be upheld.
There is ample evidence on which the judge could reach his findings of fact that the accounts were false, that Frost knew that fact, and that Frost had misrepresented the likely recovery, and that he induced the plaintiffs to rely on his misrepresentations. Much of the evidence has already been mentioned. There is no justifiable ground for interfering with those findings.
The contention that the representations were not actionable was grounded on the submission that the misrepresentations as to the insurance recovery concerned a future state of affairs. It is convenient to deal with that submission together with the submissions that the judge erred in holding that the plaintiffs were induced to enter the transaction in reliance on them.
The representations did relate to a future matter but in all respects those representations were based on representations as to a past fact, namely, the turnover of the Hutt Street delicatessen which Frost knew to be false. Frost knew of the difficulties in recovering $400,000 on the insurance claim. He knew that the representations as to turnover were false. He knew of the irregular manner in which they had been prepared. He knew that they had been extensively criticised by Mr Ellery. The representations were statements made as to a future event but contained an implied statement as to a present fact, namely, that the insurance claim was valid and that there were no difficulties standing in the way of a successful recovery: see Balfour and Clarke v Hollandia Ravensthorpe NL (1977) 18 SASR 240 at 252 and the analysis by Toohey J in James v ANZ Banking Group Limited [1986] FCA 41; (1986) 64 ALR 347 at 372. The misrepresentations that Tony Bechara's business interests were in a sound state were also actionable as statements relating to past and present facts. There is an overwhelming body of evidence which shows that Frost knew that these representations were false and that the plaintiffs relied on them when entering into both the first and the Perpetual re-financing transactions. He made them as Tony Bechara's agent.
There is ample evidence that the representations made by Frost induced the plaintiffs to enter into the transactions. Further support for that conclusion is found in the judgment of Wilson J in Gould v Vaggelas (1983-1984) 157 CLR 215 at 236 where His Honour identified the relevant principles:
"1. Notwithstanding that a representation is both false and fraudulent, if the representee does not rely upon it he has no case. 2. If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation. 3. The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation. 4. The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contribution to the formation of the contract."
The representations as to the insurance pay-out and the state of Tony Bechara's business interests were material and were calculated to induce the four plaintiffs to enter into the first and second re-financing transactions. It is not only reasonable to infer that the plaintiffs were induced to enter into them by the representations but there is also a substantial body of evidence pointing to that conclusion. It was submitted that the plaintiffs knew of the difficulties with the insurance claim and did not rely on it. The evidence is overwhelmingly to the contrary and we reject the submission. Frost is, therefore, liable for damages for deceit.
The finding that Frost was liable in negligence to the Becharas must also be upheld. (The Micarones had not made a claim in negligence.) Frost will be liable in negligence to the Becharas only if there existed a sufficient degree of proximity between them: see San Sebastian Pty Ltd v Minister Administering Environmental Planning & Assessment Act 1979 (NSW) (1986) 162 CLR 341 at 355 and the cases there cited. We do not think there is any doubt that Frost had a sufficient relationship of proximity with the Becharas. He knew that they were the parents of his client, Tony Bechara. He knew that Tony Bechara wished to persuade them and the Micarones to assist by offering their property as security for both the first and the Perpetual re-financing transactions. At Tony Bechara's request he made representations which he knew they were likely to rely upon. That must have been particularly apparent to him in the case of the Perpetual transaction given their earlier willingness to enter into the first re-financing transaction. Frost, therefore, owed them a duty of care and he acted in breach of that duty of care. His breach caused the losses they suffered in consequence of entering into the transaction. There is no basis for interfering with the conclusions of the trial judge.
The plaintiffs are entitled to damages against Frost in respect of misrepresentations in relation to the Perpetual re-financing transaction. In addition, the Becharas are entitled to damages based on his misrepresentations in relation to the first re-financing transaction as well as damages for negligence in relation to both the Perpetual transaction and the first re-financing transaction.
We have mentioned that Frost had raised a number of issues concerning the assessment of damages in his notice of appeal. The parties agreed that it was preferable to postpone argument on those issues until these reasons have been published. It will be necessary, therefore, to hear further argument on those issues and on the plaintiffs' cross appeal on the same issues.
We next deal with the appeal by Perpetual. The grounds of this appeal are that the trial judge erred in finding that the plaintiffs were at a special disadvantage or special disability vis-à-vis Perpetual; in finding that Perpetual had actual or constructive knowledge of the plaintiffs' disadvantage or disability; and in finding that Perpetual had unconscientiously taken advantage of the plaintiffs. Perpetual also complains of the finding that it was not entitled to rely on the certificates given by Mr Belperio.
The jurisdiction of the court to grant relief in equity where a party has been guilty of unconscionable conduct is of long standing. It is sufficient to refer to such cases as Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362; Commercial Bank v Amadio [1983] HCA 14; (1983) 151 CLR 447; Louth v Diprose [1992] HCA 61; (1992) 175 CLR 621; and Bridgewater v Leahy [1998] HCA 66; (1998) 72 ALJR 1525. That jurisdiction may be invoked whenever one party, by reason of some condition or circumstance, is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created: see Amadio per Mason J at 462 and per Deane J at 474. Thus, two matters must be established if the court is to grant relief. The first is that one party is at a special disadvantage vis-à-vis the other. The second is that the stronger party has unconscionably taken an unfair advantage of the weaker party. Both these matters had been identified earlier in Blomley v Ryan (supra) by Fullagar J at 405 and by Kitto J at 415 who said:
"This is a well known head of equity. 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."
A party would not act unconscientiously if he did not know of the other's disability. Therefore, it is necessary also to show that the stronger party knows or ought to know of the existence of the disability and its effect on the weaker party: Blomley v Ryan per Fullagar J at 405; Amadio per Mason J at 462 and 467 and per Deane J at 474.
The trial judge identified three questions which arose for determination in this case:
1 Were the plaintiffs, or any of them, under a special disability of such a nature as to attract the jurisdiction to set aside the transaction?
2 Did Perpetual know, or should it have known, of the special disability?
3 Did Perpetual take advantage of any such disability, condition or circumstance when entering into the transaction?
Those questions fairly state the issues so long as the expression "special disability of such a nature as to attract the jurisdiction to set aside the transaction" in the first question is intended to denote a special disability vis-à-vis Perpetual. The issue is not simply whether the plaintiffs were labouring under one or more disabilities but whether they were under a special disability vis-à-vis Perpetual.
The terms "a special disadvantage" or "special disability" are used interchangeably as if they are synonymous. As the trial judge used the expression "special disability", it is convenient to continue to use the same expression. In Amadio (at 462) Mason J pointed out, when explaining his use of the expression "special disadvantage", that a mere difference in bargaining power will not suffice. He said:
"I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party."
Thus, in this context the special disability must be of a kind which seriously affects the ability of the innocent party to make a judgment as to his own best interests. In Amadio (at 476 to 477) Deane J identified the weakness which attracts the jurisdiction in terms used by McTiernan J in Blomley v Ryan (supra) at 392 that the "essence of such weakness is that the party is unable to judge for himself". In Bridgewater v Leahy (supra) at par39 Gleeson CJ and Callinan J described this special disability in these terms:
"The nature of the relevant disadvantage concerns the ability of the weaker, or victimised, party, to make an informed judgment as to his or her interests."
The special disability must operate in respect of the dealing with the other party: Blomley v Ryan per Fullagar J at 405 where, having listed the factors which may constitute a special disadvantage, he adds:
"The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the others."
Those words were adopted in Amadio by Mason J (at 462) and by Deane J (at 475).
The mere existence of disabling factors does not, standing alone, necessarily result in one party being at a special disability vis-à-vis the other, although, of course, the existence of those factors will be relevant factors in determining that question. This is an important issue when considering the obligations of a lender in a money-lending transaction where, as here, there is no allegation that the actual terms of the money-lending transaction itself are unconscientious. For example, an applicant for a loan may have a poor command of English, may lack a proper education, may not understand all of the terms of the document evidencing the transaction, and may be under financial pressure giving rise to the need for the loan. These are characteristics shared by many members of the community. As the Federal Court pointed out in Tarzia v National Australia Bank Ltd [1995] ANZ ConvR 159 par48:
"It was not suggested in Amadio and cannot be the position, that a combination of ignorance of English, age and lack of business experience necessarily puts a person at a special disadvantage in dealings with a bank on a guarantee. For one thing, the description presumably covers a great number of astute and capable Australians. Age itself does not raise a presumption of weakness... the same may be said of their ethnicity and fluency in English. Such factors may contribute to a relevant disadvantage in some people, and not in others."
We will in a moment refer to the evidence concerning the special disability alleged by the plaintiffs in this case.
The facts and circumstances of this case are altogether different from those in Amadio. In Amadio, the bank was the moving party in that it knew that the borrower company was, to use Mason J's words (at 464), in "a perilous financial condition" and was looking for additional security to shore up its position. It obtained that additional security from the Amadios. The bank knew that the Amadios were of advanced years, did not have a good command of English, and had placed great reliance on their son, the director of the borrower company. The bank knew that they were unable to make a judgment as to what was in their best interests because of their reliance on their son, whose interests inevitably inclined him to urge them to sign the documents proffered by the bank and in circumstances where the bank knew that the Amadios did not know the true financial position of the company. By contrast, so far as Perpetual was concerned, the plaintiffs were the moving party since they had decided, albeit in reliance on the misrepresentations of Frost and Tony Bechara, to restructure their borrowings in order to reduce their monthly outgoings. In addition, they had engaged a finance broker to assist them. There was, therefore, the intervention of a third party on behalf of the plaintiffs. The plaintiffs initiated the transaction in that they applied to Perpetual for a loan. By contrast, in Amadio the bank had initiated the transaction and it did not fully inform the Amadios of their obligations under the security they provided or of the parlous financial state of their son's company: see Deane J at 479 to 480. Amadio Builders was a major customer of the bank and the largest customer at the bank's Glynde branch. In addition, the continuation of the company's business was advantageous to a finance company with whom Amadio Builders dealt and was a subsidiary of the bank. The deal was, therefore, advantageous to the bank. To use the words of Mason J at 465, the effect of the execution of the mortgage guarantees by the Amadios was disastrous for them though advantageous to the bank. Amadio was a case where there was a gross inequality of bargaining power between the bank and the Amadios. In this case, there was no advantage to Perpetual. It merely made a loan at a fair prevailing rate of interest.
The principles of unconscionability do not relieve a party from responsibility for a foolish bargain or the consequence of his own mistakes: Instead, they operate only where a special disability exists and one party who knows or ought to know of that special disability uses that knowledge to its benefit.
The trial judge found that the plaintiffs were at a special disability which attracted the jurisdiction to set aside the transaction. He found that although, in a very general way, they all understood the nature and effect of the mortgage transaction, none of them "had a proper understanding of the terms and conditions of the documents which were explained to them." He held that they did not understand "the seriousness of the risk they were taking in providing their properties as securities". He added:
"They had been misled into believing that the insurance claim in the amount which they were advised was well based and would be successful. They were misled about the financial performance of the Hutt St delicatessen as at the time of the transaction and their co-operation in executing the mortgages has to be viewed against a background of deceit by Tony Bechara concerning the use to which he was going to put the monies borrowed with their assistance. The first and second re-financing came about following pressure by Tony Bechara, with the professional assistance of Mr Frost, to advance the financial interests of Tony and Amelia Bechara and, to a lesser extent, Marisa Micarone. Looked at overall there was no financial advantage to any of the plaintiffs in this series of transactions, only financial detriment. All four plaintiffs had been deceived over a lengthy period of time by the unscrupulous actions of their son and son-in-law who traded on his relationship with them. At no stage during the period covered by the events of this case was he able to overcome the burden of his heavy debts as he attempted to expand his business interests well beyond his financial and managerial capabilities."
"Special disability in a particular case can arise from a combination of factors. I find that Mr and Mrs Micarone were under such a disability by reason of their age, their reliance on the pension, the emotional attachment they had for their family, their limited language capacity and their naivety in business matters which led them to more readily act upon the misrepresentations made to them in relation to the matters to which I have just referred. Furthermore they lacked assistance by way of proper advice concerning their predicament in being drawn into Tony Bechara's financial difficulties. Mr and Mrs Bechara laboured under a combination of similar disabilities. They were not as old as the Micarones and they had at least some experience in small business. However Mrs Bechara's illiteracy put her into a special category and both Mr and Mrs Bechara were dependent upon the pension, they had very strong emotional ties with their son which were heavily influenced by ethnic considerations, they had no understanding of the serious risk to their assets which these transactions involved and were ready victims of their son's misrepresentations. All the plaintiffs relied heavily on what appeared to them to be helpful professional advice from Mr Frost. They had no means of knowing that when advising them he was prepared to act on the transparently false assertions of Tony Bechara."
These findings fail to have regard to the evidence as to the relatively extensive financial dealings by the plaintiffs, in particular the Becharas, over a number of years, the involvement of the plaintiffs in the financial affairs of their children, the fact that they had had the first re-financing explained to them by Hartley, the fact that Finnimore explained the Perpetual transaction to them, the significance of the first re-financing, and the fact that they, along with their children, wished to restructure their financial arrangements in order to reduce the monthly repayments which they and their children were obliged to make. They had all decided to participate in the second re-financing.
The trial judge found that Mrs Micarone and Mrs Bechara, and in particular Mrs Bechara, deferred to their husbands in matters of business. In the case of Mrs Bechara, that was because of the tradition in which she had grown up in Lebanon. She had a strong view that the husband was the head of the family. It is of course necessary to examine the position of each of the plaintiffs for the purpose of determining whether each was at a special disadvantage. However, where the evidence shows that a wife has deferred to the wishes of her husband, the wife must accept the consequences of relying on her husband in that way. In such cases, the wife cannot shield behind the fact that she relied on her husband and so escape the consequences of her husband's knowledge. Thus, although the female plaintiffs deferred to their husbands in these financial transactions, they must be treated as having the same degree of understanding as their husbands. As their husbands both understood the consequences of default on a mortgage, they must be deemed to have that understanding. As their husbands had entered into the Perpetual transaction with that understanding, they must be deemed to have done so. In this case, there is evidence to support the conclusion that they each had a basic understanding that the consequence of a failure to repay a loan secured by a mortgage was that their houses would be sold. Mrs Bechara had that understanding in respect of loans made before the Perpetual loan. For these reasons, it is proper to regard each husband and wife as one for the purpose of determining whether they were under a special disability. However, the two couples must be considered separately.
The finding that the plaintiffs understood in a very general way the nature and effect of a mortgage transaction does not accurately reflect the true position. The reasons of the trial judge suggest that he believed that the plaintiffs sought to minimise their understanding of mortgages. The number of financial transactions into which both the Micarones and the Becharas had entered is objective evidence pointing to the conclusion that they would have had a clear understanding of the consequences of a default on a mortgage. There is clear evidence from the Micarones and the Becharas that they understood the basic obligations of a mortgage and that consequences of default was that the lender would seek to sell the security. As already noted, before they entered into the Perpetual mortgage, each of the plaintiffs had executed a number of mortgages and guarantees. Nine mortgages had been executed by the Becharas. The Micarones had executed seven mortgages. The Becharas had executed at least five guarantees of the financial obligations of their children and the Micarones had executed at least two. Both had received independent legal advice concerning a mortgage and guarantee on at least two occasions. They had all signed quite a number of other documents relating to the several transactions in which they had been separately involved, such as applications for loans, acceptances of letters of offer, payment authorities to lenders authorising the manner in which the loans should be applied, and requests to an existing lender to provide to a new lender the amount required to discharge the loan. In addition, Mr Hartley of Adelaide Finance had explained the implications of the first re-financing to them, including the fact that the properties given as security would be solved on default. We exclude the fact that Mr Belperio had given similar advice. The evidence of Mr Micarone and Mr Bechara also discloses that they had a clear understanding that default on a mortgage would result in a lender realising the security. As the plaintiffs themselves were borrowers in the Perpetual transaction, it is unnecessary to consider the extent of their knowledge of the consequences of acting as a guarantor. However, it is fair to note that the frequency with which they had acted as guarantors points to the conclusion that they must have been at least aware of the liability to repay the debt of the principle debtor should he default. The trial judge has failed to have regard to all of these facts.
In addition, it must be remembered that the Perpetual loan was a restructuring of the first re-financing and was entered into for the express purpose of achieving a reduced monthly payment of interest. The plaintiffs had effectively crossed the Rubicon when they decided to re-open the Hutt Street delicatessen. That was a critical decision. By that decision they committed themselves to a substantial increase to their already onerous financial obligations. They implemented that by entering into the first re-financing through Adelaide Finance. The Perpetual transaction enabled them to reduce the monthly payments of interest from approximately $6,170 to about $5,000. The saving of about $12,000 per annum had to be attractive to the plaintiffs. Despite their assertions to the contrary, the plaintiffs were willing to proceed with the second re-financing. In other words, if the plaintiffs were under a special disability, it was at the time of the first re-financing. The effect of the Perpetual transaction was to improve their position by reducing the interest payments. That would have been perceived by them as being very attractive as it reduced their outgoings pending the resolution of the insurance claim.
The deceit of Tony Bechara and Frost as to the turnover of the Hutt Street delicatessen and the prospects of success on the insurance claim were no doubt factors which weighed significantly in the plaintiffs' decision making. In that sense they were under a special disability. But they did not know that they were being deceived when they entered into the transaction. They were confident that a large part of the loans would be repaid with the proceeds of the insurance claim. In that sense, they were not under a special disability at that time vis-à-vis Perpetual.
Thus, when determining whether the plaintiffs were under a special disability, the trial judge failed to have regard to the several financial dealings of a similar kind in which each of the plaintiffs had earlier engaged and in particular the first re-financing transaction. Their commercial acumen was obviously at fault. They appear to have acted on the precept that continued borrowing was a way out of their financial difficulties. Little regard seems to have been had to the need for a cash flow to service the borrowing. In this, they are like many who get into financial difficulty. In fairness to them, it must be acknowledged that they relied on the financial advice they received from Frost on the insurance claim producing $400,000. In addition they were not told the true position by Tony Bechara or Frost. But they all knew at the meeting in April 1992 of the poor financial position of Tony Bechara and hence Amelia Bechara and Marisa Micarone.
While they may have been under a disability by reason of their age, their reliance on the pension, their emotional attachment for their children, their limited language capacity, and their reliance on the misrepresentations of Frost and Tony Bechara, the plaintiffs had sufficient experience in business matters to understand the consequences of entering into the Perpetual loan particularly given that the first re-financing and the Perpetual loan had been explained to them before they entered into each transaction. The finding that the Becharas had no understanding of the serious risk to their assets is belied by the number of transactions in which they had engaged and the frequency with which they had guaranteed the financial obligations of Tony Bechara. The finding that Mrs Bechara's literacy put her in a special (albeit unidentified) category is also belied by the evidence that she had herself assisted in the various shops and had herself been in touch with ANZ Bank officers concerning guarantees given by her husband and herself concerning the delicatessen at Unley. It also fails to give effect to her deference to her husband. The finding that the Micarones did not understand the serious risk to their assets is belied by Micarone's own evidence as to his understanding of the consequence of defaulting on a mortgage and his dealings with Citibank to prevent a default.
In addition to all of these compelling factors, it must be noted that Perpetual was the last of three financial institutions to whom the plaintiffs applied for a loan. Furthermore, they did not themselves directly communicate either with any officer of either Perpetual or of Perpetual's agent Puma. The whole transaction was conducted on their behalf first by Finnimore, and later by I F & I. In other words, they had two financial brokers acting on their behalf at what might be called different levels. There was no relationship of any kind between the plaintiffs and Perpetual.
Although the plaintiffs had the disabilities identified by the trial judge, the conclusion that they were at a special disadvantage vis-à-vis the plaintiff was wrong for the following reasons.
1 The plaintiffs had had a good deal of experience with financial transactions of this kind and, in particular, knew the consequences of default. As Finnimore said they understood their obligations.
2 The plaintiffs had entered into the first re-financing when in a desperate financial state. They were then having difficulties discharging their obligations under existing loans. They had increased their financial burden by deciding to re-open the Hutt Street delicatessen. Not long after the first re-financing, they were again unable to service the loans. The Perpetual transaction was perceived by the plaintiffs as a means of reducing payments of interest, pending the recovery of the insurance claim.
3 Through Tony Bechara they had approached financial brokers who, in turn, had approached Perpetual. The position is quite different from that in Amadio where the bank was the moving party.
4 Perpetual was but one of a number of lenders approached.
5 There was no relationship with Perpetual. The plaintiffs had a broker acting for them.
6 There was no complaint about the terms of the loan. In any event they were more advantageous than the existing terms in that the monthly payments of interest were less.
For these reasons, the plaintiffs were not at a special disadvantage in their dealings with Puma.
In order to establish that the relevant transaction is unconscionable, it is necessary to establish that the stronger party knew or ought to have known of the other's special disadvantage. In Amadio Mason J twice referred to the required state of knowledge of the stronger party. He first referred to it (at 462) when describing what is meant by "unconscionable conduct". The passage has already been quoted. He described the required state of knowledge as being what
"... the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party".
Later, when assessing what the bank knew of the situation of the Amadios, he said (at 467):
"As we have seen, if A having actual knowledge that B occupies a situation of special disadvantage in relation to an intended transaction, so that B cannot make a judgment as to what is in his own interest, takes advantage of his (A's) superior bargaining power or position by entering into that transaction, his conduct in so doing is unconscionable. And if, instead of having actual knowledge of that situation, A is aware of the possibility that that situation may exist or is aware of facts that would raise that possibility in the mind of any reasonable person, the result will be the same."
Thus, the issue is not only what is actually known to the strong party but what the stronger party ought to have known.
In many cases, evidence of the knowledge of the stronger party will be readily available. It may be apparent from the relationship of the parties or from the circumstances in which the transaction was made. But what is meant by the stronger party being "aware of the possibility" that the other party is at a special disadvantage or is "aware of facts that would raise that possibility in the mind of any reasonable person"? Some guidance is to be found in the preceding paragraph where Mason J held that the bank manager knew facts which would raise 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 so that he was bound to enquire about their state of knowledge of the transaction. Thus, the bank could not shelter behind its failure to make enquiry with the consequence that its "wilful ignorance was not to be distinguished in its equitable consequences from knowledge": Owen v Homan [1853] EngR 883; (1853) 4 HLC 997 at 1035[1853] EngR 883; , 10 ER 752 at 767. The reasons of Deane J (at 474 and 479) indicate a like approach. It must not be overlooked that in Amadio the bank was anxious to keep what it regarded as a valued customer, that it was aware of the parlous financial condition of the company, that it had, as the Federal Court so eloquently described it in Tarzia, been intricately involved with the facade to give the impression to the Amadios, among others, that the company was prosperous and successful, and that it had cause to be put on enquiry that the Amadios did not know the true position.
The effect of the test is that if facts are known to the stronger party which raise the possibility that the weaker party is at a special disability vis-à-vis the stronger party, the stronger party is bound to make enquiries. The test takes the facts as known to the stronger party and, by reference to those facts, imposes the objective test of whether a reasonable person's perception of those facts would raise the possibility of the other party being in a position of special disability. If the stronger party fails to make enquiries, he may be deemed to know that the other party is in a position of special disability and will have the burden of proving the fairness of the transaction. The fact that the stronger party did not perceive the significance of a particular fact will not avail it.
What then is the position where a financial institution ("the lender") is dealing with an application for a loan by a stranger with whom it has had no prior dealings? The applicant will have completed an application. Generally speaking, the lender will be aware only of what is contained in the application. The relationship of the parties may give rise to an obligation on the lender to make further enquiries. The lender may have to take steps to avoid being fixed with constructive notice of undue influence.
As Professor Finn (as he then was) pointed out in "Equity and Contract" in Finn (ed) Essays on Contract at 104 and 141, if the law is to stigmatise one party's conduct as unconscionable, it must make credible demands of that party. As he said, it cannot stray too far from actual knowledge before it leaves itself open to the criticism of pursuing a policy of protecting the mistaken or disadvantaged under the guise of proscribing what is essentially innocent behaviour.
In this case, the plaintiffs applied to Perpetual through two finance brokers and Perpetual's agent Puma had no direct dealings with the plaintiffs. For the reasons which follow, Perpetual had no actual or constructive knowledge of a disability.
The applicants for the loan were the plaintiffs and their children. I will refer to them collectively as "the borrowers". It is common ground that Puma was Perpetual's agent so that Puma's knowledge is the knowledge of Perpetual. Thus, the relevant enquiry is what did Puma know or what ought it to have known of any special disability of the plaintiffs? The plaintiffs did not deal directly with Puma but through two finance brokers, Capital Link, where the application was handled by Mr Finnimore, and I F & I, where the application was handled by Mr Holland. After I F & I took over the application, Finnimore had no contact with either Perpetual or Puma at any stage. The transaction was handled in the last month or six weeks by I F & I. Puma did not deal directly with any of the plaintiffs or the other borrowers. It relied on I F & I to interview the borrowers and obtain necessary information from them. Thus, I F & I, effectively acted in this transaction as the agents of all of the borrowers including the plaintiffs. Puma's knowledge was limited to what was contained in the documents provided by I F & I.
No-one at I F & I spoke directly to any of the applicants other than Tony Bechara who enquired on one or two occasions as to the progress of the application. I F & I accepted at face value the statements of assets and liabilities and the cash flow statements which had been presented to it by Finnimore. Finnimore had no direct contact with either Perpetual or Puma. The negotiations concerning this transaction were entirely handled by I F & I. Finnimore did, however, provide information or other assistance on one or two occasions to I F & I.
After Finnimore had referred the application to I F & I, it was re-drafted and called a "Residential Mortgage Summary". The application stated that the proposed borrowers were to be Tony and Amelia Bechara, Marisa Micarone, Mr and Mrs Micarone and Mr and Mrs Bechara Snr and that each was to be a mortgagor. It stated that the principal purpose of the loan was "to re-finance existing loan facilities". It listed the principal activities of the borrowers, mentioning the Bechara delicatessen and the Hutt Street delicatessen. The principal activities were described in these terms:
"Tony and Amelia Bechara are deli and snack bar proprietors, trading as Bechara Deli & Snack Bar since 1988. Marisa Micarone is also a deli and snack bar proprietor, trading as Hutt Street Deli since January 1990. Ennio and Linda Micarone are both pensioners. Joseph and Dianne Bechara are also pensioners."
The application stated that the Micarones and Becharas were pensioners. The amount sought to be borrowed was $600,000. The loan was to be for a period of 20 years, the first year to require payment of interest only, and thereafter payments of principal and interest. The application listed the five house properties as security. The application stated that the loan would be serviced by takings from the Hutt Street delicatessen and the Bechara delicatessen as well as the rental from the two house properties in which Tony Bechara had an interest (390 Regency Road, Prospect and 36 Grant Avenue, Salisbury) as well as the Micarones' property at Blair Athol. I F & I concluded the application with the following recommendation:
"- Applicants in sound financial position, with ability to service debt undoubted.
- By re-financing these loans, the payment is reduced from approximately $9,500 per month to approximately $5,700 per month.
The application was accompanied by a number of documents including financial statements of the Hutt Street delicatessen for the years ending 30 June 1990 and 1991, financial statements for the Bechara delicatessen for the year ending 30 June 1991 and for the Valley View Fish Café, and statements of assets and liabilities of the plaintiffs and the other borrowers. The insurance claim was shown as an asset worth $450,000 being divided equally between Tony and Amelia Bechara on the one hand and Marisa Micarone on the other.
A second Residential Mortgage Summary was prepared and dated 11 November 1992. It was in essentially the same terms as the first save that the amount to be borrowed was increased to $640,000 and the term of the loan was varied. It proposed a loan for a term of three years with payments of interest only. This application was also recommended by I F & I. It showed that the monthly payments of interest were to be reduced.
The application stated that the total income to service the borrowings was $265,313. Of that sum $200,263 was said to be the income from the Hutt Street delicatessen and $46,644 was said to be derived from the Bechara delicatessen. The balance was the income from the rental properties.
The statements of assets and liabilities listed the existing mortgages. The surplus of assets over liabilities was $340,555 in the case of the Micarones, $130,555 in the case of the Becharas. The surplus of assets over liabilities in the combined statement of Tony and Amelia Bechara was stated to be $554,155 but $225,000 of that amount was the expected return from the insurance claim. Marisa Micarone's net worth was said to be $264,282 of which $225,000 was included as her share of the insurance claim.
The documents included in the application also included an approval from CUAMIC. That approval related to an earlier application which had been rejected but later, on 16 November 1992, CUAMIC reaffirmed its willingness, unconditionally to insure the mortgage transaction.
The first officer in Puma to assess the loan was Mr Brennan. He recommended approval. He was influenced by a number of factors including the fact that the application satisfied Perpetual's lending criteria which were set out on a checklist, that the total income which was within Perpetual's criteria, the fact that it was intended to re-finance an existing debt, that five properties were offered as security, and that the application satisfied Perpetual's loan to valuation ratio. The fact that the application included four pensioners was not considered to be unusual as the loan was for an established family business. Brennan assumed that the two delicatessens were operated as a business in which all members of the family had some interest despite the stated details as to the ownership of the delicatessens. The trial judge held that the more obvious inference was that the respective parents were assisting in the provision of funds to those who owned and operated the businesses. Nothing turns on the difference in these conclusions. In truth they amount to the same. It was obvious that the respective parents were providing financial assistance in the form of security for the borrowings, a not uncommon event. The total gross income was perceived to be sufficient to service the loan. Brennan saw the application as "a conforming mortgage". The fact that the loan was to re-finance an existing loan was perceived to give assurance to a lender.
The income from the delicatessen in Hutt Street was plainly crucial to the capacity of the applicants to service the loan and hence to the question whether the application would be approved. Brennan acknowledged that fact and said that, if the stated income was not available, Puma would not have proceeded with the application. Mr Brennan knew of the fire and that the business had re-opened. He assessed the application on the footing that it was trading at a level similar to that shown in the accounts for the year ended 30 June 1991. He was thus relying on a turnover of $200,363 which, unbeknown to him, had been grossly mis-stated by Frost.
On 17 November 1992 Brennan prepared a schedule summarising the transaction and the terms on which it could proceed. The procedures at Puma for assessing loan applications required Brennan to submit his recommendations to a superior employee. In this case it was Mr Ganis. Ganis added other conditions to those nominated by Brennan. They included a condition requiring the borrowers to obtain independent legal advice concerning the transaction. Mr Brennan's approval was subject to the valuations of the properties satisfying the loan to valuation ratio. The valuations received by Puma did not satisfy that standard. In those circumstances, Puma's internal procedures required Brennan to submit the application to an officer employed by Macquarie Bank. The application was reviewed by Ms Christine Pope. She reported in these terms:
"The major source of income appears to be the Hutt Street Deli, which has been burnt out 28/7/91. No later financials are provided.
The question whether the application should be approved did not end with Ms Pope's assessment. The assessment procedures permitted the application to be submitted to a higher level. After Ms Pope made her assessment, the application was reviewed by a Mr Moss. He approved the application on 24 November 1992. Before approving the loan, Moss had discussed the transaction with the State Manager of CUAMIC in South Australia and had been informed that CUAMIC was very happy with the proposal. According to CUAMIC, the five properties provided good security for the loan and the Hutt Street delicatessen was well located and should trade well. Moss made a note of the conversation which concludes:
It is apparent from a note made by Mr Moss that he based his decision on the fact that CUAMIC had advised it would grant mortgage insurance.
It should be noted that no-one at Puma knew that the application had been rejected by the Bank of Melbourne or the R & I Bank. According to Brennan, it was not unusual for an application to be approved despite the fact that it did not strictly fall within the guidelines fixed by Puma.
The trial judge found that Puma had no actual knowledge of the misrepresentation made by Mr Frost and Tony Bechara concerning the fire claim and the takings from the Hutt Street delicatessen or of the role played by Tony Bechara. The trial judge also held that the material in possession of I F & I and Puma did not indicate that Mr Frost and Tony Bechara had misrepresented any relevant fact. There is no appeal against those findings. The trial judge also dismissed the plaintiffs' claims against Perpetual for misrepresentation and breaches of the Trade Practices Act 1974 (Cth) which had been based on allegations of constructive knowledge of the conduct of Mr Frost and Tony Bechara. There is no appeal from that part of his decision.
It is helpful to summarise the essential points of the information in the possession of Puma. They were:
* The application was for a loan of $640,000 to re-finance existing loans
* Although the loan concerned the two delicatessen businesses operated respectively by Tony and Amelia Bechara and Marisa Micarone, it was apparent that the parents were providing financial backing.
* The ability to repay outgoings depended on the turnover of the Hutt Street delicatessen.
* The takings for Hutt Street in 1991 showed a profit in excess of $200,000 per annum. As this was shown under the heading "Serviceability", together with other income of the applicants, it constituted a representation that the turnover was the same in 1992.
* CUAMIC was prepared to grant mortgage insurance.
* The application essentially satisfied Puma's guidelines.
On its face, the application showed a substantial income in excess of $265,000 per annum to service the repayments of interest and that there were substantial securities in the form of the five house properties. It was open to Puma to decide to grant the loan on the information provided to it.
The trial judge summarised the information supplied to Puma in these terms:
"By way of summary, therefore, the information supplied to Puma presented the picture of four pensioner plaintiffs with insufficient income to make any realistic contribution to the payment of instalments, each incurring a liability of $640,000. The only reason given for the loan was re-financing, but there was a clear possibility on the face of the material that the loan was to be used for the businesses referred to in the application and in which the plaintiffs had no interest. The application which described the principal activities of the borrowers made the distinction between Tony and Amelia Bechara and Marisa Micarone as proprietors of the relevant businesses and the plaintiffs as pensioners. The application made clear that the plaintiffs were permitting most of their assets to be used as security. The loan could not be serviced in any event without a substantial contribution from the profits of the Hutt St delicatessen. There was a large question mark over the ability of that business to provide those funds. The delicatessen had been reopened at some stage after the fire, but Puma did not know when. The only financial statements which had been submitted for that business covered a period which ended 14 months before the loan application and a senior officer at Puma was not prepared to use them as part of her calculations in assessing the appropriateness of lending the money. There was no explanation as to why no more recent figures had been provided. Puma was aware that the previous loans had been taken out only a few months before the application for the Perpetual loan and that there had been defaults in making payments within that short period of time."
Those were his reasons for concluding that it must have been obvious to Puma that the transaction was improvident from the point of view of the plaintiffs and that it must have been apparent that there was a possibility that the plaintiffs had been led into the transaction by the proprietors of the business, who appeared to be related to them. This would, he found, fairly give rise to the question whether "some advantage might have been taken of the plaintiffs". He concluded that Perpetual, therefore, had a duty to make enquiry. The summary shows that there are four facts upon which the trial judge relies to reach that conclusion. They are
1 The plaintiffs had no interest in the businesses which were being financed.
2 The plaintiffs, who had little income to service payments of interest, were permitting most of their assets to be used as security.
3 The borrowings could not be serviced without the takings of the Hutt Street delicatessen and there was a question mark over them.
4 Puma was aware that there had been defaults in the loans secured a few months before.
For the reasons which follow, the judge erred in finding that the facts disclosed in the application put Puma on enquiry.
With respect, the trial judge does not fairly state the position. The application to Puma showed a good deal more than a picture of "four pensioner plaintiffs with insufficient income to make any realistic contribution to the payment of instalments, each incurring a liability of $640,000". One of the applications showed that the plaintiffs could service the instalments of interest, the application stating unequivocally the interest would be paid from the profits of Hutt Street and Tony Bechara's businesses. That information had in effect been vouched for by I F & I since its contract with Puma required it to select suitable applicants and to warrant that the application is correct: see cl 2.6 and cl 6.3 of the Mortgage Origination Deed.
Furthermore, the fact that the plaintiffs had no interest in the businesses being financed, little income to service the payments of interest, and as joint borrowers were permitting most of their assets to be used as security are not reasons why Puma should have been put on enquiry. It is not uncommon for parents to provide assistance to business operations of their children by assisting them in borrowing funds. They might either lend the money themselves, if they have funds available, or they might guarantee or provide other assistance to enable funds to be borrowed from a financial institution. The plaintiffs were engaging in the latter practice. There was a representation as to the income available to pay the interest. It appeared to Puma to be quite adequate. So far as Puma knew, the interest would be paid.
The fact that the plaintiffs were permitting their asset to be used as security is of little significance. We repeat parents not infrequently assist children by doing so. It is normal lending practice to require security. It would have been apparent to Puma that the plaintiffs were, with their children, providing security and so, effectively, were guaranteeing the financial obligations of their children.
Furthermore, there is the important fact that Puma knew that the applications simply sought to re-finance existing lending arrangements and had the consequence of reducing the monthly payments of interest. The transaction had that benefit for each of the borrowers, including the plaintiffs. In that sense, the transaction had a very real benefit to the plaintiffs. The benefits to the borrowers would not cause Puma to be put on enquiry. In addition, Puma would be entitled to assume that the decision of the plaintiffs to support the two businesses would have been made at an earlier time than before the decision to apply to Perpetual. Given that this was a financial restructuring with a benefit to the borrowers in reduced monthly payments of interest, there was no cause for Puma to make any other enquiry than whether the borrowers were able to service the reduced interest payments or had made any default on the prior lending arrangement. Indeed, that is the footing upon which Ms Pope made her assessment. There was nothing to indicate to Puma that there was any undue influence or other feature of the transaction which would put Puma on enquiry.
The trial judge's conclusion that there was a large question mark over the ability of the Hutt Street delicatessen to provide the income to service the monthly payments of interest is obviously grounded on Ms Pope's assessment. Ms Pope noted that the application showed the major source of income to be the takings of the Hutt Street delicatessen and that no financial statements existed for the period after the fire. She, therefore, excluded the takings from the Hutt Street delicatessen and, having calculated the difference between the stated income and the repayment of interest, showed a shortfall of $17,084. She had made a cautious assessment and, in the result, events showed it to be the most prudent assessment. But the fact that she was proved to be correct does not of itself lead to the conclusion that Puma was put on enquiry. Brennan and others had assumed that the income from Hutt Street was as stated. There was nothing in the documents which caused them to question that statement. The delicatessen had re-opened less than 12 months after the financial statements for the year ending 30 June 1991 so that there was some basis for assuming the takings would be at the same level when the shop re-opened. Obviously, the more prudent course was to require evidence of the current takings. The assumption made by Brennan and others who assessed the application that the takings were the same might amount to carelessness on their part. However, it does not indicate that Puma was aware of facts which would fairly put it on enquiry or suggest that in some way it was taking advantage of the position of the plaintiffs. The trial judge has placed too much weight on Ms Pope's assessment. Where an application is made to borrow funds, there is no obligation on the lending institution to go behind the information proffered by the applicant unless there are circumstances which put the lender on enquiry. Different considerations may apply in the case of a guarantee.
Furthermore, Puma was relying on the representations as to the turnover of the Hutt Street delicatessen. The turnover had, of course, been misrepresented by Mr Frost and Tony Bechara. But, as the trial judge found, no-one in Puma was aware that the turnover had been mis-stated. Puma was entitled to rely on the information contained in the application. The plaintiffs, albeit unwittingly, were party to the misrepresentation as to the turnover. The effect of their case is that they seek to be relieved of their obligations to Perpetual because Puma failed to verify the information they had provided. It would be a curious result that a party could be relieved of its obligation when it had given misleading information to a proposed lender and relied on the failure of the lender to investigate the information it had provided: cf Perry J in Citibank v Nicholson [1997] SASC 6784; (1997) 70 SASR 206 at 229. What enquiries a lender makes to verify information given in support of a loan application is entirely its concern. It may choose to make no independent enquiries.
The plaintiff and Puma were parties contracting at arm's length. So far as Puma was concerned, the plaintiff's application was a standard application for finance. It was not aware of any unusual circumstances. There is no duty on a financier to provide either a borrower or a third party with commercial advice, although, if such advice is tendered, the financier may assume a duty of care: Beneficial Finance Corporation v Karavas (1991) 23 NSWLR 256, 276 to 277 per Meagher J. Nor is there any general principle of law that a lender is in a fiduciary relationship with a borrower: Farrow Mortgage Services Pty Ltd v Trewhitt [1995] ANZ ConvR 127. Circumstances may give rise to an obligation to give advice or to create a fiduciary duty. But such circumstances did not exist in this case. To adapt a phrase used by Scott V.C. in Banco Exterior Internacional S.A. v Thomas [1996] EWCA Civ 676; [1997] 1 WLR 221 at 230 to 231, a lender is not to be treated as a branch of a social services agency. It is entirely for a lender to determine what enquiries it should make to verify information given in support of a loan application: Citibank v Nicholson (supra) at 229. See also Coldunell Limited v Gallon [1986] 1 All ER 429 at 440; C_IBC Mortgages plc v Pitt_ [1993] UKHL 7; [1994] 1 AC 200 at 210 and Tarzia v National Australia Bank. On receipt of an apparently regular and satisfactory loan application, there is no obligation on the lender to pursue further detailed enquiries as to the circumstances of the applicant for the loan, the proposed business transaction to which it relates, or the commercial viability of the loan: Citibank v Nicholson (supra) at 230.
The trial judge found that "Puma was aware that the previous loans had been taken out only a few months before the application for the Perpetual loan and that there had been defaults in making payment within that short period of time". The finding is not correct. It suggests that the applicants had defaulted on the loans the subject of the first re-financing. Neither inference is correct. It is correct that Puma knew that the previous loans had been taken out. After all, the application was to re-finance the existing loans. But it is incorrect to suggest that the plaintiffs and their children had defaulted on the loans the subject of the first re-financing and Puma knew that fact. The only defaults of which Puma was aware were defaults in paying accounts to three organisations, ARFN Credit Limited (for a department store account) for $2731, David Jones Adelaide for $3328, and Esanda for $1763. By 19 November 1992 those defaults had been cleared. The fact that others than Ms Pope were prepared to approve the application shows that these defaults were not necessarily of a kind which would put a potential lender on enquiry. Default in paying existing lenders would be of greater significance and there was no evidence in Puma's hands of any default in paying any of the existing lenders.
In short, this is the case where a lender had neither actual nor constructive knowledge of a disability on the part of any of the intended borrowers nor was there any fact which reasonably put it on enquiry. So far as Puma was concerned, this was a joint application to borrow in order to restructure existing borrowings, a not altogether unusual transaction. There was nothing to indicate that the transaction was in any respect out of the ordinary.
The plaintiffs sought to avoid this conclusion by contending that I F & I was Puma's agent so that Puma knew that the previous application had been rejected. We now deal with that submission.
I F & I knew that the applications to the Bank of Melbourne and to the R & I Bank had been rejected. Those facts were not known to Puma. The plaintiffs submitted that I F & I was Puma's agent so that Puma was deemed to have the same knowledge as I F & I. The trial judge rejected that contention, holding that, although I F & I became the agent of Perpetual after the application for the loan had been accepted, it was not its agent at the time of the two earlier unsuccessful attempts to obtain finance. The plaintiffs pursued the same argument on appeal.
It is, therefore, necessary to examine the relationship between I F & I and Puma. Capital Link had been approached by Tony Bechara to find a lender. Capital Link was, therefore, acting as the agent of all of the borrowers including the plaintiffs. Capital Link, through Finnimore, referred the application to I F & I. In fact and in law, I F & I was, therefore, acting as the agent of the borrowers to find a lender. I F & I approached three potential lenders on behalf of the borrowers.
Before I F & I approached Puma on behalf of the borrowers it had already entered into contractual relations with Puma. The relevant documents are the Mortgage Origination Deed and a document called "The Puma Fund Program Parameters" ("The Puma Parameters"). I F & I was a mortgage originator to find borrowers for lenders for whom Puma acted. But it is important to note that I F & I was not bound to offer any potential borrowers first to Puma. So, in this case, I F & I offered the application first to the Bank of Melbourne and then to the R & I Bank. Similarly, for its part, Puma could look to other mortgage originators than I F & I to provide potential borrowers. The evidence was that in 1992 there were about thirteen mortgage originators in Australia. I F & I was, therefore, not the agent of Puma to find loans. Instead, it was an independent contractor which could, if it chose, refer an application to Puma. The Mortgage Origination Deed by cl 9.1.1 provided that I F & I and Puma were independent contractors and prohibited I F & I from holding out that it was the agent, partner or employee of either Puma or Perpetual. Statements of this nature are, of course, not conclusive: Branwhite v Worchester Works Finance Ltd [1969] 1 AC 552 at 587; Commissioner of Taxation (Cth) v Krakos Investments Pty Ltd (1995) 61 FCR 489 at 495. It is necessary to determine whether the parties have agreed to what in law amounts to the relationship of principal and agent. Regard must be had to the substance of the matter. An examination of the facts shows that the statements in cl 9.1.1 that the parties were independent contractors and that I F & I was not Puma's agent accorded with the true position.
In this transaction I F & I was seeking a lender on behalf of the borrowers which included the plaintiffs. It was the agent of the borrowers and not the agent of Puma. A finance broker in a transaction of this kind is prima facie the agent of the borrower: Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] VicRp 72; [1993] 2 VR 284 at 308 and that is so notwithstanding that the broker may receive a commission from the lender: Custom Credit Corporation Ltd v Lynch [1993] VicRp 86; [1993] 2 VR 469 at 486 to 487; Octapon Pty Ltd v Esanda Finance Corporation (unreported, Supreme Court NSW, 3/02/89). The position may, of course, differ according to the individual circumstances of each case. I F & I did not receive any commission from Puma or Perpetual for providing the loan. The only fee it received in connection with obtaining the loan was a procuration fee from the plaintiffs. I F & I did at a later stage receive a management fee from Puma for managing the loan agreement but that has no relevance for present purposes. The circumstances in which that fee was paid are explained in par157 below.
Puma's role is to find borrowers for institutional investors. Perpetual acts as trustee and, when Puma finds suitable borrowers, the rights and obligations of Perpetual are taken over by the institutional investor by means of a securitisation agreement. The Mortgage Origination Deed contains detailed procedures for processing loans. Investors are invited to participate in the knowledge that the strict procedures have been followed. Thus, the mortgage originator has specified duties to perform and is obliged to give warranties as to the enquiries made of the borrowers and the suitability of the application. Other requirements intended to attract investors are that the loan is covered by mortgage insurance and that approved solicitors are involved in completing the transaction. As the borrowers in this case defaulted at an early stage, it was not possible for the loan to be securitised.
The Mortgage Origination Deed contemplates the following procedures. I F & I submits the application to Puma on behalf of the borrowers. Puma considers the application. If it approves the application, it is submitted to a mortgage insurer for approval. If approved by the mortgage insurer, Puma may in its discretion make an offer to accept the application: cl 2.2.2. Clause 2.2.4 provides that the offer will be made to the originator, in this case I F & I, and not to the proposed borrowers. In this case the offer was made to I F & I which in turn then offered the loan to the borrowers, who accepted it.
Once an application has been accepted, I F & I was obliged to carry out a further role. Recital D of the Mortgage Origination Deed provides:
"The Originator has requested the Manager to appoint the Originator as its non-exclusive delegate to manage and administer those aspects of the Fund as are more particularly detailed in this Deed and the Manager has agreed to do so in accordance with the provisions of this Deed."
In the Mortgage Origination Deed the Originator is I F & I and the Manager is Puma. The Trustee is Perpetual. The deed spells out a series of managerial duties which must be performed by I F & I. Its obligation to perform those duties does not commence until the offer made by Puma has been accepted. I F & I is required to instruct an approved solicitor to search the title and to give all necessary instructions to the solicitor: see cl 2.5.2 which lists the matters to be included in the instructions. I F & I, as Originator, is responsible for arranging settlement of the loan. After settlement, I F & I was required by the deed to manage the mortgage. The managerial duties include directing the borrower to make all payments, maintaining records of the mortgage, advising of defaults and generally reporting to Puma: cl 3. If the borrowers default, I F & I has certain obligations including paying all overdue interest and enforcing the terms of the mortgage: cl 5.
That is a summary of the obligations I F & I had as the "non-exclusive delegate [of Puma] to manage and administer" aspects of the Fund. The plaintiffs submitted that these obligations caused I F & I to be the agent of Puma so that its knowledge of the failed applications to the Bank of Melbourne and the R & I Bank gained before it became Puma's agent to settle the loan should be imputed to Puma and, hence, to Perpetual.
The Mortgage Origination Deed and the Puma Parameters spell out a complete and onerous duty upon I F & I to make all relevant enquiries to ensure that it submitted suitable borrowers so as to serve the interests of the investors: see cl 2.1, 2.6 and cl 2.17. All of the matters which I F & I was obliged to disclose would obviously include details of other applications made by the borrowers which had been refused. Once I F & I became Puma's delegate to arrange settlement and complete the transaction, the plaintiffs said, the knowledge of I F & I became the knowledge of Puma.
The argument must be rejected. The knowledge that the application had been refused by the Bank of Melbourne and the R & I Bank was gained by I F & I at a time when it was not the agent of Puma. Knowledge acquired by an agent is imputed to the principal only if the agent was at the time that the knowledge was acquired acting for the principal: Taylor v Yorkshire Insurance Co Limited (1913) 2 IR 1, 20 to 21; Jessett Properties Ltd v UDC Finance Ltd [1992] 1 NZLR 138 at 143 and El Ajou v Dollar Land Holdings PLC [1993] EWCA Civ 4; [1994] 2 All ER 685 at 703 to 704. Puma made its decision to approve this application on the basis of the information submitted to it. If I F & I failed to disclose relevant information, Puma could recover from I F & I damages for such loss as was caused by the failure to make full disclosure.
The principle just mentioned is subject to two exceptions, namely, where the agent has a duty to know or communicate that knowledge and where the principal purchases the knowledge of the agent: Taylor v Yorkshire Insurance Co Limited (supra) at 20 to 21. However in no sense did Puma purchase the knowledge of I F & I. Quite the contrary. If it approved the application, I F & I would be paid a procuration fee by the borrowers. Neither Puma nor Perpetual paid any fee or other commission to I F & I for introducing the borrowers. Clause 6.1 and cl 6.3 of the Mortgage Origination Deed required I F & I to warrant that it had disclosed all relevant information and that the information was correct thus providing Puma and Perpetual with a remedy in damages for any breach of the warranty. Puma did not purchase information from I F & I. Instead, it has required I F & I to declare all that was material to enable it to decide whether to enter into the loan agreement. I F & I was not its agent but an independent contractor with a contractual duty to make full disclosure and a contractual liability in damages for failing to do so. Its failure to inform Puma of the rejected applications may have rendered it liable to Puma but it does not result in I F & I's knowledge being the knowledge of Puma. Similarly, I F & I was in no sense "an agent to know" in the sense in which that expression was used by Lord Halsbury LC in Blackburn Low & Co v Thomas Vigors (1887) 12 App. Cas. 521 at 537. It was at all relevant times an independent contractor. It was not employed as Puma's agent to ascertain facts.
That conclusion is not altered by the fact that I F & I was appointed agent for the limited purpose of arranging completion of the transaction and to manage the mortgage. By that time the application for a loan had been approved. I F & I was then appointed agent for a specified and limited purpose. It was not the agent to know. It was the agent to settle and manage. As Lord Halsbury LC said in Blackburn Low & Co v Thomas Vigors (supra) at 538:
"To lay down as an abstract proposition of law that every agent, no matter how limited the scope of his agency, would bind every principal even by his acts, is obviously upon the face of it absurd."
The limited scope of the agency to arrange settlement and manage the mortgage does not lead to the conclusion that I F & I's knowledge became Puma's knowledge.
It must be acknowledged that the Mortgage Origination Deed and Puma's Parameters required I F & I to disclose all information relevant to the grant of the application and that, by cl 6.2, all warranties continued to the date of settlement. That does not lead to the conclusion that I F & I's knowledge must be imputed to Puma. Once I F & I became the agent to settle, I F & I always remained an independent contractor bound to disclose all relevant information and liable to damages for breach of warranty if it did not disclose. As has been emphasised in many cases, the issue turns on the nature of the agent's engagement.
For these reasons, the trial judge was correct in holding that the knowledge of refusal by the Bank of Melbourne and the R & I Bank to accept the application should not be imputed to Puma or Perpetual.
Notwithstanding that conclusion, the trial judge held that there was another more limited way in which the evidence of those previous refusals could be used. He referred to the terms upon which the Bank of Melbourne had refused the application.
"I refer to your memo of 9th October, 1992 and now advise that after further consideration the loans are declined.
Leaving aside the issue of the Pensioner/Mortgagor I am not comfortable with the financials supplied in regard to serviceability.
This matter has been given every consideration, including the information regarding the conduct of the accounts."
- their trading experience with the Hutt St. Deli is insufficient for us to be comfortable with the projections and likewise for the Valley View Fish Café.
- security being provided appears to be third party, most of the properties are owned by ethnic pensioners with insufficient income to meet loan commitments.
- their debt level against the security offered is considered high, both in terms of principal recovery and the burden of servicing."
The trial judge held that Perpetual should have drawn the same inferences and refused the application.
The fact that I F & I was bound to warrant that it was not aware of circumstances which would cause a prudent lender to regard the mortgage as an unacceptable investment or anticipate that the borrower was likely to make default did not, the trial judge found, diminish the consequences of failure by Puma to make an investigation as to matters that suggest that a party might be affected by a special disadvantage. The trial judge held that Puma and Perpetual should have been conscious of the fact that I F & I had a financial interest in the granting of the application.
There are at least two flaws in that reasoning. The first is that the trial judge had no evidence before him of the lending criteria adopted by either the Bank of Melbourne or the R & I Bank. It cannot be assumed that all financial institutions apply identical standards when determining whether to accept an application. Each is entitled to make its own assessment. Secondly, the decisions were grounded on the capacity of the borrowers to service the loan and the existing debt level, not on any suggestion that any party was at a special disadvantage or special disability. Puma and Perpetual believed that the loan could be serviced because it was assumed by all at Puma (except Ms Christine Pope) and by the mortgage insurer that the takings of the Hutt Street delicatessen were sufficient to service the loan. In the result that assumption was erroneous and perhaps even careless. But it does not justify the trial judge relying on the Bank of Melbourne and the R & I Bank's refusals in the way that he did.
After finding that each of the plaintiffs laboured under a special disability and that the disability in each case was apparent to Perpetual from the information in the possession of its agent Puma, the trial judge held that the burden of proof passed to Perpetual because the transaction was on its face unfair. He said:
"It was prima facie unfair for Perpetual to have entered into the transaction under these circumstances and the burden passes to Perpetual to demonstrate that the transaction was fair, just and reasonable. For the reasons I have given it cannot be said that the transaction was fair and in my view a case has been made out for it to be set aside. I have not yet referred to the advice given by Mr Belperio, an issue which I will now discuss. However, for the reasons which I will give, the advice which was provided did not have the effect of removing the unfairness to the plaintiffs."
There is a division of judicial opinion whether the onus of proof shifts to the stronger party once the weaker party has demonstrated that he is at a special disadvantage and that the stronger party is aware of it: see the discussion in Cope, Duress, Undue Influence and Unconscientious Bargains, (1985) at 136 to 139. For present purposes, we assume that the burden passes. Although the trial judge says that he has given reasons why the transaction was not fair, the judgment does not contain explicit reasons for that conclusion or show that Perpetual took advantage of the plaintiffs. For the reasons which follow, we think the trial judge erred in concluding that the transaction was unfair.
We first disagree because we have concluded the plaintiffs have not proved that they were at a special disadvantage or at a special disability and that Puma or Perpetual was aware of it. However, even if it is assumed that the plaintiffs were at a special disability and Puma or Perpetual was aware of it, there was nothing unconscionable about Puma or Perpetual's conduct. In our view, neither Puma nor Perpetual exploited the special disability of the plaintiffs.
Unconscionable conduct connotes exploitation by one party of another's position of disadvantage in such a manner that the former could not in good conscience retain the benefit of the bargain. So, in Amadio (at 461 and 463) Mason J repeatedly refers to a party making an unconscientious use or taking an unconscientious advantage of his knowledge of the disadvantageous position of the other. The term "exploitation" is used by Dawson J in Amadio at 489 and by Brennan J in Louth v Diprose (supra) at 630, 632. To like effect is the observation of Deane J in Commonwealth v Verwayen (1990) 170 CLR 394 at 441:
"... 'unconscionable' should be understood in the sense of referring to what one party "ought not, in conscience, as between [the parties], to be allowed" to do (see Story, Commentaries on Equity Jurisprudence, 2nd Eng. ed. (1892), par. 12219; Thompson v Palmer). In this as in other areas of equity-related doctrine, conduct which is "unconscionable" will commonly involve the use of or insistence upon legal entitlement to take advantage of another's special vulnerability or misadventure (cf. Stern v McArthur) in a way that is unreasonable and oppressive to an extent that affronts ordinary minimum standards for fair dealing."
The Privy Council has described unconscionable conduct which provides the basis for equitable relief as "victimisation, which can consist either of the act of extortion of a benefit or the passive acceptance of a benefit in unconscionable circumstances": Hart v O'Connor [1985] UKPC 1; [1985] AC 1000 at 1024. Equity grants relief only where the transaction shocks the conscience, not where the transaction is unreasonable. These matters were emphasised by Sir Anthony Mason speaking extra-judicially: see "The Impact of Equitable Doctrine on the Law of Contract", (1998) 27 Anglo-American Law Review 1 at 12. He said:
"There is a strong objection to simply equating the concept to what is unreasonable and unfair. The object of the doctrine is not to protect people from the consequences of their own mistakes. Because our contract law, unlike that of the United States, does not impose a general obligation of good faith and fair dealing, it is preferable to think of unconscionable conduct in terms of that which shocks the conscience, something which is harsh or oppressive in that it involves taking advantage of another's special disability or disadvantage. So understood, the concept is not one which is open-ended, to be applied according to the subjective whim of the Judge, though like other standards, such as that of "the reasonable person", borderline applications will require an element of value judgment."
We respectfully agree with Kennedy J who noted in "Equity in a Commercial Context" in Finn (ed) Equity in Commercial Relationships (1987) 1 at 12 that the remedy is most unlikely to be available, other than exceptionally, between persons who are engaged in commerce and who have negotiated their contracts at arm's length.
The trial judge's conclusion that the transaction was unfair cannot be sustained. Although the loan was very substantial, this was an ordinary commercial contract. The loan was made at ordinary rates of interest prevailing at the time. As is usual on a loan of such a substantial amount, Perpetual like any prudent lender took security for the advance. There is no suggestion that the terms of the loan agreement were in any way unconscionable, unfair or unreasonable. The loan replaced the series of loans the subject of the first re-financing transaction. The effect of the transaction with Perpetual was to reduce the monthly repayments by at least $1,000 per month, a substantial reduction. The security taken for the loan was the same as that for the loans the subject of the first re-financing. All of the plaintiffs understood that the monthly repayments would be less. Thus, the plaintiffs had the benefit of reduced payments of interest whilst providing the same security as had been provided in the first re-financing. The parties were at arm's length, contracting through intermediaries.
One searches in vain to find any aspect of the transaction by which Perpetual has exploited the position of the plaintiffs. The plaintiffs sought a loan and Perpetual agreed to grant it on terms which were usual. It did not seek to induce the plaintiffs to enter this contract nor did it apply any pressure upon them. There was nothing which Perpetual did which in any way deprived them of a real choice to enter into the transaction, the terms of which were reasonable. On default, Perpetual could enforce its securities in the same way as any other lender. Should a default occur, it would recover no more than the money it had lent, interest and any costs in realising its security. In short, it would be restored to its original position with reimbursement of the costs it had incurred. Perpetual stood to gain nothing other than interest on the loan, which was a legitimate business transaction and an inherent feature of any money-lending transaction. Perpetual made no misrepresentation and did not act in any wrongful way. Perpetual gained no advantage, let alone any unfair or unjust advantage. To adapt the words of McHugh J in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 628, the argument that Perpetual took an unconscientious advantage really depends on ignoring the position of Perpetual and its legitimate right to protect itself by reasonable contractual terms and on ignoring the circumstances which caused the plaintiffs, along with their children, to apply to Perpetual for a loan, namely, the desire to reduce monthly interest payments by entering into a transaction to re-finance existing loans.
In Collier v Morlend Finance Corporation (Vic) Pty Ltd (1989) ASC 55-716 it was held that a lending transaction cannot be set aside as unconscionable under the Contracts Review Act 1980 (NSW) when the lender knew that an existing debt was being discharged, where the terms of the loan were not unfair, and where the lender had no knowledge of any other vitiating factor. The reasons of Clarke JA (at 58430) apply with equal force to the circumstances of this case:
"Where, as here, the substantial part of the impugned loan was applied, to the knowledge of the lender, in the discharge of an existing debt it is difficult to see how it could be said that the lender, who is not said to have imposed unfair terms, acted unconscionably."
Puma had no knowledge of any other vitiating factors. It must be repeated that the terms of the loan were of a standard kind. There was no suggestion that the terms were in any respect unfair. The plaintiff then entered into separate loans in the first re-financing with a cap on the respective liability of each but were joint borrowers of $640,000 in the Perpetual transaction. Nevertheless, there was an effective cap on the liability of the plaintiffs, namely, the value of their respective properties. As already mentioned, the amounts of each of the loans in the first re-financing approximated the value of each of their house properties. Thus, the consequences of default on each the first re-financing and the Perpetual transaction were effectively the same. Furthermore, although the first re-financing involved a series of separate loans, the financial affairs of Tony and Amelia Bechara and Marisa Micarone were so intermingled and so precarious that any default would affect them all and so affect each of the separate mortgages.
In no sense has Perpetual taken unfair advantage of the plaintiffs so that it cannot in good conscience require the plaintiffs to adhere to the terms of their bargain. The position is to be contrasted with Amadio where an existing lender, knowing the circumstances, unconscientiously sought to improve its position by obtaining additional security. In this case the plaintiffs wished to reduce their monthly outgoings and sought Perpetual's financial assistance to do so. The trial judge erred in concluding that Perpetual had acted unconscionably.
Perpetual seeks to rely on the certificates of independent legal advice given by Mr Belperio. The trial judge held that, in the circumstances in which the certificates were signed, Perpetual was not entitled to rely on them. Given the conclusions we have reached, it is unnecessary to consider the issue. However, as we are disagreeing with the trial judge, it is appropriate that we should deal with the question.
The trial judge gave the following reasons for his conclusion that Perpetual could not rely on the certificates:
"this is a matter which is relevant to take into account when considering the issue of unconscionability. However it was not as though Perpetual insisted on independent legal advice being given before or at the time the legal obligations arose. The requirement of certificates was an afterthought. For all Perpetual knew at the time of the signing of the documents there may have been no advice at all. The evidence as to why the subsequent request for certificates was made is vague and the person who made the decision was not called to give evidence. Nor was there any evidence that Perpetual would have released the plaintiffs from their legal obligations if it had been discovered that no legal advice had been given. Mr Brennan simply said that he would not have allowed settlement to proceed in the absence of the certificates. The effect of obtaining the certificates was to enable Perpetual to claim to any purchaser of the rights under the mortgages that the guidelines had been fulfilled. There was no evidence to suggest that there was a further purpose in the request for certificates after the documents had been signed. Nor was there any evidence as to what Puma or Perpetual inferred from the certificates. There is some ambiguity on the face of the certificates as to the extent of the advice. Mr Brennan said he did not read the certificates, but he did not expect the solicitor to provide any financial advice and, as far as he knew, he did not think they had any independent financial advice."
He has concluded that the manner in which the certificates were obtained and the ambiguity in the certificates combined to defeat Perpetual's reliance on them. With respect, the judge has misunderstood undisputed evidence and his conclusions cannot be upheld.
It is not unconscionable for a lender to enforce the financial obligations of a loan agreement if the borrower has received competent independent and disinterested advice: Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 72 ALJR 1243 at par41; Banco Exterior Internacional v Mann [1995] 1 All ER 936 (Cwlth); Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649 at 685 to 686 per Dixon J. If the lender is provided with a certificate from a solicitor stating that the debtor has been independently advised, the lender is entitled to rely on it. In the absence of actual knowledge to the contrary, the lender is entitled to assume that the solicitor has acted competently and has given proper advice: Bank of Baroda v Shah [1988] 3 All ER 24; Bank of Baroda v Rayarel [1995] 2 Family Law Reports 376 [1995] HLR 387; Massey v Midland Bank plc [1995] 1 All ER 929; Banco Exterior Internacional S.A. v Mann (1995) 1 All ER 936; Barclays Bank v Thomson [1997] 4 All ER 816; Royal Bank of Scotland v Etridge (No 2) (17 August 1998, The Times; noted in 115 LQR 8); St George Bank Ltd v Dunstan (unreported, Supreme Court of Victoria, Hayne J, 10 November 1994); National Mutual Trustees Ltd v Dedrion Pty Ltd (unreported, Supreme Court of Victoria, Hansen J, 18 August 1997). The lender may rely on the certificates even if, unknown to it, the advice given by the solicitor is not competent or is given in an inappropriate manner, say, where a guarantor is advised in the presence of the borrower: Massey v Midland Bank plc (supra).
Mr Belperio provided Perpetual with certificates stating, among other things, that he had read over and explained the documents to the plaintiffs and, to the best of his knowledge and belief and in his opinion, the plaintiffs
(a) appeared to understand the true import and effect of the documents including the rights of Perpetual on default, the method of calculation of and the implications in relation to, the costs payable by the plaintiffs on voluntary pre-payment and early termination under the documents, and the nature and extent of the legal liability and obligations which the documents placed upon them; and
(b) had freely and voluntarily executed the documents.
The terms of the certificates are set out in full in par212. There was no obligation upon Perpetual to obtain the certificate that the plaintiffs had received independent legal advice. However, it decided to do so because it was aware that the plaintiffs were pensioners. The circumstances were as follows.
When Ganis reviewed Brennan's assessment of the application, he added as a condition of the approval that certificates be obtained because four of the borrowers, that is to say the plaintiffs, were pensioners. He stated the condition in the following unequivocal terms.
"All borrowers are to obtain independent legal advice".
At settlement, Mr McLeod, who was Puma's solicitor, asked Brennan if certificates were required. Brennan overlooked the condition imposed by Ganis and said they were not. He was relying on the fact that it was not standard practice to require certificates where there was no guarantor.
Belperio was asked to come to the Micarones' house on 15 December 1992. He could not recall whether he was asked by Tony Bechara or Marisa Micarone to do so. The documents were at their home when he arrived. They had been collected by Tony Bechara from McLeod's office. They included the mortgages of each property, a document setting out the standard terms and conditions of Perpetual's mortgage, statutory declarations and other documents. As already mentioned, the trial judge found that Belperio adopted his invariable practice of explaining the documents before witnessing the signatures. He advised them of their obligations and the consequences of default. He took the borrowers through the statutory declarations which required answers. He was occupied on this task for a little under two hours. He said that he assumed the function of giving independent legal advice. The trial judge found that Belperio believed he had a duty to issue warnings to the plaintiffs because they were providing their properties as security for their children's business ventures. The advice was given to the group as a whole and not to each borrower separately. Belperio told them that it was dangerous to enter into the transaction. As the judge found, Belperio explained the nature and effect of the documents to all who were present. We set out his advice in more detail below.
On 21 December 1992, after the executed documents had been returned to McLeod, it came to Brennan's attention that there was a condition which required certificates. He informed McLeod, who in turn rang Belperio and told him that certificates were required. Belperio believed that, as he had advised the borrowers on 15 December 1992 before witnessing the documents, he did not need instructions from them before signing the certificates. He executed the certificates and returned them to McLeod on the same day. McLeod, in turn, sent them to Puma at about 8.00pm on 21 December. Neither I F & I nor Puma had informed any of the borrowers of the desirability of obtaining independent legal advice and Belperio did not inform them that he had signed the certificates.
Settlement was initially intended for 22 December 1992. As already noted in par60 it was delayed by the failure of the borrowers to satisfy all the prerequisites for the loan. Settlement was in the end delayed until 28 January 1993. Before settlement, the borrowers were required to execute extensions of the mortgage. Puma required certificates of independent legal advice concerning their execution of the extension. Belperio was requested to give that advice. He explained the terms and effect of the documents, witnessed the execution of them and signed certificates which were returned to Puma. Thus, before settlement, Puma had obtained two sets of certificates, one relating to the documents executed on 15 December 1992 and the other to the documents executed on 17 January 1993. The condition imposed by Mr Ganis was satisfied at least by the certificate dated 17 January 1993. It was then that the transaction could proceed to settlement. Mr Brennan said that Puma relied on the certificates as well as another certificate from Mr McLeod that the certificates of independent legal advice had been obtained. Not only did Mr Brennan give evidence to the effect that settlement would not have taken place in the absence of the certifications but there was also Mr McLeod's evidence that he would not have proceeded to settle the transaction without certificates of independent legal advice.
The reasons of the trial judge overlook this evidence. They overlook the fact that Ganis had required a certificate as a pre-condition of the loan. They overlook that it was through oversight that Brennan failed to request a certificate when the documents were executed on 15 December. It is therefore entirely wrong to conclude, as the judge did, that Perpetual had not insisted on independent legal advice and had requested the certificates as an afterthought. It was always a requirement but was overlooked because, as Brennan said, it was not usually required for a loan of this kind. The requirement of the certificates was an afterthought only in the sense that, through oversight, they were not required on 15 December and were later requested on 21 December. When he was asked to provide the certificates on 21 December, it was up to Belperio decide if he wished to call the plaintiffs together or in some other way explain the transaction to them again in the manner required by the certificates. He did not. While he may be open to criticism for having failed to do so, there can be no criticism of Puma or Perpetual. Neither knew that Belperio had not called the borrowers together or in some other way advised them. They were entitled to rely on the terms of the certificates and assume that advice in accordance with those terms had been given: see the cases cited in par177 above.
Even if we are wrong in that conclusion, the matter is put beyond doubt by reason of the fact that, after 15 December, Puma included additional terms in the mortgage concerning settlement of the insurance claim. It virtually took over control of the claim. Given these new terms, the borrowers could have decided not to proceed with the loan. They had a locus poenitentiae. It is reasonable to infer that they decided to proceed because they keenly desired to do so. They later received further advice from Belperio on 17 January 1993. That advice was given before settlement on 28 January. In no sense were the certificates dated 17 January 1993 an afterthought. They were a prerequisite for the loan. Settlement would not have proceeded without them. So far as Puma or Perpetual knew advice in accordance with the terms of those certificates had been given to the plaintiffs.
The evidence to which we have referred also demonstrates the judge is incorrect to find that the reason for the subsequent request for the certificates on 21 December was vague. It was a condition of the loan. It had been imposed by Ganis. Given the condition had been proved and formed part of the Puma file, there was no need to call any further witness from Puma or Perpetual. For like reasons, the submission of the plaintiffs calling in aid the rule in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 must be rejected. It was unnecessary for Perpetual to prove that it would have released the plaintiffs from their obligations if no advice had been given. The condition is that independent legal advice be obtained was ultimately fulfilled. In addition, as already mentioned, the plaintiffs had a locus poenitentiae when additional terms were imposed by Puma on behalf of Perpetual. The fact that Perpetual obtained the certificates in order to be able to claim to any purchaser of the rights under the mortgages that the guidelines had been fulfilled is nothing to the point. We repeat it was a condition precedent for the loan. It was also unnecessary for Puma or Perpetual to call evidence as to what was inferred from the certificates. The certificates spoke for themselves and Puma and Perpetual were entitled to rely on their terms. The reasons of the trial judge for his conclusion that Perpetual could not rely on certificates must be rejected in their entirety.
To summarise, Ganis imposed a condition precedent that certificates of independent legal advice be obtained. That requirement was initially overlooked but later remedied. Any questions about the manner in which it was remedied are removed by the further advice given on 17 January 1993 and the certificates which were signed following that advice. That advice was given before settlement in circumstances in which Puma did not know that Belperio had failed to comply with what the certificates required. Perpetual is, therefore, entitled to rely on the certificates.
The Plaintiffs' Alternative Contentions re Perpetual
The plaintiffs submitted that the findings of the trial judge should be upheld on two other grounds. The first is that Perpetual had entrusted the execution of its mortgage to Tony Bechara so that it was not in a position to enforce it.
The plaintiffs rely on the principle that a court will not enforce a transaction at the suit of a creditor if it can be shown that the creditor entrusted the task of obtaining the debtor's signature to the relevant document to someone who was, to the knowledge of the creditor, in a position to influence the debtor and who procured the signature of the debtor by means of undue influence or by means of fraudulent misrepresentation: Shephard v Midland Bank plc [1987] 2 Family Law Reports 175 at 181; Barclay's Bank plc v Kennedy [1989] 1 FLR 356; Kings North Trust Ltd v Bell [1986] 1 WLR 119 and Challenge Bank Ltd v Pandya [1993] SASC 3803; (1993) 60 SASR 330 at 340-343. In Challenge Bank Ltd v Pandya at 343 King CJ restated the principle in these terms:
"The Court will not enforce a guarantee at the suit of a creditor if it can be shown that the creditor entrusted the task of attaining the alleged debtor's signature to the relevant document to someone who, as the creditor knew or ought to have known, was in a position to influence the debtor or had a motive for or interest in ensuring the execution of the document, and who procured the signature of the debtor by means of undue influence or by means of fraudulent misrepresentation. In these case, the lender cannot be in a better position than the person who procures the signature."
We respectfully agree with Perry J in Citibank Savings Ltd v Nicholson (supra) at 227 to 228. That formulation expresses the rule in rather more absolute terms than most of the authorities would support. But in this case, as in Citibank Savings Ltd v Nicholson, there is an important distinction between the facts of that case and this.
In this case, the evidence does not justify the conclusion that Puma had entrusted the documents to Tony Bechara for execution. The plaintiffs had the burden of proof on this issue. The only evidence on the topic came from Tony Bechara and he simply said that he collected the documents from McLeod's office and gave them to Marisa Micarone to take to Belperio's office. After the documents had been executed he returned the documents to McLeod's office. There is other evidence that either Tony Bechara or Marisa Micarone had asked Belperio to witness the signatures. That evidence does not prove that Puma had entrusted the documents to Tony Bechara for execution. Indeed, the evidence goes a long way to proving the contrary. It shows no more than that the documents were taken to Belperio's office whence they were to be taken to the meeting for execution. The plaintiffs failed to ask McLeod any questions on this topic. They have not discharged the burden of proof.
The plaintiffs' second alternative contention is that the trial judge should have found that Tony Bechara procured the execution by the plaintiffs of the Perpetual mortgage by the exercise over them of undue influence and that Perpetual had actual or constructive notice of that fact. The undue influence was said to consist of the position of dominance, prolonged emotional pressure and manipulation and the misrepresentations made by him and Frost as his agent. The trial judge rejected this submission in these terms:
"In my view, the facts do not attract a separate remedy in the event of undue influence. I do not think that it can be said that the individual wills of the plaintiffs were overborne to the extent that they were not independent and voluntary (Amadio's case supra at 461)."
For the reasons which follow, this conclusion, albeit briefly expressed, is correct.
Undue influence may be actual or presumed from particular relationships. In Barclay's Bank plc v O'Brien [1993] UKHL 6; [1994] 1 AC 180 at 189 Lord Browne-Wilkinson adopted the following classification.
"Class 1: Actual undue influence In these cases it is unnecessary for the claimant to provide affirmatively that the wrongdoer exerted undue influence on the complainant to enter into the particular transaction which is impugned. Class 2: Presumed undue influence In these cases the complainant only has to show, in the first instance, that there was a relationship of trust and confidence between the complainant and the wrongdoer of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. In Class 2 cases therefore there is no need to produce evidence that actual undue influence was exerted in relation to the particular transaction impugned: once a confidential relationship has been proved, the burden then shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example by showing that the complainant had independent advice. Such a confidential relationship can be established in two ways, viz., Class 2(A) Certain relationships (for example solicitor and client, medical advisor and patient) as a matter of law raise the presumption that undue influence has been exercised. Class 2(B) Even if there is no relationship falling within Class 2(A), if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such relationship raises the presumption of undue influence. In a Class 2(B) case therefore, in the absence of evidence disproving undue influence, the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer without having to prove that the wrongdoer exerted actual undue influence or otherwise abused such trust and confidence in relation to the particular transaction impugned."
The plaintiffs submitted that Tony Bechara's conduct constituted actual undue influence as described in Class 1 or presumed undue influence of the kind described in Class 2(B).
We do not think that the plaintiffs proved either actual undue influence or a relationship from which it could be presumed. Neither of the Micarones suggested in their evidence that they were subject to any undue influence by Tony Bechara. Indeed, their evidence indicates that they were not prepared to trust or believe him particularly at the time of entering the Perpetual transaction. The effect of their evidence was that the reason why they believed what he said was that it was supported by Frost. They relied on Frost because he was an accountant.
The trial judge found that he was satisfied that Tony Bechara spoke the truth when he said that he put a lot of pressure on the Micarones to act as guarantors for the loans required to purchase the Hutt Street delicatessen. The judge found that they were reluctant at first but in the end were persuaded. The evidence paints a different picture. The effect of the evidence of both Mr and Mrs Micarone is that Mrs Micarone was quite amenable to the suggestion that the business be purchased. It was, among other things, a means of providing employment for her daughters, particularly Marisa who was then unemployed. She, along with her daughters and Tony Bechara, persuaded her husband that they should act as guarantors. It is not unusual for family decisions to be made in this way. Even then, the Micarones were firmly of the view that the business should be a Micarone asset. They did not permit Tony Bechara to be an owner of the business. The fact that Mr Micarone was persuaded, even pressured, by other members of the family into agreeing to be a guarantor is not, standing alone, evidence of undue influence. An isolated act of family pressure of this kind does not indicate undue influence.
Later, after the fire at the Hutt Street delicatessen, the Micarones were subject to and relied on the misrepresentations of Tony Bechara and Frost about the insurance claim when the desirability of the first refinancing transaction was under consideration. As already mentioned, their evidence shows that they relied heavily on those misrepresentations. Later, they again relied on the misrepresentations of both Tony Bechara and Frost, particularly Frost, as they were not willing to trust Tony Bechara. In short, the Micarones were induced to enter into the two refinancing transactions because of the misrepresentations made to them particularly by Frost. In essence, this was a misrepresentation - not an undue influence - case. Misrepresentation by a member of the family may, in certain circumstances, help prove a picture of undue influence. But, as the evidence showed, the Micarones relied on the evidence of Frost, not of Tony Bechara.
The same conclusion applies to the Becharas. In their evidence they do not complain of undue influence. Their evidence shows that they were willing to provide financial assistance, sometimes directly, sometimes by guarantees, in order for Tony Bechara to undertake his various business ventures. It is possible to be critical of their willingness to do so. They were obviously prepared to indulge their son's financial ventures to a degree which many others would not. Like the Micarones, their involvement in the two refinancing transactions came about because of the misrepresentations of Tony Bechara and Frost as to the insurance claim and as to the liability of entering into the transactions. Their involvement in the Perpetual transaction resulted from misrepresentations as to the insurance claim and the turnover of the Hutt Street delicatessen and the other business ventures of Tony Bechara. They relied on what Frost and their son told them. In addition, their decision to enter into the Perpetual transaction was motivated by the fact that it would result in reduced interest. Tony Bechara did pressure them but their case, like the Micarones, was in essence a case turning on misrepresentation.
For these reasons, there is no basis for interfering with the trial judge's conclusion that the individual wills of the plaintiffs were not overborne and that they were not subjected to undue influence.
The plaintiffs cannot succeed on this ground for the further reason that Puma, and therefore Perpetual, had no actual or constructive knowledge of any undue influence. In this respect, we refer to our earlier reasons which show that Perpetual did not know or have constructive knowledge of any special disability of the plaintiffs.
The trial judge found that Mr Belperio had advised the plaintiffs as to the nature and effect of the Perpetual documents which they then executed in his presence but that he had, nevertheless, failed to discharge his duty to the plaintiffs and that his negligence caused their loss. He found, therefore, that he and his partners were liable to the plaintiffs. He further found that the plaintiffs were not guilty of contributory negligence at any stage of the first or second re-financing. Belperio's acts or omission which constituted his negligence were found by the judge to be
(i) that he had made no investigation of the particular circumstances of the transaction or why the plaintiffs wished to enter into it or whether there might have been any influence or pressure upon them;
(ii) that his failure to make an investigation had the consequence that he was unable to warn the plaintiffs about relying too heavily on recovering the proceeds of the insurance claim;
(iii) that he did not stress the improvident nature of entering into the transaction; and
(iv) the advice was not given separately to each borrower.
He found that, although Belperio had acted with the best intentions in difficult circumstances in endeavouring to assist the plaintiffs without remuneration, he was negligent in failing to provide the essential advice which was called for in the circumstances. He then found that the failure to give proper advice had caused loss to the plaintiffs.
Belperio and his partners have appealed against that decision. Essentially there are three issues in the appeal. The first is whether Belperio acted in breach of his duty of care to the plaintiffs. Belperio does no dispute that he owed a duty of care to the plaintiffs. Instead, he submits that he discharged that duty. Thus, the issue what, in all the circumstances was the scope or content of that duty? The second question, which only arises if it is held that Belperio did act in breach of this duty to the plaintiff, is whether his negligence caused their loss. The issue is whether the plaintiffs, if properly advised, would have acted on his advice and not proceeded with the Perpetual transaction. If the answer to that question is favourable to the plaintiffs, the third question is whether the plaintiffs were guilty of contributory negligence.
As already mentioned, Belperio had already twice given advice to the plaintiffs in connection with two aspects of the first re-financing arranged by Adelaide Finance. He had advised them when they executed the Credential mortgage and later the AGC mortgage. The plaintiffs next saw Belperio in relation to the Perpetual loan when they signed the certificate of acceptance on 3 December 1992. It did not have to be executed in the presence of a solicitor but all of the applicants executed it in the presence of Belperio.
It is helpful to recall the plaintiffs' financial position at the time they accepted the Perpetual loan. They had mortgaged their three houses as security for the loans the subject of the first re-financing. Two other houses belonging to Tony and Amelia Bechara were also mortgaged as security for those loans. There were difficulties in paying the monthly instalments of interest. The plaintiffs and their children faced the real possibility of default with the result that their houses would be repossessed and sold to repay the moneys borrowed. The Perpetual loan offered substantially reduced monthly payments of interest. The plaintiffs were presented with a difficult choice. If they did not meet their existing outgoings, they stood to lose all of their properties. On the other hand, if they entered into the new transactions with Perpetual, although a larger sum would be borrowed, the monthly repayments would be reduced. The Perpetual arrangements at least provided some light at the end of the tunnel in the sense that it enabled more affordable interest payments pending resolution of the insurance claim which would be applied to repay a substantial part of the principal.
At the time Belperio saw the plaintiffs, he knew that they were receiving financial advice from Frost and legal advice in relation to the insurance claim, though he did not know the solicitor's name.
Belperio saw the plaintiffs again when the Perpetual documents were executed on 15 December 1992 at the Micarones' home. The evidence concerning this meeting differed. The trial judge accepted the evidence of Belperio. Belperio was asked to attend by either Tony Bechara or Marisa Micarone. He arrived at about 10.00pm. The meeting was late because some of the borrowers were working in the delicatessens. He was there for a little under two hours. All of the applicants were present. The documents were at the house. They included the five mortgages, a separate document containing Perpetual's standard conditions of mortgage, statutory declarations and other documents associated with the transaction. Belperio had not been instructed to explain the documents. Instead, he had been asked to witness the mortgages. He, nevertheless, assumed the responsibility of explaining the effect of the mortgages. According to Belperio, he went through the documents and paraphrased them. He spoke to all seven at the same time as a group. He gave what he said was his standard warning in these terms:
"These sorts of documents are dangerous. Banks never lose. You risk bankruptcy and the loss of everything you have. The amount secured can increase dramatically because of default costs. That sort of thing. And I always finished off my standard warnings with, it is my advice to my clients not to sign these sorts of documents, it is up to you, however, or words to that effect."
He explained the mortgages. He said that he also advised those present that the lender could pursue any of them for the full amount in the event of default and that this borrower could then attempt to recover from the others. He said that it was part of his stock warning that, if the lender was not paid, they would lose their homes.
None of this was new to the plaintiffs. They had heard similar explanations several times before. The evidence shows that the plaintiffs understood what Belperio said to them. The evidence also shows that, when the plaintiffs gathered together at the Micarones' house, they were prepared to sign the documents. As Micarone said, it is important to everybody that the re-financing proceed.
Belperio said that, at one stage, Mr Micarone asked him for his opinion on the insurance claim. He told him that he was not an insurance lawyer and could not comment on the claim. He advised him to speak to the lawyer handling the matter. Mr Micarone wanted his house released once the insurance claims had been paid. Belperio advised him to get a document drawn up to record the agreement that the Micarones' property would be discharged from the proceeds of the claim.
On 21 December, after the mortgages had been executed and returned to Puma's solicitors, Puma directed its solicitors to obtain certificates that the borrowers had received independent legal advice. The reasons have been mentioned in par170 above. On the same day, the certificates were delivered to Belperio, who completed them and returned them the same day. Belperio said that he read them and satisfied himself that he was able to certify as accurate the statements they contained. He did not contact the plaintiffs before signing them.
Belperio again gave advice on 17 January 1993 when the plaintiffs executed the extension to the mortgage. It will be recalled that settlement did not occur on 22 December 1992 as planned because the borrowers were unable to satisfy the conditions precedent requiring credit references from Tony Bechara's creditors (see par60 above). For that and other reasons, Perpetual amended the terms of the mortgage. The documents were executed at a meeting of the borrowers with Belperio on the evening of 17 January 1993. The trial judge accepted Belperio's evidence about the meeting. Belperio paraphrased the documents for the borrowers. He expressed his concern that, as Perpetual required the insurance claim to be settled within 10 days, control of the insurance claim had moved from the borrowers to Perpetual. Apart from expressing these concerns, he did not warn the borrowers about the documents and he did not think that was appropriate. He said that the borrowers appeared to understand what he said. The borrowers executed the documents in his presence. He told the borrowers that he would endeavour to get the clause changed but expressed his belief that there was little scope for negotiation. After the extensions had been executed, Belperio signed certificates of independent legal advice in the same terms as the earlier certificates, except that these certificates stated that each certificate was an addition to the certificates dated 21 December 1992.
The next day Belperio rang McLeod and asked for a longer time to be allowed to enable the insurance claim to be settled. McLeod told him that he was not confident that any further time would be allowed. The documents were not changed. Belperio then rang Tony Bechara and advised him not to proceed. He also rang Marisa Micarone and gave her the same advice. He told her to advise all the others in the same terms. He did not directly give advice to the plaintiffs, relying on Marisa Micarone to pass on the message. The plaintiffs say that the advice was not passed on to them. Settlement of the Perpetual transactions occurred on 28 January 1993 and the loans the subject of the first re-financing were then discharged.
The main thrust of the trial judge's reasons concerned the advice given on 15 December. The judge accepted the evidence of Belperio in preference to the plaintiffs. He found that, although he had been asked to come to the meeting on 15 December 1992 by Tony Bechara, Belperio assumed the role of legal adviser to the plaintiffs. Belperio said that he took his instructions "to be implied" and that he saw his role as being mainly to look after the interests of the parents. He said that he saw his role as explaining the documents, ensuring that they appeared to understand them, and that there was no undue influence or pressure being placed upon those signing the documents. He was aware of the decision in McNamara v Commonwealth Trading Bank (1984) 37 SASR 232 and the remarks in that case that the solicitor should give some kind of financial advice. He did not consider himself qualified or experienced to do that. He considered that he had discharged that obligation by stating that he was not an accountant and by advising them to see an accountant. The trial judge held that, although signed in retrospect on 21 December, the certificates of independent legal advice accurately summarised Belperio's role as he understood it at the time he advised the plaintiffs. It is common ground that Belperio's assumption of responsibility provided sufficient proximity to cause Belperio to assume a duty of care pursuant to the law of negligence. The question was, what was the content of that duty of care?
The trial judge followed the decision in McNamara and held that the giving of independent legal advice, particularly in cases where persons may be under a disability of the type discussed in Amadio, will often necessitate directing attention to the prudence of entering into the transaction and explaining why it may be imprudent. He also held that it was clearly within the solicitor's duty in such cases to give consideration to the possibility of influence from persons who stand to benefit from the transaction. He held that, although Belperio told the plaintiffs that it was dangerous to enter into the transaction, he had made no investigation as to the particular circumstances of the transaction or why the plaintiffs wished to enter into it and whether there might have been any influence or pressure brought to bear upon them. Belperio did no more than observe that there did not seem to be any evidence of influence at the time the documents were signed. He found also that Belperio failed to advise Mr Micarone concerning two issues which were of importance to him, namely, the prospects of success of the insurance claim and the request that the Micarone property be released from the securities once the insurance claim had been paid. Belperio told Micarone to seek advice but made no suggestion that he should not sign the documents until that advice had been given. Similarly, he did not advise that the documents should not be signed until Micarone had been advised on the insurance claim. The trial judge also held that Belperio failed in his duty of care by failing to advise the plaintiffs separately from the children whose business ventures were being financed by these borrowings. He also held that Belperio had failed to advise as to the improvident nature of this particular transaction. He concluded that the advice fell significantly short of what was required and constituted a breach of his duty of care to the plaintiffs, a breach which, he held, caused the loss they had suffered.
The extent of a solicitor's duties to his client depends upon the terms and limits of the retainer and any duty of care to be implied must be related to what he is instructed to do: Midland Bank v Hett Stubbs & Kemp [1979] Ch 384 per Oliver J at 492 to 403. In Hawkins v Clayton (1988) 164 CLR 539 at 574, Deane J expressed the view that the trend of modern authority supported the approach that the duty of care owed by a solicitor to a client in respect of professional work prima facie transcends that contained in the express or implied terms of the retainer and includes the ordinary duty of care arising under the common law of negligence. As the Court of Appeal in New South Wales pointed out in Cousins v Cousins (Court of Appeal, New South Wales, 18 December 1990, unreported) which was followed in Citicorp v O'Brien (1996) 40 NSWLR 398 at 413, it is not clear whether it is yet possible to express in general terms the duty that arises at common law from the relationship of solicitor and client as distinct from the contract since none of the other justices in Hawkins v Clayton appear to have adopted the approach of Deane J. Later, at page 579, Deane J said:
"The relationship of solicitor and client is, as has been seen, a relationship of proximity which ordinarily involves the combination of those elements with respect to foreseeable loss which may be caused to the client by the performance of professional work. It is a relationship of proximity of a kind which may well give rise to a duty of care on the part of the solicitor which requires the taking of positive steps, beyond the specifically agreed professional task or function, to avoid a real and foreseeable risk of economic loss being sustained by the client. Whether the solicitor-client relationship does give rise to a duty of care requiring the taking of such positive steps will depend upon the nature of the particular professional task or function which is involved and the circumstances of the case."
Although these views of Deane J may not, in a formal sense, form part of the ratio decidendi in Hawkins v Clayton, they accord with the trend of development in the law of negligence in the High Court in recent years. We will, therefore, proceed on the footing that the views of Deane J accurately state the law in Australia. The scope or content of the duty of care owed by Belperio to the plaintiffs is, therefore, to be determined by reference to the circumstances surrounding the relationship between the plaintiffs and Belperio. Those circumstances include the instructions Belperio received, the terms of any retainer, and any responsibility assumed by Belperio.
The terms of Belperio's retainer can be gleaned from the terms of each of the certificates of independent legal advice, which were in the same terms. The relevant parts read:
"2. I have been instructed by ...............................(Name of Client) (the "Client") to explain to him/her the content and effect of the loan and security documents referred to in the Schedule below (the "Documents") relating to the financial accommodation and to be provided to the Client by Perpetual Trustees Australia Limited.
3. Before the Documents were executed by the Client and which executed I have witnessed, I:
(a) read over and explained the Documents to the Client; and
(b) examined the Client touching on his/her knowledge of the Documents.
4. To the best of my knowledge and belief and in my opinion:
(a) the Client appeared to understand the true import and effect of the Documents, including the rights of Perpetual Trustees Australia Limited on default, the method of calculation of, and the implications in relation to, the costs payable by the Client on voluntary prepayment and early termination under the Documents, and the nature and extent of the legal liability and obligations which the Documents place upon him/her; and
(b) the Client has freely and voluntarily executed the Documents.
5. I regularly advise clients in relation to agreements and securities similar to the Documents and I am qualified to fully explain the import and effect of the Documents to the Client.
6. I have been engaged by the Client in advising him/her and have given this Certificate entirely independently of all other parties to the Documents."
The certificate requires the solicitor to be satisfied that the client understands the purport and effect of the documents. The certificate spells out that obligation in detailed terms, requiring the solicitor to explain such matters as the rights of Perpetual on default, and the nature and extent of the liability and obligations imposed upon the client. But the terms of the certificate do not expressly require the solicitor to advise upon the prudence of entering into the transaction. It is concerned to ensure only that the person entering into the transaction understands the purport and effect of the documents.
There were a number of other factors relevant to the content of the duty of care. The first is that Belperio knew that this was a transaction by which the plaintiffs were re-financing their existing loans. He knew of the first re-financing. Belperio, therefore, knew that the Perpetual transaction was not the first occasion on which the plaintiffs had entered into a substantial borrowing of this kind. This was a matter to which Belperio said he had regard when advising them on 15 December. He said that he would have given different advice if they had not been involved in the earlier transaction. Secondly, Belperio knew that he had on two earlier occasions, some five to six months earlier, given advice about the legal effect of mortgages and guarantees and had on that occasion recommended that the parties seek independent accounting advice and had advised Micarone that, if he sought further information about the insurance claim, he should seek it from an insurance lawyer or the lawyer handling the claim. These two factors show that the advice given on 15 December 1992 must be considered in the context of earlier advice Belperio had given to the plaintiffs.
Thirdly, although he did not know the name of the lawyer involved, he knew that the parties had legal representation in respect of the insurance claim. That is why he had answered Mr Micarone's request for advice about the claim by saying that he should refer the request to an insurance lawyer or the lawyer handling the claim. Fourthly, he knew the insurance claim was perceived by the plaintiffs to be important. He also knew that three businesses were available to service the borrowings. He did not, however, know of the turnover of those businesses. Fifthly, he knew that an accountant had been advising all of the parties. He was entitled to believe that they were obtaining their financial advice from the accountant. Finally, Belperio was a friend of the Micarone family and he charged no fee for his services. This last fact does not, however, assist him.
As already mentioned, Belperio assumed responsibility for advising in terms of the certificates and, in particular, to advise the plaintiffs. Nothing express or implied in the certificates required him to assume any responsibility to advise on the wisdom of entering into the transaction or to give any financial advice. Nothing in the certificates required him to go outside the usual duties of a solicitor. The fact that he assumed responsibility for advising the plaintiffs does not alter the position. Further, applying the decision in Hedley Byrne to which Deane J referred in Hawkins v Clayton, the existence of any duty not found in the expressed, inferred or implied terms of the retainer would depend upon Belperio assuming responsibility to the plaintiffs and the plaintiffs relying on Belperio to perform diligently and skilfully the services for which he had assumed responsibility. There is nothing in the surrounding circumstances as found by the trial judge which allow for a term to be inferred or implied that Belperio assumed responsibilities to provide financial advice to the plaintiffs or that they relied on him to do so.
It is well settled that it is not part of a solicitor's function to give commercial or financial advice unless he is retained to do so and agrees to carry out that task: Hogan v Howard Finance Ltd (1987) ASC 55-594; Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 at 277; Krambousanos v Jedda Investments Pty Ltd (1996) 64 FCR 348 at 365 and the cases there cited; Citicorp Australia Ltd v O'Brien (supra) at 412; and Teachers Health Investments Pty Ltd v Wynne (1996) ASC 56-356 at 56,987. As the Full Federal Court noted in Tarzia v National Australia Bank:
"It is not generally the task of solicitors to explain the financial result or prudence of the transaction involved in documents they are merely asked to explain. Unless they undertake the task of doing so, or are specifically retained to perform it and supply the necessary information and documentation, they will not be negligent for failing to do so."
One reason for the principle is that solicitors may not be qualified to assess the financial risks or proffer financial advice. In addition, the solicitor may be placed at a disadvantage because he is not provided with all necessary information and documents to give the financial advice. In addition, as these proceedings eloquently demonstrated, a long enquiry into complex dealings may be involved, dealings where the financial issues may not be readily apparent. The obvious consequence is that, if the solicitor is wrong and the client has relied on the financial advice, the solicitor is liable in negligence: Citicorp Australia Ltd v O'Brien. Neither is a solicitor under any duty, whether before or after accepting instructions, to go beyond those instructions by proffering unsought advice as to the wisdom of the transaction: Clark Boyce v Mouat [1994] 1 AC 428; Citicorp Australia Ltd v O'Brien (supra) at 418.
In McNamara v Commonwealth Trading Bank (1984) 37 SASR 232 two judges of this Court observed that a solicitor had a duty to give financial advice when advising a guarantor pursuant to s44(1) of the Consumer Transactions Act 1972. Section 44(1) provides that, where a guarantor enters into an agreement of a type specified in that section, the agreement should be void unless it is executed by the guarantor in the presence of a legal practitioner instructed and employed independently of the credit provider or mortgagee. The mortgage, which was also a personal guarantee, was executed by three joint owners of a house property. Two signed in the presence of a legal practitioner. The third did not. The issue was whether the guarantee and mortgage were void. It was held that the guarantee and mortgage were void because of the failure of the third guarantor to execute in the presence of an independent solicitor. In his reasons, King CJ went on to examine the duty of a solicitor when discharging the obligations under s44(1). The material parts of s44(1) provided:
"Where a guarantor enters into an agreement binding the guarantor...
the agreement so entered into by the guarantor shall be void unless the agreement is executed by the guarantor in the presence of a legal practitioner instructed and employed independently of the credit provider or mortgagee and the legal practitioner certifies in writing upon the agreement -
(f) that he is satisfied that the guarantor understands the true purport and effect of the agreement; and
(g) that the guarantor has voluntarily executed the agreement in his presence."
King CJ explained the duty of a solicitor in these terms:
"A further aspect of this case requires comment. It emphasizes the dependence of creditors upon the integrity of the legal profession, for the validity of the guarantees upon which they rely. Section 44 is a beneficent enactment designed to protect prospective sureties from putting their assets at risk of being lost by the default of another, without proper advice. In order to achieve that purpose the legislature has made the validity of a guarantee depend upon its being signed in the presence of a legal practitioner and upon its bearing the necessary certificate signed by the practitioner. The creditor must in practice rely upon the certificate on the document. The soundness of the creditor's reliance upon the certificate on the document depends, forgery apart, upon the veracity of the legal practitioner when he certifies that it was signed in his presence.
Likewise, the protection of the prospective surety, which the legislature sought to achieve by the section, can only be achieved if the legal practitioner performs his duty to his client by advising him fully and competently. The section requires that the practitioner certify "that he is satisfied that the guarantor understands the true purport and effect of the agreement". This demands a careful explanation to the guarantor of the terms of the document and its legal effect. Although it is sufficient for the validity of the guarantee that it be executed by the guarantor in the presence of the legal practitioner and that the legal practitioner certify as required by the section, the duty of a solicitor to a client who consults him for advice prior to signing a guarantee extends much further. The solicitor should raise with the client questions relating to the prudence of entering into the guarantee and should ascertain whether the client wishes to be advised as to such questions. The client may, of course, indicate that he does not wish advice as to those matters and that he is prepared to rely upon his own judgment. But unless the client so instructs the solicitor, the instructions from the client should be regarded as extending to advice on all matters relating to the guarantee, including the wisdom of entering into it from a practical point of view. The state of the financial affairs of the principal debtor should be discussed as well as the extent of the assets of the client. A client whose assets are few and who will be putting the whole of his assets, perhaps including his home, at risk obviously needs careful and perhaps quite forthright advice. The need is even greater where, as so often is the case, the affairs of the principal debtor are precarious. Solicitors undertaking to advise clients in relation to guarantees would do well to study the cases as to the type of independent advice which is required to rebut a presumption of undue influence. They should remember, among other things, that there is a potential conflict of interest between the principal debtor and the prospective surety. Frequently the debtor who desires to be guaranteed is a near relative and the prospective surety is under considerable emotional pressure. It is essential that the solicitor act and be understood to act solely for the prospective surety. The section requires that the solicitor be "instructed and employed independently of the credit provider. Sound professional practice requires also that the solicitor be and be seen to be free to advise the prospective surety unencumbered by any ties to the principal debtor. The solicitor, moreover, should be at pains to ensure that his client's decision is as free of the influence of the debtor as he can arrange. I was disturbed to read in the present case that the principal debtor, a son, was present in the office of the solicitor when he was advising the appellants... Sound professional practice requires that the debtor should not be present when the solicitor is advising the client and receiving his instructions.
The legislation has placed great faith, in enacting s. 44, in the integrity and competence of the legal profession. Its members are relied upon to certify truly so that the creditor is not misled into the belief that a valueless document is a valid guarantee; they are also relied upon to provide the protection to prospective sureties which the legislature understood to be necessary. If solicitors come to regard the certification of guarantees as a matter of mere routine to be performed after merely perfunctory advice and perhaps even without strict regard to the truth, the scheme of the section will fail and the legal profession will have failed the community in the discharge of the important responsibility entrusted to it."
Cox J expressed his concurrence with these reasons. But the reasons were not necessary for the decision. They are observations made after the matter had been decided and are, therefore, obiter dicta. Legoe J was the third member of the court. He noted that the court did not have to adjudicate on this question and the matter had not been argued by counsel. Legoe J expressed the view that the court should not impose any higher duty than that required by the section. In Tarzia v National Australia Bank the Full Federal Court followed the decision in McNamara, observing:
"In certain situations it may be negligent of a solicitor not to ensure that his client has good financial advice, particularly when the client is at a disadvantage with respect to the other parties to the transaction, and where the result is potentially disastrous to the client: McNamara v Commonwealth Trading Bank of Australia (1985) 37 SASR 232 at 241 per King CJ."
To that extent, the Federal Court qualified its remarks quoted in par216 above.
There are essentially three duties to which King CJ refers. They are to advise on the legal effect of a guarantee; to ask if the guarantor wishes to be advised on the wisdom of entering into the guarantee and, if so, to give that advice; and to ensure that the guarantor is not acting under any undue influence or other improper influence of the debtor or any other person. In our view, so far as those remarks require solicitors to advise on the wisdom of entering into the transaction, they impose too onerous a duty on solicitors giving advice in certain circumstances. Furthermore, the duty goes beyond that required by s44.
Section 44(1)(f) requires a solicitor to advise of the true purport and effect of the guarantee. That requires the solicitor to summarise the obligations of the guarantor and, in doing so, to explain the onerous nature of the obligations of a guarantor. The requirement in s44(1)(g) to certify that the guarantor has voluntarily executed the agreement means that the solicitor must make enquiries for the purpose of ascertaining whether the guarantor has been subjected to any kind of undue influence or other pressure which might indicate that the guarantor is not voluntarily executing the guarantee. These obligations can be discharged without the necessity of giving financial advice. There is no provision in s44 which imposes a duty on a solicitor to give financial advice of the kind averted to by King CJ. Had it been intended, it would have been only too easy for Parliament to have said so. So, too, in the case of the certificates signed by Belperio in this case. They required the true purport and legal effect of the documents to be explained, spelling out the content of that duty. They also required each party to be individually and separately advised. There is nothing in the certificates which required advice as to the wisdom of entering into the transaction or any enquiry after the financial affairs of the parties.
The policy reasons which underlie the principle that it is not part of a solicitor's function to give commercial or financial advice unless he is retained to do so and agrees to carry out that task apply with equal force here. Solicitors may not be qualified to assess the financial risks or proffer financial advice. The solicitor may not be able to ascertain all of the relevant facts. The circumstances of this case amply illustrate how difficult the task of giving sound financial advice might be and the kind of difficulties which might arise, particularly where, as here, misrepresentations have been made and there may be no means of ascertaining that fact. In order to discharge the duty imposed by King CJ, a solicitor would have to investigate the obligations under the Adelaide Finance loans, the subject of the first re-financing and examine the capacity of the parties to meet the obligations under the proposed loan. This would require an investigation to ascertain the personal income of each of the plaintiffs as well as of the two delicatessens, to assess the prospects of success of the insurance claim, and to investigate the financial dealings in past years to determine whether Tony and Amelia Bechara and Marisa Micarone had exercised any undue influence over the parents. Furthermore, as King CJ noted, the advice would have to be given in the absence of the principal debtor. The parallel in this case is advice in the absence of Tony and Amelia Bechara and Marisa Micarone. How, then, is the solicitor to obtain full information as to the financial affairs without them present? The plaintiffs did not know every relevant fact. In addition, they relied on Frost's misrepresentations. How would a solicitor be able to ascertain that Frost was deceiving the plaintiffs? We do not think, therefore, that the solicitor should have a duty to advise as to the financial position and the prudence or otherwise of entering into the transaction.
There is a further policy reason for this conclusion. Not infrequently, advice is given in respect of a transaction involving a very substantial sum of money. If a solicitor is found to have acted negligently, he may well be liable to one or other of the parties. If the duty imposed on solicitors is too onerous, they will refuse to advise, with the consequence that many who need advice will not receive it. In addition, a prudent solicitor anxious to avoid liability for negligence in failing to advise on the financial implications of the transaction would feel obliged to make a long and exhaustive investigation. In all likelihood, it would involve at least several hours work, if not a day or two. A considerable amount of work would have been required to investigate, unravel and understand the history of this matter. The enquiry may occupy several days. The solicitor may have to charge a substantial fee to reimburse him for the time occupied in this exercise. Parties about to execute documents to enable the borrowing will in all likelihood be unwilling to incur the cost. All of this is a far cry from simply explaining the nature and effect of the documents they are about to execute. I do not think it was intended that these should be the consequences of the certificate.
It is not necessary to go into financial implications in order to explain the purport or effect of, say, a mortgage or guarantee. The obligations can be spelled out and explained by example. As the trial judge found, Belperio did explain the manner and effect of the mortgages. The evidence shows that the plaintiffs understood the essential aspects of a mortgage and a guarantee. One example of Mr Micarone's understanding is to be found in his questions concerning the possibility of the proceeds of the insurance claim being applied first in payment of the amount secured by the mortgage over his house.
For these reasons, we do not think that Belperio was under a duty to advise on the wisdom of entering into the transaction.
In deciding that Belperio had been guilty of negligence, the trial judge followed and applied McNamara by deciding that Belperio had failed to advise the parties separately. The failure to see the parties independently denied him the opportunity of ascertaining whether the plaintiffs were at a disadvantage and whether the transaction was potentially disastrous. On its face, the fact that Belperio did not separately advise each of the borrowers or at least separately advise the Micarones, the Becharas, and the three children indicates that he was negligent. But, even if Belperio had advised the parties separately, there is also a real question whether any one of them would have decided not to proceed with the transaction. We deal with that issue in a moment when examining whether the plaintiffs had relied on Belperio's advice. It is not difficult to understand why Belperio did not advise the plaintiffs separately. But, as he acknowledged, he was aware of the obligations of a solicitor giving independent legal advice in these circumstances which had been spelled out in McNamara's case. In any event, the certificates he was required to sign made it clear that he was obliged to advise the parties separately. For these reasons, although we differ from the reasons of the trial judge, we nevertheless agree that Belperio was guilty of negligence in advising the plaintiffs.
There remains the important question of causation. In order to recover damages, the plaintiffs had to prove not only that Belperio had acted negligently, but also that his negligence caused their loss: Sykes v Midland Bank Executor & Trustee Co Limited [1971] 1 QB 113; Lillicrap v Nalder & Sons (1993) 1 WLR 94; Hanflex Pty Ltd v N S Hope & Associates [1990] 2 Qd R 218. They had to prove that, if properly advised, they would not have proceeded with the Perpetual transaction. It cannot be emphasised too much that causation must be established before the court is required to assess damages: Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 at 355. In the absence of direct evidence, the court can have regard to any contemporaneous facts or documents which might assist in determining how the plaintiffs might have acted: Sykes v Midland Bank Executor & Trustee Co Limited (supra) at 127 per Salmon LJ.
The trial judge held that Belperio's negligence had caused the plaintiffs' loss. He did not explain his reasons beyond stating: "The failure to give the advice was causative in the sense explained in March v Stramare [1991] HCA 12; (1991) 171 CLR 506." The reasoning appears to proceed on the footing that the failure of Belperio to give advice necessarily resulted in the loss to the plaintiffs. A little earlier he had said that the breach by Belperio of his duty of care had the effect of "making it more likely that the plaintiffs would enter into the transaction with Perpetual than would have been the case if the issues to which I have referred had been properly canvassed". But that conclusion says nothing about what advice should have been given. It also fails to examine whether, if properly advised, the plaintiffs would have acted differently, a matter on which there was a complete - and in the circumstance of this case a significant - lack of evidence.
None of the plaintiffs proved that, if properly advised, he or she would not have entered into the Perpetual transaction. In a case such as this, where there were so many factors capable of affecting the plaintiffs' decision to enter into the Perpetual transaction, evidence as to whether they relied on Belperio's advice was absolutely essential. The plaintiffs were, as they said, very much influenced by Frost's misrepresentations as to the prospects of recovery on the insurance claim and the viability of Tony Bechara's businesses. They had already committed themselves to the first of the loans the subject of the first re-financing transaction. They were anxious to reduce their monthly payments of interest by entering into the Perpetual transaction. There is a real likelihood that they believed that entering into the Perpetual transaction was the only alternative available to them. The existence of all of these factors suggests that it would be most unlikely that any advice from Belperio would have deflected them from proceeding with the Perpetual transaction. In the absence of any evidence that they would have relied on his advice, it cannot be said that Belperio's negligence caused their loss.
The absence of any evidence as to reliance is not surprising. The financial position of the parties shows that they would probably have entered into this transaction whatever Belperio had advised. In addition, it is not possible to conclude from the contemporaneous facts or documents how the parties would have acted if properly advised. At the risk of repetition, it is important to remember that the plaintiffs had already entered into the first re-financing transaction. They had done so knowing that Citibank was demanding payment and threatening to act on default. Mr Micarone had advanced Tony Bechara about $30,000 to enable the instalments to Citibank to be paid. Mr Micarone's evidence shows that he and his wife were concerned that their properties would be sold on a default to Citibank. The Becharas knew of the default. The first re-financing transaction was perceived as a means of resolving their financial difficulties. A few months later they are willing to enter into the Perpetual transaction because it would result in a substantially reduced monthly payment of interest. In other words, they had already committed themselves to the first re-financing transaction with its financial obligations. The reduced payment of interest was, therefore, a strong inducement to enter into the Perpetual transaction. It cannot be inferred that they would have turned their backs on that benefit. Had they done so, they would have been liable to pay a higher rate of interest, thus exposing themselves to a higher risk of default and consequential loss of their house properties. In these circumstances, the real likelihood is that the plaintiffs would have proceeded with the Perpetual transaction no matter what Belperio advised. But it is not necessary to go so far as to reach that conclusion. It is sufficient to note that the plaintiffs have not proved how they would have acted if properly advised and it is not possible to conclude, on the balance of probabilities, that they would not have entered into the Perpetual transaction if they had been properly advised. In a case such as this, where a choice between two alternative courses plainly exists, evidence is necessary to show how the plaintiffs would have acted. As there is no such evidence, the plaintiffs have not proved how they would have acted. They have not proved that the failure to give proper advice caused their loss.
The plaintiffs also failed to prove what advice Belperio should have given. Seeing that they had already committed themselves to the first re-financing transaction and were being offered a reduced liability for interest in the Perpetual transaction, it is not possible to conclude that Belperio should have advised them not to proceed with the Perpetual transaction. It might have been negligent for Belperio to have advised them not to enter into the transaction. Had he done so, they were incurring a liability for a higher payment and, therefore, running a greater risk of default. In short, their financial difficulties were such that it was not readily apparent what advice should have been tendered. Opinions might reasonably differ as to what advice should have been given. It is not surprising that the plaintiffs did not lead evidence as to what advice ought to have been given.
Had Belperio seen the plaintiffs separately, he would have heard again of the existence of the insurance claim and their reliance on it and that the turnover of the Hutt Street delicatessen was very high and likely to be sufficient to service the loan along with all the other sources of income. The plaintiffs were relying on the turnover as stated to them. Although that turnover had been misrepresented to them by Tony Bechara and Frost, Belperio as well as the plaintiffs were unaware of that fact. Belperio had no duty to examine the books of the Hutt Street delicatessen and determine whether the stated turnover was correct. Thus, what Belperio would have learned was that there was a sufficient income to service the loans, that the payment of the insurance claim would substantially reduce the principal debt and entry into the Perpetual transaction would enable the plaintiffs to substantially reduce their monthly payments of interest. Given those facts, it cannot be inferred that the advice that the plaintiffs ought to have received was that they should not enter into the transaction and that, even if they had been so advised, they would not have done so.
The trial judge also found that Belperio was negligent was in failing to advise the Micarones to negotiate to have their properties discharged first upon payment of the insurance claim. Here again, there are real questions of causation. There is no evidence that Perpetual would have agreed to that course. Indeed, it is unlikely that Perpetual would have done so for it did not know what the proceeds of the insurance claim would be and would be unlikely to accept any assurances concerning that question. A prudent lender would prefer to see the outcome of the insurance claim. Secondly, there is no evidence that, had Belperio given such advice, the Micarones would have acted upon it.
For these reasons, the plaintiffs have failed to prove that Belperio's negligence caused their loss. The appeal by Belperio must, therefore, be allowed. Given that conclusion, it is unnecessary to examine whether the plaintiffs were guilty of contributory negligence.
The Micarones and the Becharas each filed a separate cross appeal. As we would allow the appeals of Perpetual and Belperio and his partners, it is unnecessary to determine most of the issues which they have raised. As against Frost, it may be necessary to examine questions affecting the assessment of damages and the parties have agreed to postpone that question until the other issues in these appeals have been determined.
The remaining issues in each cross appeal concern decisions made by the trial judge dismissing extremely late applications by the plaintiffs to amend their respective statements of claim. The trial judge had dismissed an application by the Micarones to amend their statement of claim to claim relief against both Frost and Belperio and his partners in respect of the first re-financing by Adelaide Finance. The trial judge dismissed the Becharas' application to amend their statement of claim to claim relief against Belperio and his partners in respect of the first re-financing by Adelaide Finance.
The Becharas' statement of claim had included a claim against Frost for misrepresentations and negligence in relation to the first re-financing. However, the Micarones did not include a like claim. However, at the end of what had been an 85 day trial and immediately before counsel for Frost began his final address, Mr Niarchos, counsel for the Micarones, applied to amend their statement of claim to include a claim against Frost for damages for misrepresentation relating to the first re-financing. After hearing submissions, the trial judge indicated that he was disposed to allow the amendment but said that he would look favourably on any application by counsel for Frost to have relevant witnesses recalled for further questioning on the issues raised by the amendments. After considering the matter further, Mr Niarchos decided not to press the application.
The judge delivered judgment on 19 November 1997 but refrained from making orders pending submissions of the parties on issues as to damages. After hearing argument, the judge published his decision on the issue of damages on 16 April 1998. He then indicated in broad terms the orders he proposed to make. The matter was adjourned to 28 April 1998.
On 28 April, Mr Niarchos and Mr Stevens, counsel respectively for the Micarones and the Becharas, applied to amend their statements of claim. The amendments sought by the Micarones were 20 pages long. They claimed relief against Frost and Belperio and his partners in respect of the first re-financing. The amendments sought by the Becharas had not been prepared but they also sought relief in damages against Belperio and his partners. After hearing argument, the judge refused both applications and the plaintiffs now appeal against his rulings.
The judge set out his reasons in some detail. We do not repeat them. We respectfully agree with them. Briefly stated, his reasons were, first, that the Micarones were making a like application concerning Frost as they had earlier made and withdrawn. It was too late to renew it. Secondly, it would be necessary to recall witnesses and perhaps to call additional witnesses to be questioned on the issues raised in the amendments. Neither Mr Niarchos nor Mr Stevens could satisfactorily explain why the applications had not been made earlier. Finally, the interests of fairness. prevented the applications being made after judgment. These are all compelling reasons. The applications smacked of opportunism, especially having been made after judgment. We would dismiss both of these cross appeals.
When dealing with the issues in this appeal, we have with one exception adopted the findings of fact made by the trial judge. We have, however, differed in the conclusions we have reached. This court is entitled to review the conclusions of the trial judge: State Rail Authority (NSW) v Earthline Constructions Pty Limited (in Liq) [1999] HCA 3; (1999) 73 ALJR 306 per Kirby J at 322. We acknowledge the advantage which the judge had of seeing and hearing the parties give their evidence. That advantage was specially significant when he determined whether the plaintiffs were at a special disability vis-a-vis Perpetual. However, we have departed from the conclusions of the trial judge because he failed to weigh the plaintiffs' evidence against other important objective facts which were of crucial importance. In respect of all other issues as against Perpetual we have reached our conclusion by reference to the facts as found by the trial judge, in respect of issues where this court is in as good a position as the trial judge to decide those issues. In respect of the appeal against Frost, we have concluded that the trial judge correctly found the facts and we agree with his conclusions.
The one question where we have found facts different from those found by the trial judge was the question whether Perpetual was entitled to rely on Belperio's certificates of independent legal advice. With respect, the trial judge overlooked important and uncontested evidence. That evidence is set out in our reasons and justifies the conclusion we have reached.
For these reasons, we would allow the appeals by Perpetual and Belperio. It follows that the orders for contribution as between the defendants should be set aside. We would dismiss the appeal by Frost against the finding that he is liable to the plaintiffs. For the reasons expressed earlier it will be necessary to hear the parties on the appeal by Frost against the assessment of damages and the cross appeals of the plaintiffs which also concern that assessment. We would dismiss the cross appeals by the plaintiffs on all issues except those concerning the assessment of damages to be paid by Frost.
MICARONE & ANOR
PERPETUAL TRUSTEES & ORS No. SCGRG-94-1711, SCGRG-94-1914 Judgment No. S265 [1999] SASC 265
(1) that, because the substantial part of the loan was to be applied in discharge of existing debts, it could not be said that the transaction was unconscionable (cf. Collier and Anor v Morlend Finance Corporation (Victoria) Pty Ltd [1989] ASC 55,716 at 58,430, 58,433. ("Collier");
(See also the decision of Duggan J in Farmers' Co-operative Executors Trustee Ltd v Perks [1989] SASC 1932; (1989) 52 SASR 399 at 404).
(See also the remarks made by Pincus JA at 62,067 and the type of reasoning expressed in cases such as Grantwell Pty Ltd & Anor v Franks & Ors (1993) 61 SASR 390 at 400-401 and Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd & Ors [1987] FCA 332; (1988) 78 ALR 193 at 242.)
"In my view Mr Belperio was under a duty of care by reason of the relationship of proximity which arose when he assumed the responsibility to give legal advice appropriate to the situation. For the reasons which I have given, the legal advice fell significantly short of what was required in the circumstances and, in my view, amounted to a breach of the duty of care. I am of the opinion that the breach had the effect of making it more likely that the plaintiffs would enter into the agreement than would have been the case if the issues to which I have referred had been properly canvassed. I repeat that this would not have required extensive advice about matters beyond Mr Belperio's knowledge and experience. The improvident nature of this transaction was very close to the surface; it would not have been a difficult task, for example, to warn about reliance on the insurance payout. At the very least I think that a solicitor in Mr Belperio's position should have told the plaintiffs that he would not witness the execution of the documents until they had the opportunity to go away and receive independent legal advice on the insurance policy and other financial matters. In the result, I have reached the conclusion that Mr Belperio, although he acted with the best of intentions in difficult circumstances in endeavouring to assist the plaintiffs without remuneration, was negligent in failing to provide essential advice which was called for in the circumstances. The failure to give the advice was causative in the sense explained in March v Stramare [1991] HCA 12; (1991) 171 CLR 506 and I am of the view that the plaintiffs' claim against Mr Belperio has been made out. In my view the plaintiffs were not guilty of contributory negligence at any stage of the first or second re-financing.
(1988) 171 CLR 167
(1985) 3 NSWLR 207
(1983) 151 CLR 447
(1992) 175 CLR 621
(1998) 72 ALJR 1525
(1993) 60 SASR 330
(1991) 23 NSWLR 256
(1995) 61 FCR 489
(1990) 170 CLR 394
(1986) 5 NSWLR 610
(1939) 63 CLR 649
(1998) 155 ALR 614
(1997) 70 SASR 206
(1989) 52 SASR 399
(1978) 18 SASR 240
(1986) 64 ALR 347
(1986) 162 CLR 341
(1984) 2 FCR 82
(1995) 184 CLR 102
(1996) 188 CLR 449
(1965) 113 CLR 265
(1988) 164 CLR 539
(1997) 142 ALR 750
(1984) 154 CLR 672
(1993) 61 SASR 390
(1988) 78 ALR 193
(1991) 171 CLR 506
(1996) 40 NSWLR 398
(1996) 64 FCR 348
(1994) 179 CLR 332
(1999) 73 ALJR 306
(1996) 67 SASR 207
(1984) 37 SASR 232
(1956) 96 CLR 10
(1990) 55 SASR 314
(1983) 48 ALR 365
(1938) 60 CLR 336
(1977) 18 SASR 240
(1956) 99 CLR 362
(1913) 2 IR 1
(1998) 72 ALJR 1243
(1959) 101 CLR 298
(1985) 37 SASR 232