The May 1998 deed - presumed undue influence case
55 The plaintiffs say that the April 1998 deed should be set aside because Portland, CVC and BDL, the parties benefiting from the participation therein by, in particular, Multi No 1, Lovrinovic, Rasic and Komadina, knew that those other participants did not bring a free will and understanding to bear in deciding to participate, they at that time being overborne in their decision making by actual or presumed exercise in an unconscientious way of a power on the part of Solomon as their solicitor. This part of the judgment deals with presumed undue influence.
56 The relevant equitable principles are explained in Garcia v National Australia Bank Ltd (1998) 194 CLR 395. After referring to the distinction drawn by Dixon J in Yerkey v Jones (1939) 63 CLR 649 between cases of actual undue influence by a husband upon his wife (where "a wife, alive to the nature and effect of the obligation she is undertaking, is procured to become her husband's surety by the exertion by him upon her of undue influence affirmatively established") and cases of presumed undue influence (where the ascendancy of one party over the other raises a presumption that the will of that other has not been freely exercised), Gaudron, McHugh, Gummow and Hayne JJ, referring to the particular case of a guarantee, continued:
"Thus, Dixon J was dealing with two kinds of case. In the former, the case of actual undue influence, as Dixon J says, explaining the effect of the document to the surety will not protect the creditor and '[n]othing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice'. In the latter, '[I]f the creditor takes adequate steps to inform [the wife] and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp some material part of the document, or, indeed, the significance of what she is doing' cannot give her an equity to set the instrument aside."
57 The majority judges then dealt with a submission that principles about unconscionable or unconscientious dealing discussed in Commonwealth v Verwayen (1990) 170 CLR 394 and Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 44 had overtaken the principles in Yerkey v Jones. They continued:
"The principles applied in Yerkey v Jones do not depend upon the creditor having, at the time the guarantee is taken, notice of some unconscionable dealing between the husband as borrower and the wife as surety. Yerkey v Jones begins with the recognition that the surety is a volunteer: a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee. It holds, in what we have called the first kind of case, that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that:
(a) in fact the surety did not understand the purport and effect of the transaction;
(b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed);
(c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet
(d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her."
58 Item (c) in this extract refers to the understanding of the party benefited by the transaction. It makes it clear that that party is to be presumed to understand that undue influence is at work if the party has knowledge of the relevant relationship (in the present case, that of solicitor and client). That notice of the relationship is alone sufficient to sheet home to the party benefited the consequences of undue influence is borne out by subsequent decisions. It is sufficient to refer briefly to two of them, both involving, like Garcia, the relationship of husband and wife.
59 In Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37, Wheeler J said:
"So far as Dorothy is concerned, in respect of guarantees which she gave in her personal capacity in respect of Ridout Nominees, Cloverdale and Ranleigh, it is appropriate to apply the equitable presumption in favour of wives enunciated in Yerkey v Jones (1939) 63 CLR 649 and subsequently explained by the High Court in Garcia .
The only question of notice that arises in such a case is whether the creditor knew at the time of the taking of the guarantee that the surety was then married to the borrower. The principle extends, as in Garcia , to the situation in which the 'borrower' is a company, where the company is effectively under the control of the husband."
60 To the same effect are observations of O'Connor J in Westpac Banking Corporation v Paterson [2001] FCA 556. After noting that the majority in Garcia had held that equity will grant relief to a married woman if she enters into a transaction under the actual undue influence of her husband and misunderstands the nature of the transaction, her Honour continued:
"In such a situation, it is not necessary for the lender to have specific notice of the misunderstanding; it is enough that the misunderstanding exists in fact and the lender knows that the surety is a married woman. This is because 'the lender is taken to have understood that, as a wife, the surety may repose trust and confidence in her husband and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife'."
61 If the principles set out in the majority judgment in Garcia are to operate in the present case by reference to some presumed solicitor-client undue influence, it will be necessary to find, first, that Portland, CVC and BDL knew that a relationship of solicitor and client existed between Solomon on the one hand and Multi No 1, Lovrinovic, Rasic and Komadina on the other; and, second, that a relevant misunderstanding on the part of the latter parties existed in fact.
62 There are difficulties with the first of these. When, in August 1997, the original funding arrangements were entered into between Portland/CVC and Multi No 1 (with Lovrinovic, Rasic, Komadina and Kasalo as guarantors), the loan agreement was prepared by Solomon. His firm was nominated in that agreement as the recipient of notices for the borrower and the guarantors. It may be accepted, therefore, that Portland/CVC at that time had grounds to believe, and did believe, that Solomon was the solicitor for those parties. Ross said in cross-examination that he knew Solomon to be Dunkley's solicitor on that transaction. But beliefs held in August 1997 cannot have been held by Portland/CVC at the time they became parties to the May 1998 deed. The evidence shows quite clearly that Read of CVC read closely all drafts of what became the May 1998 deed and that Ross of Portland was content to rely on Read in matters of documentation. Amendments were requested and proposed by Read in several areas. Each such draft contained what was, in the final document, clause 6.3:
"The parties acknowledge and agree that Solomon Garland Partners have prepared this Deed and that they only act for St Helens and Dunkley in relation to all matters set forth in this Deed. The parties further acknowledge and that they have each been counselled by Solomon Garland Partners and have sought and received independent legal advice in relation to their individual and joint legal position in relation to the negotiation, drafting and execution of this Deed. Further, each of the parties hereto releases absolutely Solomon Garland Partners in this regard."
63 As Read read closely each succeeding draft containing this clause, he would have seen that, in the particular context, Solomon's firm was not acting for Multi No 1, Lovrinovic, Rasic and Komadina. He would also have read a provision which, upon the deed being executed, would become an acknowledgment by each of those parties that it or he had been counselled by Solomon's firm and had received independent legal advice in relation to the subject matter and execution of the deed. Read's frame of mind would accordingly have been such that he would not have regarded Solomon as the solicitor for any of them.
64 Read was cross-examined about his understanding of who was acting for the counterparties other than the Dunkley interests. The following parts of the cross-examination about clause 6.3 are pertinent:
"Q. Did you think that this clause only related to the guarantee part of the document?
A. No, I think it related to the parties that weren't St Helen's and Dunkley.
Q. So you didn't think, after reading this, that Mr Solomon was acting for, or his firm was acting for, Multi-Span Constructions; is that what you say?
A. The first part of this clause states that Solomon Garland Partners --
Q. We can read it, Mr Read. Trust me, we can all read. What is your understanding or what was it when you read this?
A. That Solomon Garland acted for Mr Dunkley and his companies.
Q. You thought that, did you, that Solomon Garland was not acting for Multi-Span Constructions?
A. I would put it in the positive, that Solomon Garland Partners were acting for St Helen's and Dunkley.
Q. Who did you think was acting for Multi-Span?
A. Again, I reiterate, I didn't put my mind to it.
Q. If this caused you, Mr Read, to think about who was acting for whom and you saw that Solomon Garland was acting for St Helen's and Dunkley, then by a matter of elimination, that left one party who was the borrower that wasn't mentioned, didn't it?
A. No, it left more than one party. It left the borrower, and the guarantors and the lender.
Q. You weren't worried about who was acting for you, did you?
A. No.
Q. So, who was acting for Multi-Span, in your view, if anybody?
A. If anybody, as I say, I didn't turn my mind to it.
Q. Who was acting for the guarantors, other than St Helen's and Dunkley?
A. Again, I didn't turn my mind to it. It was a matter for those parties.
……
Q. So you didn't think, when you signed this or executed the document, you didn't think that Mr Solomon was acting for Multi-Span Constructions; is that what you say?
A. That is correct.
Q. And are you sure about that?
A. Yes.
Q. No doubt?
A. Not that I am aware of, no.
……
Q. Was it your understanding, Mr Read, that Multi-Span Constructions was without legal advice in relation to this document?
A. Mr Roberts, that's an incorrect inference from what I said. I said I did not turn my mind to it and secondly, with respect to the second part of clause 6.3, Multi-Span and all parties were counselled to obtain their own advice.
Q. How did you know they were counselled to obtain their own advice?
A. As in clause 6.3.
Q. So you read that as a representation that in fact they had been counselled, including Multi-Span Constructions, who you understood was not represented by Mr Solomon; is that right?
A. That's correct, yes.
Q. Did you ever ask Mr Solomon who the legal representative was or were who had given this counselling to Multi-Span Constructions and the other guarantors, apart from Helen's and Dunkley?
A. To the best of my recollection, no.
Q. You trusted Mr Solomon, did you, to carry out the enquiry that is apparently referred to in paragraph 6.4.3, did you?
A. No, Mr Roberts. I formed another view that there was no enquiry required because the parties acknowledged they were the parties that were giving up and saying we obtained - I formed the view that clause 6.3 was that the parties had obtained their own legal advice and that thereafter no enquiry would be made. It was upon them to undertake that act."
65 There is not, on the evidence, any basis for concluding that Read and Ross (they being, individually or together, the guiding minds of Portland, CVC and BDL) had, in the period during which the May 1998 deed was developing or when it was executed, any knowledge of a subsisting solicitor-client relationship of the relevant kind beyond that to be inferred from clause 6.3. Ross said in evidence that he knew Solomon was acting for the Dunkley interests in the May 1998 transaction. He said nothing about solicitors for the borrower and guarantors. And Read, clearly enough, was of the view that Solomon was not acting for anyone other than the Dunkley interests. That being the state of mind of both Ross and Read, it is somewhat beside the point to inquire whether a solicitor-client relationship did in reality exist between Solomon and the borrower and guarantors. Even if it did, it was not something of which Ross and Read were at that time on notice.
66 There is, in any event, a question as to whether a basis for the application of principles as to presumed undue influence existed in this case. In their discussion of the presumption in relation to solicitor and client, Meagher, Gummow and Lehane, in "Equity Doctrines and Remedies", 3rd ed (1992), at para 1511(c) refer to eighteen decided cases. Of these, four were decided in the twentieth century, all but one of them before the First World War and the last in 1927. The other fourteen cases were decided before 1900, six (that is, almost half of them) before the Battle of Waterloo. The results in all of these cases were, naturally enough, shaped by the particular circumstances. Without exception, the cases involved natural persons, not corporations. Many involved gifts or other dealings whereby the solicitor gained a benefit at the expense of the client in a way which involved a clear breach of fiduciary duty. It is natural that equity should have intervened in those cases. But one wonders about the utility of those older cases involving individuals as guidance in a case such as the present.
67 More pertinent and instructive, for present purposes, is the decision of the Full Court of the Supreme Court of Victoria in Westmelton (Vic) Pty Ltd v Archer & Shulman [1982] VR 305. That case involved consideration in the modern era of the presumption of undue influence in the context of a solicitor-client relationship where the client was a company. The transaction sought to be impugned was one under which the solicitor agreed to reduce his fees in return for a promise by the client company to pay him a percentage of certain future profits. Starke, Kaye and Fullagar JJ, in a joint judgment, emphasised the importance of ascertaining the facts of each case rather than seeking to distil absolute rules from decided cases. They did so as follows by reference to an example:
"It is vitally important in this class of case to ascertain the precise facts of each case which is said to be a case for the application of some such supposed sub-rule, whether the case be one of solicitor and client or not. If a client is pleased with the way a solicitor has carried out his duties of forming a company and setting up some trusts for the client, and gives the solicitor a gift of a house property, of course the presumption applies. But suppose that this very solicitor offers, in rebuttal, proof not only that he was at the time the 25-year-old son of the client, and that at the time there was a strong bond of affection between them, but that the client was also a very successful and experienced Queen's Counsel at the height of his powers. In such a case common sense rebels at the notion that the solicitor fails to rebut the presumption, and loses the house, unless he proves also that he solemnly advised his father to take the advice of another solicitor upon the matter generally and upon the value of houses in particular; and it is not surprising to find that the law in the twentieth century provides little support for this notion. Prima facie the position would be the same even if the Queen's Counsel was not the father of the solicitor."
68 On the particular facts before them, the members of the Full Court found that, because the principals of the client company had "more expertise in commerce and finance than most solicitors would have", the solicitor had no duty to advise that they obtain independent legal advice. Their Honours also said:
"But once the Court is satisfied, as the learned trial Judge was, that the solicitors dealt fairly and honestly and openly with a sophisticated and well-informed corporate client, and that the client in fact was in no way relying upon any confidence or expectation of legal advice of that character or of any character, then the Court is entitled to conclude that there was no duty to advise further."
69 Several factors combine, in my opinion, to justify a similar view of matters in this case. Solomon was in no sense a beneficiary of the transaction centred upon the May 1998 deed. In terms of natural persons, the person who benefited most was Dunkley. The additional $1,000,000 provided by Portland/CVC relieved severe financial pressure on the Broadway project. Some $400,000 of the proceeds was paid to St Helens. The remaining $600,000 was paid, via Solomon's trust account, to Abigroup, the builders at Broadway. An attempt was made, on behalf of the plaintiffs, to suggest that Solomon somehow benefited indirectly because he had business interests with Dunkley. While Solomon conceded that he and Dunkley had gone into unrelated business ventures together (he referred to two "small residential townhouse developments"), there was nothing in the evidence to suggest that Solomon stood to gain in any shape or form from the May 1998 deed. This removes immediately one of the main pillars supporting the undue influence principle.
70 It is important to record that Lovrinovic, Rasic and Komadina also benefited in a real and tangible way from the transaction centred upon the May 1998 deed. They too, through Malenia, were effectively joint venturers in the Broadway project and had a very distinct interest in seeing it rescued from a financial predicament. Thus, while they were in a sense burdened from the Wollstonecraft perspective, they accepted the burden in order that they might benefit from the Broadway perspective.
71 It is true that Solomon's firm had a specific and confined solicitor-client relationship with Multi No 1 at the time the April 1998 deed was executed. The firm was acting on "off the plan" sales of units in the Wollstonecraft development. There is no evidence that Solomon's firm was at that time acting for any of Lovrinovic, Komadina and Rasic: to the contrary, there is evidence that they were accustomed to use other solicitors and were in fact using other solicitors in unrelated matters which were then current. Furthermore, Komadina's evidence as to his supposed conversation with Solomon on 30 April 1998 (to be examined more closely later) was to the effect that Solomon had made it clear that he was not acting for any of the individuals in the May 1998 transaction. As will be seen presently, I do not accept that this conversation took place, but Komadina's version may nevertheless be accepted as the most he would wish to have the court believe on the question of who Solomon's client was in the particular matter.
72 As to the transaction involving the April 1998 deed itself, an important question is whether the content of what became clause 6.3 came to the notice of the two Multi No 1 directors to whom was left the task of dealing with the matter, namely, Komadina and Lovrinovic. In the case of Komadina, I am satisfied that he read the document. He must have read and understood it in draft because he knew from a relatively early stage that Kasalo would not consent to be part of it - obviously, because Kasalo, in contrast to Lovrinovic, Komadina and Rasic who were interested in Broadway, had nothing to gain from it. And by reading any of the drafts, he would of necessity have seen what became clause 6.3 so that, despite whatever he may have said to the contrary afterwards, he was aware that Solomon's firm would not be acting for Multi No 1 and its directors in relation to the deed. Furthermore, because Komadina knew that Solomon had created the draft document, he must have known that the statements in that clause about counselling and independent advice were effectively statements by Solomon.
73 All this is borne out and reinforced in relation to Komadina by evidence of Ibrahim as to what passed between her and Komadina on 30 April 1998:
"Q. You say in this that you showed Mr Komadina a copy of the deed or the original, or indeed exhibit C. You showed him that, is that right.
A. Yes.
Q. And you say that he said he knew all about it as Mr Lovrinovic had faxed a copy to him yesterday. Is that right?
A. Yes.
Q. did you ascertain or ask if that occurred, which copy got faxed to him?
A. No. I don't remember asking it.
…..
Q. You go on in your file note,
'I pointed out clause 6.3 by which he confirms that SGP acts only for St Helens/Dunkley. He is happy with that clause.'
Is that right?
A. That's correct.
Q. What did you do to point out clause 6.3?
A. As with clause 5, I would have directed him to that particular clause and just explained in my own words what that clause meant.
Q. You see what 6.3 said, just turn it up in one of those copies that you have got there. You see 6.3, the second sentence commencing, 'The parties further acknowledge' and the word 'and' is there, which presumably shouldn't be there,
'The parties further acknowledge and that they each have been counselled by Solomon Garland Partners and have sought and received independent legal advice in relation to their individual and joint legal position in relation to the negotiation, drafting and execution of this deed.'
That's what it says, isn't it?
A. Yes.
Q. You were familiar with that clause at that time, is that right?
A. Yes.
Q. Did you counsel Mr Komadina or had you counselled Mr Komadina, Mr Lovrinovic or anybody from Multi-Span Constructions No. 1 in relation to any of those matters?
A. I can't remember.
Q. Well, if you had, you would remember that, wouldn't you?
A. Not necessarily.
Q. Miss Ibrahim, you knew full well that neither Mr Komadina nor Mr Lovrinovic nor Multi-Span Constructions had received any legal advice from anybody in relation to this matter, other than your own firm, if any advice was so given as at the time this document was executed, didn't you?
A. I didn't turn my mind to it.
Q. So the bit that you pointed out to them was the first sentence, was it,
'The parties acknowledge and agree that Solomon Garland Partners have prepared this deed and that they only act for St Helens and Dunkley'.
That was the passage that you emphasised; is that right?
A. Possibly, but I did direct them to the whole clause.
Q. That's what your file note suggests, doesn't it?
A. Yes.
Q. So you were anxious for them to acknowledge that your firm was only acting for St Helen's and Dunkley; they are the two matters set forth in the deed, is that right?
A. Yes.
Q. You weren't anxious to point out to them the other matters in there, were you?
A. I can't remember."
74 In the case of Lovrinovic, it is clear that he had the same appreciation of Kasalo's position. He said in cross-examination that, some time around 23 April 1998, he "flagged" to Dunkley "the problem that, that Mr Kasalo would probably not, not agree to it or Mark was going to be contacting Mr Kasalo". There follows almost two pages of further cross-examination in which Lovrinovic goes to the extent of making the quite implausible statement that, by becoming party to the May 1998 deed, he was "just doing Mr Dunkley a favour". The reality was eventually extracted:
"Q. What was the difference between you and Mr Kasalo?
A. There is actually quite a lot of difference. Dunkley and I have been working, or Dunkley and I were more intimate than Mr Kasalo and Mr Dunkley and the other reason is, Mr Kasalo was only involved with one project with Mr Dunkley, whereas I was involved with several projects with Mr Dunkley.
Q. And one of those was the Broadway project?
A. One of those was the Broadway project.
Q. You believed you stood to gain millions of dollars from the Broadway project?
A. No, I think, I think about $1.2 million was the absolute - if the project had gone to schedule, which was very, very rare and if the project had returned Mr Dunkley's figures, which was very rare, we would have made a maximum $1.2 million."
75 There was thus an eventual acknowledgment that Lovrinovic himself had an incentive to procure the transaction effected by the May 1998 deed because of his interest in the Broadway project, whereas Kasalo had no equivalent interest. Lovrinovic's appreciation of the effect of the transaction also emerged upon cross-examination:
"Q. So when Mr Dunkley said to you: I want a guarantee from Multi-Span Constructions No.1, he told you, didn't he, that what was required was a mortgage that Multi-Span Constructions No.1 would have to give over the Wollstonecraft project?
A. No.
Q. You say that didn't happen?
A. It he didn't say that. He didn't say what is required, what is required is that we give a mortgage here. He did mention there was a further facility, there was an allowance or facility or he was able to draw a million dollars from the Joe Ross facility and he needs Multi-Span and me and us to guarantee that.
Q. Because you knew Multi-Span Constructions No.1 had already given a mortgage to Dr Ross?
A. Yes.
Q. And what Mr Dunkley told you was that Multi-Span could give a guarantee for the extra million dollars?
A. Yes."
76 Also pertinent is a later exchange as follows as to a conversation with Dunkley some time before 30 April 1998:
"Q. You rang him again?
A. Based on, at this point bearing in mind at this point that though you are referring to it as, though you are referring to it as a deed of variation, at this instance or this moment in time, it wasn't a deed of variation, it was a guarantee, Mr Dunkley was the borrower and we were guaranteeing the loan for him, so that's what I agreed to do at this instance in time and there was no more and no less to that.
Q. And he had told you that part of the proposal was security over Wollstonecraft?
A. Yes.
Q. A couple of days later you rang him back and you told him so far as you were concerned, you agreed?
A. Yes."
77 There was also evidence from Lovrinovic as to whether he had read drafts of what became the May 1998 deed which he conceded with apparent reluctance had reached him by fax in the days before 30 April 1998:
"Q. I suggest to you that on 24 April you got the fax cover sheet, together with five pages of the typescript deed of variation that appears as annexure D, the page starting with No. 29 without the handwriting?
A. Okay, yes.
Q. You accept that that happened?
A. I accept that it is more than likely this was received.
Q. Would you accept that you read the attachment, that is, the document at page 29 and following?
A. I couldn't say it is likely that I read the document.
Q. Is there any particular reason why you would not have read it?
A. One particular reason may be, one particular reason was time, and another particular reason, which was my normal course of business, was to pick up any, pick up these matters when I am with my lawyer, to pick up these matters with my lawyer, when I am with my lawyer. I didn't spend any time scrutinising documents by myself. They would always be scrutinised with the appropriate legal person at the same instance. That was also a time issue as well as just a normal course of business for myself."
78 The implausibility of this is borne out by other evidence of Lovrinovic. Far from being a neophyte who did not scrutinise lending and financing documents by himself and needed a lawyer on hand to do so, he was an author of such documents. There was in evidence a document which Lovrinovic himself prepared, addressed to "Andrew and Linda" and dated 18 May 1998. It is on the letterhead of Multi Group and bears an impression of the common seal of that company next to Lovrinovic's signature and the words, "Steve Lovrinovic, Managing Director". The content is as follows:
" Re: $20,000 LOAN TO MULTI-SPAN GROUP P/L
Dear Andrew & Linda
This letter is an acknowledgment of a loan arranged by me (Steve Lovrinovic) on behalf of Multi-Span Group P/L.
We had agreed on: (1) A $20,000 loan
(2) 50% interest
(3) At this point a maximum term of 12
mths.
As promised I personally take responsibility for this transaction & promise to return the money & interest safely."