National Australia Bank Ltd v. Nobile, S. & Anor National Australia Bank Ltd v. Martelli, D. & Anor [1988] FCA 107

of the Court by which a contract of guarantee and a bill of mortgage entered into by the first mentioned respondents, Salvatore Nobile and Francesca Nobile, in favour of the appellant, National Australia Bank Limited ("the Bank") were declared void and to have been void ab initio insofar as they applied to Mr and Mrs Nobile. That order was made pursuant to the provisions of ss.52 and 87(2)(a) of the Trade Practices Act 1974 (Cth) though the equitable principles which I shall later discuss were equally applicable to it. The appeal is further brought against an order that the contract of guarantee, entered into by the second mentioned respondents, Domenico Martelli and Catena Martelli, in favour of the Bank, be set aside as from the time of its execution insofar as it

applied to them. That order relied upon equitable principles.

In this country, the courts have recently turned back from the stance of strict respect for the sanctity of common law contracts which was expounded by Lord Eldon L.C. and other

judges in cases such as Hill v. Barclay (1811) 18 Ves. Jun.56

and more recently in Scandinavian Trading Tanker Co. A.B. v.

Flota Petrolera Ecuatoriana [1983] 2 A.c. 694 and Sport

International Bussum B.V. and Ors v. Inter~Footwear Ltd [1984]

2 ALL E.R. 321. The High Court of Australia has reinforced

the wider view of the application of the principles of equity

which was taken, for example, in Story's Commentaries on

Equity Jurisprudence, which in the 6th Ed. para 1316 stated:-

"The whole system of Equity Jurisprudence proceeds upon the ground that a party, having a legal right, shall not be permitted to avail himself of it for the purposes of injustice, 'or fraud, or oppression, or harsh and vindictive injury."

Story followed views expressed in earlier cases such as Earl

of Chesterfield v. Janssen (1751) 2 Ves. Sen. 125, in which,

at 155-7 Lord Hardwicke, L.C. examined the principles upon which a court of equity would intervene. At p.155 he posed the question, "The second question is, supposing the first contract to be valid in law, whether it was contrary to conscience, and to be relieved against in this court upon any head or principle of equity?". His Lordship went on to say "This court has an undoubted jurisdiction to relieve against every species of fraud." His Lordship stated that the fraud "may be apparent from the intrinsic nature and subject of the bargain itself" and, at p.157, that fraud may be "presumed or unferred from the circumstances or conditions of the parties contracting: weakness on one side, usury on the other, or extortion or advantage taken of that weakness." His Lordship pointed out at p.155, that, in equity, fraud may be "presumed from the circumstances and condition of the parties contracting" and that the equitable principles go further than

the principles of the common law which require fraud to be

The grounds for intervention by a court of equity cannot be circumscribed by definition, but encompass accident, undue influence, misrepresentation both active and passive, mistake and "unconscionable conduct", a term now used to describe circumstances falling within Story's description "injustice, or fraud, or oppression, ..." and a term appropriate to the application of a broad view of the

In the United Kingdom, in Shiloh Spinners Limited v.

Harding [1973] A.C. 691 at p.722, Lord Wilberforce, in whose judgment all members of the House save Lord Simon concurred, referred to the fact that from earliest times courts of equity have asserted the right to relieve against forfeiture of property and, at p.723, he reaffirmed the right of courts of equity so to act on equitable principles in appropriate and limited cases. In Australia, in the Commercial Bank of Australia Limited v. Amadio (1983) 151 C.L.R. 447, all judges other than Dawson J. took a wide view of the application of equity. At p.459, Gibbs C.J. referred to the power of a court of equity to set aside a transaction in the event of fraud, misrepresentation or undue influence and also in the case of

"A transaction will be unconscientious within the meaning of the relevant equitable principles only if the party seeking to enforce the transaction has taken unfair advantage of his own superior bargaining power, or of the position of disadvantage in

which the other party was placed. The principle of equity 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": Blomley v. Ryan (1956) 99 C.L.R. 362, at p.415, per Kitto J., and see at pp. 405-406, per Fullagar a."

"Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of "unconscionable conduct" 1s usually taken to refer to the class of case in which a party makes unconsclentious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed 1n some special situation of disadvantage, e.g., a catching bargain with an expectant heir or an unfair contract made by taking advantage of a person who is seriously affected by intoxicating drink. Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there 15 a difference between the two. In the latter the will of the innocent party 1s not independent and voluntary because it 1s overborne. In the former the will of the innocent party, even if independent and voluntary, 1s the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position.

There 1s no reason for thinking that the two remedies are mutually exclusive in the sense that only one of them is available ina particular situation to the exclusion of the other. Relief on the ground of unconscionable conduct will be granted when unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary, just as it will be granted when such advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest.

It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct."

"The jurisdiction of courts of equity to relieve against unconscionable dealing developed from the jurisdiction which the Court of Chancery assumed, at a very early period, to set aside transactions in which expectant heirs had dealt with their expectations without being adequately protected against the pressure put upon them by their poverty (see O'Rorke v. Bolingbroke (1877) 2 App. Cas. 814, at p.822). The jurisdiction is long established as extending generally to circumstances in which (1) a party to a transaction was under a special disability 1n dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (1i) that disability was sufficiently evident to the stronger party to make zt prima facie unfair or ""unconscientious" that he procure, or accept, the weaker party's assent to the impugned transaction in the circumstances in which he procured or accepted 1t. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable: "the burthen of shewing the fairness of the transaction is thrown on the person who seeks to obtain the benefit of the contract" (see per Lord Hatherley, O'Rorke v. Bolingbroke (1877) 2 App. Cas., at p.823; Fry v. Lane (1888) 40 Ch.D. 312, at p.322; Blomley v. Ryan (1956) 99 C.L.R. 362 at pp.428-429).

Subsequently, in Legione v. Hateley (1983) 152 C.L.R. 406 at

424-5, Gibbs C.J. and Murphy J. cited with approval the

observations of Lord Wilberforce in Shiloh Spinners Limited v.

Harding, cited above. Their Honours distinguished those cases which took a more restricted view. At p.444, Mason and Deane

"Underlying the approach taken in the Dagenham (Thames) Dock Case (1873) L.R. 8 Ch. App. 1022

and Kilmer's Case [1913] A.c. 319 is an expansive view of the equitable jurisdiction to relieve against forfeiture. This in turn conforms to the fundamental principle according to which equity acts, namely that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable

conduct - - see Story, Commentaries on Equit Jurisprudence, 12th ed.(1877), vol.2, par.1316.

-»- when the equitable jurisdiction 1s invoked to relieve against a forfeiture which is not in the nature of a penalty, equity looks to unconscionable conduct, ...""

In Ciavarella v. Balmer (1983) 153 C.L.R. 438 at 453-4 all

members of the Court referred to Legione v. Hateley with

These more recent decisions followed the approach earlier taken in Blomley v. Ryan (1956) 99 C.L.R. 362. At p-385 McTrernan J. referred to Lord Hardwicke's judgment in Earl of Chesterfield v. Janssen, cited above, and at p.386

"Lord Selborne said in Earl of Aylesford v. Morris (1873) L.R. 8 Ch. App., 484, that the ''fraud' which Lord Hardwicke said may be presumed or inferred means 'an unconscientious use of the power arising out of these circumstances and conditions' of the contracting parties. 'When' (said Lord Seiborne) 'the relative position of the parties is such as prima facie to raise this presumption, the transaction cannot stand unless the person claiming the benefit of it is able to repel the presumption by contrary evidence, proving ut to have been in point of fact fair, just, and reasonable'. (1873) L.R. 8 Ch. App., at p.491"

"Equity traditionally looked at the matter rather from the point of view of the party seeking to enforce the contract and was minded to inquire whether, having regard to ail the circumstances, 1t was consistent with equity and good conscience that he should be allowed to enforce it."

"This 1s a well-known head of equity. It applies whenever one party to a transaction 1s ata 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 unconsclentiously takes advantage of the opportunity thus placed in his hands-"

Accordingly, the Court has adequate power to set aside the contract of guarantee and the supporting bill of mortgage provided that one or more of the bases on which equity acts, namely undue influence, misrepresentation, mistake, accident or

The learned trial Judge found against the Bank with

respect to the guarantees of Mr and Mrs Nobile on the basis that

the Bank had engaged in conduct that was misleading or deceptive or likely to mislead or deceive and he accordingly exercised his

discretion under s.87(2)(a) of the Trade Practices Act 1974 to

declare the contract of guarantee and the bill of mortgage to have been void ab initio as against them. In the circumstances of this appeal it is, I think, not necessary to consider separately from the issues which arise in relation to equitable

principles the issues which arise under the Trade Practices Act

I do not propose to discuss the facts of the case at length. They are fully set out in the reasons for judgment of the trial Judge. The submissions put by Mr R. Douglas, Q.C., senior counsel for the appellant, did not persuade me that the

trial Judge was in error with respect to his findings of fact.

However, before turning to deal with the main issues

which arise in the appeal, 1t 1s appropriate to make a comment

about the nature of the transaction into which the Bank sought to

have Mr and Mrs Nobile and Mr and Mrs Martelli enter and into which they did enter. The son of Mr and Mrs Martelli, Mr Carlo Martelli, and his wife Pierina Martelli, the daughter of Mr and

Mrs Nobile, were the major shareholders in a small building

company which operated a business, Martelli Enterprises, which had little capital. The activities of the building company, Suesha Nominees Pty Limited ("Suesha"), were funded principally by a finance company (not the Bank) which lent to Suesha 80-90% of the costs of the acquisition of land and of the construction work. The business of Suesha at the relevant time involved the purchase of land, the construction of homes thereon and the sale of the completed properties. Needless to say, the means of financing adopted was likely to lead to the failure of the undercapitalised enterprise 1f the business encountered delays in construction, sales or settlement... In such event, the interest or holding charges encountered during the period of delay would diminish, and might exceed, any anticipated profits. In 1984, Suesha encountered such problems and Mr D.W. Bannerman, the Manager of the Bank's Zillmere Branch, was informed that Suesha had encountered delays in obtaining Council approval of its proposed developments and also delays in construction due to wet weather. It was also the fact of which Mr Bannerman was aware that the building andustry in 1984 encountered a downturn or slump in the demand for housing. As a result, Suesha's liability to the Bank grew from $30,000.00 in 1983 to $220,000.00 by October 1984. Suesha consistently failed to meet its projections of returns. In October 1984, there were signs that Suesha might

be in serious financial trouble. Mr Bannerman himself stated in evidence that he was concerned as to the position though not

Suesha was a limited liability company. No doubt Carlo and Pierina Martelli had provided guarantees for the company's debts and it was proper that they were personally liable for any misfortunes their building company might incur. But it was plainly imprudent and wrong that Mr and Mrs Nobile, who were the parents - in~ - law of Carlo Martelli, should risk all their assets on the fortunes of the building business. And it was likewise plainly foolhardy and wrong that Carlo's parents, Mr and Mrs Martelli, should risk all their assets on the fortunes of the building business. Mr and Mrs Nobile and Mr and Mrs Martelli did not have any personal involvement or interest in the building company. By entering anto the contract of guarantee Mr and Mrs Nobile and Mr and Mrs Martelli risked all that they had built up over many years, including their homes. As Mr Bannerman knew, they were not wealthy people and could not afford to enter into such a transaction. The contract of guarantee was very much to

On the other hand, the contract of guarantee was very much to the Bank's and to Mr Bannerman's advantage. The Bank was overcommitted beyond the limit of existing securities. Mr Bannerman had been reprimanded once by a superior officer with respect to the account. The contract of guarantee gave the Bank adequate security for the existing indebtedness as well as enabling the Bank to extend the accommodation by an additional $30,000.00 to $250,000.00 if 1t should see fit to do so. The

arrangement was as much to the advantage of the Bank as it was to

the benefit of Suesha, though 1t was to the detriment of Mr and

The nature of the transaction no doubt influenced the view of the trial Judge that Mr and Mrs Nobile entered into the transaction as the result of misrepresentation by Mr Bannerman and that Mr and Mrs Martelli entered into 1t as the result of unconscionable conduct on the part of the Bank through its employee, Mr Bannerman. The trial Judge rightly referred to the nee@d for independent advice, and he did so, I assume, for the very reason that had Mr and Mrs Nobile and Mr and Mrs Martelli had independent advice, that advice would have been that they ought not to have entered into the transaction. While Mr Bannerman thought it proper to ask for guarantees from Mr and Mrs Nobile and Mr and Mrs Martelli, that fact can be explained only by the undue concentration of Mr Bannerman upon the interests of the Bank and his lack of objective consideration of the interests

Mr and Mrs Nobile, who are of Sicilian descent, are the parents of Pierina Martelli and the parents- - in-law of Carlo Martelli, the builder. Carlo Martelli had persuaded them to execute the guarantee to support his company's indebtedness to the Bank. The trial Judge found as a fact that when Mr and Mrs Nobile arrived at the Bank they believed that their combined

"I accept their evidence that at the time when they went to the bank, they believed (because {Carlo] Martelli had told Mr Nobile, who had passed it on to Mrs Nobile) that the guarantee was to be for $80,000.00. I accept also that until they went to the respondent's premises on that day they did not know that the guarantee was to be for $250,000.00. They had little knowledge of the affairs of Suesha Nominees and they had not received any independent advice. It was known to Bannerman that the applicants came to execute the guarantee and mortgages because Carlo Martelli had arranged for them to do so, and it must have been obvious to Bannerman that the male applicants' (sic) command of English, though adequate, was not good. It must also have been obvious that they had come with a wrong view of their intended liability.

The applicants had arrived believing they were to sign a guarantee for $80,000.00, a view from which they had to be disabused."

A ground of the appeal was that this finding was inconsistent

"Turning first to the allegations by the applicants, I do not accept the evidence of the applicants and Carlo Martelli that Bannerman told them that the guarantee was for $80,000.00 and was to be for a period of 3-4 months. I think that the figure of $80,000.00 was mentioned in discussion on that occasion, either as being the amount which the applicants thought was to be the amount of the guarantee or as bezung about the amount by which there was a need for an increase, or perhaps as being roughly the amount of the potential exposure of the applicants to liability, if each of the three families who were to be parties to the guarantee had to pay in the end one third of a liability of $250,000.00. It 1s pure speculation, however, to attempt to work out what was said about the $80,000.00 on that occasion. It suffices to say that I am satisfied that the representation relied on was not made."

The submission pul in support of this ground of appeal was that, 1£ it was pure speculation as to what was said about the $80,000.00, there was no reason for concluding that Mr Bannerman must have known that Mr and Mrs Nobile had arrived

at the Bank with a wrong view as to their possible liability.

I adopt the finding of the trial Judge which I first set out, and do so for two reasons. The first is that the finding appears later in his Honour's judgment and at a time when he had obviously reflected further on the issue. Secondly, it seems to me to be likely that the Nobiles did go to the Bank under the misapprehension that their obligation was only $80,000.00. Mr Nobile gave evidence which has the cing of truth that he and his wife had three children who would be treated equally on their death and were prepared to risk Pierina's share, the $80,000.00, during their lifetime if that was what she and Carlo wished. That evidence provides a reasonable explanation as to why, in the first place, they

If that be the fact, then the conclusion was properly drawn by the trial Judge that the sum of $80,000.00 was mentioned in the course of the discussions with Mr Bannerman and that Mr Bannerman was aware that Mr and Mrs Nobile had a misunderstanding as to the extent of their liability.

Thus, Mr and Mrs Nobile arrived at the Bank under a

misapprehension as to their liability under the guarantee,

they were persons who were at a disadvantage because of their problems with the language and because of their obvious lack of business acumen and they were persons who had not received

The trial Judge accepted the evidence of Mr Nobile that Mr Bannerman told him, before the guarantee was signed, that the business was "going well" and of Mrs Nobile that Mr Bannerman said the business was "going ok". Mr Bannerman

"Did you say anything to Mr and Mrs Nobile concerning the nature of the business and how 1t was going - that 1s Martelli Enterprises? ~-- I said that the business appeared to be operating quite satisfactorily.

But you, I think, have given evidence yourself that you said the company seemed to be going well? --~ Yes.

Apart from your observation that the company was going satisfactorily? ~-- Yes.

Did you volunteer that? --- I cannot recall under what circumstances it was given.

You do not know whether 1t was in response to a question, or whether ... ? --- No, I cannot say.

But you can remember saying it quite clearly?

• ~-- Yes.

And I take it that you intended the guarantors to accept that as an assurance that the business was going satisfactorily? --- Yes. "

In the circumstances, the trial Judge properly held that Mr and Mrs Nobile had been induced to enter into the contract of guarantee and the bill of mortgage as the result of misrepresentation on the part of Mr Bannerman. A submission was put by Mr Douglas that what was said by Mr Bannerman was merely an expression of an opinion which Mr Bannerman truthfully held. However, His Honour took Mr Bannerman's statement as a statement of fact and 1t accords with Mr Bannerman's own evidence that His Honour should have done so. In any event, having regard to Mr Bannerman's knowledge of the state of the business of Suesha, 1t was misleading for Mr Bannerman to have made the statement that

he did. See Bowen L.J. in Smith v. Land and House Property

Corporation (1884) 28 Ch.D. 7 at p.15 and the judgment of the Judicial Committee, delivered by Lord Merrivale, in Bisset v. Wilkinson [1927] A.C. 177 especially at pp.182-3. The statement that the business was going well was an inducement for Mr and Mrs Nobile to sign the contract of guarantee. The trial Judge properly held that Mr and Mrs Nobile were misled thereby and signed the contract of

guarantee in reliance upon Mr Bannerman's misrepresentation.

Mr Douglas submitted that there was no sufficient evidence that either Mr or Mrs Nobile was influenced by Mr Bannerman's statement. However, there was adequate evidence from Mrs Nobile on this point and the probabilities themselves support the finding of the trial Judge.

principles or the provisions appearing in the Trade

Practices Act 1974 are relied upon, the trial Judge was correct in declaring the contract of guarantee and the bill

of mortgage void ab initio as against Mr and Mrs Nobile.

It was a ground of appeal that the issue as to the misrepresentation was raised at a late stage 1n the hearing of the proceeding and that an amendment to the pleadings to rely upon it was permitted at the close of the evidence. In my opinion, the amendment was properly allowed. The factual evidence had already been given by all relevant witnesses who, on that point, were in substantial agreement. It would have been unjust to exclude reliance upon it~ Pleadings are intended to enhance the achievement of justice, not to hinder it. Unless good reason appears to the contrary, an amendment should be made to raise the real issues between

the parties. See, eg. Cropper v. Smith (1884) 26 Ch.D. 700

at p.710-11 per Bowen L.J.. As Muirhead J. said in Caruso

Australia Pty Limited v. Portec Australia Pty Limited (No.WA

"The powers of this Court to amend pursuant to Order 13 Rule 2 are more than wide, they tend to be remedial in that "all netessary amendments shall be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, or of correcting any defect or error un any proceeding, or of avoiding multiplicity of proceedings". Consideration of the authorities indicates that an amendment should only be refused where bad faith is demonstrated or where the consequential inyury or prejudice to the other party is incapable of remedy. And this reasoning

applies to amendments sought during trial or on the eve of trial."

for in their case there was no active misrepresentation by

-.. that the third parties were both unreliable witnesses, but the matter 1s complicated by the fact that I am not at all satisfied that Bannerman's evidence of the events taking place at the execution of the guarantee by them 1s other than a reconstruction. In particular T am not satisfied that he explained the contents of the typewritten parts of the guarantee in a manner Similar to that which he used 1n relation to the applicants. Doing the best I can, I think then Bannerman assumed that the third parties knew what they were there to sign, and simply invited them to sign the document, which they did."

But in their case also there were aspects of the matter upon

which the finding of unconscionable conduct on the part of the

In a transaction such as this, Mr and Mrs Martelli were

at a disadvantage when dealing with the Bank. Mr Martelli was

not a person of wide business experience or a person who showed business acumen. He conducted a small market garden and fruit

stall. He gave this evidence as to his difficulties with the

"When you did the banking at the National bank at Zillmere? --- Yes.

How did you go about 1t? --- I go inside. If I got some money I give it to the teller, you know. The teller write down everything, you know, because they write it down so much I give.

Do you know what a deposit book 1s? --- - Yes, T know deposit book.

Who filled in the deposit slips for you when you did the banking? -- - The teller. I no write English. I did not try. The teller fix up everything.

Did you ever write out the deposits yourself? --- No.

How about cheques, Mr Martelli. When you signed a cheque did you fill out the cheque? --- No, I no £2111 out because i1f I have to give some money to somebody they fill out the cheque and I watch and then I sign.

Who did that for you? --- If inside the home Carlo or somebody else, somebody write English, you know, or my daughter some time.

Were there other occasions at the bank when you ~ when a teller - a new teller did not understand that they had to f111 out the form for you? -~~Yes - no - many time - new teller done the job.

I am sorry? --- The new teller no want to do the job and no want to write it out. They tell me to write it myself.

What did you do then? ~~~ I tell them no understand English you had better write it out. I no understand to write."

Mr Martelli appears to have felt himself in an inferior position when speaking to Mr Bannerman. When questioned as

"Do you remember being there for five minutes, ten minutes to sign it? -~- Yes, while I sign like that not stay too long there because I never been too long in conversation with Mr Bannerman because I no understand. When he wants something ~ just sign here and I know because I no understand.

him at the bank? --- If he see me I say hello, he say hello.

Did you talk about how the farm was going or how you worked? --~ No. .......

inside. I go outside. He done something in the office. I am not stickybeak ~ talk to him inside. I say hello like that. That is all."

"Used he visit the bank? -- - He was in there fairly regularly. What do you mean by fairly regularly? -- - Every one

And would you ever strike up a conversation with him? --- Not a lengthy conversation; [I] would say hello to him if I saw him in the banking chamber."

Mrs Martelli's knowledge of the English language and her

business experience were even less than her husband's.

Though lacking much capacity with the English language, Mr and Mrs Martelli had garnered a reasonable living and a happy and secure home. Their son Carlo ought not to have prejudiced all that his parents had built up by asking them to enter into the contract of guarantee. But he did, and it is without doubt that, whatever one might say about Mr Bannerman, Carlo Martelli was the greater defaulter so far as his parents and his parents-in-law were concerned. Yet what was said by Carlo Martelli to his parents was not the only matter that induced them to enter into this contract of guarantee. They were asked to do so by the

Mr and Mrs Martelli had on prior occasions signed guarantees of Suesha's liability and had done so both for the Bank and for other creditors. The principal current guarantee was a guarantee limited to $150,000.00 plus unterest and charges which Mr and Mrs Martelli had executed aun favour of the Bank. Mr Douglas therefore asked the Court to infer that when Mr and Mrs Martelli executed the subject contract of guarantee in Mr Bannerman's office at the Zillmere Branch, in Mr Bannerman's presence, each knew exactly what he or she was doing and was well capable of assessing its consequences. Having regard to the nature of the transaction, which I have already explained, it appears

The Martellis' case has many analogies to the facts described in Amadio's case. I take the following passages from the judgment of Mason J. in Amadio's case at

"There are a number of factors which go to establish that there was a gross inequality of bargaining power between the bank and the respondents, so much so that the respondents stood in a position of special disadvantage vis~a-vis the bank in relation to the proposed mortgage guarantee. By way of contrast to the bank, the respondents' ability to judge whether entry into the transaction was in their own best interests, having due regard to their desire to assist their son, was sadly lacking. ... Their reliance on their son was due in no small degree to their infirmities - they were Italians of advanced years, aged 76 and 71 respectively, having a limited command of written English and no experience of business in the field or at the level in which their son and the company engaged. They believed that the company's business was a flourishing and prosperous enterprise, though temporarily in need of funds. In reality, as the bank well knew, the company was in a perilous financial condition.

The effect of the respondents' execution of the mortgage guarantee was disastrous for them though advantageous to the bank.

It must have been obvious to Mr Virgo [the bank manager], as to anyone else having knowledge of the facts, that the transaction was improvident from the viewpoint of the respondents. In these circumstances it is inconceivable that the possibility did not occur to Mr Virgo that the respondents' entry into the transaction was due to their inability to make a judgment as to what was in their best interests, owing to their reliance on their son, whose interests would inevitably incline him to urge them to sign the

It is indeed diffult to find any significant aspect of the matter which was relied on by Mason J. which is not present in the present case. Likewise, there are analogies with the facts stated in the reasons for judgment of Deane J., with whom

Of course, distinctions can be drawn between the facts of the two cases and one distinction is that there was a very close and special tie between the bank 1n Amadio's case and the building company operated by the son of Mr and Mrs Amadio. That special situation 1s not seen in the facts of the present case but, nevertheless, the Bank had continued to support Suesha and thereby Carlo's image as a successful businessman and this had been done by Mr Bannerman on his own initiative and in disregard of the formal procedures laid down by the Bank for the making of loans. Mr Bannerman had consistently permitted Suesha's liability to exceed figures that ought not to have been exceeded

having regard to Mr Bannerman's authority. In the present case,

as in Amadio's case, the bank manager had an interest in

continuing the overdraft facility and in obtaining greater

A point of distinction, which appears from the judgment of Deane J., is that Mr and Mrs Amadio's evidence that they believed that their potential liability was limited to a maximum amount of $50,000.00 was believed whereas the evidence of Mr and

However, as in Amadio's case, the arrangement was a strange one. In addition to the matters I have already mentioned in this respect, it is worth mentioning Mr Bannerman's evidence when he was questioned in cross - ~examination with respect to an internal minute which contained the note, "The disturbing feature is the reliance on the parents' guarantees for the account of

Martelli Enterprises." Mr Bannerman gave this evidence:~ -

"You agree with that judgment on the matter, do you not? -- - Yes.

In that respect this was an unusual sort of guarantee because really - the bank was relying on the guarantors rather than on the integrity of the

At that time, though, the borrower had no capacity to pay? --~- Not at that stage, no.

Mr Bannerman was pointing to the fact that the Bank would not

receive any funds from Suesha, for the latter's returns from the

sales of property went in the first instance to the finance company which held the mortgage over those properties. Thus the Bank would receive funds only if Suesha received an advance from the finance company or 1f its ceturns were sufficient to exceed the liability to the finance company. Accordingly, the contract guaranteed a liability which Suesha had no capacity to pay at

Moreover, there is an element in the present case that did not appear in Amadio's case and that is that Mr and Mrs Martelli were long~time customers of the Zillmere Branch of the Bank. The fact that a person is a customer of a branch does not mean that the customer necessarily trusts or is understood to trust the bank manager. But 1t does mean that the customer and the bank have had contractual relationships which have involved duties and proper dealing on the bank's part and that the customer has been entitled to rely upon the bank's proper performance of those duties. It 1s not a great step to conclude that a customer who has dealt with a branch for a long time with mutual satisfaction on each side has come to trust the officers of the branch in their dealings with him. Mr and Mrs Martelli had been customers of the Bank for 24 years and Mr Martelli had often sought and received assistance from the Bank in relation to his financzal affairs, not only in the form of loans which had been granted to him from time to time, but also in the writing out of his cheques and deposit slips. Having regard to the

nature of the subject transaction into which Mr and Mrs Martelli

entered, which was a transaction so disadvantageous to them, it is an easy inference to draw that Mr and Mrs Martelli entered into it not only because they trusted their son Carlo but also

because they relied upon the Bank and its manager, Mr Bannerman.

It was this element of trust as between customer and bank which was influential in the decision of the Court of Appeal

in the United Kingdom in LLoyd's Bank Limited v. Bundy [1975] 1

Q.B. 326 in which Lord Denning, M.R., Cairns L.J. and Sir Eric Sachs set aside a guarantee given by an elderly father in favour of his son's company's liability to Lloyd's Bank. At pp.339-40 Lord Denning identified a number of factors that he considered significant. They were: "The consideration moving from the bank was grossly inadequate. The son's company was in serious difficulty. ..- The charge was for 11,000 Pounds. That was for the benefit of the bank. But not at all for the benefit of the father, or indeed for the company. ... All that the company gained was a short respite from impending doom. ... The relationship between the bank and the father was one of trust and confidence. ... The father trusted the bank. This gave the bank much influence on the father. Yet the bank failed 1n that trust. It allowed the father to charge the house to his ruin. ... The relationship between the father and the son was one where the father's natural affection had much influence on him. -.. He trusted his son. ... There was a conflict of interest between the bank and the father. Yet the bank did not realise it. Nor did

it suggest that the father should get independent advice. If the

father had gone to his solicitor - or to any man of business - there is no doubt that any one of them would say: 'You must not enter into this transaction. ...''" Sir Eric Sachs, with whose reasons Cairns L.J. agreed, also concluded that on the particular facts of the case a duty of fiduciary care on the part of the

bank toward its customer arose in that case. At p.344 Sir Eric

"Moreover what happened on December 17, 1969, has to be assessed in the light of the general background of the existence of the long-standing relations between the Bundy family and the bank. It not infrequently occurs 1n provincial and country branches of great banks that a relationship 15s built up over the years, and in due course the senior officials may become trusted councillors of customers of whose affairs they have an intimate knowledge. Confidential trust is placed in them because of a combination of status, goodwill and knowledge. Mr Head was the last of a relevant chain of those who over the years had earned, or inherited such trust whilst becoming familiar with the finance and business of the Bundys and the relevant company: he had taken over the accounts from Mr Bennett (a former assistant manager at Salisbury) of whom Mr Bundy said 'I always trusted him.' "

In my opinion, the decision in that case 1s apposite to the facts of the present case and supports the view taken by the trial

It is true that some of the statements of principle

which appear in the judgments in Lloyd's Bank Limited v. Bundy,

were properly criticised by Lord Scarman, with whom the other

members of the House agreed, in National Westminster Bank P.L.C.

v. Morgan [1985] A.C. 686. Moreover Lord Scarman gave a warning.

"Por these reasons, I would allow the appeal. in doing so, I would wish to give a warning. There is no precisely defined law setting limits to the equitable jurisdiction of a court to relieve against undue influence. This 1s the world of doctrine, not of neat and tidy rules. The courts of equity have developed a body of learning enabling relief to be granted where the law has to treat the transaction as unimpeachable unless it can be held to have been procured by undue influence. It is the unimpeachability at law of a disadvantageous transaction which is the starting-point from which the court advances to consider whether the transaction is the product merely of one's own folly or of the undue influence exercised by another. A court in the exercise of this equitable jurisdiction is a court of conscience. Definition 1S a poor instrument when used to determine whether a transaction is or is Not unconscionable: this is a question which depends upon the particular facts of the case."

However, the decision in Lloyd's Bank Limited v. Bundy was not

itself overruled and the facts considered in National Westminster

Bank P.L.C. v. Morgan are not analogous to those of the present

case, whereas the facts considered in Lloyd's Bank Limited v.

Bundy have many analogies, as also do the facts considered in

Harrison v. The National Bank of Australasia Ltd (1928) 23

If Lord Scarman's dictum be taken as encompassing the principles of unconscionable conduct which were enunciated in Amadio's case, then the principles which His Lordship expounded

are not inconsistent with the principles which have been

enunciated in the Australian courts. Lord Scarman referred, as

did Lord Hardwicke, L.C. in Earl of Chesterfield v. Janssen,

cited above, to the fact that "A court in the exercise of this equitable jurisdiction is a court of conscience.". His Lordship referred to the necessity to determine whether or not the transaction was unconscionable and said that this question would turn on the particular facts of the case. As Lord Scarman said, at p.709, "There is no substitute in this branch of the law for a

When Mr and Mrs Martelli, who were persons with little knowledge of the English language and little knowledge of complex financial arrangements, entered into this transaction, which was a transaction which benefitted their son and the Bank but was very much to their disadvantage, they must have done so without a proper understanding as to the nature of the transaction into which they were entering. Mr Bannerman ought to have realised this. Mr Bannerman did not by any positive statement mislead either Mr or Mrs Martelli but he must have been aware, as he was in fact fully informed as to their income and assets, that they were risking their lifestyle, including their home, ina transaction which was being carried out for the benefit of the Bank and for the benefit of Suesha. I agree with the view of the trial Judge that it was unconscionable that Mr Bannerman, who in this transaction was not acting as their bank manager but had a conflict of interest, should not have explained to Mr and Mrs

Martelli that they should seek independent advice. It must have

been apparent to Mr Bannerman, if he had given any consideration at all to the interests of Mr and Mrs Martelli, which obviously he did not, that they ought not to enter into the transaction without being advised fully as to the situation of Suesha and of the Bank's interest in having the transaction carried through. Indeed, the fact that, in the case of Mr and Mrs Nobile, Mr Bannerman did descend to active misrepresentation is at least an indication that 1n relation to Mr and Mrs Martelli he did seek to and did exercise such authority as the Bank had in relation to Mr

and Mrs Martelli to ensure that the transaction was consumated.

For these reasons, which differ slightly from those of the trial Judge on this aspect of the case, I agree with his conclusion that, on equitable grounds, the contract of guarantee

should be set aside insofar as 1t applied to Mr and Mrs Martelli.

In the circumstances I am of the opinion that all the grounds of appeal fail and that the judgment under appeal was

correct. It follows that the appeal should be dismissed with

I certify that this and the 29 preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr Justice Davies

) ) QUEENSLAND DISTRICT REGISTRY ) No. Qld G 82 of 1987 ) GENERAL DIVISTON )

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

National Australia Bank Limited ("the Bank") has appealed from a judgment of the Court constituted by a single judge (Jackson J.) given on 11 May 1987 whereby a contract of guarantee in favour of the Bank executed on 26 October 1984 by Salvatore Nobile and Francesca Nobile (his wife) and by Domenico Martelli and Catena Martelli (his wife) was set aside

in so far as it purported to bind those signatories. The Court

also set aside a bill of mortgage executed on the same date by Salvatore Nobile and Francesca Nobile in support of the contract of guarantee giving the Bank security over certain land at Caboolture in the State of Queensland. The Court dismissed cross-claims brought by the Bank against Mr and Mrs

The contract of guarantee guaranteed the indebtedness to the Bank of Suesha Nominees Pty Limited. That company, which had been acquired in July 1981, was the trustee of "The Martelli Family Trust" and traded as a building company under the name "Martelli Enterprises". Its directors and shareholders were Carlo Robert Martelli and his wife, Pierina Grazella Martelli. Mr and Mrs Nobile are the parents of Pierina Martelli. Carlo Robert Martelli is the son of Domenico and Catena Martelli. Carlo and Pierina Martelli were also Signatories to the contract of guarantee. The guarantors were, by the terms of the guarantee, to be jointly and severally liable to the Bank in respect of the moneys thereby secured. Their liability was limited by c1.3(i) to the sum of $250,000 together with additional sums in respect of interest, bank

The learned trial judge set aside the contract of guarantee in so far as it purported to bind Mr and Mrs Nobile and the bill of mortgage executed by them on two bases. One basis was that the Bank, through the manager of its Zillmere

Branch (Mr Douglas William Bannerman), had, in trade or

commerce, engaged in conduct that was misleading or deceptive

in contravention of s.52 of the Trade Practices Act 1974 (Cth).

His Honour found that Mr Bannerman, on 26 October 1984, had represented to Mr and Mrs Nobile that the business of Suesha Nominees Pty Limited was "then trading satisfactorily", that that representation was, in fact, untrue because it was manifest that the business was not then trading satisfactorily, and that Mr and Mrs Nobile had been induced by that representation to enter into the transaction and execute the

The other basis upon which the trial judge found in favour of Mr and Mrs Nobile was that the Bank had engaged in unconscionable conduct in procuring the execution by them of the contract of guarantee and the bill of mortgage. His Honour found that Mr and Mrs Nobile were under a "special disability" in dealing with the Bank so that there was an absence of any real degree of equality between the parties. His Honour aiso Found that the special disability was sufficiently evident to Mr Bannerman to make it prima facie unfair or "unconscientious" of the Bank, in the circumstances in which Mr and Mrs Nobile executed the contract of guarantee and bill of mortgage, to procure the execution of those documents by them. The Bank, in his Honour's view, had not discharged the onus which rested upon it to show that the transaction was "in point of fact

The contract of guarantee was set aside in so far as

it purported to bind Mr and Mrs D. Martelli solely on the

ground that the Bank had been guilty of unconscionable conduct

Background Both Mr and Mrs Nobile were born in Sicily. At the

time of the transaction in question Mr Nobile was 51 years of age. He had had very limited formal education. While in Sicily he worked as a farm lJlabourer. He migrated to Australia at the age of 20 years and worked as a cane cutter in the north of Queensland for two years before buying a fruit farm in the Stanthorpe area of that State. The farm

was not successful and in 1960 he again went north to cut

cane. He had married in 1958. After some six years as a

cane cutter he went to Brisbane where he worked as a plant operator with the Brisbane City Council for eight and a half years. He and his wife then commenced to operate a market garden and shop on rented premises at Sandgate Road,

Boondall. At the time they gave evidence in this proceeding, they were conducting a market garden on a property owned by them at Groth Road, Boondall. The primary judge regarded Mr Nobile's command of English as adequate

of age. In Australia, she worked on the farm at Stanthorpe

and in factories. Later she assisted her husband in operating the market garden enterprises. She had minimal formal education. The primary judge found that she could

Over the years Mr and Mrs Nobile purchased various properties including the farm at Stanthorpe, flats in Brisbane, land at Greenbank, houses at Newmarket and Boondall and blocks of land at Caboolture, one of 17 1/2 acres and two of 10 acres each. Finance for the purchase of the various properties was arranged through banking institutions which required mortgages to be executed. It appears that Mr Nobile had on a previous occasion signed a guarantee. That was in 1982 when he guaranteed a loan of $10,000 made to his daughter, Pierina. Mrs Nobile, so far

as appears, had not previously signed a contract of

Mr D. Martelli was born in Sicily on 9 February 1928 so that at the relevant time he was 56 years of age. After some five years' schooling, he worked on a farm until he came to Australia in 1952. He worked in Brisbane for some seven months in a timber yard and then went to Innisfail cutting cane. Thereafter he worked inaée tyre repair shop and then, for 17 years, in a food processing

business called Nanda Macaroni. At the time of giving his

evidence he was carrying on business as a market gardener at Taigum and operating a fruit and vegetable shop in association with that business. He had during his lifetime engaged in a number of property transactions which involved the obtaining of finance and the giving of mortgages as security. Over the years he had executed a substantial number of guarantees, mainly in connection with the business

The primary judge found that Mr D. Martelli spoke English, though with a relatively heavy accent, and read newspapers in English but was not very proficient in writing

in English. His Honour was satisfied that he understood most English spoken to him and that in the witness box he had exaggerated to some degree his difficulties in

Mrs Martelli (Snr.), who was also born in Sicily, came to Australia 1n 1955. She assisted her husband in the market garden business, particularly in the running of the fruit and vegetable shop. Although Mrs Martelli gave her evidence through an interpreter, the primary judge considered that she spoke and understood some English. He expressed himself as being satisfied that her comprehension of other than simple English spoken to her was not good. He

accepted that she did not read or write in English.

Suesha Nominees Pty Limited first became a customer of the Bank in December 1982 when an account in the name "Martelli Enterprises" was opened at the Bank's Zillmere Branch. The company's business activities involved the acquisition of land, the construction of houses thereon and the sale of the completed dwellings. Those activities were funded, in the main, by finance companies which were prepared to advance up to 90% of the value of the land acquired by the company and up to 80% of construction costs.

Moneys from time to time advanced by the finance companies

were paid to the credit of the account with the Bank as were

Upon the opening of the "Martelli Enterprises" account, an overdraft limit of $30,000 was arranged by Mr Bannerman. On 13 December 1982 Mr and Mrs D. Martelli executed a guarantee in favour of the Bank in the sum of $6,000 pilus interest and other charges and expenses. A further guarantee in favour of the Bank in the sum of $30,000 plus interest, charges and expenses was given by Mr and Mrs D. Martelli on 4 February 1983. The latter guarantee was executed in the presence of Mr Bannerman who

signatures. On 23 February 1983 the account, to the limit of s30,000 plus interest, charges and expenses was

During the calendar year 1983 the balance of the account of Suesha Nominees Pty Limited fluctuated above and below the limit of $30,000 but there were substantial periods when the limit was exceeded. On 12 September 1983,

for example, the account was overdrawn to the extent of

During 1983 Mr Carlo Martelli was also carrying on business with another man under the name "M & K Enterprises". On 27 October 1983 Mr and Mrs D. Martelli guaranteed the account operated by that enterprise with the

Bank to the limit of $60,000 plus interest, charges and

expenses. The execution of that guarantee was also witnessed by Mr Bannerman. A further guarantee in respect of that account in the sum of $40,000 plus interest, charges

and expenses was executed by Mr and Mrs D. Martelli on 8

In March 1984 a Mr Gavin Roderick Ginn commenced employment with Suesha Nominees Pty Limited as its financial manager. Thereafter, the financial dealings between the company and the bank were largely conducted between Mr Ginn

On 8 April 1984 Mr Bannerman allowed the overdraft limit of Suesha Nominees Pty Limited to go to $50,000 upon a

fresh guarantee in that amount being executed by Mr and Mrs BD. Martelli. The document of guarantee was not executed in the presence of any officer of the Bank but in the presence of Mr Ginn who witnessed the signatures of the guarantors. He also witnessed their signatures to the guarantee, also dated 8 April 1984, in respect of the account of "M& K

Enterprises" to which reference has already been made.

At the close of business ons8 April 1984 the account of Suesha Nominees Pty Limited was overdrawm $43,556.26. By the end of the month the account was in debit to the extent of $59,633.24 and by the end of May 1984 to the extent of $90,677.09. By 10 June 1984, when a meeting took place between Mr Ginn and Mr Bannerman, the

debit balance had grown to $106,916.44. At that meeting, Mr

Ginn informed Mr Bannerman that, within a period of two months at the maximum, the company "would be clear of debt

or at least within their limit". Mr Bannerman's note of the

"In view of short terms involved & following production of cash flow to end of Oct. agreed to assist to $150,000 on execution of fresh G'tee by parents."

On 11 June 1984 a further guarantee with a limit of

$150,000 plus interest, charges and expenses was executed by Mr and Mrs D. Martelli. Mr Ginn again witnessed their

signatures. No bank officer was present when the document

At the end of June 1984 the account was in debit in the sum of $141,790.51. The debit balance continued to rise during July 1984 and on i August 1984 it stood at $204,689.81. During July, two cheques, each for s5,000, were dishonoured by the Bank. On 11 July 1984 Mr Ginn had informed Mr Bannerman that wet weather had delayed building construction and that, in the case of some houses, the delay

in completion could be up to three weeks. Mr Bannerman

requested that expenditure be curtailed as far as possible.

In the early part of August 1984 substantial deposits were made to the credit of the account and by 22

$145,663.36. On that day Mr Ginn informed Mr Bannerman that

"all should be well" by 4 September 1984 as, by that date, amounts totalling $158,000 were expected to be received by

the company. In fact, between 22 August and 19 September

1984, deposits totalling only $126,032.28 were made to the

During August 1984 Mr SBannerman's conduct in permitting the overdraft to increase as it had was the subject of adverse comment by the Bank'''s Regional Lending

application on behalf of the company for a commercial b6b1ill facility in an amount of $70,000. The proceeds of the sale of the bill of exchange, $66,490.75, were credited to the account on 21 September 1984. As at the close of business

on that day, the debit balance stood at $101,484.63.

Mr Bannerman proceeded on holidays as from the close of business on 7 September 1984. During his absence, Mr Ian Leslie Nelson Hayes, who normally occupied the position of accountant at the Zillmere Branch of the Bank, acted as relleving manager. Shortly after Mr Hayes became relieving manager, a Regional Manager of the Bank, who was

his superior, instructed that the account was to continue to

the company's cheques for amounts totalling nearly $20,000.

On 14 September 1984 a further contract of guarantee in respect of the account of Suesha Nominees Pty Limited with a limit of $150,000 plus interest, charges and expenses was executed. This guarantee was given by Mr and Mrs D. Martella and Mr and Mrs Carlo Martelli. The guarantee was not executed by any of the signatories in the presence of an officer of the Bank. Mr Ginn witnessed the

On 28 September 1984 Mr Hayes was informed by Mr Ginn that deposits of $65,000 would be made to the account by 5 October 1984 and that expenditure for supplies and wages would be about $80,000. Mr Ginn was informed that the maximum debt permitted was $85,000 by way of overdraft together with the $70,000 toa become due on the bill of

On 24 September 1984 a deposit of $41,436.20 had been made to the account and that amount, together with other deposits totalling $74,213.13, resulted in the debit

balance in the account being reduced to $76,434.51 on 5 October 1984. The debit balance then increased to $97,940.90 on 12 October 1984, to $137,905.73 on 19 October 1984 and to $146,265.48 on 25 October 1984. To those figures must be added the liability of Suesha Nominees Pty

The Bank had allowed the limit of the company's total indebtedness to be raised to $190,000 upon Mr Ginn and his wife agreeing to give a guarantee for $40,000 supported by a term deposit by them with the Bank of an equivalent sum. The guarantee executed by Mr and Mrs Ginn is dated 15

Mr Nobile''s evidence was that on some date - which he did not specify but which must have been earlier than 15 October 1984 - Mr Carlo Martelli came to his home and asked him to guarantee him, Carlo, for $80,000. According ta Mr

Nobile, his son-in-law told him that he had a number of

houses built but they were slow in selling and he asked for

some help for a short period. Mr Nobile said that a few days later, after discussing the matter with his wife, he told Carlo that he would guarantee him to the extent of $80,000 and that a block of land at Caboolture would be available to support the guarantee. The primary judge appears tao have accepted that some such conversations in

Mr Bannerman returned from leave on 15 October 1984. Mr Carlo Martelli and Mr Ginn came to see him and asked that the overall limit on the account be increased to $250,000, stating that Mr and Mrs Nobile were prepared to assist by offering security over land at Caboolture. Mr Bannerman agreed to this proposal subject to being satisfied as to the value of the land. To this end, he arranged to

have the land valued through the branch of the Bank at

Caboolture. Mr Nobile arranged for the certificates of title to the land to be obtained from another bank where they were held and delivered to Mr Bannerman who then proceeded to have the contract of guarantee and the bill of mortgage prepared. An appointment for the execution of those documents was then arranged. The appointment was for

Before detailing the events of that day, it is convenient to mention that the business of Suesha Nominees Pty Limited continued to deteriorate progressively and, on 30 September 1985, the company was wound up by order of the

Supreme Court of Queensland. On 19 November 1985, Mr Carlo

On the morning of 26 October 1984 Mr and Mrs Nobile (who were not customers of the Bank) and Mr Carlo Martelli attended upon Mr Bannerman at his office. Differing versions of what then took place were given by the witnesses. The primary judge expressly found both Mr and Mrs Nobile to be unreliable witnesses. He must be taken to have made a similar finding concerning Mr Carlo Martelli's evidence as to the events of 26 October 1984. With one or two minor qualifications, his Honour accepted Mr Bannerman's

version of those events. His Honour must, therefore, be

taken to have found that Mr Bannerman explained to Mr and

Mrs Nobile that the guarantee was in favour of Suesha

Nominees Pty Limited, that they were entering into the guarantee with Mr and Mrs D. Martelli and Mr and Mrs Carlo Martelli, that the basic liability of the guarantors was $250,000 and that they were jointly and severally liable up

to that amount. During the course of the interview, Mr

Bannerman took a statement of the assets and liabilities of

Mr and Mrs Nobile and this was signed by Mr Nobile. The

statement showed assets of $530,000 and liabilities nil. The guarantee and the mortgage were then signed by Mr and Mrs Nobile and Mr Carlo Martelli. At the conclusion of the interview, Mr Bannerman asked Mr and Mrs Nobile whether they understood the documents which they had executed and whether

they had any questions. Their responses did not indicate

After Mr and Mrs Nobile and Mr Carlo Martelli left, Mr and Mrs D. Martelli (who were long standing customers of the Bank) came into the office. Mr Bannerman's evidence in relation to the execution by them of the guarantee in question was that after they entered his office he asked them whether, as he had been told, they were agreeable to the execution of a guarantee for the increased amount and that Mr Martelli indicated that that was so. Mr Bannerman said that he then showed them the guarantee, read out to them the typewritten parts and explained their effect in terms similar to those which he had used to Mr and Mrs Nobile for a similar purpose. Mr and Mrs Martelli, he said, then executed the guarantee and at some point he asked them

if they realised the intent of the document and understood

what he had explained to them. According to Mr Bannerman,

Mr Bannerman's evidence as to what took place at the interview was at variance with that of Mr and Mrs Martelli. The primary judge found that Mr and Mrs Martelli were both unreliable witnesses. However, his Honour was not satisfied that Mr Bannerman's evidence of the events was other than a reconstruction. In particular, he was not satisfied that Mr Bannerman explained the contents of the typewritten parts of the guarantee in a manner similar to that which he had used in relation to Mr and Mrs Nobile. His Honour concluded that Mr Bannerman assumed that Mr and Mrs Martelli knew what they were there to sign and simply

aunvited them to sign the document, which they did.

His Honour also found, contrary to the evidence given by Pierina Martelli, that she had signed the guarantee

in the presence of Mr Bannerman later on 26 October 1984.

Claim by Mr and Mrs Nobile under Trade Practices Act

The hearing proceeded before the primary judge on the basis of an allegation that at the meeting on 26 October 1984 Mr Bannerman represented to Mr and Mrs Nobile that the guarantee which they were to sign was for the sum of $80,000 and was to be given for a period of three to four months. At the conclusion of the evidence, however, the statement of

claim was amended, by leave, to include an allegation that

Mr Bannerman had represented to Mr and Mrs Nobile at that

meeting that Suesha Nominees Pty Limited was then trading

Made a representation that the guarantee was for $80,000 and

fora limited period. His Honour did, however, find that the representation that the company was trading satisfactorily had been made. Although that finding was challenged, I am satisfied that there was evidence before his Honour - particularly the evidence given by Mr Bannerman

Bannerman as one which was meant to convey, and did convey, that the business was trading satisfactorily and that he believed that to be the case. On the question whether the

statement was misleading or deceptive, his Honour said:

"Tt is manifest in my view that the business was not then trading satisfactorily. I accept that, as Mr Douglas Q.C. ECcounsel for the Bank put at, one should not too readily assume that a business is not trading satisfactorily simply because it has a large overdraft, but so much depends on the particular circumstances. Here the company's business was building and selling houses. It was building them, but it was not selling them. Its borrowings had increased dramatically from around $30,000.00 in mid-March to about $220,000.00 on 26th October, including the liability on the bill of exchange, and there

was no relief in sight. In these circumstances I regard the statement as in fact untrue, and I so find."

Thus, his Honour found that the representation was one of

Again, these findings were challenged but, in my opinion, no sufficient ground has been shown to warrant this

I have more difficulty in accepting the further finding made by his Honour that the representation was a factor which induced Mr and Mrs Nobile to enter into the transaction. Indeed, the circumstance that the representation was not relied upon to support the claim until after the conclusion of the evidence, no prior complaint having been made on this score, must militate against accepting the proposition that it was an inducing factor. There is also the circumstance that, if one accepts Mr and Mrs Nobile's evidence on the point, they made no enquiries of their daughter or son-in-law or, indeed, of any other person as to the financial standing of Suesha Nominees Pty Limited. From their evidence one might conclude that that was a matter of no concern to them. However, one must bear in mind that the primary judge regarded them as unreliable witnesses. Their evidence in this regard is also

at variance with the evidence given by Mrs Nobile and Mr

Carlo Martelli to the effect that Mr Nobile was a careful man who required to be told a good deal about any business

experience had led him to trust bank managers and that he

trusted Mr Bannerman. His evidence did not, as his Honour

has recorded, deal specifically with the question whether Mr Bannerman's statement that the business of Suesha Nominees Pty Limited was trading satisfactorily was a factor inducing him to enter into the transaction. Mrs Nobile also gave general evidence that she trusted and relied upon Mr Bannerman but, in addition, she gave evidence specifically directed to the effect upon her of the representation. She

was asked, in cross-examination, whether she had signed the

guarantee and mortgage because she thought her husband

"No, because he (Cmeaning Mr Bannermanlds said everything O.K. We trust him."

"He said the business going well, then we sign, because we think he have ail the books there. We think everything going well."

His Honour accepted Mrs Nobile's evidence on the point and, on the basis of the whole of the evidence before him, drew the inference that both she and her husband had been induced to enter into the transaction on the faith of

the representation found to have been made by Mr Bannerman.

Investments Pty Ltd (1985) 6 F.C.R. 512 where a Full Court

"The onus of establishing that they were induced by or relied upon the misrepresentation when

appellants. See Holmes v. Jones (1907) 4 C.L.R. 1692 at 1706 per O'Connor J and Smith v. Chadwick (1884) 9 App Cas 187 at 190 per Lord Selborne and at 195-196 per Lord Blackburn ....

Holmes v. Jones and Smith v. Chadwick were both cases where the causes of action relied upon were the tort of deceit, but a similar onus lies upon a claimant who alleges that he has suffered damage as a result of misleading conduct in breach of s.52 of the Trade Practices Act 1974. As those cases make clear, if a representation is proved which is of such a nature as to be likely to induce a representee to act upon it, the inference may be drawn, if the representee does act, that he has acted in reliance on the representation. But since the inference is one of fact it may be rebutted by other evidence which is inconsistent with the inference. See Holmes v. Jones (supra) at 1707 per O'Connor J."

See also Gould v. Vagqgelas (1985) 157 C.L.R. 215 per Wilson

Notwithstanding the general criticism which his Honour made of Mrs Nobile as a witness and the considerations to which I have referred which tend to negative that any reliance was placed upon the representation, the representation was a material one and was clearly of a nature likely to induce those to whom it was made to enter into the transaction. In the light of my consideration of the whole of the evidence, I am not

prepared to say that the primary judge should not have drawn

concerns the claim made by Mr and Mrs Nobile under the Trade

The appeal also raises the question whether the impugned transaction, so far as it concerned Mr and Mrs Nobile on the one hand and Mr and Mrs D. Martelli on the other, was an unconscientious one of the kind which equity will set aside. The principle of equity applies "whenever one party to a transaction 1s 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": Bromley v. Ryan (1956) 99 C.L.R. 362 per Kitto J. at p.415.

As Mason J. (as he then was) pointed out in Commercial Bank

of Australia Ltd v. Amadio (1983) 151 C.L.R. 447 at p.462,

"the situations mentioned are no more than particular exemplifications of an underlying general principle which may be ainvoked whenever one party by reason of some consideration or circumstance is placed at a special disadvantage vis-a-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created".

"IT 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 emphasize 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."

In the same case, Deane J., in whose judgment Wilson J.

"The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special agisability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or 'unconscientious' that he procure, or accept,

the weaker party's assent to the impugned transaction in the circumstances in which he

procured or accepted it. _ Where such circumstances are shown to have existed, an onus

is cast upon the stronger party to show that the transaction was fair, just and reasonable."

In the light of the conclusion to which I have come in relation to the claim made by Mr and Mrs Nobile based upon s.52 of the Trade Practices Act 1t is unnecessary to consider whether they are entitled to succeed on the alternative ground. However, as the matter was fully argued

find, as he did, that Mr and Mrs Nobile were at a special disadvantage vis-a-vis the Bank are contained in the

"IT accept their evidence that at the time when they went to the bank, they believed (because CCarliol Martelli had told Mr Nobile, who had passed it on to Mrs Nobile) that the guarantee was to he for $80,000.00. I accept also that

until they went to the respondent's premises on that day they did not know that the guarantee was to be for $250,000.00. They had little knowledge of the affairs of Suesha Nominees and they had not received any independent advice. It was known to Bannerman that the applicants came to execute the guarantee and mortgages because Carlo Martelli had arranged for them to do so, and it must have been obvious to Bannerman that the male applicants' command of English, though adequate, was not good. It must also have been obvious that they had come witha wrong view of their intended liability. I am satisfied that the applicants were the weaker parties to the transaction vis-a-vis the respondent and that that weakness - i.e. 'the party is unable to judge for himself' (Commercial Bank of Australia Ltd v. Amadio (supra) at 476-477 - constituted a 'special disability' of the applicants for the purposes of the application of the principle."

Both Mr and Mrs Nobile knew that their daughter and

son-in-law enjoyed a comfortable life style. Mr Nobile was aware of the general nature of the business carried on by Suesha Nominees Pty Limited. Carlo and Pierina Martelli appear to have regularly visited Mr and Mrs Nobile but there appears to have been little discussion about the business. Little in the way of enquiries appears to have been made by ezrther Mr or Mrs Nobile about the business even after they

were approached by Carlo to provide the company with

financial assistance. Mr Nobile knew that "the business was slow" and that the houses constructed by the company were

The primary judge concluded that it must have been obvious to Mr Bannerman at the meeting on 26 October 1984 that Mr and Mrs Nobile had come to that meeting with a wrong

view of their intended liability. That conclusion is, in

part, based on a statement earlier in the judgment that his Honour thought that the figure of $80,000 was mentioned in

"either as being the amount which the applicants thought was to be the amount of the guarantee or as being about the amount by which there was a need for an increase Lin financial assistance to the company], or perhaps as being roughly the amount of the potential exposure of the applicants to liability if each of the three families who were to be parties to the guarantee had to pay in the end one third of a liability

"It is pure speculation, however, to attempt to work out what was said about the $80,000.00 on

Mr and Mrs Nobile and Mr Carlo Martelli had given evidence that, at the meeting on 26 October 1984, Mr Bannerman had told them that the guarantee was for $80,000. According to their evidence the figure of $80,000 was mentioned by Mr Bannerman, not by any of them. The primary judge did not accept their evidence. He accepted that Mr Bannerman had explained to them that the guarantee was for $250,000. It 1s curious, to say the least, that, if Mr and Mrs Nobile and Mr Carlo Martelli came to the meeting under the mistaken impression that the guarantee was for $80,000,

not one of them objected when Mr Hannerman explained the

true position. According to Mr Bannerman's version of the

conversation, which was generally accepted, they did not do

so. They did not give evidence that they did so ~ indeed, to give that evidence would have been inconsistent with their assertion that the figure of $s250,000 was not mentioned, even though that figure appears prominently on

the first page of the guarantee which each of them then

In my opinion, there was no evidence upon which the primary judge could properly find that it must have been obvious to Mr Bannerman that Mr and Mrs Nobile had come to the meeting with a wrong view of their intended liability. His Honour was, therefore, in error in taking that matter

into account in finding that Mr and Mrs Nobile were at a

The other matters referred to in the passage I have cited from his Honour's judgment as setting out the considerations which led him to conclude that Mr and Mrs Nobile were at a special disadvantage vis-a-vis the Bank are not, in my view, sufficient to support the conclusion to which his Honour came. The case is one in which the persons concerned, who were not customers of the Bank, had come forward offering to give security to assist the business being operated by their daughter and son-in-law. It may well be that they were induced to do so by what their son-in-law had said to them but, even if what he told them was untrue or misleading, that circumstance, in the absence

of any knowledge of it by the officers of the Bank, does

not, in my view, establish that they were, vis-a-vis the

Bank, at a special disadvantage. JI am also of opinion that the evidence does not disclose other circumstances which, taken singly or in combination, establish the necessary

position of special disadvantage vis-a-vis the Bank.

'It follows that, in my opinion, Mr and Mrs Nobile were not entitled to have the guarantee and mortgage set aside on the ground that the Bank had been guilty of unconscientious conduct in regard to the execution by them of those documents. However, as they are entitled to that relief on the ground based on the Trade Practices Act, the Bank's appeal so far as they are concerned should, in my

I turn, then, to the question whether the impugned Eransaction was an unconscientious one in relation to Mr and

In my opinion, Mr and Mrs D. Martelli were at a special disadvantage vis-a-vis the Bank in relation to the execution of the guarantee though my reasons for reaching that conclusion differ in some respects from those on which the primary judge relied to reach a similar conclusion. In my view, there are three factors and three factors only which, taken in combination, support the conclusion which I have reached. The first of those factors is that it was the

Bank that required the guarantee in question to be signed by Mr and Mrs D. Martelli. Although the primary judge made no

finding on the point, it seems clear enough from the

evidence that, at some time between 15 October 1984 (when Mr Carlo Martelli and Mr Ginn informed Mr Bannerman that Mr and Mrs Nobile were prepared to assist Suesha Nominees Pty Limited) and 26 October 1984 (when the guarantee was signed), Mr Bannerman told Mr Carlo Martelli that his

The second factor is that the guarantee was for such a sum that, 1f Mr and Mrs Martelli were required to discharge in full the total liability which could arise

under it, their assets would be totally, or almost totally,

The third factor is that the security which the guarantee was intended to provide in addition to that provided by the guarantees for $150,000 which Mr and Mrs D. Martelli had executed on li June 1984 and 14 September 1984

related, very largely, to advances and obligations which had already been made or incurred by Suesha Nominees Pty Limited

prior to the date on which the guarantee was executed.

Iam also satisfied, on the evidence, that Mr Bannerman was aware of each of these factors and yet he took no adequate steps, as his Honour found, to explain to Mr and Mrs Martelli the typewritten parts of the document and procured their execution of it upon the assumption that they knew what they were there to sign. The circumstance,

adverted to by his Honour, that Mr and Mrs Martelli had

already given a number of guarantees in favour of the Bank in relation to the business of M & K Enterprises and Suesha Nominees Pty Limited and in favour of a number of suppliers

to the latter provides no justification for Mr Bannerman's

It follows that, in my opinion, the primary judge was correct in setting aside the guarantee executed on 26 October 1984 in so far as it purported to bind Mr and Mrs D.

Conclusion For the above reasons, I would dismiss the appeal

I certify that this and the preceding 26 pages are a true copy of the Reasons for Judgment herein of the Honourable Mr Justice Neaves.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

Respondents AND BETWEEN: NATIONAL AUSTRALIA BANK LIMITED

CORAM: Davies, Neaves and Spender JJ. DATE: 17 March, 1988 PLACE: Brisbane REASONS FOR JUDGMENT SPENDER J.:

I have had the benefit of reading in draft form the Reasons for Judgment of Neaves J.. I agree with the conclusions to which he comes and the order which he proposes; in

particular, I agree that the appeal by the National Australia

Ty ante eneneaaes neeenaoe anneied -- a ' . 7 oe en

Bank Limited ('the bank') against Mr. and Mrs. Nobile based on s,.52 of the Trade Practices Act 1974 should be dismissed, for the

Since, in some other respects, the conclusions to which I come differ from those of the learned primary judge, I wish to

In my view the finding by the learned primary judge that the bank had engaged in unconscionable conduct in procuring the

execution by Mr. and Mrs. Nobile of the contract of guarantee and the bill of mortgage was based, in a significant respect, on a

The equitable jurisdiction to set aside a transaction ag unconscionable reguires a "special disability" in one party vis-a-vis the other, of which that other party knows or ought to know, and circumstances surrounding the effecting of the

transaction which are prima facie unfair, or unconscientious.

If the finding that there existed a special disability known to the bank be correct, then the circumstances of this transaction are clearly within the principle. The failure to suggest the obtaining of independent advice, and the failure to give an opportunity for the obtaining of that advice, in my view, made the obtaining of Mr. and Mrs. Nobile's signatures prima facie unfair or unconscientious. It is these failures, and not

the transaction itself, which, in my opinion, constitute the

However, the finding of a special disability in Mr. and Mrs. Nobile, known to the bank, is based in part on the conclusion that "it must have been obvious (to Mr. Bannerman) that they had come with a wrong view of their intended liability." The learned primary judge found that when going to the bank, Mr. and Mrs. Nobile believed that the guarantee was to be for $80,000.00, and until they got to the bank, 'they did not realise that it was to be for $250,000.00. That this 'wrong view' was known to Mr. Bannerman is, in ny view, unsupported by any evidence and inconsistent with the earlier finding concerning the allegation of the applicants, Mr. and Mrs. Nobile, that the amount and term of the guarantee had been misrepresented. The

",..I do not accept the evidence of the applicants and Carlo Martelli that Bannerman told them that the guarantee was for $80,000.00 and was to be for a period of 3-4 months. I think that the figure of $80,000.00 was mentioned in discussion on that occasion, either as being the amount which the applicants thought was to be the amount of the guarantee or as being about the amount by which there was a need for an increase, or perhaps as being roughly the amount of the potential exposure of the applicants to liability, if each of the three families who were to be parties to the guarantee had to pay in the end one third of a liability of $250,000.00. It is pure speculation, however, to attempt to work out what was said about the $80,000.00 on that occasion. It suffices to say that Iam satisfied that the representation relied on was not made."

Concerning the finding by the learned primary judge that

the conduct of the bank leading to the execution of the guarantee

by the third parties, Mr. and Mrs. Martelli, was unconscientious,

the conclusion that there was a special disability in Mr. and'

Mrs. Martelli vis-a-vis the bank, known to the bank, was clearly

open to the learned primary judge on the evidence, view, no reason had been advanced as to why it disturbed. lL respectfully agree with the learned primary judge that : -

they were called upon to pay the whole or most of it, would take up all their assets, and which was

to provide advances and already made or parties to be given the separate advice ...",

the respondent for which largely were called out for the

with the consequence that the appeal against his finding that the

8 [' : t. 5. f Counsel for appellant: Mr. R.R. Douglas, Q.C. and Miss S.M. Kiefel instructed by: Cannan and Peterson Counsel for first respondent: Mr. R. 0'Regan Q.C. and Mr. D.A. Reid instructed by: Gabriel Ruddy and Garrett Counsel for second respondent: Mr. G.L. Davies Q.C. and Mr. G. Brandis ' instructed by: Seymour Nulty and Co. ,

Dates of Hearing: 5, 6 August 1987 ' ' Date of Judgment: 17 March 1988