Plaintiff v Defendants

Supreme Court of Victoria|2014-09-16|Before: HARGRAVE J

BANKING - Whether Code of Banking Practice published by the Australian Bankers Association incorporated into loan agreement and related guarantee - Whether clause 25.1 of Code contains contractual obligation by bank to customer and guarantor to exercise care and skill of diligent and prudent banker in assessing ability of customer to repay loan - Held: obligation to exercise care owed to both customer and guarantor - SAM Management Services (Aust) Pty Ltd v Bank of Western Australia [2009] NSWCA 320; Brighton v Australia and New Zealand Banking Group Limited [2011] NSWCA 152.

COMPROMISE - Whether scope of release in compromise agreement extended to particular claims - Held: claims within contemplation of the parties and therefore released - Grant v John Grant & Sons Pty Ltd [1954] HCA 23; (1954) 91 CLR 112, 129-30.

1 The defendants, Steven Doggett and Kevin Sullivan,[1] are domestic partners. They live in Melbourne. Mr Doggett is a self-employed painter and handyman and Mr Sullivan is employed as an operating theatre technician. From in or about 2004, they commenced buying investment properties on the Gold Coast in south-east Queensland. They concentrated most of their investments in the purchase of apartments in a holiday apartment complex known as 'Trickett Gardens', which Mr Doggett described as 'a small, quaint, family-oriented property' which occupied 'a very special place in [their] hearts' and about which they were 'extremely passionate'. By late 2007, the defendants had purchased seven of the 33 apartments in Trickett Gardens with money borrowed from the plaintiff, Commonwealth Bank of Australia ('the Bank' or 'CBA'), under a portfolio loan facility.

2 In an effort to improve and maintain the value of their investments in Trickett Gardens, the defendants renovated and upgraded some of their apartments and became actively involved in the body corporate and the management of the complex - including by arranging or direct involvement in painting the external buildings, and in the upgrading of pools, barbeques, gardens and other common areas. Their involvement in this regard, and presumably that of other apartment owners and the resident managers of the complex, developed Trickett Gardens into what Mr Doggett described as a 'lead property in the 3½ star beachside market in Surfers Paradise'.

3 In this context, the resident managers, Dino and Wendy Rechichi, advised the defendants in late November 2007 that they were preparing to sell their management rights contract with the body corporate and the associated managers' apartment owned by them in the complex. The defendants decided to try to purchase the management rights business and managers' apartment. Their decision was based on their passion for the complex, the desire to protect their existing investments in it, friendships with other apartment owners, the fact that Mr Doggett had relatives living close by, and other lifestyle reasons.

4 At that stage the discussions between the defendants and the Rechichis were informal and no binding agreement was entered into. There was, however, a loose verbal agreement to purchase for $1.5 million. On that basis, the defendants approached the Bank in November 2007 with a view to obtaining finance for the proposed purchase. They spoke with their relationship manager, Andrew Duncan. Despite the absence of a formal agreement, and no trading figures having been provided to Mr Duncan, the defendants allege that Mr Duncan made representations to them at this time to the effect that he was a specialist in small business lending, that he had assessed the defendants' current cash flow and their future cash flow from the management rights business, and that, from their cash flow, the defendants could 'support' a loan from the Bank 'in the vicinity of $1.6 million and reasonable extensions of that sum' if they purchased the management rights business and managers' apartment (the 'first representations').

5 The defendants contend that the first representations encouraged them to commit to the proposed purchases. In May 2008, they incorporated Dogvan 007 Pty Ltd and appointed it trustee of the 'Doggett Sullivan Discretionary Trust'. In June 2008, they signed two binding contracts on behalf of Dogvan: one to purchase the management rights for $1.15 million and the other to purchase the managers' apartment for $350,000, a total of $1.5 million. Both contracts were subject to finance. The management rights contract was also subject to verification of the financial records of the business.

6 The defendants made a formal loan application on behalf of Dogvan in respect of the proposed purchase, for 100 per cent of the total purchase price and acquisition costs. Both before and after they signed the purchase contracts on behalf of Dogvan, the defendants, their solicitors and their accountants provided documents and information to the Bank in connection with Dogvan's loan application.

7 The Bank approved the loan. The formal letter of offer is dated 31 July 2008, and was accepted by the defendants on behalf of Dogvan on that day or soon after. The loan was to be provided by a bill facility with a facility limit of $1.63 million. The defendants guaranteed the loan and thereby exposed their equity in the other apartments owned by them in the Trickett Gardens complex as security.

8 The defendants contend that the Bank made further representations to them during the course of the loan application and approval process, and by its conduct in approving the loan to Dogvan, to the effect that the future cash flow of the management rights business would be sufficient for Dogvan to service the proposed loan 'including further advances' - and that a specific representation to this effect was made on 15 July 2008, when the defendants contend that oral approval for the loan was given by Mr Duncan's assistant, Elizabeth Geldart (the 'second representations').

9 The loan was finally settled on 15 August 2008, when the bill facility was fully drawn down. The first bill rollover was due on 15 September 2008. Dogvan did not have sufficient money in its nominated account to fund the rollover. The management rights business was undercapitalised and never traded profitably.

10 From this early time, the defendants commenced alleging that the Bank had failed them in many respects and should assist them by providing relief from their financial difficulties. The Bank did provide some relief, but it was not enough. Not only was the management rights business cash-starved from the outset, but the global financial crisis hit soon after the loan was settled, which in combination with other factors affected the occupancy rates and rentals for apartments in the Trickett Gardens complex. On 29 September 2010, the Bank appointed Grant Sparks and David Leigh as receivers and managers to Dogvan ('the Receivers'). On 13 October 2010, the Bank appointed the Receivers as receivers of the defendants' units in Trickett Gardens under the powers contained in the mortgages securing the portfolio loan facility. The Receivers sold all of the assets provided by Dogvan and the defendants as security. A substantial shortfall of approximately $3.1 million remains outstanding, which the Bank claims as a debt from the defendants in their own right, under the portfolio loan facility, and as guarantors of Dogvan. Dogvan has no remaining assets.

11 The defendants raise various counterclaims against the Bank's claims.

12 First, the defendants allege that the Bank had no reasonable grounds for making the first and second representations and that the Bank thereby engaged in misleading or deceptive conduct causing them loss and damage. The claim for loss and damage is based on the contention that the loan was never affordable. The defendants allege that, once Dogvan purchased the management rights business and the managers' apartment, their personal financial positions became untenable, with the result that they lost all of the equity in their apartments in the Trickett Gardens complex. In addition, the defendants claim loss as a result of them having become liable as guarantors for Dogvan's debt.

13 Second, the defendants contend that the circumstances in which the loan was made involved unconscionable conduct by the Bank.

14 Third, the defendants contend that the Bank owed them a contractual obligation to exercise the care and skill of a diligent and prudent banker in assessing Dogvan's loan application and forming an opinion about its ability to repay the loan. They contend that this obligation arose under clause 25.1 of the Code of Banking Practice published by the Australian Bankers Association (the 'Code'), which was incorporated into the Dogvan loan facility contract and the deed of guarantee, or as a common law duty of care in tort. They contend that the Bank breached the obligation or duty by negligently approving Dogvan's loan application in circumstances where a diligent and prudent banker would have realised that the loan was unaffordable from the historical cash flow of the management rights business.

15 The Bank denies all of the counterclaims. In the alternative, should one or more of the counterclaims succeed, the Bank relies on releases given by the defendants in a written compromise agreement between the parties dated 6 April 2010. The defendants contend that the compromise agreement is unenforceable, because it was procured by duress. There is also an issue as to the scope of the releases if the duress claim fails and the compromise agreement is enforceable.

16 The defendants were represented during many pre-trial steps in the proceeding, including in the preparation of their defence and counterclaim. Unfortunately, due to lack of available funds, they chose to represent themselves at trial. The fact that the defendants were unrepresented in a case of some complexity and novelty imposed significant burdens on the Court, and on the Bank as the represented party, to ensure that the defendants received a fair trial. This was especially so in circumstances where the defendants had little understanding of the matters which they were required to prove in order to establish one or more of the causes of action in their counterclaims, or of the relevant legal principles to be applied.

17 To the extent that the Court could legitimately do so, I provided the defendants with an opportunity to adduce relevant evidence and to make submissions in a logical form. To enable the defendants to understand the various ways in which their case had been pleaded by their previous lawyers, and to guide them as to which issues were relevant, I gave the defendants a detailed list of the pleaded issues in the case. The Bank raised no objection to this course.

18 Understandably, the defendants sought to raise irrelevant issues and, when they did, that was generally not permitted. When evidence or lines of questioning were ruled inadmissible, the defendants appeared to understand the basis for the ruling and accepted all rulings without question. Their behaviour in the courtroom during the trial was generally commendable given their difficult and stressful circumstances.

19 The issues for determination in the proceeding may be summarised by the following questions:

(1) Subject to the counterclaims, how much is owing to the Bank?

(3) Was any such representation fraudulent, false or misleading?

(4) Did the defendants rely on any such representation?

(6) Did the Bank owe the defendants an obligation to exercise care?

(8) Did the Bank breach s 912A(1) of the Corporations Act 2001?

(9) Did the Bank's conduct cause loss to the defendants?

(10) Was the compromise agreement procured by duress?

(11) Does the compromise agreement defeat the counterclaims?

20 Before dealing with the issues in sequence, it is necessary to set out a more detailed factual narrative.

21 This factual narrative builds upon the summary facts and issues contained in the introduction to these reasons. Some repetition is necessary in order to give context to the further facts in this narrative.

22 The defendants purchased and maintained their units in the Trickett Gardens complex by a series of loans from the Bank and a personal overdraft facility. Those facilities were grouped together under the umbrella of a 'portfolio loan facility' with various sub-accounts. Their liabilities under these facilities were secured by first mortgages over their units.

23 The defendants owned other properties outside of Trickett Gardens, and had liabilities associated with those properties at material times. Some of these liabilities were not disclosed to the Bank when the defendants applied for increases in their portfolio loan facility, in December 2007 and June 2008, and when they applied for the Dogvan bill facility, also in June 2008.

24 The defendants were confident in their judgment when deciding to purchase investment properties in the Trickett Gardens complex. They acknowledged this in evidence. But their appetite for investment in the Gold Coast property market was not limited to Trickett Gardens:

(1) The defendants also owned unit 32 in the 'View Pacific' building on the Gold Coast. That unit was purchased with finance from the Bank of Queensland. According to their statements of assets and liabilities at relevant times, this unit was worth approximately $600,000 and was mortgaged to the Bank of Queensland for $275,000 ($260,000 mortgage loan and $15,000 credit card limit).

(2) In early 2007, they entered into a contract to purchase a luxury apartment in the 'Nirvana by the Sea' building for $2.5 million. They paid a nominal deposit of $2,000 and then raised the balance (a further $253,000) by a bank guarantee provided by Mr Doggett's parents. From that stage onwards, they were locked into purchasing the apartment because it was only the deposit which was subject to finance. In common with other property purchases, the defendants did not, at least formally, seek finance before signing the contract of sale. They initially approached the Bank for finance but withdrew that application before it was considered, opting instead to obtain finance for the deposit from the Bank of Queensland.

25 The Nirvana by the Sea purchase did not ultimately proceed. However, the liability to complete the purchase remained both in December 2007 and at the time the defendants, on behalf of Dogvan, applied for and were granted the bill facility to purchase the management rights business and managers' apartment at Trickett Gardens. The defendants did not disclose this obligation to the Bank in the course of completing their statements of assets and liabilities in December 2007 and June 2008.

26 The defendants also owned their home at Langwarrin, Victoria, and a holiday home in Dromana, Victoria. The Dromana property was secured by a mortgage to the Bank of Queensland for $300,000. That loan also was not disclosed to the Bank in the statements of assets and liabilities provided by the defendants in December 2007 and June 2008.

27 Further, Mr Doggett had a $55,000 personal loan from the Bank of Queensland, which was not disclosed to the Bank in the December 2007 or June 2008 statements of assets and liabilities.

28 The defendants could offer no acceptable explanation as to why they had not told the Bank about their obligation under the Nirvana by the Sea contract, the $300,000 mortgage over the Dromana property, or the $55,000 personal loan to Mr Doggett. They contended that the statements of assets and liabilities provided by them to the Bank in December 2007 and June 2008 were completed by Mr Duncan in a rush and signed by them in his presence. I do not accept that evidence, particularly concerning the second statement of assets and liabilities in June 2008. Mr Duncan said that this statement was completed by him and sent to the defendants for consideration and, if correct, signing and return by mail. I accept Mr Duncan's evidence. It is supported by the mail receipt stamp on the document: 'RECEIVED 19 JUN 2008 CORPORATE FINANCIAL SERVICES - BOX HILL, VIC'.

29 The evidence concerning the oral arrangements made between the defendants and the Rechichis for purchase of the management rights and managers' apartment is scant. Whatever the substance of those discussions, the defendants were extremely keen to purchase the management rights and associated apartment if they could - for the lifestyle and other reasons referred to above. In November or December 2007 they approached Mr Duncan at the Bank with a view to obtaining funding for the proposed purchase. From the outset, the defendants asked the Bank to fund the whole of the purchase price of $1.5 million and purchase costs. It was during these conversations that the defendants contend that the first representations were made.

30 For reasons which it is unnecessary to recount, Mr Duncan temporarily ceased being the relationship manager for the defendants in about December 2007 and did not resume the role until about late April 2008. In the meantime, Andrew Browne acted as the defendants' relationship manager. They could not recall this, and nothing turns on that. I accept Mr Duncan's evidence that this was the fact. The defendants say that they never spoke with Mr Browne, and that may be correct. They continued to provide any information relevant to the proposed transaction to Mr Duncan, who passed it on to Mr Browne. All of this was prior to the contracts of sale being executed in June 2008.

31 In December 2007, the defendants applied for an increase to their portfolio loan facility in respect of apartments at Trickett Gardens. Mr Duncan prepared a loan application which incorporated a statement of the defendants' assets and liabilities. The defendants signed that application on 17 December 2007, probably in Mr Duncan's presence. As appears above, the asset and liability statement did not include all of their liabilities.

32 By January 2008, the defendants and the Rechichis had both engaged the same firm of solicitors to act for them in connection with the proposed purchase of the management rights and the managers' apartment. That firm was Short Punch & Greatorix Lawyers, or 'SP&G Lawyers'. On 11 January 2008, the solicitors sent an email to Mr Duncan attaching information in connection with the proposed sale and purchase, including the agreements constituting the Rechichis' entitlement to the management rights business associated with Trickett Gardens. There was no financial information provided and, at this stage, the Bank did not have sufficient information to assess any loan application by the defendants or an entity associated with them such as Dogvan.

33 In about April 2008, Mr Duncan resumed responsibility for the defendants' file within the Bank as their relationship manager. By this time, the defendants, their solicitors and accountants had provided further information to the Bank concerning their application for the Bank to finance the proposed purchase, but Dogvan had still not been incorporated and no contracts of sale had been signed. Notwithstanding this, Mr Duncan began collating relevant documentation in connection with the proposed purchase and sought further information from the defendants.

34 By late May 2008, SP&G Lawyers had prepared draft contracts of sale. The defendants met with their solicitor on 26 May 2008, who explained the proposed contracts of sale to them in detail and received their instructions.

35 The defendants also dealt with 'BAMR' accountants, who were also the accountants for the Rechichis, prior to executing the contracts of sale on behalf of Dogvan. In a later file note made by Mr Duncan on 12 December 2008, he recorded that the defendants had informed him that they had sought advice from solicitors and accountants prior to executing documents and were satisfied with the advice they had been given. Mr Doggett agreed in cross-examination that this was the case and that the defendants had relied on their solicitors, 'BAMR' Accountants, and their own judgment prior to entering into the contracts of sale. Mr Sullivan gave evidence to similar effect, stating that the defendants: (1) 'relied a lot on our accountants to give us the figures'; (2) had previously looked at the figures and believed they demonstrated income from the business which was 'enough to cover the bills'; and (3) believed from their own examination of the Rechichis' books of account that the occupancy at Trickett Gardens was good at the time.

36 In June 2008, the defendants signed a number of contracts:

(1) On 1 June 2008, they signed an unconditional contract to purchase unit 24 in Trickett Gardens.

(2) On 9 June 2008, the defendants signed the contract to purchase unit 1, the managers' apartment at Trickett Gardens for $350,000, subject to finance, with a deposit of $35,000 payable upon signing of that contract. The Rechichis may have signed later, because the contract is dated 20 June 2008.

(3) On 12 June 2008, the defendants signed an unconditional contract to purchase unit 17 at Trickett Gardens.

(4) On 20 June 2008 the defendants signed the contract to purchase the management rights at Trickett Gardens from the Rechichis for the sum of $1,150,000, with a deposit of $115,000 payable on signing that contract. The management rights contract was subject to both finance and independent verification by an accountant nominated by the defendants that the minimum net operating profit for the management rights business was in a certain amount.

37 There was a dispute on the evidence as to whether the defendants informed the Bank and obtained verbal approval for finance to purchase units 17 and 24 at Trickett Gardens. The Bank contends that the defendants did not inform it of the proposed purchases. The defendants contend that they did. Although this is a collateral credit issue, the Bank relied upon it to support its submission that the defendants were confident of their own judgment in purchasing assets of significant value and assessing their own ability to repay the necessary debt, without any reliance on the Bank. This issue is capable of being relevant to issues of reliance and causation, although I would not place much weight on it if the Bank's contention was accepted. In my opinion, however, it is likely that Mr Doggett spoke with Mr Duncan about purchasing units 24 and 17 prior to the defendants signing contracts of sale, and that Mr Duncan gave Mr Doggett reason to understand that the Bank would likely assist with finance. This is supported by the contemporaneous documents.[2] In each case, the defendants borrowed the full purchase price and stamp duty from the Bank - $280,000 and $300,000 respectively.

38 It is convenient to note here that the Bank contends that other collateral issues were relevant to reliance and causation issues. For example, the defendants' non-disclosures in their statements of assets and liabilities discussed above. Further, the Bank relied on the defendants' conduct as discussed below in (allegedly): (1) misleading the Bank as to the amount of penalty charges payable to the Rechichis under the contracts for the purchase of the management rights business and the managers' unit; and (2) misleading the Bank by inferring that deposits of $150,000 had been paid by the defendants under those contracts when, in fact, no deposits had been paid. When the Court noted that the Bank's pleadings do not allege any breach of warranty, fraud, misleading conduct claims, or any contributory negligence or proportionate liability defences, the Bank agreed and declined the Court's invitation to consider applying to amend its pleadings. The Bank confirmed that it only wished to rely upon these matters in connection with reliance and causation issues relevant to such claims as the defendants might establish.

39 In Mr Duncan's application notes in respect of the application for finance to purchase apartment 17, prepared in June 2008, he recorded his view of the defendants' creditworthiness at the time, noted the proposed purchase of the management rights for Trickett Gardens, and recorded the defendants' intention to sell their unit in the View Pacific complex for the purpose of paying out the debt on the unit and retaining the balance of the sale proceeds (about $240,000 after repayment of the Bank of Queensland loan and capital gains tax). These application notes contain a contemporaneous summary of the Bank's knowledge and understanding of the position and intentions of the defendants, and of the Bank's credit assessment methods, and I will quote them in full:

Application Notes:

Steven Joseph Anthony Doggett & Kevin Sullivan

CPL Application $300,000.00

Purpose - Purchase Unit 17/24 Trickett Street "Trickett Gardens"

Surfers Paradise P.P $290,000 and associated costs.

Please refer to the attached CPL application submitted on behalf of the clients. As per recently approved CPL application dated 07/05/2008 for the purchase of Unit 24.

The clients have been able to procure another unit within the Trickett Gardens complex which is situated 2 blocks south of Cavill Avenue in Surfers Paradise, and between the Esplanade and Gold Coast Highway.

The complex comprises a mix of residents and holiday tenancies and the client's [sic] are also presently in negotiations to purchase the management rights for the Trickett Gardens apartments for which they will be seeking financial assistance via the CBA.

The client's [sic] have another unit on the Gold Coast in the "View Pacific" apartments which they intend to place on the market. The indicative sale price for this unit is in the vicinity of $600k having paid $325k for it two years ago. The property is mortgaged to the Bank of Qld and the client's intention is to retire the debt on the unit (approx $260k) and retain the balance of proceeds for any future capital expenditure requirements for the maintenance and up-keep of their remaining properties. The sale of this unit is to take place next financial year for Capital Gains Tax purposes.

We have completed servicing exercises based on the following:

(A) The current exposure including the proposed rental income from the 2 units being acquired in Trickett Gardens (10% gross of purchase price as per previously approved application). Combined purchase prices being $540,000 x 10% =$54,000 split 50% to each individual = $27,000 gross rental per applicant. These [sic] results in a net monthly surplus of $304 after allowance for living expenses and 10% buffer deducted.

(B) Based on proposed sale of the View Pacific apartment and repayment of $260k debt to Bank of Qld. Rental income has been reduced down by the amount of rental derived from the Pacific View apartment as per the 2007 tax returns and results in a monthly surplus of $1,387 after repayment of the Bank of Qld debt.

Should the clients achieve the sale price for the Pacific View apartment, this will leave them with approx $240k surplus funds after repayment of Bank of Qld debt, agents (say 5%) and CGT of approx $66k calculated on basic gain of $275k over the past 2 years.

Servicing is considered demonstrated on the initial scenario with all exposures included.

It is not intended to make the sale of the Pacific View apartment a condition of this additional finance given that the CBA does not have control of the title and disbursement of funds. However, the clients are realistic in their approach and see the sale of the unit as being in their longer term interests in regards to overall cash-flow and capital expenditure requirements.

The client's [sic] have a good equity position in regards to their property portfolio, with properties worth in the vicinity of $4.1m and exposure of $2.47m. (Gearing of 60%), the clients also have the ability to sell any one of their existing non-brand sensitive properties to reduce exposure/commitments should their circumstances alter.

Included within this request is consideration for temporary assistance in the form of a T/E on account number 3608 1025 3383 for an additional sum of $29,000 to assist with the payment of the deposit on the purchase. Clearance to be achieved from the implementation of the formal loan facility within 30 days - settlement term 30 days from signing of contract. In the event that the purchase does not proceed, deposit funds are refunded to client.

Approval as outlined is recommended.

[Signed]

Commonwealth Bank

Andrew Duncan[3]

40 In June 2008, the defendants were seeking finance from the Bank, either personally or on behalf of Dogvan, to complete four contracts of sale in relation to Trickett Gardens - for the purchase of apartments 1, 17 and 24 and the management rights. They had signed the contracts of sale to purchase the three apartments by 12 June 2008, and signed the contract to purchase the management rights by no later than 20 June 2008. In this context, the defendants were asked by Mr Duncan to complete a loan application including a statement of their personal assets and liabilities. Although the handwritten portions of the document were mostly completed by Mr Duncan, Mr Duncan completed the document by reference to bank records and his understanding of the defendants' financial position based on what he had been told by them. The document was mailed to the defendants for their consideration and, if correct, signing and return by mail. For the reasons given above, the statement of assets and liabilities was materially incomplete, as it omitted reference to undisclosed liabilities and obligations.

41 The contracts of sale for the purchase of the management rights and the managers' apartment, dated 20 June 2008, required the defendants to pay a 10 per cent deposit - $150,000 in total - upon signing the contracts. The defendants did not initially pay any part of the deposits. Although they asked the Bank from the outset to fund 100 per cent of the purchase price and costs, they did not seek immediate finance from the Bank to enable them to pay the deposits, as they had done with apartment 17, and did not inform the Bank that the deposits had not been paid. Instead, about four weeks after executing the contracts, they asked Mr Duncan to provide them with an advance of $100,000 from the proposed Dogvan loan amount.

42 In his witness statement, Mr Duncan said that the amount asked for to cover penalty charges was $60,000, an increase to the facility from $1,570,000 to $1,630,000. I accept that evidence, as the facility was in fact increased by that amount.

43 The Bank contends that the defendants misled it about the amount of the penalties, which were only about $15,000, and that the true purpose of the temporary financial assistance of $100,000 was to enable the defendants to pay part of the unpaid deposits. The $100,000 was in fact paid to the Rechichis and accepted by them as part-payment towards the unpaid deposits of $150,000.

44 Mr Duncan's contemporaneous note does not say that the $100,000 temporary advance was all for penalties. He recorded that it also represented a show of faith of the defendants' commitment to the purchase and would have the effect of minimising potential penalties for delay in settlement. So Mr Duncan must have known that a substantial portion of the $100,000 was required to pay part of the purchase price for the management rights. The fact remains, however, that the defendants did not inform Mr Duncan that the deposits had not been paid, and this contributed to the Bank's later assumptions (discussed below) that the deposits had been paid and that, at settlement, the defendants would obtain working capital equal to the amount of the deposits less the penalties which had been financed by the temporary advance.

45 Taking the evidence on this issue as a whole, I am satisfied that the defendants sought and obtained the $100,000 advance on the proposed Dogvan loan for the sole purpose of paying that sum towards their obligations to pay the deposits totalling $150,000, and that they did not inform the Bank that this was their purpose.

46 As at the date of the contracts to purchase the management rights and managers' unit, the defendants had been receiving accounting advice from BAMR Accountants who, as noted above, were also the accountants for the vendors. In about early 2007, the vendors had requested that Ms Kay Terry of BAMR Accountants prepare a special purpose financial report to calculate the net operating profit of the management rights business. The report, dated 27 March 2007, calculated the net operating profit for the 12 month period ending 29 February 2007 to be $220,661.

47 The contract of sale for the purchase of the management rights business was subject to the defendants obtaining independent verification by an accountant of the business's financial records. In these circumstances, BAMR could not act as accountants for the purpose of providing the independent verification under the contract. So, the defendants engaged the firm of 'Valmadre' as independent accountants to provide them with the requisite verification.

48 Clause 12 of the management rights contract gave Dogvan the right to terminate the contract if an independent accountant did not verify that the minimum net operating profit of the management rights business was not less than the amount referred to in item K(c) of the contract. However, the contract was in error in two respects: First, item K(c) did not include a minimum net operating profit figure for verification. Second, item K(b) stipulated that the verification period was to be a nine month period from 1 July 2007 to 31 March 2008. By email to Mr Jones of SP&G Lawyers (copied to Mr Valmadre) dated 23 June 2008, Ms Terry queried the nine month verification period and missing profit figure. In reply on the same date (copied to Mr Valmadre), Mr Jones confirmed by email that the profit figure in item K(c) was to be $221,000 and asked Mr Morrow (the defendants' solicitor at SP&G Lawyers) to confirm that the relevant verification period was 12 months. Mr Morrow confirmed on the same date that the profit figure corresponded with a 12 month verification period ending 29 February 2008. For unexplained reasons, Valmadre verified the profit for the 12 month period ending 31 March 2008. I infer that this was because the mistaken nine month period stated in item K(b) ended on that date. In my view, nothing turns on this discrepancy.[4]

49 Valmadre provided its independent accountants' report to the defendants, as directors of Dogvan, on 7 July 2008. The report was provided for the purpose of it being submitted to the Bank as Dogvan's 'intended mortgagee'. The Valmadre report is noteworthy for a number of reasons.

50 First, the Valmadre report did not verify that the minimum net operating profit was $221,000 for the 12 month period. The report concluded that the net operating profit for the full year ending 31 March 2008 was $217,751, $3,249 less than the stipulated amount.

51 Second, the Valmadre report assumed that the Dogvan directors (Mr Doggett and Mr Sullivan) would work in the business and perform the role of a 'two person management team'. That assumption was mistaken. The defendants always intended to employ a two person resident management team who would live in the managers' apartment and perform that role. Initially, it was intended that the managers would be relatives of Mr Doggett, but, when they could not perform the role, Renelle Askew and her husband were employed as managers. This mistaken assumption is also contained in clause 12.1(a) of the management rights contract, which excludes the wages of a two person resident management team from the expenses of the business in calculating the net operating profit, and is made plain by a number of paragraphs of the verification report.[5]

52 As appears below, however, the risk executive employed by the Bank who approved the Dogvan bill facility, Carmelo Digiglio, said that he reviewed the Valmadre report (but not the contract) and reached a different conclusion - that the net operating profit figure calculated by Valmadre included allowance for the wages of a two person management team. He came to that conclusion in circumstances where he understood that the defendants were not going to act as on-site managers of the management rights business.

53 When the Valmadre report was received by SP&G Lawyers, they immediately posted the original report to the defendants on 8 July 2008 by express post.

54 It was in the context of the defendants or their solicitors providing the Valmadre report to the Bank that the defendants contend that the Bank made the second representations. The defendants contend that the representations were made (1) generally, by the Bank approving the Dogvan bill facility; and (2) specifically, by statements made by Ms Geldart on 15 July 2008 when she gave oral approval for the loan to Mr Sullivan. This issue is determined below.

55 The Valmadre report was received by the Bank during a week in which Mr Duncan was on leave. Accordingly, the task of preparing the Bank's internal request for approval of the Dogvan loan fell upon Ms Geldart. The Bank's internal approval processes involved preparation of an 'Application Report' for approval by a Bank officer with the necessary authority. In this case, that officer was Mr Digiglio.

56 Ms Geldart completed the Application Report on 11 July 2008. The task of preparing that report probably commenced much earlier, as and when the information was received and collated by Mr Duncan and Ms Geldart. Mr Digiglio, a Risk Executive at the Bank, assessed and approved the Application Report. A summary of the assessment and approval process, and Mr Digiglio's evidence in this regard, is set out further below.

57 Mr Duncan returned from leave on Monday 14 July 2008. He learned that Ms Geldart had prepared the Application Report, submitted it to Mr Digiglio and that he had approved the Dogvan loan. He formed the view that Dogvan would be exposed to significant interest rate risk due to the variable nature of the proposed BetterBusiness Loan facility. He contacted either Mr Doggett or Mr Sullivan and arranged to meet with them to explain possible ways to mitigate against interest rate risks. The meeting took place on 17 July 2008. Mr Duncan was accompanied by Tim Smith, then a Global Markets Specialist employed by the Bank. Mr Duncan and Mr Smith informed the defendants about the different bill facility products offered by the Bank, which could have the effect of minimising their exposure to the risk of interest rate increases. During the course of the meeting, it became apparent that the defendants were interested in the Bank's 'Combo Advantage' bill facility product, which offered customers a fixed interest rate on a component of total borrowings and a variable interest rate on the balance. No decision was made by the defendants during the course of the meeting, however.

58 The defendants later confirmed that they wished to proceed with a bill facility in this form and, as a result, Mr Duncan updated and amended the Application Report so that it became an application for approval from Mr Digiglio of a bill facility for an increased amount of $1,630,000.

59 Before turning to consider that Application Report, and Mr Digiglio's approval of it, it is necessary to mention two aspects of the discussions at the 17 July 2008 meeting between the defendants, Mr Duncan and Mr Smith. First, during the course of the meeting, the defendants confirmed that they intended to sell their apartment in the View Pacific complex to realise their equity in it. They also asked for an increase in the loan amount from $1,570,000 to $1,630,000, in the context of discussing their urgent need to pay penalties for late settlement to the Rechichis. These issues have been discussed above, and are referred to in Mr Duncan's amended Application Report dated 22 July 2008 which is discussed below.

60 Second, Mr Duncan and Mr Smith said that they explained to the defendants that, in addition to the interest rates applying to a bill facility, the Bank would also charge a 'line fee' separately. Mr Duncan said that Mr Smith made a specific point of drawing the two costs components of a bill facility to the defendants' attention, and stating that the applicable line fee could only be calculated once the defendants elected between the various kinds of bill facilities offered by the Bank. Mr Smith confirmed this evidence. He said that he told the defendants:

that the line was charged separately from the applicable interest rates, and the amount of the line fee was dependent upon various factors, including the type of security to be provided, the loan to value ratio, the cashflow, and the provision of an independent valuation of the security.

61 The defendants acknowledged in their evidence that there was discussion about fees at the 17 July meeting. Mr Doggett gave the following evidence:

I suggest that you did, and you were told about it by Mr Smith and Mr Duncan that the line fee was charged separately to any interest?---No, I wasn't.

You've admitted as much that you were told at least something about the line fee and interest?---Correct.

What were you told?---I was told - I asked - for some reason I asked Mr Duncan when he mentioned the line fee, I said, 'What is the line fee?' And almost his exact words were, 'It's a one-off payment, you don't need to worry about it.' That's exactly what I recall in my head, I had no idea what a line fee was.

62 Mr Sullivan said that there were 'many ... discussions around the rates and line fees', that a line fee 'would have been mentioned ... but it was all rushed'. Like Mr Doggett, he maintained that a singular line fee was mentioned and there was no mention of any continuing fees.

63 It is strictly unnecessary to determine this issue, as the pleadings do not raise a separate case based on misrepresentation as to the amount or the continuing nature of the line fee under the bill facility. The issue is, however, an important part of the factual narrative and, as appears below, is part of the context in which the compromise agreement relied on by the Bank was executed in April 2010. By that compromise, the Bank agreed with the defendants to repay the line fees which had been paid by Dogvan and waived line fees for the future.

64 Taking the evidence as a whole on this issue, I prefer the version of events given by Mr Duncan and Mr Smith. There was no reason for them to mislead the defendants on this issue, and their version is supported by a warning given by the Bank on the front page of the document explaining the various kinds of bill facilities offered by the Bank. That document was referred to by Mr Smith during the course of the meeting and a copy was left with the defendants at the end of the meeting for them to consider before making a decision as to whether to proceed with any of the bill facility products on offer. The front page of the document is headed in bold type 'Important Information - General Advice Warning'. In a box at the bottom of the page, there is a note including the statement: 'A line fee is charged separately from any rates/fees discussed in this presentation.' Moreover, as appears below, the continuing nature of the line fee was explained in the letter of offer when the loan was restructured as the Dogvan bill facility.

65 In the amended Application Report submitted by Mr Duncan to Mr Digiglio on 22 July 2008, Mr Duncan commented that the increase in the facility amount would have a 'minimal' impact on Dogvan's ability to service its financial commitment to the Bank. In that regard, he noted (as had Ms Geldart before him) that the defendants were 'looking to liquidate one of their properties' - a reference to their apartment in the View Pacific complex - within six months. Ms Geldart had noted in the Application Report that this sale would improve the defendants' ability to contribute to servicing the Dogvan loan. Based on his discussions with the defendants on 17 July, Mr Duncan believed that the sale of the View Pacific apartment would enable the defendants to reduce the principal on the Dogvan facilities and that, for this purpose, a portion of the Dogvan bill facility was to be at a variable rate.

66 Mr Digiglio reviewed the amended Application Report on 22 July 2008 and gave approval to increase the total facility to $1,630,000 and to restructure it as a bill facility. He recorded the following in his approval comments:

Amending facility type to BDF and grossing up amount to $1,630,000 has minimal impact on overall servicing ... It is noted that funds position reveals that client will be left with approximately $150K in surplus funds post settlement by virtue of having already paid deposits on the management rights and managers' residence and these funds will be reimbursed to the client. This provides client with ongoing working capital and will assist with ongoing maintenance and capex, if required. On this basis increase in loan amount to $1,630,000 is approved as recommended subject to all original approval conditions remaining in place.

In relation to [the temporary excess] of $100,000 this is also approved as recommended and is to be cleared by 31/8/2008 or earlier upon funding of the new loan.[6]

67 The $100,000 temporary excess on the defendants' overdraft account was credited to their account on 25 July 2008. They immediately paid it to the vendor's solicitors, whose trust account receipts record the whole of the $100,000 having been paid in respect of 'Deposit Moneys'. In cross-examination, Mr Doggett acknowledged that the defendants always intended that the $100,000 temporary advance would be applied towards the deposit, which he thought was $100,000 in total. Mr Doggett's evidence was that the $100,000 'was always going to be for the deposit, which was part of the $1.63 million we borrowed.'

68 Following approval of the restructured loan as the Dogvan bill facility, on 22 July 2008, the Bank prepared a letter of offer dated 31 July 2008 and sent it to the defendants. There are a number of important aspects to the letter of offer, which are clearly stated:

(3) An indicative commencing bill rate of 8.13 per cent per annum (subject to change) to be determined on the day of each drawdown.

(4) The staged requirement for principal reductions on a monthly basis (to correspond with bill rollovers) with the intention that the residual balance at the end of the eight year period would be $1,350,000.

(5) The line fee was 3.5 per cent per annum, calculated as a percentage of the facility limit and payable on the first drawdown and 'monthly in advance thereafter'.

(6) The Bank would consider re-financing the residual balance at the end of the eight year term, but gave no commitment that it would do so.

(7) The facility was to be secured by guarantees from the defendants, second mortgages over their nine apartments at Trickett Gardens, a first mortgage over the managers' apartment and a first registered charge over all of Dogvan's assets.

69 The defendants acknowledged that they read the letter of offer before they signed it and returned it to the Bank. At that time, they were paying interest to the Bank of Queensland of 11.49 per cent. The combined indicative bill rate and line fee under the Dogvan bill facility, as stated in the letter of offer, was 11.63 per cent. Mr Doggett acknowledged that he knew the interest rate he and Mr Sullivan were paying to the Bank of Queensland at this time. Accordingly, had the defendants read and understood the clear terms of the letter of offer, they would have realised that the total cost of the bill facility was broadly equivalent to the amount of interest they were paying to the Bank of Queensland.

70 The defendants said that they did not understand the letter of offer. Mr Doggett said that he didn't understand that the line fee was a separate and continuing monthly fee. Mr Sullivan said that the letter was signed in a rush and that he and Mr Doggett did not really try to understand it:

[W]e just returned the document ASAP, we went over the document with Andrew previous [sic], but we just signed the document and took it back to the bank.

So you didn't read it? Is that what you're telling me? I have to understand your evidence and I'm having very great difficulty understanding your evidence and Mr Doggett's evidence?---We must have just rushed through it.

What's your position on this? You had the document, you had it for a weekend. Did you read it or not?---We read the document, Your Honour, but obviously, we obviously didn't take much notice of the fine print, that's all - or the print.

71 Shortly prior to settlement of the Dogvan bill facility, the defendants were under pressure from the Bank of Queensland to pay $20,000 in connection with their loan on their View Pacific apartment. They promised to pay the $20,000 from the proceeds of the Dogvan bill facility when it settled on 15 August 2008. The pressure to pay must have been intense because the defendants swore a statutory declaration for the Bank of Queensland on 6 or 7 August 2008 supporting their promise to pay the $20,000 from the Dogvan bill facility proceeds. These events were not disclosed to the Bank.

72 The Dogvan bill facility was settled by being drawn down in full on 15 August 2008. The settlement statement for the management rights contract and managers' apartment contract shows that the total amount of the $100,000 temporary advance to the defendants had been applied to part payment of the deposit, and that the penalty interest (of only $13,893) under the contracts was paid at settlement and not before.

Subject to the counterclaims, how much is owing to the Bank?

73 The Bank called admissible evidence to prove its claims. The defendants did not challenge those proofs in any meaningful way. Thereafter, the trial proceeded on the basis that the Bank's claim had been proved and it was for the defendants to establish one or more of their counterclaims. As at the commencement of the trial on 15 October 2013, the amounts owing by the defendants, in their own capacity or as guarantors of Dogvan, totalled $3,103,213.07, calculated as follows:

(1) $507,637.67 - the defendants' personal liability for the balance of the portfolio loan facility in respect of their purchases of apartments in the Trickett Gardens complex, following sale of those apartments by the Bank as mortgagee;

(2) $2,445,165.48 - the defendants' liability as guarantors of Dogvan's liabilities under the bill facility agreement;

(3) $66,316.87 - the defendants' liability as guarantors of Dogvan's liabilities under a temporary overdraft facility; plus

(4) $84,093.05 - the defendants' liability as guarantors of Dogvan's liability under an 'investment loan facility' in respect of the managers' residence in the Trickett Gardens complex. As appears above, the Dogvan bill facility initially included finance for the full amount of the purchase prices of both the management rights and the managers' apartment, and stamp duty, in the total amount of $1,630,000. Later, that portion of the facility relating to the managers' apartment was restructured as a separate 'investment loan facility', at a lower interest rate and repayable over a longer period, to assist Dogvan in servicing its commitments to the Bank.

74 Subject to the counterclaims, I find that the defendants are indebted to the Bank in the amount claimed, together with interest accruing under the various facility agreements.

75 In their defence and counterclaim, the defendants alleged that the Bank made the first representations to this effect:

[In] or about mid November 2007, the [Bank] through Mr Duncan informed the defendants that he was a specialist in small business lending, and that he had assessed the defendants' current and future cash flow and informed the defendants there was sufficient future cash flow from the defendants' proposed business operation to support a future loan in the vicinity of $1.6 million and reasonable extensions of that sum from the [Bank].

76 The defendants did not give evidence which proved the making of the first representations.

77 Mr Doggett said the defendants approached Mr Duncan in November 2007 after the purchase price of $1.5 million for the management rights and managers' apartment had been agreed, and sought funding from the Bank for the whole of the purchase price plus stamp duty and fees, in a total amount of about $1,630,000. He said that Mr Duncan 'was generally supportive'. Mr Doggett continued:

At all times Andrew Duncan received all relevant documents that he requested from us. There was never a suggestion that we did not have the capability of ... purchasing the management rights for Trickett Gardens.

78 Later, Mr Doggett said that Mr Duncan 'never ever said to me that we should not endeavour to purchase this business because he knew the passion we had for this building, it was more myself than Kevin that were [sic] stipulating, "we only want to do this if it is affordable" '.

79 This general evidence from Mr Doggett does not prove the making of the first representations. In any event, Mr Doggett later said that he could not recall if he and Mr Sullivan made the stipulation referred to above:

I can't recall if it was 2007. I know that was just a bit of excitement then, when we brought it to his attention. It would have been around sometime early 2008, from memory, and then there was a bit of a gap where there was not a lot of communication.[7]

80 The highpoint of the defendants' case in support of the first representations was the evidence of Mr Sullivan in chief:

Well, initially back in 2007 when we went and met with Andrew Duncan, I believe it was at the Box Hill office, we went to him, we had spoken to him about the investment opportunity. We spoke to him about the management rights, the units. He looked at the security and said it was affordable. From there we had moved along into January right through with the same understanding that the business could be purchased. We had plenty of equity and there was no problem in servicing the debt.

81 In cross-examination, however, Mr Sullivan agreed with the general proposition that the early discussions with Mr Duncan in late 2007 and early 2008 were 'really at a very high level' and that it was only once the defendants started providing information about the management rights business to the Bank, in about January 2008, that it had any information to even commence assessing the merits of the loan application.

82 Mr Duncan denied making the first representations.

83 I find that the first representations were not made. It is implausible that Mr Duncan would have made those representations at such an early stage, well before any financial information in support of the proposed loan application had come forward.

84 The defendants contend that the second representations were made generally by the Bank approving the Dogvan bill facility; and specifically by statements made by Ms Geldart on 15 July 2008 when she gave oral approval for the loan to Mr Sullivan.

85 Mr Sullivan's evidence of this conversation was to the following effect. He said that, on 15 July 2008, Ms Geldart initially spoke with him on the telephone and told him that the Valmadre report did not meet the profit requirements under the contract and the Dogvan loan application would therefore be refused ('her words were, "the figures don't add up"'); and that he then suggested that Ms Geldart contact the vendors or their accountants. That request can only mean that he was asking the Bank to reconsider its refusal of the Dogvan loan application. According to Mr Sullivan, Ms Geldart telephoned him later that day and told him that the Dogvan loan had been approved, and that he replied that he would then 'remove the subject to finance clause off the contract of [sic] the purchase of the management rights'.

86 The contemporaneous Bank records created by Ms Geldart on 11 July 2008 are consistent with her speaking with Mr Sullivan on that day, when she prepared an Application Report for the proposed Dogvan loan and submitted it to Mr Digiglio for assessment. In that report, she referred to the net operating profit figure of $217,751 from the Valmadre report, but nevertheless recommended that Mr Digiglio approve the loan. If it is assumed that the conversations which Mr Sullivan recalls with Ms Geldart occurred on 11 July 2008, the following scenario is possible: she telephoned Mr Sullivan that morning, told him that the Dogvan loan was declined because the Valmadre report verified only $217,751; then reconsidered the application (perhaps after making enquiries of the vendors' accountants); prepared the Application Report recommending approval of the loan; and telephoned Mr Sullivan later that day after Mr Digiglio had approved the loan. In the absence of contrary evidence from Ms Geldart, I accept that this scenario is not so implausible that it should be rejected. Accordingly, Mr Sullivan's evidence should be accepted. I reject the Bank's contention that it was unnecessary to call Ms Geldart as a witness. In the absence of any explanation for not calling her as a witness, I infer that her evidence would not have assisted the Bank's case on this issue.

87 However, Ms Geldart's statements did not amount to representations by the Bank to the effect of the second representations. The statements made by Ms Geldart amount to no more than communication of the loan approval. They do not amount to a representation that Dogvan could afford to repay the loan from the anticipated cashflow of the management rights business. As the defendants well knew, from the Bank's request for a statement of their assets and liabilities, the Bank was also taking their income and assets into account in deciding whether to approve the Dogvan loan. There is no evidence that the defendants knew of clause 25.1 of the Code and, on that basis, understood that the Bank was only assessing Dogvan's ability to repay the loan.

88 In these circumstances, I agree with the statement by the Full Court of the Federal Court (Olney, Moore and Tauberlin JJ) in Sheedy v Abalpark Pty Ltd that:

There are many differing circumstances which may cause a bank to make an advance. It cannot be stated as a general proposition that where a bank forms the view on the information before it, that a loan is capable of being serviced and repaid by the borrower, it follows that the bank is making a representation that the borrower can service and repay the loan.[8]

89 I find that the second representations were not made.

Was any such representation fraudulent, false or misleading?

90 As I have found that none of the alleged representations were made, it is unnecessary to consider whether they were fraudulent, false or misleading. It is necessary to record, however, that the allegation of fraud was made without any sufficient basis and ought not to have been made. There is no evidence of any fraudulent conduct on behalf of Mr Duncan or Ms Geldart in their dealings with the defendants or, in particular, in their conduct relevant to the alleged representations.

91 If, however, the second representations had been established, they would have been false or misleading. The information then held by the Bank did not provide reasonable grounds for representations that the future cash flow of the management rights business would be sufficient for Dogvan to service the proposed loan, with or without further advances. As appears below, this is because it was known to the Bank that the defendants would employ on-site managers and provide them with rent-free accommodation in the managers' apartment which Dogvan was purchasing.

Did the defendants rely on any such representation?

92 Again, having regard to my finding that none of the alleged representations were made, it is unnecessary for the Court to consider this element of the defendants' case. In my opinion, however, the defendants would not have established reliance on the first representations, if they had been proved, because their own evidence, in particular that of Mr Sullivan, was that the defendants well knew that Mr Duncan did not have sufficient information to make the first representations at the time he allegedly made them. Moreover, it would have been wholly unreasonable for the defendants to rely upon the first representations in circumstances where they had withheld material information from the Bank as to their financial commitments to other financiers. In my opinion, their own negligence would have severed any causal relationship between the first representations and their conduct in purchasing the management rights business and managers' apartment six months later.[9]

93 If the second representations had been established, I am satisfied that they would likely have been a material matter relied upon by the defendants in causing Dogvan to proceed with the contracts and in them guaranteeing Dogvan's liabilities to the Bank. Whether such representations were made on 11 or 15 July 2008, Dogvan still had the opportunity to avoid the contracts - (1) for non-satisfaction of the subject to finance conditions; and (2) because the Valmadre report did not verify net income of $221,000 for the management rights business in the relevant 12 month period. Mr Sullivan said that, after Ms Geldart gave him oral approval for the loan, he telephoned SP&G Lawyers, told them that the loan had been approved and instructed them to remove the subject to finance clause from the contracts for the management rights and the managers' apartment; and that he believed that Dogvan was committed to proceed with the transaction from that day.[10]

94 I am satisfied that, had the Bank refused the Dogvan loan, the defendants would likely have caused it to avoid the contracts. Taking the evidence as a whole, it is unlikely that another financier would have stepped in on short notice, and Mr Sullivan's evidence demonstrates that the defendants were aware of their opportunities to avoid the contracts.

95 The defendants allege that, in making the alleged representations in circumstances where the Bank was aware that the defendants reposed trust and confidence in its officers, the Bank engaged in unconscionable conduct contrary to ss 12CA and 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (the 'ASIC Act').

96 Section 12CB of the ASIC Act prohibits unconscionable conduct. It provides that:

(1) A person must not, in trade or commerce, in connection with:

the supply or possible supply of financial services to a person (other than a listed public company); or
the acquisition or possible acquisition of financial services from a person (other than a listed public company);

engage in conduct that is, in all the circumstances, unconscionable.

97 For the reasons given above, I have found that the alleged representations were not made.

98 Even if they had been made, I would not be satisfied that the representations constituted unconscionable conduct within the meaning of s 12CB, because the Bank undertook a bona fide (albeit mistaken)[11] credit risk analysis of the ability of Dogvan, supported by the defendants as guarantors, to repay the moneys loaned under the bill facility. In those circumstances, the Bank's conduct cannot be said to contain the element of moral obloquy required to establish statutory unconscionability.[12]

99 Nor do the circumstances disclose any general law unconscionability within the meaning of s 12CA. I am not satisfied that the relationship between the parties was anything other than a normal banker/customer relationship. There was nothing in the dealings between them to put the Bank on notice of any special disadvantage that the defendants may have been suffering,[13] nor has it been shown that any relevant disadvantage existed. Further, the fact that the Bank performed a bona fide (albeit mistaken) credit risk analysis means that this case does not fall within the category of unconscionable conduct cases based on 'asset lending'.[14]

100 The allegation of unconscionable conduct has not been made out.

Did the Bank owe the defendants an obligation to exercise care?

101 The defendants' principal case is that the Bank owed them and Dogvan a contractual obligation, arising under clause 25.1 of the Code. They contend that clause 25.1 was incorporated into the Dogvan bill facility contract and their deed of guarantee of Dogvan's obligations. Alternatively, they contend that the Bank owed them a duty of care in tort. For the reasons appearing below, I accept that a contractual obligation to exercise care was owed to the defendants, under clause 25.1 of the Code, as a term of their guarantee. It is therefore unnecessary to consider whether there was a common law duty of care in tort.

102 The accepted position is that a bank generally owes no obligation to exercise care, in contract or in tort, to a customer in performing its own credit risk analysis and deciding whether or not to provide finance.[15] That position may change if a bank assumes the role of a financial adviser to the customer.[16] The issue in this case is whether clause 25.1 of the Code was incorporated into the terms and conditions of the Dogvan bill facility and the defendants' guarantee and, if so, with what consequences.

103 The defendants contend that the Bank breached clause 25.1 by approving Dogvan's loan application in circumstances where a diligent and prudent banker would have realised that the loan was unaffordable from the cash flow of the management rights business.

25 Provision of credit

25.1 Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it.[17]

105 Clause 10.3 of the Code provides that any written terms and conditions of a banking service offered by a bank 'will include a statement to the effect that the relevant provisions of this Code apply to the banking service but need not set out those provisions'.

106 Clause 18.20 of the Bank's Terms and Conditions for Commercial Lending Facilities is in the following terms:

18.20 If the Borrower is an individual or small business, relevant provisions of the Code of Banking Practice will apply to these facilities. A copy of the code is available from the Bank upon request.

107 The defendants (as unrepresented parties) were unable to provide the Court with any assistance as to the legal issues concerning the incorporation of the Code into the Dogvan bill facility and their guarantee. In these circumstances, following the completion of the trial, the Court asked the Victorian Bar Pro Bono Scheme to nominate counsel to assist it, as amicus curiae, on legal issues, including: (1) whether clause 25.1 was incorporated as a term of the Dogvan bill facility? (2) if so, what is the scope of the Bank's contracted obligation under clause 25.1? The request was made because the issues are novel and are of potential general significance to the banking industry. Quite properly, the Bank did not oppose the involvement of amicus curiae.[18] Amicus curiae considered the legal issues, sought clarification in relation to context, and provided written submissions. The Bank replied to those written submissions and amicus curiae provided further submissions as a result. The defendants also made submissions, although these were of no utility on these issues. Moreover, it was necessary to invite further submissions when the Court was finalising reasons for judgment, concerning whether clause 25.1 had been incorporated as a term of the guarantee and, if so, what it meant in the guarantee.

109 The first issue is whether clause 18.20 of the loan facility had the effect of incorporating clause 25.1 of the Code as a term of the Dogvan bill facility agreement. Throughout the trial, the Bank denied that clause 18.20 had this effect. It contended that, notwithstanding authorities which decided or assumed that other clauses of the Code were incorporated into banking contracts,[19] the better view was that the Code had no contractual force. Following the conclusion of argument at trial, and prior to the receipt of submissions from amicus curiae, the Bank withdrew this submission in a limited way.[20] By email to the Court dated 24 December 2013, the Bank's solicitors stated:

We are instructed to inform the Court that ... the Bank makes the following limited concession:

(a) the Bank concedes that clause 18.20 of the Bank's Terms and Conditions for Commercial Lending Facilities (Terms and Conditions) had the effect of incorporating clause 25.1 of the Code of Banking Practice (Code) as a term of the bill facility agreement dated 31 July 2008 between the Bank and [Dogvan] ...

We believe that as a result of the above concession, it is not necessary for amicus curiae or the Bank to make submissions to the Court in relation to the issue ...

110 Unfortunately, for reasons which it is unnecessary to recount, amicus curiae was not informed of this concession and provided the Court with helpful submissions concerning the incorporation issue, which were in accordance with the concession.

111 In my opinion, the Bank's concession that clause 25.1 was incorporated into the Dogvan bill facility agreement was properly made. The Bank's concession, however, does not address whether clause 25.1 was incorporated into the defendants' guarantee. So it in any event remains necessary for the Court to consider the incorporation issue in that context.

112 As noted above, clause 18.20 of the terms and conditions of the Dogvan bill facility provides expressly that, if the borrower is an individual or small business, 'relevant provisions of the Code will apply to these facilities'. There is no dispute that clause 18.20 applies in the circumstances of this case, as Dogvan was a 'small business' within the meaning of the Code. The defendants' guarantee of the facility contains a similar statement on the front page of that document: 'Relevant Provisions of the Code of Banking Practice apply to this Guarantee'.

113 The incorporation of the relevant provisions of the Code into banking contracts containing similar clauses is in accordance with two decisions of the Court of Appeal in New South Wales. In Sam Management Services (Aust) Pty Ltd v Bank of Western Australia Ltd,[21] it was accepted that clause 2.2 of the Code was incorporated into the relevant banking contract as an express term. Young JA made general comments about the effect of incorporating the Code into banking contracts. His Honour concluded his comments with the statement, in substance a warning to the banking industry, that:

the principal purpose of these remarks is to suggest to bankers that the cross-reference in legal documents to their promotional material is likely to lead to complications in litigation.[22]

114 In Brighton v Australia & New Zealand Banking Group Ltd,[23] the Court of Appeal in New South Wales again accepted that provisions of the Code were incorporated into banking documents. In that case, the statement in the relevant guarantee, that '[t]he applicable provisions of the Code of Banking Practice apply to this Guarantee', was enough to incorporate the relevant provisions of the Code into the guarantee.

115 The incorporation of the relevant provisions of the Code into the Dogvan bill facility and the defendants' guarantee is also supported by the decision of the Full Court of the Federal Court of Australia in Goldman Sachs JB Were Services Pty Ltd v Nikolich.[24]

116 The Bank contends that clause 25.1 was not incorporated into the defendants' guarantee because 'the relevant clauses to be incorporated into the guarantee documents are limited to clauses 28, 33 and 39'[25] or, alternatively, that clause 25.1 is 'not relevant to the terms of the guarantee'.[26] I do not accept those submissions. For the following reasons, clause 25.1 was incorporated into the guarantee:

(1) Clause 1.1 of the Code provides that the Code applies to the Bank's dealings with persons 'who are or who may become our ... customers and their guarantors.'[27]

(2) Clause 28.1 of the Code defines a 'guarantee' for the purposes of the Code. In summary, clause 28.1 provides that the Code applies to every guarantee obtained from an individual for the purpose of securing financial facilities provided by the Bank to another individual or a small business. The defendants are individuals and Dogvan was a 'small business' within the meaning of the Code. Accordingly, the defendants' guarantee was a guarantee within the meaning of the Code.

(3) Clause 39.1(a) of the Code provides that the Bank will be bound by the Code in respect of any guarantee (as described in clause 28) 'except as provided for below'. None of the exceptions provided for in the balance of clause 39 [sub-paragraphs 39.1(b)-(h)] excludes 25.1 from applying to guarantees.

(4) Clause 28.3 of the Code provides that a guarantee 'must include a statement to the effect that the relevant provisions of this Code apply to the Guarantee but need not set out those provisions.' (emphasis added). The defendants' guarantee included a statement to that effect.

(5) In my opinion, clause 25.1 was a 'relevant provision' of the Code for the purposes of guarantees within the meaning of clause 28.1. A promise by the bank to the customer (who is the principal debtor) to exercise care, or that it has exercised care, in the terms set out in clause 25.1 is obviously relevant to a guarantor, or a proposed guarantor. Any guarantor has a material interest in whether the bank, exercising the care and skill of a diligent and prudent banker, has formed an opinion that the borrower will be able to repay the loan sought.

(6) The above reasoning is supported by the decision of the Court of Appeal in New South Wales in Brighton.[28] In that case, Campbell JA (Giles and Hodgson JJA agreeing) stated that one of the guarantees in issue would have incorporated clause 22 of the Code, which imposes a duty of confidentiality, if it had been established that it was a guarantee within the meaning of clause 28.1 of the Code.[29] In that case, however, the principal debtor was neither an individual nor a small business, and so the guarantee did not fall within clause 28.1 of the Code. For the reasons given below, I do not accept the Bank's contention that the decision in Brighton is distinguishable because clause 22 is capable of being relevant to guarantors while clause 25.1 is not.

117 The question remains as to the meaning of clause 25.1 when incorporated as a term of the defendants' guarantee. Notwithstanding their concession that clause 25.1 of the Code forms part of the bill facility agreement between it and Dogvan, the Bank contended that clause 25.1 has no effect upon the 'very narrow duty' that courts have in the past, absent particular circumstances, imposed upon bankers in their dealings with customers. Having analysed those limited duties by reference to decided cases,[30] the Bank contended in paragraph 32 of its written submissions in reply to those of amicus curiae that:

A diligent and prudent banker may be assumed to be aware of the authorities cited above regarding the very limited extent of its prima facie duties to borrowers. Clause 25.1 of the Code rises no higher than, in a sense, reinforcing that those limited duties will be met. It does not seek to go any further.[31]

118 I do not accept the Bank's submissions in this regard. Clause 25.1 of the Code is in my opinion a contractual obligation extending beyond the previously recognised duties or obligations of banks. It is expressed in promissory language ('we will') and the promise is expressly one to 'exercise the care and skill of a diligent and prudent banker' for a specific purpose. Further, the Bank's submission is inconsistent with clause 3.2 of the Code which provides:

3.2 If this Code imposes an obligation on us, in addition to obligations applying under a relevant law, we will also comply with this Code except where doing so would lead to a breach of a law (for example, a privacy law).[32]

119 Clause 40 of the Code defines 'you' and 'your' for the purposes of clause 25.1 of the Code in a manner which limits those terms to the borrower - in this case, Dogvan. Relevantly, as it stood at July 2008, clause 40 provided the following definitions:

we, us, and our means the bank that you deal with that has adopted this Code

you and your means a person who, at the time the banking service is provided, is an individual or a small business that is our customer (or, where this Code specifically applies to potential customers, a potential customer of ours) and includes, in clauses 28, 33 and 39, any individual from whom we have obtained, or propose to obtain, a Guarantee.[33]

120 As can be seen, clause 25 is not mentioned as a clause in which the words 'you' and 'your' include a guarantor.

121 At trial, however, the Bank contended that the meaning of 'you' and 'your' in clause 25.1 included the guarantors and, therefore, that the Bank's credit assessment referred to in that clause related to it forming an opinion about the ability of both Dogvan and the defendants, as guarantors, to repay the loan, including from the income and securities provided by the defendants. In argument and in the questions framed for amicus curiae, the Court proceeded on the basis that this contention was correct. In the course of preparing these reasons, the Court doubted the correctness of that contention, and invited further submissions. In submissions filed on 18 August 2014, the Bank withdrew this contention, accepted that 'you' and 'your' in clause 25.1 means the customer only, but contended that assessment of the customer's ability to repay the relevant loan includes having regard to the assets and income of any guarantors who are proprietors of a corporate small business customer - in this case the defendants as directors of Dogvan.

122 I do not accept that submission. Clause 25.1 concerns the Bank's opinion as to Dogvan's ability to repay the relevant loan. The fact that the Bank had regard to the assets and income of the defendants, as both proprietors of Dogvan and its guarantors, is understandable and commercially realistic. But it does not allow the Court to read words into clause 25.1, to extend the meaning of customer in that clause to include 'proprietor' guarantors such as the defendants.

123 On this basis, clause 25.1, as a term of the guarantee, contained a promise to the defendants as guarantors in the following terms:

25.1 Before we offer to give [the customer/Dogvan] a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about [the customer's/Dogvan's] ability to repay it.

124 On this interpretation, the requisite opinion to be formed by the Bank for the purposes of clause 25.1 related to Dogvan's ability to repay the credit facility, and not (as submitted by the Bank) the ability of Dogvan and the defendants as guarantors to repay the amount lent to Dogvan from their combined resources. I do not accept the Bank's submission that incorporating clause 25.1 into guarantees would cause linguistic confusion. Guarantors are not being offered or given a credit facility.

125 For the above reasons, I conclude that the Bank owed a contractual obligation to both Dogvan and the defendants (as guarantors) in terms of clause 25.1 of the Code as I have interpreted it. I turn to consider whether the Bank breached that obligation.

126 Before doing so, however, I note two further issues raised by the Bank.

127 First, counsel for the Bank drew attention to the oddity arising from a promise in a contract to exercise care before the contract is entered into. I do not think that creates any difficulty. Reading the Code as a whole, it is intended to apply to persons 'who may become' customers or guarantors (clause 1.1) and the definition of 'you' and 'your' specifically mentions that it applies to customers and to 'potential customers' in circumstances 'where this Code specifically applies' to them. In my opinion, clause 25.1 is a clause which, on its face, specifically applies to potential customers. In substance, clause 25.1 is a warranty from the Bank as to a standard of care it has exercised in approving the relevant credit facility.

128 Second, in reply to the submissions of amicus curiae concerning the scope of the contractual obligation in clause 25.1 of the Code, the Bank contended that the terms of the Dogvan bill facility contained a disclaimer in clause 18.5, which relevantly states that:

18.5 The Bank takes no responsibility for any decision the Borrower [Dogvan] makes:

(a) to enter into the Contract [the Dogvan bill facility];

(b) to obtain the Facility [the Dogvan bill facility]; or

(c) ...

129 Implicit in this submission was the contention that clause 18.5 was inconsistent with the Bank being liable for any breach of clause 25.1 of the Code, notwithstanding its concession that clause 25.1 was incorporated as a term of the Dogvan bill facility. I do not accept that contention.

130 First, I accept as correct the following statement from Lewison and Hughes, The Interpretation of Contracts in Australia: '[w]here parties expressly incorporate terms into a contract, the incorporated terms must be construed as if they had been written out in full in the contract, and accordingly must be construed in the context of the contract into which they have been incorporated'.[34]

131 Second, where a contract incorporates terms stated in another document, the terms of the contract prevail over the incorporated terms if they conflict.[35] But if the apparent conflict can be reconciled it should be. This approach is consistent with the following statement of the High Court in Re Media Entertainment & Arts Alliance; ex parte Hoyts Corp Pty Ltd (No 1):

A conflict ... involving apparently inconsistent provisions in the one instrument, is to be resolved, if at all possible, on the basis that one provision qualifies the other and, hence, that both have meaning and effect ... that rule is an aspect of the general rule that an instrument must be read as a whole.[36]

132 Third, clause 18.5 was not pleaded by the Bank as a defence, and the Bank advanced no specific submission that clause 18.5 was inconsistent with clause 25.1 of the Code or that clause 18.5 effectively destroyed the effect of clause 25.1. In my opinion, clause 18.5 is capable of being read together with clause 25.1 of the Code. As appears above, clause 25.1 of the Code imposes a specific contractual obligation on the Bank. It contains a promise by the Bank to exercise, or warranty that it has exercised, the stipulated standard of care in forming the requisite opinion before offering the relevant credit facility. This focuses upon the Bank's conduct. On the other hand, clause 18.5 focuses upon the conduct of the borrower. It provides that the Bank takes no responsibility for the borrower's decisions. The clause does not provide that the Bank takes no responsibility for its own conduct in breach of the bill facility agreement. Read in this way, the two clauses can stand together in the context of the bill facility agreement as a whole.

133 Fourth, in any event, as appears above, clause 25.1 of the Code was also incorporated into the defendants' guarantee. There is no equivalent provision to clause 18.5 in the guarantee.

134 The defendants contend that the Bank breached its obligation to exercise the care and skill of a diligent and prudent banker in assessing the ability of Dogvan to make the repayments due under the Dogvan bill facility.

135 The defendants contend that the Bank acted negligently in assessing Dogvan's likely future cash flow from the management rights business, for the following principal reasons:

(1) the Bank knew that Mr Doggett and Mr Sullivan would not be working in Dogvan's business as on-site resident managers, but would be retaining their jobs in Melbourne;

(2) the Bank knew or ought to have known that Dogvan would employ on-site managers who would live in the managers' apartment rent-free and would be paid wages;

(3) the Bank knew or ought to have known that the vendors of the management rights business had not been paying managers' wages;

(4) the Bank knew or ought to have known that the purchase contracts under which Dogvan proposed to buy the management rights business and managers' apartment were subject to finance;

(5) the Bank knew or ought to have known that the purchase contract for the management rights business was also subject to and conditional upon an accountant nominated by Dogvan verifying that the net operating profit of the business for the twelve month period ended 31 March 2008 was not less than $221,000;

(6) the Bank mistakenly assumed that the accountant's verification of a slightly lower figure for the full year ($217,751) included allowance for wages to the on-site managers to be employed by Dogvan (without considering the amount of such wages), when the Valmadre report made no such allowance;

(7) if the Bank had identified that the verified minimum net profit omitted any allowance for wages to on-site managers, as a prudent banker exercising diligence, skill and care, it ought to have formed the opinion that Dogvan would not be able to meet its payment obligations to the Bank.

136 In these circumstances, the defendants contend that the Bank should have refused Dogvan's loan application and, if that had occurred, Dogvan could and would have terminated the purchase contracts under either the 'subject to finance' clause or the 'subject to accountant's verification' condition.

137 The above formulation of the defendants' allegations of breach represents the Court's interpretation of the defence and counterclaim and the case advanced by the defendants in person at trial.

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