Plaintiff v Firstnamed Defendant Secondnamed Defendant Thirdnamed Defendant

Supreme Court of Victoria|2008-05-13|Before: ROBSON J

PRACTICE AND PROCEDURE - Application to set aside consent judgment obtained under terms of settlement - Whether Rule 22.15 encompasses consent judgment obtained by a motion for judgment under terms of settlement - Consideration of means to set aside a judgment obtained by consent under terms of settlement

EQUITY - Undue influence - Wife not receive independent and competent advice - Whether plaintiff had constructive knowledge of undue influence or inadequate advice - Whether principles of constructive knowledge under the second limb of are applicable to an application to set aside terms of settlement or a consent judgment obtained under terms of settlement

EQUITY - Wife executed guarantee at request of husband for the benefit of the husband - Meaning and effect of guarantee not explained to the wife - Application of principle in Garcia's Case

Baden v Societe Generale pour Favoriser le Development du Commerce et de l'Industrie en France SA [1993] 1 WLR 509, [1992] 4 All ER 161

Barclays Bank PLC v O'Brien[1993] UKHL 6; [1994] 1 AC 180

Brownport Management Ltd v Aqua-Tech 21 Pty Ltd [2002] VSC 396

Consul Developments Pty Ltd v DPC Estate Pty Ltd. [1975] HCA 8; (1975) 132 CLR 373

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) HCA 22

Harrison v Charalambous [1999] FCA 902

Heller Financial Services Ltd v Solczaniuk[1989] NTCA 3; (1989) 99 FLR 304 at 310

Kostokanellis v Allen[1974] VicRp 71; 1974] VR 596 at 603 (Full Bench)

National Australia Bank v Garcia [1998] HCA 48; (1998) 194 CLR 395

Roberts v Gippsland Agricultural & Earth Moving Contracting Co Pty Ltd [1956] VicLawRp 86; [1956] VLR 555

Tresize v National Australia Bank Ltd (1994) 122 ALR 185

Waltons Stores (Interstate) Ltd v Maher[1988] HCA 7; (1988) 164 CLR 387

Yerkey v Jones[1939] HCA 3; (1939) 63 CLR 649Evans v Bartoam 1937] AC 473

1 By notice of appeal dated 14 April 2008, Euroasia, Euroasia (Pacific) Pty Ltd (ACN 006 604 922) ("Euroasia"), appeals against orders made by Master Daly on 11 April 2008 setting aside the judgment of the court entered 12 May 2006 insofar as it applies to the second defendant, Edwina Kate Narain ("Mrs Narain"). The appeal is by way of a hearing de novo.

2 Before the Master was a summons dated 12 March 2008 filed on behalf of Mrs Narain applying for an order to set aside the judgment entered against Mrs Narain in this proceeding on 12 May 2006. In support of her application, Mrs Narain relies on her affidavit sworn 12 March 2008 and an affidavit sworn 1 April 2008 of Michael Douglas Main. In opposition, Eurasia relies on an affidavit sworn 31 March 2008 by Angela Jane Nunn, solicitor for Eurasia.

3 The allegations of Euroasia in the statement of claim in this proceeding are not in dispute. Mrs Narain's sole ground for seeking to set aside the judgment entered on 12 May 2006 relies on the principle in National Australia Bank v Garcia as explained below.

4 The proceeding was commenced on 23 August 2005. Euroasia is the plaintiff and the defendants are Andrew John Michael ("Mr Michael"), Mrs Narain and Ravi Amrit Narain ("Mr Narain"), the husband of Mrs Narain. The statement of claim alleges that in or about late 2004 Euroasia lent Golden Dragon Abalone Pty Ltd ("GDA") the sum of $500,000 as working capital.

5 The statement of claim further alleges that in or about late January or early February 2005 Euroasia entered into heads of agreement with GDA, Mr Michael, and Mrs Narain for the purchase by Euroasia from Mr Michael and Mrs Narain of 50% of the issued share capital in GDA.

6 It is alleged that the sale by Mr Mitchell and Mrs Narain was subject to certain conditions precedent. It is further alleged that after the execution of the heads of agreement, Euroasia paid GDA the sum of $1m on account of the agreed consideration for 50 per cent of the issued share capital in GDA. It is alleged that the transfer of shares in GDA to Euroasia did not occur and that none of the conditions precedent to the heads of agreement were satisfied. It is further pleaded that as the transfer of shares did not proceed, the sum of $1.5m paid by Euroasia to GDA became immediately repayable by GDA to Euroasia.

7 The statement of claim alleges that in or about early May 2005, Euroasia, GDA as borrower and the defendants (including Mrs Narain) as guarantors entered into a loan deed ("the deed") to avoid the requirement for GDA to immediately repay the sum of $1.5m that Euroasia had paid to it as alleged. The statement of claim alleges that there was default under the loan deed and that notices of default and demands were served on each of the first, second and thirdnamed defendants for the sum of $1,621,519.97, that included principal, interest and legal costs, all due under the loan deed and Euroasia claimed against the defendants, including Mrs Narain, the sum of $1,621.519.97.

8 Angela Jane Nunn, solicitor for Euroasia, deposes that Mrs Narain at all relevant times was, and had been since 28 October 1998, a director and secretary of GDA. Thus, under the loan deed Mrs Narain was guaranteeing the debt and liability of GDA, a company in which she was a shareholder, director and secretary.

9 Ms Nunn also deposes that at all relevant times throughout the negotiation of the deed, GDA, Mr Narain, Mrs Narain and Mr Michael were represented by Mark Eden of Beveridge Eaton Lawyers and that Euroasia was represented by Gadens Lawyers.

10 On 20 September, an appearance was filed in the proceeding on behalf of Mrs Narain and the other defendants by Beveridge Eaton Lawyers.

11 On 19 October 2005, a defence was filed on behalf of Mrs Narain and the other defendants drawn by Mr T.R. Messer of counsel.

12 The defence admits that by the heads of agreement executed in early 2005, Mr Michael and Mrs Narain agreed to sell and Euroasia agreed to purchase 50 per cent of the issued share capital of GDA. Further, the defendants admit that, by the loan deed, GDA agreed to repay the sum of $1.5m to Euroasia on the terms contained in the loan deed.

13 The defence alleges that moneys had been paid under the loan deed by Citrofresh Pty Ltd ("CPL") and, save that they admit that GDA did not pay the amounts demanded, they say that GDA was under no obligation to do so.

14 Mrs Narain admits receipt of the letter of demand and admits not paying the sum demanded.

15 Ms Nunn deposes that the proceeding was settled as a result of negotiations between the parties to the proceeding. The terms of settlement were contained in a deed of settlement dated 28 October 2005 and signed by Mrs Narain and the other defendants.

16 Ms Nunn deposes that at all times throughout the settlement negotiations and preparation of the deed of settlement, Euroasia was represented by Gadens Lawyers and Mrs Narain and the defendants to the proceeding were represented by Mark Eaton at Beveridge Eaton.

17 She deposes that the executed deed of settlement was sent to Euroasia's solicitors under cover of letter from Beveridge Eaton dated 28 March 2005. The letter from Beveridge Eaton addressed to Gadens Lawyers refers to the Supreme Court proceedings and states:

"We refer to the above matter and enclosed counterpart deed of settlement executed by our clients to complete the exchange."

18 By a letter dated 15 November 2005 from Gadens Lawyers to the Associate to Master Kings, Gadens Lawyers enclosed minutes of proposed consent orders that had been signed by both the solicitors for the defendants and the solicitors for Euroasia. The consent orders provided that the proceedings be struck out with a right of reinstatement and there be no order as to costs.

19 By an email dated 17 November 2005, the Associate to Master Kings advised Ms Nunn that the Master did not grant a right of reinstatement unless reasons were provided by the parties. In reply Ms Nunn advised that the parties had agreed, as part of the terms of settlement, that Euroasia was entitled to reinstate the proceedings and enter judgment in the event of default on the part of the defendants in complying with the terms of settlement. In any event, despite the reasons being provided, no order was made.

20 On 3 January 2006, Euroasia took steps to enter judgment on the terms of settlement by filing a notice to produce the file on 9 February 2006 before the Master. Euroasia also filed an affidavit sworn 30 December 2005 by Mr Bee Kok Peh, a director of Euroasia, exhibiting the deed of settlement and swearing that Mrs Narain, the other defendants and GDA had failed to comply with notices to default and sought judgment pursuant to the deed of settlement in the sum of $1,116,034.25 and interest and costs.

21 Mr Bee Kok Peh relied upon clause two of the deed which provided, inter alia, as follows:

(a) In the event of default of any of the payments set out in clause 1 Euroasia will provide GDA and Andrew Michael, Edwina Narain and Ravi Narain each with 14 days written notice within which to remedy any default. (Notice of Default) (Clause 2.1).

(b) In the event that the notice of default is not complied with Euroasia will be entitled to enter judgment against the defendants in these proceedings for

(i) The settlement sum or so much of it that may be outstanding as at the date of default.

(ii) Subject to clause 2.2(e) of the deed, interest on all amounts that have at any time been outstanding from 1 December 2004 until the entry of judgment calculated and capitalised pursuant to clause 6(b) of the loan deed or as claimed in these proceedings.

(iii) Costs of these proceedings on an indemnity basis up to the entry of judgment and including the cost of entering judgment.

(c) During any notice period referred to in clause 2.1 of the deed, interest on the then outstanding balance of the settlement sum will be calculated at the rate prescribed in the Penalty Interest Rates Act 1983 (Vic) (clause 2.2(e)).

(d) The deed will constitute the irrevocable consent of each of the parties to the entry of judgment in these proceedings and the production of the deed to the court will be conclusive evidence of all necessary consent to give effect to clause 2.2(a) of the deed including consent (if necessary) to have the application for judgment before the court and for the entitlement of Euroasia to apply for judgment in these proceedings and to enter such judgment in these proceedings.

22 Ms Nunn deposes that a notice of default dated 1 December 2005 was served on each of the defendants. Insofar as Mrs Narain is concerned, the notice was sent to her at her residence at 80 Greenhills Road, Bellarine, Victoria, 3221.

23 The notice to produce, together with the affidavit of Mr Bee Kok Peh sworn 30 December 2005 and the exhibits thereto were served on Mark Eaton at Beveridge Eaton, the solicitor acting for Mrs Narain and the other defendants. Ms Nunn depose to such service in her affidavit sworn on 9 February 2006 and filed herein.

24 On 8 February 2006, a supplementary affidavit of Mr Bee Kok Peh sworn 8 February 2006 was served on Mark Eaton at Beveridge Eaton, the solicitors for Mrs Narain and the other defendants. Gwyneth Mary Learey deposes to such service in her affidavit sworn on 9 November 2006 and filed herein.

25 On 9 February 2006, Master Evans adjourned the matter to 23 February 2006 to enable Euroasia to properly prove service of the notice of default on each of the defendants.

26 By an affidavit sworn 20 February 2006, Johann Chong deposed to service of a further notice of default on Mrs Narain by posting it to her addresses at 80 Greenhills Road, Bellarine, Victoria, 3221 as filed herein.

27 On 23 February 2006, the matter was further adjourned to 27 February by order of Master Evans.

28 Ms Nunn deposes that after service of the notice to produce, Mrs Narain and the other defendants again sought to resolve the matter. She says negotiations to resolve the matter were undertaken on behalf of Mrs Narain and the other defendants by their solicitor, Mark Eaton of Beveridge Eaton. She says the hearing of the motion for judgment was adjourned to 2 March 2006 pending the outcome of those negotiations. The court record discloses that on 3 March 2006 the notice to produce filed 3 January 2006 was adjourned to a date to be fixed with liberty to apply reserved.

29 Ms Nunn deposes that on 23 February 2006, she sent an email to Mark Eaton at Beveridge Eaton, the solicitor of Mrs Narain and the other defendants. She says the email set out proposed settlement terms. She says by email dated 23 February 2006, Azalea Daruwalla, a law clerk in the employ of Beveridge Eaton, advised her that the terms were accepted by Mrs Narain and the other defendants.

30 She deposes that the defendants failed to comply with the terms agreed on 23 February 2006 and that on or about 23 March 2006 she was instructed to serve a further notice of default on Mrs Narain in accordance with the clause 2.1 of the deed of settlement. She exhibits the notice of default. She says further that the matter was not remedied and the proceeding for judgment on the terms was re-listed before Master Evans on 12 May 2006.

31 She says that on or about 9 May 2006, Euroasia filed and served affidavits sworn by Mr Bee Kok Peh on 9 May 2006 and Mr Patrick Hsu on 9 May 2006, at which time Mrs Narain's solicitor was advised of the hearing date. Further, the court record discloses that an affidavit of Gwyneth Mary Learey sworn 11 May 2006 deposing to the service of the affidavit of Bee Kok Peh of 9 May 2006 and the exhibits referred to therein, and the affidavit of Patrick Hsu sworn 9 May 2006 and the exhibits referred to therein were served on Beveridge Eaton Lawyers, which included a proposed amended statement of claim.

32 The amended statement of claim dated 12 May 2006 on the court file pleads the deed of settlement and its terms in addition to the claims under the loan deed. It pleads the provision for giving notice of default and that such notices were given to Mrs Narain and the other defendants and, in accordance with clause 2.2 of the deed of settlement, pleads that Euroasia is entitled to judgment against the defendants for the settlement sum, interest and costs and further pleads that in accordance with clause 2(f) of the deed of settlement the defendants irrevocably consent to the entry of judgment in the proceeding. Euroasia claims the sum of $1,116,034.25 interest and costs.

33 On 12 May 2006, Master Evans gave leave for Euroasia to amend its statement of claim in the form exhibited to the affidavit of Gwyneth Mary Learey sworn 11 May 2006 referred to above and filed herein, ordered that service of the amended statement of claim would not be necessary and ordered that the judgment of the court is that the defendants pay Euroasia the sum of $1,116,034.25 plus interest in the sum of $169,000.54 and the defendants pay Euroasia's costs of the proceeding including the costs of this application assessed on an indemnity basis, such costs to be taxed in default of agreement.

34 The judgment was founded on the amended plea relying on the terms of settlement and of the agreement by the defendants, including Mrs Narain, to consent to enter judgment for the sum specified in the deed of settlement in event of default.

35 The rest of the history of this matter may be taken from Ms Nunn's affidavit as follows. She says she was then instructed to issue bankruptcy notices against each of the defendants. On 1 June 2006, Mrs Narain was personally served with a bankruptcy notice dated 22 May 2006. Mrs Narain says without prejudice negotiations then ensued with Mrs Narain and the other defendants. She says that Mrs Narain and the other defendants were represented throughout these negotiations by Mark Eaton of Beveridge Eaton. She says those negotiations did not lead to a resolution of the matter.

36 Mrs Narain says that in July 2006 she was instructed to present a creditor's petition for the bankruptcy of Mrs Narain. She says that a creditor's petition returnable on 24 August 2006 was served on Mrs Narain on 16 July 2006. She says creditor's petitions were also issued against Ravi Narain and Andrew Michael returnable on the same date. She says that notwithstanding the service of the first bankruptcy notice and the creditor's petition on Mrs Narain, at no stage did she seek to make application to set aside the judgment in these proceedings.

37 Mrs Narain says on 9 August 2006, the Supreme Court of Victoria ordered that GDA be wound up in insolvency upon the application of Euroasia. Leonard Milner was appointed liquidator of GDA.

38 Mrs Narain says that in August 2006, further without prejudice negotiations commenced between the parties. She says Mrs Narain and the other defendants were represented by Mark Eaton at Beveridge Eaton solicitors throughout those negotiations.

39 She says that on 24 August 2006, the creditor's petition against Mrs Narain and the creditor's petitions issued against Ravi Narain and Andrew Michael were adjourned until 14 September 2006 to allow the settlement negotiations to continue.

40 She says that on 23 August 2006, a facsimile was received from Mrs Narain's solicitor, Mark Eaton of Beveridge Eaton, advising that the sum of $40,000 had been paid to Euroasia pursuant to the settlement negotiations. She says that further without prejudice negotiations continued with Mrs Narain's solicitor, Mark Eaton of Beveridge Eaton in relation to the terms of settlement.

41 On 13 September 2006, she says that a further deed of settlement was executed by Mrs Narain and the other defendants. She exhibits a copy of a facsimile dated 27 September 2006 from Mrs Narain's solicitor, Mark Eaton of Beveridge Eaton enclosing a copy of the deed of settlement signed by Mrs Narain, Ravi Narain and Andrew Michael.

42 She says that on 14 November 2006, the creditor's petitions against the three defendants were withdrawn in accordance with the executed deed of settlement.

43 On 4 October 2006, she says an original counterpart of the deed of settlement executed by Euroasia was sent to Mrs Narain's solicitor, Mark Eaton of Beveridge Eaton, and she produces a copy of the letter sending the counterpart deed of settlement.

44 Ms Nunn deposes that on or about 10 December 2006, Mrs Narain and the other defendants defaulted under the deed of settlement of 18 September 2006 and on 22 December 2006 notice of Mrs Narain's default and Euroasia's intention to commence bankruptcy proceedings against Mrs Narain, Ravi Narain and Andrew Michael was sent to their solicitor, Mark Eaton of Beveridge Eaton. She produces a copy of the letter.

45 In January 2007, she says she was instructed to issue further bankruptcy proceedings against each of the defendants. On 29 January 2007, bankruptcy notices were issued against Ravi Narain, Mrs Narain and Andrew Michael respectively. Process services engaged on behalf of Euroasia were unable to effect service of the bankruptcy notice on Mrs Narain. As a result, Euroasia obtained an extension of time for the service of the bankruptcy notice.

46 On 29 July 2007, she says the second bankruptcy notice was personally served on Mrs Narain, and she exhibits a true copy of the affidavit of service sworn by Mark John Burnett.

47 Mrs Narain says that a creditor's petition was presented for the bankruptcy of Ravi Narain on 19 April 2007. She says the creditor's petition was initially listed on 17 October 2007. Ravi Narain was represented by Michael Main of Russell Kennedy Lawyers. She says Euroasia entered into settlement negotiations with Ravi Narain and a payment of $350,000 was made on 17 October 2007, with the balance to be paid at a later date. She says this payment reduced the debt owed to Euroasia to the amount of $935,034.79. She says Euroasia received a further part payment of the debt in the sum of $150,000 on 19 October 2007, reducing the debit owed to the amount of $785,034.79

48 She says the creditor's petition against Ravi Narain was adjourned until 21 December 2007 pending payment of the balance of the debt. She says Euroasia received no further payment, and on 21 December 2007 the Federal Magistrates' Court made a sequestration order against the estate of Ravi Narain. She says that Sterling Horne was appointed as trustee of Mr Narain's estate.

49 Ms Nunn says that in January 2008, she was instructed to present a creditor's petition for the bankruptcy of Mrs Narain and a petition returnable on 13 March 2008 was served on Mrs Narain on 5 March 2008.

50 She says that on 12 March 2008 at approximately 5.00pm Euroasia was served with Mrs Narain's application to set aside the judgment in these proceedings together with her affidavit sworn on 12 March 2008.

51 At the hearing of the creditor's petition on 13 March 2008, she says Mrs Narain sought an adjournment of the petition on the basis that the application set aside judgment listed on 2 April 2008. Ms Nunn says this was the first occasion that Mrs Narain sought to set aside the judgment in these proceedings and raised the issues now set out in her affidavit sworn on 12 March 2008.

52 Ms Nunn says the creditor's petition has been adjourned until 21 April 2008 pending the outcome of this application.

53 Mrs Narain deposes that she executed the loan deed at the office of Euroasia at 133 Queensberry Street, South Melbourne at which she attended at the request of her husband, Mr Ravi Narain, in or around June 2005. She says that her husband rang her and asked her to go to Euroasia's office and to execute a document, which he told her was important, but he gave her no further information. She deposes: "I had neither legal nor accounting advice nor any background information as to what the document was or why it was important for me to execute it."

54 She says she was initially reluctant to comply with her husband's request, but he told her that it was urgent and very important, and that he needed her to do it and it was only a formality.

55 She says she attended at Euroasia's premises and there was no one initially in attendance. She says that then Mr Lincoln Peh came downstairs and took her upstairs to see his father, Mr Bee Kok Peh, whom she had met previously on social occasions. She says they indicated where she was to sign the deed. She says she neither read it nor took a copy away with her.

56 Mrs Narain says she has been married to Mr Ravi Narain for 15 years and has not been involved in any paid employment during that period, and her duties has been primarily in relation to the raising of their three children aged eleven, twelve and thirteen. Mrs Narain says that after leaving school she attended the University of Western Sydney where she obtained a Degree in Arts, majoring in Communications. She says she worked for the Australian Jockey Club as a trainee judge and has always had an interest in horses and horse riding.

57 She says that her business experience is limited to assisting her husband in his various business ventures, but she has no independent business experience.

58 Regarding the current proceeding number 7851 of 2005, she says that she understands that she was represented in that proceeding, along with her husband, by Mark Eaton of the firm Beveridge Eaton. She says she never actually instructed Mr Eaton about any of the matters that she refers to and was never asked any questions in relation to the circumstances in which she executed the deed. She says that everything done on her behalf by Mr Eaton in that matter she assumes was done on the instructions of her husband, who generally looked after the business and financial affairs of their family.

59 She says that she was informed by her solicitor and verily believes that the deed she signed was a document proffered by Messrs Gadens on behalf of Euroasia and had the effect of making her personally liable for the repayment of moneys advanced to GDA by Euroasia.

60 She says she was unaware of this at the time she executed the deed. She says she received no personal benefit from the execution of the deed.

61 She says she now understands from her solicitor's advice to her that at the time she signed the loan deed, the deed made her responsible for a loan that was already in default.

62 The affidavit does not depose to any matters relating to the execution of the deed of settlement upon which judgment in the matter was obtained.

63 She says that she received no personal benefit from the execution of the deed, however she does not depose to the offices that she held in GDA, which were both director and secretary. Nor does she deal with the matter which was admitted on her behalf in the action that she held shares in GDA which she had agreed to sell to Euroasia under the original heads of agreement.

64 The affidavit does not explain who were the other shareholders in GDA and whether or not GDA was the beneficial owner of its assets or held them on behalf of a discretionary trust. If the company held them on behalf of a discretionary trust, there is no evidence as to whether or not she was one of the beneficiaries or what, if any benefits she received from the company.

65 Mrs Narain also relies upon the affidavit of Michael Douglas Main sworn 1 April 2008. He is her solicitor in this matter. He deposes that he was first consulted by Mrs Narain in late August 2007 in relation to her situation in respect to this proceeding and the fact that she was a judgment debtor for an amount in excess of $1m pursuant to the judgment entered by Master Evans on 12 May 2006.

66 Mr Main deposes that he was informed by Mr Ravi Narain that there was no appearance by or for the defendants at the hearing of Euroasia's application for summary judgment 12 May 2006. He says he was informed by Mr Narain that this was because Mr Mark Eaton of Beveridge Eaton advised him that to do so was useless and that neither he nor Mrs Narain had an arguable defence. Mr Main says that to the extent that Mrs Narain has a meritorious defence based upon the equitable doctrine affirmed in Garcia v National Australia Bank Ltd[1], the advice of Mrs Narain's ostensible solicitors may have been negligent, causing judgment to be entered against her without any hearing on the merit.

67 Mr Main says he was informed by Mrs Narain and believes that at no time were separate instructions taken from or advice given to, her by Beveridge Eaton.

68 He further deposes that he has been informed by Mrs Narain and believes that although she executed the deed of settlement dated 26 October 2005 in the offices of Beveridge Eaton, she was informed at that time only that the document was to formally resolve the dispute with Euroasia, that it was "important" and that she should sign it. He says that at no time was she advised by Beveridge Eaton or by her husband that the deed of settlement she was being told to sign might be unnecessary and unwarranted because she had arguable grounds for disputing her alleged liability to Euroasia under the loan deed or for having the judgment debt set aside insofar as it related to her.

69 Mr Main deposes that by August 2007, as a result of developments in Mr Ravi Narain's business activities, Mr Narain made a decision not to further pursue his attempt to set aside the judgment of 12 May 2006 in this proceeding and instead decided to pay out the judgment debt from the proceeds of the sale of shares in a company, GDM Technologies Pty Ltd. Mr Main then deposes to various attempts by Mr Narain to pay out the judgment debt. Mr Main deposes that in view of the attempts by Mr Narain to pay the judgment debt and the expectation that the judgment debt would be paid out in either October or December 2007, no steps were taken on behalf of Mrs Narain during that period to apply to set aside the judgment.

70 He deposes that after service of a bankruptcy petition on Mrs Narain on 5 March 2008, it became apparent that unless her rights were enforced, the outcome for Mrs Narain would be catastrophic. Mr Main deposes that he does not believe that Euroasia would be prejudiced if the judgment were set aside in any respect which could not be adequately compensated by a suitable award of costs. He puts forward no evidence to establish that Mrs Narain in fact could meet such an award of costs. Nor, I note, does Mrs Narain.

71 Mr Main exhibits a proposed amended defence which would be filed should the court exercise its discretion to set aside the judgment as against Mrs Narain.

72 Under the proposed amended defence, Mrs Narain alleges that she executed the loan deed at the office of Euroasia at 133 Queensberry Street, South Melbourne:

(a) as directed by Mr Bee Kok Peh, an officer of Euroasia;

(b) without explanation as to its contents or effect;

(d) without a copy of the loan deed being provided to her either before or after the execution by her.

73 She alleges she went to Euroasia's office and executed the loan agreement at the direction of Mr Narain, who told her to go to that location urgently and to sign there a document which, whilst important, was only a formality. She pleads that Mr Narain gave her no explanation as to the content or effect of the loan agreement.

75 She alleges she derived no material benefit from the loan agreement.

76 She alleges that by reason of the matters that she has referred to, it is unconscionable of Euroasia to rely upon the loan deed and in the premises the loan agreement insofar as it imposes any liability on Mrs Narain is void and of no effect.

77 As to the deed of settlement which is pleaded and relied upon in the amended statement of claim, she says that she admits that she signed the deed and alleges she did so at the direction of Mr Narain without explanation of its contents or effect. Further, she alleges that by reason of the matters that she alleges in relation to her execution of the loan agreement and that she alleges in respect of her execution of the deed of settlement, that insofar as the deed of settlement purports to affect her, it is void and of no effect.

78 She admits the pleaded terms of the deed of settlement and admits that she did not remedy the alleged default, but says she was not obliged to do so and that she was under no obligation to pay the sums due under the deed of settlement.

79 On the hearing of the appeal, Mrs Narain sought to rely upon a further affidavit sworn 22 April 2008 which was not used before Master Daly. Under Rule 77.05(7), Mrs Narain is only entitled to rely upon her affidavit of 22 April 2008 by special leave of the judge.

80 In Brownport Management Ltd v Aqua-Tech 21 Pty Ltd[2], Hansen J explained the reason why the requirement for special leave was introduced. He said as follows:

It is important to bear in mind the reason why the requirement of special leave was introduced. It was introduced to stop the mischief of a party using the hearing before the Master as a dry run and, depending on the result, appealing and, on the appeal, filing additional affidavits to bolster its case in light of the arguments presented to the Master and the Master's reasons for the decision. This became all too common an occurrence. It could cause vexation to another party in terms of time and cost, and it could take up an unreasonable amount of a judge's time when there might not have been an appeal if the case had been properly presented to the Master. In short, in many cases it constituted an unreasonable taking advantage of the fact that under Rule 77.05(7) an appeal is by re-hearing de novo.

81 Mrs Narain submitted that the mischief referred to by Hansen J does not exist here. Mrs Narain submits she was successful below. Secondly, she says, the motivation for swearing the supplementary affidavit is to address Master Daly's early concern (noted in her reasons for decision) that she did not have enough evidence to satisfy her regarding the delay between Mrs Narain becoming aware of the judgment debt and her making this application. In that regard, I was referred to paragraphs 9, 10, 11, 14, 15 and 16 of Mrs Narain's supplementary affidavit. Mr Narain submits that the remainder of the supplementary affidavit is largely to affirm material which was contained in the affidavit of Michael Main on information and belief, the fact of which was the source of complaint before the Master.

82 Euroasia objects to Mrs Narain being given leave to rely upon her supplementary affidavit. In her supplementary affidavit, Mrs Narain deposes that at no time were separate legal instructions taken from, or advice given to, her by Beveridge Eaton or any other lawyer in relation to the loan deed, the subsequent settlement deeds or the procedures in this court and including the judgment by Master Evans.

83 She says that no one from Beveridge Eaton or any other law firm ever asked her the sort of questions about her understanding or otherwise of the loan deed or the subsequent settlement deeds that her current solicitors asked her in preparation for this application.

84 She says that she has only recently learned from her current solicitor that it was a failed investment in her husband's company, Gold Dragon Abalone Pty Ltd, that was converted into the loan for which she now understands she became immediately liable when she signed the loan deed at her husband's direction.

85 She further deposes as to the execution of the deed of settlement as follows. She confirms that she executed it in the offices of Beveridge Eaton and says that she was informed at that time only that the document was to formally resolve her dispute with Euroasia and that it was "important" that she should sign it. She says the deed of settlement was never explained to her and that she had no idea of the arrangements that had been agreed upon in that document.

86 She says she only became aware of the existence of the judgment debt against her towards the end of 2006 or early 2007.

87 I accept the submissions of Mrs Narain's counsel and in the circumstances, I will grant special leave for Mrs Narain to rely upon her supplementary affidavit of 22 April 2008.

88 Euroasia submits that Mrs Narain had the right under Rule 77.05 of the Supreme Court (General Civil Procedure) Rules 2005 to appeal to a judge against the judgment given by the Master on 12 May 2006.

89 It submits that instead of filing an appeal, or an application for an extension of time within which to appeal, Mrs Narain filed a summons seeking an order to "set aside" the judgment entered 12 May 2006 and did so relying upon Rule 22.15, which provides "The court may set aside or vary any judgment given against a party who does not attend on the hearing of an application to Rule 22.02 or 22.08".

90 Euroasia submits that the judgment given by Master Evans on 12 May 2006 was not made on an application under Rule 22.02 or 22.08.

91 There was no dispute that the application before Master Daly was an application under Rule 22.15. Euroasia submits that Rule 22.08 applies to a judgment on a counterclaim which is not applicable in this case. Euroasia also submits that Rule 22.02 is inapplicable. It provides that where the defendant has filed an appearance, the plaintiff may at any time apply to the court for judgment against the defendant on the ground that the defendant has no defence to the whole or part of a claim included in the writ or statement of claim, or no defence except as to the amount of a claim.

92 As indicated above, in the history of the matter it is clear that Euroasia did not apply for judgment against the defendants on the grounds the defendants had no defence to the claim, but rather sought judgment by consent pursuant to the terms of settlement.

93 As Euroasia points out in its submissions, the application for judgment was not made by summons supported by the affidavit required under the rules and, in particular, Rule 22.03. Rather, Euroasia moved for judgment relying on affidavit material filed on behalf of Euroasia proving the terms of settlement; the default under the terms; and service of the notice of default on Mrs Narain and the other defendants. It is true, however, that an amended statement of claim was delivered which pleaded the terms of settlement. In my opinion, this did not alter the nature of the proceeding.

94 The procedure of moving for judgment on an agreement of compromise is well recognised by this court. In Roberts v Gippsland Agricultural & Earth Moving Contracting Co Pty Ltd[3], the Full Court (Lowe, O'Brien and Smith JJ) held that the court could, in a motion in the proceedings, give judgment on the terms of settlement. Lowe and O'Brien JJ said as follows:

Both on principle and in accordance with Victorian authorities we have no doubt that in certain simple cases an agreement for the compromise of an action may be enforced on a motion for judgment in the action itself in accordance with the agreed terms. If the action itself is still on foot, not having been stayed or discontinued or struck out or its normal progress otherwise interrupted; if the claim in the action is for payment of a sum of money for one of the common counts, such as work and labour done, and the compromise is upon terms that the defendant pay to Euroasia an agreed amount at an agreed date in full settlement of Euroasia's claim in the action, and with an agreement by the defendant that in default of payment Euroasia may enter judgment for that amount and that the defendant will consent to such judgment, we entertain no doubt that this court has jurisdiction on motion in the action to direct that judgment be entered for the agreed sum if the defendant makes default in payment - even if at that stage the defendant is, contrary to her agreement, no longer a consenting party.[4]

95 The motion for judgment on the terms of settlement is not a proceeding encompassed by Rule 22.15. Accordingly, I find that the application before the Master under Rule 22.15 to set aside judgment was incompetent and should have been dismissed without proceeding to an adjudication of the merits.

96 In my opinion, a proper course open to Mrs Narain was to seek an extension of time to appeal the order of Master Evans. If an extension was granted, the issue before the judge would be simply should the motion for judgment be allowed or not on the basis of the alleged agreement of compromise. A defence to that motion would be to impugn the agreement of compromise: see for example Koutsouradis v Koutsouradis.[5]

97 I was referred to Harrison v Charalambous[6], where Finkelstein J of the Federal Court of Australia considered an application to go behind the judgment entered by consent to consider whether, in truth and reality, a debt was owed by the debtor to the petitioning creditor. It was suggested that his Honour's observations throws light on the circumstances where a court might decline to enter judgment based on an agreement of compromise or set such a judgment aside. His Honour said as follows:

[6] It is accepted that a court does have jurisdiction to go behind a judgment to determine whether there is a debt owed to the petitioner: Wren v Mahoney[7]; Corney v Brien[8]. That is to say, in bankruptcy proceedings the existence of a judgment is only prima facie evidence of a debt, it is not conclusive evidence.

[7] However, before a court will exercise its discretion to go behind a judgment debt, it must be established that there are substantial reasons for questioning whether there is in truth and reality a debt owed to the creditor: Re Longo: ex parte Longo[9].

[8] It is well established that if judgment is obtained by fraud or collusion or there has been some miscarriage of justice, a court can inquire whether the judgment debt is a good debt. If a judgment has been obtained without an adjudication on the merits, for example in the case of a default judgment, the court will rarely go behind the judgment to inquire whether there is a good debt.

[9] However, where a judgment has been entered under a compromise the position is not so straightforward. In Corney v Brien, Fullagher J said[10] that it must be shown that there exists grounds for challenging the compromise before the judgment will be reopened. This is, no doubt, because it is the compromise and not the claim that was compromised that is the foundation of the judgment. Moreover, as his Honour pointed out, where a party challenges a judgment entered on a compromise and that party has acted on the advice of counsel, the judgment will not generally be reopened. The presumption is that in such circumstances it is difficult, although not impossible, to impugn the compromise.

[10] In Ex Parte Banner; In Re Blyth[11], the Court of Appeal dealt with circumstances in which a court would go behind a judgment based on a compromise. The court said that if the original claim was not bona fide, but was made for the purposes of extortion, the claimant knowing that he had no legal claim, then that would be sufficient. As Brett LJ said[12], if a judgment or compromise is obtained by dishonesty known to both parties it would be monstrous if the court could not go behind that judgment.

[11] In this case the debtor alleges that he was pressured by his legal advisers to compromise the claim notwithstanding that he had good defence to it. However, the evidence does not implicate the petitioning creditor or his legal advisers in the allegedly undue pressure that the debtor was placed under to compromise the claim. On the contrary, the evidence suggests that the petitioning creditor was not in any way implicated in what occurred between the debtor and his lawyer. That being the case, neither the compromise nor the Magistrates' Court judgment is liable to be set aside: see Tresize v National Australia Bank Ltd[13].

[12] To my mind, what has occurred in this case is not sufficient basis to go behind the judgment based on the compromise. Although the debtor may have been placed under undue pressure to enter into the compromise, I cannot discern any unfairness or impropriety of such a kind as would justify me in looking behind the judgment. The reality is that the debtor, perhaps through no fault of his own, was placed in a position where his commercial interests necessitated a compromise and he agreed to it in accordance with those interests. In one sense the position the debtor finds himself in is not very different to the circumstances which other litigants have often had to confront. I do not doubt that litigants regularly compromise actions otherwise in accordance with the true merits of the claims made, but that is not a sufficient reason to deny efficacy to the agreements to compromise that these litigants reach. It is certainly not a sufficient reason in this case.

98 It is open to seek to have a judgment set aside on grounds if it was obtained by fraud.[14] No doubt there are other grounds as well but I do not need to consider that issue any further as no such application has been made in this case.

99 If I am wrong about the validity of the application made by Mrs Narain by her summons of 12 March 2008, I turn to the merits of the summons under Rule 22.15.

100 Mrs Narain's submissions on the relevant principles in relation to setting aside judgment are as follows. She submits that Rule .22.15 authorises the court to set aside or vary any judgment given against a party who does not attend on the hearing of an application under Rule 22. She submits the power is discretionary. She submits that factors relevant to the exercise of the discretion are the same as those relevant in the case of an application under Rule 21.07 to set aside a judgment entered or given in default of appearance or defence: Heller Financial Services Ltd v Solczaniuk[15].

101 She further submits that insofar as the judgment by Master Evans was regularly obtained, it is not disputed that those factors are:

(a) Whether the defendant has a defence on the merits;

(b) The reason for the default of the defendant in consequence of which judgment was obtained;

(d) Whether, if the judgment were set aside, Euroasia would be prejudiced in any respect which could not be adequately compensated for by a suitable award of costs and the giving of security: Kostokanellis v Allen[16].

102 Mrs Narain submits that a defendant is not required to show that his or her defence is certain to succeed; rather, an arguable or prima facie defence is sufficient: Evans v Bartoam[17]

103 I accept that those are the principles that I should apply if the application was validly made to Master Daly.

104 The affidavit of Mrs Narain seeks to set up a defence to the loan deed in reliance on the principle recognised in Garcia v National Australia Bank[18].

105 Euroasia, however, submits that the Garcia principle does not apply to the circumstances in which the loan deed was executed given at all times Mrs Narain was represented, or at least ostensibly represented by Beveridge Eaton.

106 Further, Euroasia submits the judgement was entered on the basis of the deed of settlement and not under the loan deed.

107 Euroasia submits that the Garcia principle does not apply to the deed of settlement for the following reasons:

(a) The Garcia principle only applies to a suretyship agreement. It is said that the deed of settlement, so far as concerns Mrs Narain, does not in any sense guarantee Mr Narain's liability, rather it compromises the claim against her in her own personal capacity;

(b) There was no evidence that Mrs Narain did not understand the purport and effect of the deed of settlement;

(c) The Garcia principle only applies when the transaction was voluntary in the sense that the surety obtained no gain from the contract the performance of which was guaranteed. It is said this element again reinforces the first requirement that the principle only applies to a suretyship agreement. Euroasia submits that Mrs Narain cannot, in any sense, be described as a volunteer to the deed of settlement as she was in her own right a party to the loan deed and the Supreme Court proceedings which were compromised by the deed of settlement.

108 Finally, Euroasia submits that Mrs Narain was represented, or at least ostensibly represented by solicitors throughout. Euroasia submits that the wife is only entitled to the benefit of the principle if the third party "had no independent ground for reasonably believing that she fully comprehended the transaction and freely entered into it." Euroasia refers to Yerkey v Jones[19].

109 Euroasia submits that the basis for Euroasia's belief that Mrs Narain fully comprehended the terms of settlement lies in the fact that Mrs Narain was represented by Beveridge Eaton, even if only ostensibly, from early April 2005 until execution of deed of settlement in late 2005.

110 On the other hand, Mrs Narain submits that the facts surrounding the execution of the loan agreement by Mrs Narain are as strong, if not stronger, than the facts in the Garcia case. Mrs Narain submits that Beveridge Eaton were only nominally acting for her. Mrs Narain submits that they neither took instructions from her nor advised her independently. She further submits their clients were Golden Dragon and Mr Narain, and they saw to their interests, not the independent and different interests of Mrs Narain.

111 Mr Narain submits that the deeds of settlement and any subsequent further attempts by Mr Narain to settle this dispute must be viewed from the prism of the likely unenforceability of the loan deed against Mrs Narain.

112 Mrs Narain submits that it may be that her execution of those documents, in all the circumstances, is a case of non est factum. She also submits that there may be actual undue influence.

113 Mrs Narain submits that Euroasia argues that because a law firm was involved in the drafting of the loan deed and that Mrs Narain was listed as a surety, it was reasonable to assume that she had the document explained to her by that firm. Mrs Narain submits that on the contrary, given that that firm was acting for the borrower, Golden Dragon, and its director, Mr Narain, the only proper assumption that Euroasia, through its officer, should have made was that Mrs Narain was not independently advised about her obligations under the proposed loan deed and guarantee.

114 Mrs Narain submits that Euroasia then says: "Well, the same solicitors were recorded as acting for her when she signed the deed of settlement, so she is liable under that deed."

115 Mrs Narain contends that if it was unconscionable for Euroasia to rely on the loan deed under the circumstances and those circumstances had not altered when the deeds of settlement were executed. She submits it is incumbent upon Euroasia to explain what it was that extinguished Mrs Narain's equity.

116 Mrs Narain submits that it was suggested below that the nature of a settlement agreement is sufficiently special to effectively erase any unconscionable conduct on the part of Euroasia.

117 Mrs Narain submits that whilst the courts do accord some special status to settlement agreements awarded to bring finality to litigation, they are not sacred. First, Mrs Narain submits that it is by no means clear how a settlement agreement, premised on an obligation which a court of equity would never enforce, could be effectively revived by the execution of a settlement agreement in the same or similar circumstances.

118 Secondly, Mrs Narain submits that equity can step around an Act of Parliament on the basis that it seeks to bind the consciences of the parties, rather than override Parliament, as occurred in Waltons Stores (Interstate) Ltd v Maher[20]. Mrs Narain submits that by the same means a settlement agreement cannot be regarded immune or unsusceptible to equal doctrine.

119 Master Daly delivered oral reasons on 11 April 2008. In those reasons, the Master said:

Having considered the evidence tendered on behalf of both Euroasia and the second defendant, I am of the view that the judgment ought be set aside. While I accept that Mrs Narain may face some substantial hurdles in seeking to avoid liability under the original loan agreement and the settlement deed, in particular by the terms of the release provided in the settlement deed, it appears to me to be at least arguable that the principles in NAB v Garcia may apply to Mrs Narain's position under the original loan agreement, and that the subsequent agreement to release Euroasia from any claims by her with respect to the loan agreement may be tainted as a result.

On that basis, there would need to be a powerful reason for me not to exercise my discretion to set aside the judgment. One such reason would be the length of the delay and the adequacy of the explanation for the delay.

120 Mrs Narain relies on the principles confirmed and established in Garcia v National Australia Bank Ltd[21]. In Garcia, the wife had given a guarantee of liabilities incurred and to be incurred by her husband's company, Citizen Gold Bullion Exchange Pty Ltd ("Citizen Gold"), but did not understand the guarantee's full effect or that the obligations under the guarantee were secured by a mortgage which she gave over her home. Although she was a director of Citizen Gold and had a shareholding in it, the trial judge found, and the High Court accepted, that the company was in the complete control of her husband and that, taken as a whole, the wife obtained no real benefit from entering the transaction and she could be considered a volunteer.

121 The High Court upheld the trial judge in his decision that the enforcement of the guarantee and mortgage against the wife by the National Australia Bank would be unconscionable. The decision of the High Court was limited to circumstances where a husband procured his wife to act as surety for the liabilities of the husband and the transaction was voluntary (in the sense that the surety obtained no gain from the contract, the performance of which was guaranteed).

122 The majority of Gaudron, McHugh, Gummow and Hayne JJ cited with approval the decision of Dixon J in Yerkey v Jones[22]. They noted that in Yerkey v Jones, Dixon J dealt with at least two kinds of circumstances. The first in which there is actual undue influence by a husband over a wife and the second in which there is no undue influence but there is a failure to explain adequately and accurately the suretyship transaction which the husband seeks to have the wife enter for the immediate economic benefit not of the wife but of the husband, or the circumstances in which her liability may arise.

The former kind of case is one concerning what today is seen as an imbalance of power. In point of legal principle, however, it is actual undue influence in that the wife, lacking economic or other power, is overborne by her husband and goes surety for her husband's debts when she does not bring a free mind and will to that decision. The latter case is not so much concerned with imbalances of power as with lack of proper information about the purport and effect of the transaction.[23]

124 The majority cited Dixon J in Yerkey v Jones where he said:

But it is clearly necessary to distinguish between, on the one hand, cases in which a wife, alive to the nature and effect of the obligation she is undertaking, is procured to become her husband's surety by the exertion by him upon her of undue influence, affirmatively established, and on the other hand, cases where she does not understand the effect of the document or the nature of the transaction of suretyship. In the former case the fact that the creditor, on the occasion, for example, of the actual execution of the instrument, deals directly with the wife and explains the effect of the document to her will not protect him. Nothing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice. If the creditor has left it to the husband to obtain his wife's consent to become surety and no more is done independently of the husband than to ascertain that she understands what she is doing, then, if it turns out that she is in fact acting under the undue influence of the husband, it seems that the transaction will be voidable at her instance as against the creditor.[24]

125 The High Court summarised the position in Garcia v National Australia Bank Ltd as follows:

Thus, Dixon J was dealing with two kinds of case. In the former, the case of actual undue influence, as Dixon J says, explaining the effect of the document to the surety will not protect the creditor and 'nothing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice'.[25] In the latter, '[I]f the creditor takes adequate steps to inform [the wife] and reasonably supposes that she has an adequate comprehension of the obligation she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp some material part of the document or indeed the significance of what she is doing'[26] cannot give her an equity to set the instrument aside[27]......

It holds further in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even thou she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife , the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.[28]

126 In this case, in her affidavit material Mrs Narain does not rely on an allegation of undue influence by her husband in respect of her execution of deed of loan. Counsel for Mrs Narain submitted that there may be actual undue influence on her without any elaboration or reference to the evidence. The draft defence drawn on her behalf does not allege any undue influence on Mr Narain.

127 Mrs Narain does allege she did not understand the purport and effect of the deed of loan. In other words, adopting the words of the majority in Garcia[29] she complains there was a failure to explain adequately and accurately the suretyship transaction which her husband sought her to enter into or the circumstances in which her liability may arise.

128 Mrs Narain claims she was a volunteer. She deposes that she received no personal benefit from the deed of loan. As found in Garcia[30] and approved by the High Court, the fact that the wife was a shareholder is not inconsistent with being a volunteer. The ultimate question is whether or not she obtained any real benefit from entering into the transaction.[31]

129 Accepting, therefore, for present purposes that Mrs Narain had an arguable defence to the loan deed under the Garcia principle, does she nevertheless have an arguable defence to the claim for judgment under the deed of settlement of 28 October 2005 under which judgment was entered?

130 No such arguable defence is established by Garcia v National Australia Bank. As Euroasia submits, the Garcia principle only applies to a suretyship agreement.[32]

131 Mrs Narain, in her affidavit of 12 March 2008, does not say she did not understand the purposes and effect of the deed of settlement. On the other hand, in her supplementary affidavit of 22 April 2008, she does say that the deed of settlement was not explained to her and she had no idea of the arrangement that had been agreed upon in that document.

132 Further, the Garcia principle only applies when the transaction was voluntary in the sense that the surety obtained no gain from the contract, the performance of which was guaranteed. Euroasia submits that this element again reinforces the first requirement that the principle only applies to a suretyship agreement. It says that Mrs Narain cannot in any sense be described as a volunteer to the deed of settlement as she was in her own right a party to the loan deed and the Supreme Court proceedings which were compromised by the deed of settlement.

133 Mrs Narain submits that the settlement cannot be regarded as immune or unsusceptible to equity doctrine. I agree. On what grounds, however, is it alleged that it was inequitable for Euroasia to seek to enforce the deed of settlement?

134 I was referred to Tresize v National Australia Bank Ltd[33], where the Full Court of the Federal Court of Australia considered an application to set aside a consent judgment and deed of settlement of litigation. In that case, the applicants alleged that they had been induced by duress or undue influence by their own solicitors and counsel into accepting the terms of settlement. They sought to have set aside the judgment entered on the basis of the terms. The respondent bank sought to have summarily dismissed the application as disclosing no reasonable cause of action.

135 The trial judge dismissed the application on the basis that no reasonable cause of action was disclosed as no adverse allegation was made against the respondent. The applicants appealed, pursuing their argument based on undue influence alone. They argued that, by extension of the principles relating to the setting aside of compromises where, unknown to the other party to the compromise, counsel had no actual authority, a compromise resulting from undue influence should similarly be set aside. They also argued that the respondent ought to have known that the undue influence or knew of circumstances putting it on inquiry. The appeal was dismissed.

136 The applicants argued that the terms of the settlement were such as to put the respondent bank on inquiry that the applicant's solicitor and counsel had put undue and improper pressure on their client to settle.

137 It was held that, where undue influence was relied upon to set aside a transaction, it was arguable that the applicable principles were those relevant when it was sought to make a party liable for a species of conduct attracting equitable remedy. It was said, therefore, a third party might have been made so liable if it had actual knowledge of invalidating conduct.

138 The court held that the appellants would have to show actual knowledge or belief on the part of the bank as to the facts constituting the allegedly invalidating circumstances. Relying on Consul Developments Pty Ltd v DPC Estate Pty Ltd[34] and Barclays Bank PLC v O'Brien[35], the court also considered that it might be sufficient if the bank new of circumstances that would put the bank on inquiry.

139 The court held that the appellants had not raised a case of circumstances that would put the bank on inquiry, "especially bearing in mind that any such inquiry would be the unusual one of a defendant taking steps to protect the interests of a plaintiff and to examine the conduct of Euroasia's' solicitors and counsel towards their client - something that is surely none of a defendant's business."[36]

140 That observation is of particular relevance to this case if one exchanges the references to defendant and plaintiff. Sweeney and Heerey JJ said further:

In the context of any litigation, let alone hard fought commercial cases with large amounts at stake and both sides represented by solicitors senior and junior counsel, one party does not owe to the other party any obligation to ensure that the other party will be fairly and properly treated by his or her legal advisers.[37]

141 As indicated above, the Federal Court applied what they understood to be the test laid down in Consul Developments Pty Ltd v DPC Estate Pty Ltd[38] by the High Court in assessing whether or not the bank had "knowledge" of the invalidating conduct of the applicants solicitors and counsel. The High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd[39] has recently clarified the circumstances where a person has knowledge where he is alleged to have assisted "with knowledge in a dishonest and fraudulent design on the part of the trustees."[40]

142 Adopting the five categories agreed between counsel in Baden v Societe Generale pour Favoriser le Development du Commerce et de l'Industrie en France SA[41] the court accepted that knowledge would be established by (i) actual knowledge; (ii) wilfully shutting one's eyes to the obvious; (iii) wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make; (iv) knowledge of circumstances which would indicate the facts to an honest and reasonable man. The court rejected the fifth category from Baden's case, (v) knowledge of circumstances which would put an honest and reasonable man on inquiry.

143 The court acknowledged that the first three categories have been taken to involve "actual knowledge" as understood both at common law and in equity and the last two categories as instances of "constructive knowledge" as developed in equity and particularly in disputes respecting the old system of conveyancing.[42]

144 In Barclays Bank PLC v O'Brien[43], the House of Lords held that there was no basis for providing special protection in equity to wives in relation to surety transactions; but that where a wife had been induced to stand as surety for her husband's debt by his undue influence, misrepresentation or some other legal wrong, she had an equity as against him to set aside that transaction; that on ordinary principles the wife's right to set aside the transaction would be enforceable against a third party who had actual or constructive notice of the circumstances giving rise to her equity or for whom the husband was acting as agent; that when a wife offered to stand surety for her husband's debt in a transaction which was not to her financial advantage and which carried a substantial risk of the husband committing a legal or equitable wrong entitling the wife to set aside the transaction, the creditor was put on inquiry and would have constructive notice of the wife's rights unless he took reasonable steps to ensure that her agreement to stand surety had been properly obtained.

145 Maher, Gummow and Lehane's Equity Doctrine and Remedies[44] state that this decision has met with judicial and academic criticism. The authors add "In point of principle, it is unorthodox to use constructive notice to identify transactions which might be impeachable, rather than identifying when an inquirer of property takes subject to an antecedent interest." In Garcia v National Australia Bank Ltd[45] the majority of Gaudron, McHugh, Gummow and Hayne JJ preferred not to adopt the analysis made by Lord Browne-Wilkinson in Barclays Bank Plc v O'Brien.[46] In any event, the decision was director to the liability of as surety as was Garcia's Case.

146 The analysis of knowledge for the purposes of the second limb of Barnes v Addy in Farah Constructions Pty Ltd v Say-Dee Pty Ltd[47] expressly approved the dicta of Gibbs J and Stephen J (with whom Barwick CJ concurred) in Consul Developments Pty Ltd v DPC Estate Pty Ltd.[48]

147 The judgments of Gibbs J and Stephen J highlight that the fourth of Baden's categories is aimed at moral obtuseness where a person fails to recognise an impropriety that would have been apparent to an ordinary person.

It may be that it is going to far to say that a stranger will be liable if the circumstances would put an honest and reasonable man on inquiry, when the stranger's failure to inquire has been innocent and he has not wilfully shut his eyes to the obvious. On the other hand, it does not seem to me to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper. It would not be just that a person who had full knowledge of all the facts could escaped liability because his own moral obtuseness prevented him from recognizing an impropriety that would have been apparent to an ordinary man. [49]

If a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust the case may well be different, as it clearly will be if the defendant has consciously refrained from enquiry for fear lest he learn of fraud. But to go further is, I think, to disregard equity's concern for the state of conscience of the defendant.[50]

150 Stephen J had early said in relation to the first limb of Barnes v Addy "thus constructive notice arose out of the defendant's failure to recognize fraud when he saw it, not from a failure to pursue inquires."[51] This passage highlights the failure to recognize fraud when the defendant sees it is central to the fourth category.

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