[1993] FCA 127; (1993) 41 FCR 435

Guarantee - mortgage by sister and brother-in-law of insurance agent to support "agency development loan" - creditor entrusting to principal debtor arranging of surety's signature - misrepresentation of terms of loan by principal debtor - lack of independent advice - disadvantageous transaction - whether protected class.

Trade Practices - liability for misrepresentations of agent - ss.52 and 84(2).

Unconscionable Conduct - disadvantageous transaction - absence of independent advice - unusual terms.

Trade Practices Act 1974 - ss.52 and 84(2)

Avon Finance Co Ltd v Bridger (1985) 2 All ER 281.

Bank of Credit and Commerce International SA v Aboody (1990) 1 QB 923.

Barclays Bank PLC v O'Brien [1992] EWCA Civ 11; (1992) 3 WLR 593.

Chaplin and Co Ltd v Brammall (1908) 1 KB 233.

Coldunell Ltd v Gallon (1986) QB 1184.

Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447.

Contractors Bonding Ltd v Snee (1992) 2 NZLR 157.

Kings North Trust Ltd v Bell (1986) 1 WLR 119.

Louth v Diprose [1992] HCA 61; (1992) 67 ALJR 95.

Turnbull and Co. v Duval (1902) AC 429

Walplan Pty Ltd v Wallace [1985] FCA 479; (1985) 8 FCR 27.

Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649.

Counsel for the applicant: Mr J.S. Douglas QC with Mr E. Morzone

Counsel for the respondent: Mr P. Lyons QC with Mr N. Thompson

Solicitor for the respondent: Drake, Walker and Leahy

1. Bill of mortgage number K307677V dated 24 May 1990 made between

the applicants as mortgagors and the respondent as mortgagee be

set aside.

2. The respondent be restrained from enforcing the powers conferred

by the mortgage against the applicants or from dealing with the

property the subject of the mortgage.

3. Liberty to apply be reserved.

4. The respondent pay the applicants' costs, including reserved

costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

HEEREY J. On 24 May 1990 the applicants Kevin James Alderton (Mr Alderton) and Kathleen Zena Alderton (Mrs Alderton) executed a bill of mortgage in favour of the respondent The Prudential Assurance Company Limited (Prudential) over a flat which they owned in Surfers Paradise. The mortgage was to secure $150,000 lent by Prudential to St Andrews Financial Consultancy Pty Ltd (SAFC), a company controlled by Mrs Alderton's brother, John Charles Urquhart (Mr Urquhart).

2. In this application Mr and Mrs Alderton seek orders setting aside the mortgage on a number of grounds.

3. Mr Alderton was born in Victoria in 1940. He left school after second year high school and completed an apprenticeship as a painter and decorator. On a working holiday in the United Kingdom he met Mrs Alderton and they married in 1973. Mrs Alderton had left school at 15 and completed an apprenticeship as a book binder. She is eight years younger than her husband. The following year they returned to Australia. They have two children aged 18 and 15. For a time they conducted a service station at Euroa in Victoria before moving to Queensland in 1987. Mr Alderton has continued to carry on business as a painter and decorator. Mrs Alderton works as a sales assistant in the book department at a Myer store.

4. In the course of their marriage Mr and Mrs Alderton have bought and sold homes and entered into mortgages for that purpose. They also had a lease of the service station. Otherwise they have had no substantial commercial experience and in particular have had no experience with the life insurance industry.

5. At the beginning of 1990 Mr and Mrs Alderton owned a home at 115 Witt Avenue, Carrara on the Gold Coast. It was unencumbered. They also owned as an investment a flat known as Unit 902, Surfers Plaza Resort, 61 Whelan Street, Surfers Paradise which was subject to a mortgage for $85,000. They also owned a half share in a milk bar at Violet Town in Victoria purchased for $42,000. Their plans were to sell the Carrara house and with the proceeds pay off the mortgage on their flat and build a smaller house with no mortgage or at least a smaller one. Mr Urquhart becomes a Prudential Agent

6. Mr Urquhart is aged 39. According to a curriculum vitae which he presented to Prudential, he graduated in 1977 with a Bachelor of Education degree from Glasgow University and subsequently worked in Aberdeen conducting his own financial consultancy selling life insurance and subsequently as a branch manager for Commercial Union.

7. At some time during 1989 Mr Urquhart contacted his sister and told her that he, his wife and three children, the eldest of which was seven, wished to migrate to Australia. He asked for the Aldertons to sponsor them. Mrs Alderton readily agreed and the Urquhart family arrived in January 1990. They stayed with the Aldertons for three weeks. Mr Urquhart told his sister that he had been managing a department with Commercial Union in Aberdeen and that he "had a team of men and he was number one and he was doing really well there".

8. Shortly after arriving Mr Urquhart obtained employment with Colonial Mutual as a life insurance salesman on the Gold Coast. However it would appear that this employment did not suit him and in early March he approached Mr Raymond Smith, who was Prudential's agency manager for Queensland, with a view to obtaining a position with that company. He had two meetings with Mr Smith and as a result, at Mr Smith's suggestion, he made an application for appointment as a Prudential agent. Mr Smith was favourably impressed by Mr Urquhart's presentation and resume. Another attraction which Mr Urquhart held out was the possibility of attracting several Colonial Mutual agents to Prudential.

9. As a result of Mr Smith's recommendation, Mr Urquhart, in the person of his company SAFC, was appointed an agent by Prudential under an agreement in writing dated 11 April 1990. Under this agreement the parties agreed that SAFC would within the prescribed area "act for Prudential to solicit proposals for new policies of assurance with Prudential" and that Prudential would "pay to the agent ... commissions and remunerations determined in accordance with the schedule of rates and commission." By cl 7, the agreement could be determined by either party on seven days written notice. Agency Development Loan

10. At the meetings with Mr Smith, Mr Urquhart enquired after the possibility of Prudential providing him with a housing loan and an "agency development loan". Although Mr Smith did not say so in as many words, the impression created by his evidence was that it was Mr Urquhart who raised the latter topic, presumably being aware that Prudential might be likely to make such loans to agents.

11. Mr Smith provided him with a Prudential document which set out rules for agency development loans and went through the document with him. Mr Smith pointed out to him that Prudential required security over real property with the property valued at least equal to the amount of the loan sought. Mr Urquhart said that he did not have any security of that nature in Australia, although he had some property in Scotland and two villas in Portugal, but that his sister and brother-in-law had a flat on the Gold Coast which they were willing to offer as security. Mr Smith pointed out to him provisions of the rules dealing with "production requirements", which in substance meant that the agent had to sell a minimum amount of business, and also provisions which provided for repayment of commission by the agent if a policy lapsed. Mr Urquhart was given a copy of the rules, the agency agreement, an application for an agency development loan and a blank "business plan". However the agency development loan agreement form itself was not provided at this stage.

12. It would appear that, in circumstances which do not clearly emerge from the evidence, Mr Urquhart subsequently received an agency development loan agreement form. On 14 May he brought back to Mr Smith at the Prudential office in Brisbane two copies sealed by SAFC. Both copies were retained by Prudential for the purpose of obtaining the signature of the State Manager and stamping. The agreement was stamped on 23 May and a copy forwarded to Mr Urquhart on 28 June.

13. The agency development loan agreement recites that the borrower has entered into an agency agreement with Prudential whereby the borrower has agreed to solicit proposals for new policies of assurance with Prudential in consideration for which Prudential pays to the borrower certain commissions and remuneration.

14. Clause 2 provides that the borrower will on the loan repayment date specified in the schedule (31 May 1995) pay to Prudential the loan debt which is defined by cl 1 as the loan and any interest payable thereon and any other moneys payable by the borrower under the terms of the agreement.

15. Clause 3 provides that interest which becomes payable by the borrower under the terms of the agreement is payable at the rate of 21 per cent per annum or such lesser rate as Prudential may determine and that interest paid on each 31 December is to be capitalised and bear interest.

16. By cl 9, if on 31 December in any year during the currency of the loan the borrower has not "achieved the targets for that year set out in the Yearly Plan" submitted by the borrower in conjunction with the application for loan, the borrower will pay interest on the amount of the loan which bears the same proportion to the loan as the proportion for which the borrower failed to achieve the target.

17. By cl 10 if for any year during the currency of the loan Prudential determines that the lapse rate on the production of the borrower is in excess of 10.1 per cent, interest in respect of that part of the year for which the loan was outstanding calculated at the prescribed rate on the amount of the loan outstanding at the end of that year shall be immediately due and payable.

18. Clause 11 provides that the loan shall be immediately payable at the option of Prudential in any of the following circumstances:

"(a) If for any reason the Agency Agreement between

Prudential and the Borrower shall be terminated; or

(b) If on 31 December in any year during the currency of the

loan the Borrower has not achieved the targets for that year

set out in the Yearly Plan submitted by the Borrower in

conjunction with the Application for loan or in a Yearly

Plan which by agreement between the Borrower and Prudential

has been substituted therefore; or

(c) If for any year ending 31 December during the currency of

the loan Prudential determines that the lapse rate on the

production of the Borrower is in excess of 10.1 per cent; or

(d) If Prudential, in its absolute discretion, gives the

Borrower seven days' written notice that the Loan Debt is

due and payable.

19. Mr Alderton got on well with his brother-in-law during the three weeks that the two families were living together. He freely discussed his own financial position and the plans which I have already mentioned. Mr Urquhart made a number of suggestions about investments for the Aldertons such as money market operations in Chile, off shore loans from Japan and investments in the share market. None of these were pursued. After the Urquharts left the Alderton home the families still kept in touch. About a month later Mr Urquhart told Mr Alderton of his prospect of getting work with Prudential. In the course of a telephone conversation when this was first mentioned he told Mr Alderton that he had a chance of getting an interest free loan from Prudential for five years but that he would need the Aldertons to put up their flat as security. He made arrangements to come with his wife Rosemary to the Aldertons' home to discuss the matter further.

20. By the time this visit took place, the Aldertons had, on 22 April, completed the sale of their home for $230,000 and paid out the mortgage on the flat. The balance was held on term deposit pending their decision about building or buying a new house.

21. On the occasion of this visit Mr Urquhart, who had been made aware of the details of the sale of the Aldertons' home and the discharge of the mortgage on the flat, told Mr Alderton that he was going to be lent $150,000 interest free by Prudential "as an incentive for his job prospects". He put to Mr Alderton the proposition that if the Aldertons provided their flat as security Mr Urquhart would give them out of the proceeds of the loan $45,000 to do with whatever they liked, and a further $40,000 would be put into a joint account and the interest shared. He said that of the balance he would use $50,000 to pay off a mortgage on his house in Scotland and the remaining $15,000 to help him start up his insurance agency. It was made very clear to the Aldertons by Mr Urquhart that it was an interest free loan for five years and that it could not be called up for five years. Mrs Alderton raised the possibility of consulting a solicitor. Mr Urquhart said nothing, but Mrs Urquhart, in a manner described by Mrs Alderton as "quite aggressive", said "Well, look - you know - it is your brother. You should trust him." Mrs Alderton decided not to pursue the matter. The Aldertons talked about the proposal, it would seem quite briefly, and agreed to accept.

22. Mr Urquhart did not give evidence but a statement signed by him was admitted under s.92 of the Evidence Act 1977 (Qld) over the objection of counsel for Prudential. Evidence given in support of the application to tender this document indicated that the Aldertons' solicitor had spoken by telephone to Mr Urquhart in Scotland and had offered to pay his costs of coming to Australia to give evidence but he said he was too busy. In the statement Mr Urquhart claims that Mr Smith only told him that the loan was for five years interest free and did not mention any of the details about earlier termination or interest being payable if production targets were not met. Mr Smith's evidence was to the contrary and since he gave evidence on oath, was cross-examined and gave an account which was not inherently improbable, I accept his version in preference to that contained in the statement of Mr Urquhart. However by the same token I found the Aldertons truthful witnesses and I accept their evidence that Mr Urquhart conveyed to them the clear impression that the loan was for five years interest free and did not pass on to them the qualifications which had been pointed out to him by Mr Smith. It must follow that Mr Urquhart knowingly misrepresented to his sister and brother-in-law the true nature of the proposed transaction in important respects.

23. Not long after that occasion Mr Urquhart came to the home again. Mrs Alderton was at home but her husband was at work. Mr Urquhart told her that Mr Smith of Prudential wanted another document signed in relation to the loan. He dictated a document which Mrs Alderton wrote in these terms:

"49/35 Killarney Avenue

Robina 4226

17th April 1990

Mr R Smith Agency Manager Prudential Assurance Brisbane Dear Mr

Smith Unit 902 Surfers Plaza Resort We have discussed giving the above property which we own as security for a $150,000 loan Prudential is to make to my brother-in-law John Urquhart. We understand the implications involved in this act and agree to give the security. Yours - "

24. Mrs Alderton then signed the document. Although it bears date 17 April 1990 it seems clear from the evidence that the document must have been prepared and signed some time later because the Aldertons were not living at Robina until after the sale of the Carrara house on 22 April. At the time she signed this document Mrs Alderton's belief was, in accordance with what her brother had told her, that the loan was for a five year fixed term with no interest. After obtaining Mrs Alderton's signature Mr Urquhart took the document to Mr Alderton who was painting a cottage. He came outside and at Mr Urquhart's request signed the document on the bonnet of the car. Mr Urquhart told Mr Alderton just that Prudential "wanted a letter saying that we were willing to put up our unit as security for his five year interest-free loan".

25. Shortly after that Mr Urquhart told the Aldertons that the unit had only been valued at $130,000 but that this would not affect his deal with Prudential.

26. On 24 May the Aldertons signed the bill of mortgage. It contains the following term:

"IN CONSIDERATION of loans advances and

discounts which have been made or may hereafter

be made (at the request of (inter alia) the

mortgagor) by the mortgagee to ST. ANDREWS

FINANCIAL CONSULTANCY PTY LTD (hereinafter

called 'the Debtor') pursuant to the terms of a

certain agency agreement dated the day of

, 19 and entered between the Mortgagee

and the Debtor and IN FURTHER CONSIDERATION of

the sum of ONE HUNDRED AND FIFTY THOUSAND

DOLLARS ($150,000) (all of such sums so advanced

hereinafter collectively referred to as the

Principal Sum) lent or agreed to be lent by the

Mortgagee to the debtor at the request (inter

alia) of the mortgagor, the mortgagor COVENANTS

AND AGREES with the Mortgagee that the mortgagor

will pay all moneys hereby secured or secured by

the said Agency Loan Agreement on or before the

31st day of May 1995 or the date on which the

said Agency Loan Agreement may be determined in

accordance with the provisions thereof whichever

is the first to occur (hereinafter for the

purposes of these presents and the said Agency

Loan Agreement called the 'Loan Repayment Date')."

27. Mr Urquhart brought the bill of mortgage and another document to where Mrs Alderton was working at Myers and asked her to sign the documents that day so that he could get the money by the end of the week. She did not read the clause which is referred to above. Her signature purports to be witnessed by a Mr Gregory John Reid JP but Mrs Alderton says that only Mr Urquhart and his wife were present and that she does not know a person of that name. Mr Urquhart then brought the bill of mortgage to Mr Alderton where he was working and he also signed it. He did not read the document. Again Mr Gregory John Reid JP was not present.

28. The Aldertons also signed, it would seem at the same time as the mortgage, a receipt in these terms:

"WE the undersigned ACKNOWLEDGE having received a copy of

the Bill of Mortgage securing the Agency Development Loan of

ONE HUNDRED AND FIFTY THOUSAND DOLLARS ($150,000) given by

The Prudential Assurance Company Limited to St Andrews

Financial Consultancy Pty Ltd, prior to execution by us

thereof, and WE ACKNOWLEDGE that the said mortgage secures

the terms of the Agency Development Loan as aforesaid and

that the obligations of such Agency Development Loan have

been fully explained to us by the directors of St Andrews

Financial Consultancy Pty Ltd.

DATED this 24th day of May 1990."

29. On a subsequent occasion a further document was later brought to the Aldertons by Mr Urquhart and also signed by them. It is addressed to Prudential and their solicitors Messrs Drake, Walker and Leahy and is in the following terms:

"We the undersigned ACKNOWLEDGE that prior to execution by

us of the Bill of Mortgage in favour of The Prudential

Assurance Company Limited securing the sum of ONE HUNDRED

AND FIFTY THOUSAND DOLLARS ($150,000) due by St Andrews

Financial Consultancy Pty Ltd we obtained independent legal

advice concerning such mortgage and understand and accept

all the terms and conditions therein contained.

DATED this 25th day of May 1990."

30. Mr Alderton said that he was not sure whether he signed it on the same day as the mortgage. He had not in fact obtained independent legal advice and did not read the document before signing. Mr Urquhart told him that Prudential wanted a signature saying that he and his wife were putting their flat up as security for the $150,000 interest free loan to Mr Urquhart. Mr Urquhart never said anything to him about legal advice. Mrs Alderton says that Mr Urquhart came to the house again and asked her to sign this document. He told her that it was "just a normal procedure that Prudential go by and a loan procedure whatever". She thought it was quite a few days after she signed the mortgage, it could have been a week. She had not in fact obtained legal advice and did not read the document. She just trusted what her brother said and accepted his word.

31. The loan was subsequently paid by Prudential to Mr Urquhart and he in turn paid the Aldertons $45,000 on 30 May. The Aldertons decided to use this money towards the building of their new home with the intention that they would sell it before the end of the five years and then Mr Urquhart would "have his money ready to go back". But about two or three months later Mr Urquhart asked for the $45,000 back so the Aldertons, who had already arranged some other finance from a building society for their new home, increased the loan to enable them to repay Mr Urquhart. Mr Urquhart said he needed the money for a small business in Nerang. The Aldertons repaid various amounts totalling $38,977 by 3 December 1991. All except $5,000 of that amount had been repaid by 8 February 1991. They spent a further $1,388 in connection with legal costs for the building society loan making a total of $40,365. The remaining $5,000 was treated as being set off against a loan that Mr Urquhart had borrowed from them about four years previously when they were in Euroa. The promised benefit of the further $40,000 to be held on a joint account never materialised. Prudential's Side of the Transaction

32. On 11 April Mr Urquhart made applications to Prudential for the appointment of his company SAFC as a Prudential agent and also for an agency development loan. The latter application disclosed that the security offered was the flat owned by the Aldertons. As has been mentioned, the agency agreement was executed on 11 April. On 15 May the mortgage lending department of Prudential sent an internal memo to Mr Smith in these terms:

"We have been informed that a loan of $150,000 has been

granted to the above agency subject to a first mortgage

security being obtained. Please arrange for a valuation

report on the subject to be forwarded to our office.

Looking further ahead we understand that the subject

property is owned by Mr and Mrs K Alderton. Our solicitors

will need to obtain a letter from Mr and Mrs Alderton

stating that they have obtained independent legal advice

concerning the proposed first mortgage to Prudential and

understand and accept all the terms and conditions contained

therein."

33. Also on 15 May Mr Smith wrote to Drake, Walker and Leahy confirming that an agency development loan of $150,000 would be made available to SAFC but pointing out that since the valuation was only $130,000 it had been agreed that $20,000 would be placed in a controlled pass account and the balance of $130,000 would be made available. The letter advised that the agency development loan agreement:

"is in the process of being stamped and will be sent to you

immediately this occurs."

34. It was stated that Mr and Mrs Urquhart were also seeking a mortgage loan which was due for settlement on 23 May which another section of the solicitors' firm was handling. There was a request that settlement of both loans could occur simultaneously on that date.

35. On 22 May 1990 Drake, Walker and Leahy wrote to Mr Urquhart in the following terms:

"We enclose herewith the following documents:

1. Bill of Mortgage (seven copies).

2. Receipt.

3. Body Corporate notification.

4. Memorandum of the Mortgagee's costs and outlays.

Please arrange for the documents to be signed by Mr and Mrs

Alderton, yourself and your wife, together with the affixing

of the common seal of St Andrews Financial Consultancy Pty

Ltd where indicated and to be witnessed by a Justice of the Peace.

Please return the signed documents to us at your earliest

convenience."

36. It will be recalled that Mr Urquhart brought to the Aldertons on a separate occasion a document which was expressed as an acknowledgment they had received independent legal advice. The genesis of that document is a letter from Mr Smith of Prudential to its solicitors dated 24 May in these terms:

"Another requirement to enable this loan to be settled is

that as the property being offered for security is owned by

Mr and Mrs K Alderton we do require you now to obtain a

letter from them stating that they have obtained independent

legal advice concerning the proposed first mortgage to

Prudential and understand and accept all the terms and

conditions contained therein.

I spoke with Mr John Urquhart late yesterday afternoon

confirming to him that you have in fact sent your

requirements to him and that this additional requirement you

will fax to him so that he can then arrange for its

completion by both Mr and Mrs Alderton. His fax number is

the same as his telephone number which is (075) 941371.

Can you please now proceed with the preparation of the

acknowledgment to be signed by the Aldertons and fax it

direct to Urquhart.

He has indicated that he will personally travel from the

coast and bring with him all of the completed requirements

in an endeavour to have a speedy settlement of this

development loan.

The loan agreement in duplicate has been stamped and is attached."

37. As to the reference to the agency loan agreement, although on its face it appears to have been stamped on 23 May and may have been forwarded by Prudential to its solicitors as stated with the letter of 24 May, 1990 it seems that it was not attached to the bill of mortgage when the latter was executed on 24 May. Prudential's solicitors of course, had on 22 May sent the mortgage to Mr Urquhart to obtain the Aldertons signatures at a time when the agreement was still with the stamps office. On 25 May Mr Urquhart faxed to Prudential's solicitors a copy of the document about obtaining legal advice signed by the Aldersons noting that he understood from Mr Smith that receipt of the fax would enable a cheque to be drawn.

38. Mr Smith never suggested to Mr Urquhart that the Aldertons obtain independent legal advice nor did he, or anyone else on behalf of Prudential, attempt to communicate such a suggestion directly to them. He said that he did not have any belief that they had obtained legal advice and thought that "the original note that the Aldertons had given (i.e. the note dictated to Mrs Alderton and incorrectly dated 17 April) would have been satisfactory to Prudential, but obviously it was not."

39. The Aldertons put their case in a number of ways, some of which overlapped. It will only be necessary to deal with the following:

(i) Mr Urquhart was the agent of Prudential in arranging for the

Aldertons to execute the bill of mortgage. Prudential is

therefore vicariously liable for Mr Urquhart's

misrepresentations as to the nature and contents of the

document.

(ii) Mr Urquhart engaged in such conduct "on behalf of" Prudential

within the meaning of s.84(2) of the Trade Practices Act 1974

(Cth). The conduct involved a contravention of s.52.

(iii) The relationship between Mr Urquhart and the Aldertons was, to

the knowledge of Prudential, of a kind likely to involve

influence of debtor over surety, there was in fact undue

influence and misrepresentation by the debtor and Prudential

had failed to take reasonable steps to ensure that the

Aldertons entered into the transaction with adequate

understanding of its nature and effect. The mortgage should

therefore be set aside in equity: see Barclays Bank PLC v

O'Brien [1992] EWCA Civ 11; (1992) 3 WLR 593 at 618-621, 635-636.

(iv) The Aldertons were in an inferior bargaining position, lacked

independent advice and were unaware of special terms of the

agency loan agreement. It would be unconscionable for

Prudential to rely on a mortgage procured in such

circumstances: see Commercial Bank of Australia Ltd v Amadio

[1983] HCA 14; (1983) 151 CLR 447.

40. Recent authorities indicate that a court will intervene where a creditor has entrusted to the principal debtor the arranging of a surety's signature to a guarantee and the debtor obtains the signature by misrepresentation or undue influence.

41. In Avon Finance Co Ltd v Bridger (1985) 2 All ER 281 the Court of Appeal set aside a mortgage which had been given by aged parents as security for a loan to their son and induced by false representations made by him. Brandon L.J. (with whom Brightman L.J. agreed) held (at 287) that three matters gave rise to an equity in favour of the parents. First, the fact the plaintiff lender appointed the son, who was the debtor, to obtain the security from his parents; secondly the fact that the parents were older and less educated than their son and, thirdly, the parents had no independent advice even though the lender honestly thought, on the basis of what the son told it, that there was such advice.

42. In Kings North Trust Ltd v Bell (1986) 1 WLR 119 a husband and wife agreed to execute a mortgage of the matrimonial home as security for an advance by the plaintiff to the husband for a partnership business in which the wife was not involved. The plaintiff's solicitors sent the mortgage to the husband's solicitors for execution and they in turn entrusted the husband with obtaining the wife's signature. The wife, without obtaining independent advice, executed the mortgage in reliance on a false misrepresentation by the husband as to the purpose of the loan.

43. The Court of Appeal held that because the plaintiff had entrusted to the husband the execution of the mortgage by his wife they were bound by his actions and could not enforce the mortgage. Dillon L.J. (with whom Sir John Donaldson MR and Mustill J agreed) said (at 123) after referring to Turnbull and Co. v Duval (1902) AC 429 and Chaplin and Co Ltd v Brammall (1908) 1 KB 233:

"... if a creditor, or potential creditor, of a husband

desires to obtain, by way of security for the husband's

indebtedness, a guarantee from his wife or a charge on

property of his wife and if the creditor entrusts to the

husband himself the task of obtaining the execution of the

relevant document by the wife, then the creditor can be in

no better position than the husband himself, and the

creditor cannot enforce the guarantee or the security

against the wife if it is established that the execution of

the document by the wife was procured by undue influence by

the husband and the wife had no independent advice."

"On the general law of principal and agent, the principal

(the creditor), however personally innocent, who instructs

an agent (the husband) to achieve a particular end (the

signing of the document by the wife) is liable for any

fraudulent misrepresentation made by the agent in achieving

that end, including any continuing misrepresentation made

earlier by the agent and not corrected.

I should add that the authority of the cases to which I have

just referred is confirmed by the judgments of the majority

of this court, Brandon L.J. and Brightman L.J., in the recent

case of Avon Finance Co Ltd v Bridger (1985) 2 All ER 281

decided on 10 October 1979. That case is very important in

that it held that the same principle as in Turnbull and Co v

Duval (1902) AC 429 and Chaplin and Co Ltd v Brammall (1908) 1

KB 233 could be applicable outside the mere field of husband

and wife, if the creditor could or should have been aware

that the relationship between the debtor and the persons

from whom a guarantee or security was sought was such that

the debtor could be expected to have some influence over

those persons. If in such a case the creditor appointed the

debtor to procure the execution of the guarantee or

security, and the persons to give it had no independent

advice, the creditor acted at his peril." (Emphasis added.)

45. A different conclusion was reached in the later case of Coldunell Ltd v Gallon (1986) QB 1184 but an essential distinction between that case and Bridger and Bell was that "they all rested upon the critical circumstances that the lender or creditor in each case left it to the principal debtor to obtain, in such a way as he thought fit, the execution of the document. There was, therefore, in each case, material from which it was possible to infer that the principal debtor acted as the agent of the creditor in obtaining the security" ((1986) QB at 1199). See also at 1206.

46. In Barclays Bank PLC v O'Brien [1992] EWCA Civ 11; (1992) 3 WLR 593 a mortgage was given by a wife to a bank as security for a loan to her husband, she having signed it as a result of false representations by the husband as to the amount secured. It was held the bank could only enforce the security for the amount which the wife had been led to believe was applicable. The court held that the husband had not acted as agent of the bank since it retained for itself the responsibility of explaining to the wife the effect and nature of the documents she was to sign, a responsibility which it in fact failed to discharge: (1992) 3 WLR at 621H - 622B, 623B. The wife succeeded because the bank knew that she was being asked to provide security in order to advance her husband's business interests and that the husband was likely to have some influence on her and she to place reliance on him. In these circumstances the bank failed to take reasonable steps to try and ensure that she had an adequate comprehension of the nature of the document. Applying Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649 at 686 the court held that equitable principles required that the creditor should be fixed "with the consequences of the husband's improper and unfair dealing with the wife": (1992) 3 WLR at 622F - 623E.

47. In Contractors Bonding Ltd v Snee (1992) 2 NZLR 157 a mother who suffered serious mental impairment was unduly influenced by her son to execute a mortgage in support of a liability of the son's company. It was held on the evidence that the creditor had not entrusted the execution of the document to the son: see (1992) 2 NZLR at 164 and 172. See also Bank of Credit and Commerce International SA v Aboody (1990) 1 QB 923 at 972.

48. In the present case, by its solicitors' letter of 22 May 1990 Prudential entrusted the debtor Mr Urquhart with the task of obtaining execution by the Aldertons of the mortgage to secure the liability of Mr Urquhart's company SAFC. On the foregoing authorities that in itself is probably sufficient to fix Prudential with liability for the false representations Mr Urquhart had already made and which continued to influence the Aldertons: see Briess v Woolley (1954) AC 334 at 333, 344, 349, 353 - 354, Bell (supra). That would seem to follow on general principles of agency, as Dillon L.J. pointed out in Bell, irrespective of any need for a particular relationship of influence between debtor and surety.

49. However, there are further circumstances which confirm a conclusion that the court should intervene. First, the family relationship between Mr Urquhart and the Aldertons was such that trust and reliance by the latter on the former going beyond normal commercial considerations might reasonably be expected. Secondly, the agency development loan agreement was not a routine commercial document the general nature of which should be known to persons of ordinary business experience not connected with the life insurance industry. Its very name was a misnomer. Prudential did not require from the agent borrower any details as to how the loan would be spent to develop the agency. As far as Prudential was concerned, the agent could do whatever he liked with the money. Its true commercial value to Prudential was that it became a golden handcuff on the agent. A five year interest free loan is indeed an attractive proposition, but the ability to call it up on seven days notice and to impose high interest rates if sales targets were not met gave Prudential a powerful hold over the agent and a healthy incentive to performance. Thirdly, the transaction was disadvantageous to the Aldertons because the loan might be recalled by Prudential on seven days notice at its complete discretion and interest might be incurred by reason of matters beyond their control. As far as Prudential were concerned, the Aldertons were to get no benefit from the transaction. The arrangement made between them and Mr Urquhart for the use of the $45,000 does not mitigate Prudential's role. Fourthly, to the knowledge of Prudential the terms of the agency loan agreement was not even available to the Aldertons at the time they executed the mortgage. Fifthly, the Aldertons did not have independent legal advice. Prudential made no attempt to communicate directly with them to ensure they understood the nature of the transaction or to suggest legal advice. Instead Prudential relied on the assurances of Mr Urquhart and documents obtained by him in which the Aldertons purported to state that they understood the transaction and had obtained legal advice. Since Mr Urquhart's interests were in conflict with those of the Aldertons and he was in a position of influence with them, the whole point of independent advice was to put them in touch with the competent objective view of someone other than Mr Urquhart. To leave this process up to Mr Urquhart himself seems self defeating and based on the unwarranted assumption that a potential poacher would turn gamekeeper.

(ii) Trade Practices Act s.84(2)

50. My finding that Mr Urquhart acted as Prudential's agent in obtaining the execution of the mortgage by the Aldertons also brings into operation s.84(2) of the Act: Walplan Pty Ltd v Wallace [1985] FCA 479; (1985) 8 FCR 27 at 37. Prudential is therefore deemed to have engaged in Mr Urquhart's conduct in misrepresenting the terms and effect of the mortgage, which conduct was misleading and deceptive and a contravention of s.52. Appropriate relief under s.87 may therefore be granted.

51. The judgment of Scott L.J. (with whom Butler-Sloss L.J. agreed) in O'Brien contains an important and illuminating analysis of the law. The passage, (1992) 3 WLR at 618G - 621G, is too lengthy to set out in full in this judgment. His Lordship founds his decision on the historical willingness of equity to treat "married women differently and more tenderly than other third parties who provide security for the debts of others". Thus married women are, in his Lordship's term, a "protected class" to which Avon Finance Ltd v Bridger had added "vulnerable elderly parents who (have) agreed to provide security for the debts of their adult son". His Lordship continued (at 619C):

"... if a protected class is to continue to be recognised,

the class ought, logically, to include all classes in which

the relationship between the surety and the debtor is one in

which influence by the debtor over the surety and reliance

by the surety on the debtor are natural and probable

features of the relationship. In cases falling within this

protected class, security given by the surety would, in

certain circumstances, be unenforceable notwithstanding that

the creditor might have had no knowledge of and not been

responsible for the vitiating feature of the transaction.

Turnbull and Co v Duval (1902) AC 429; Chaplin and Co Ltd v

Brammall (1908) 1 KB 233; Avon Finance Co Ltd v Bridger

(1985) 2 All ER 281; Kings North Trust Ltd v Bell (1986) 1

WLR 119 and Barclays Bank v Kennedy (1989) 1 FLR 356 all, in

my opinion, provide support for this road.

In cases falling within this protected class, equity would

hold the security given by the surety to be unenforceable by

the creditor if: (i) the relationship between the debtor and

the surety and the consequent likelihood of influence and

reliance was known to the creditor; and (ii) the surety's

consent to the transaction was procured by undue influence

or material misrepresentation on the part of the debtor or

the surety lacked an adequate understanding of the nature

and effect of the transaction; and (iii) the creditor,

whether by leaving it to the debtor to deal with the surety

or otherwise, had failed to take reasonable steps to try and

ensure that the surety entered into the transaction with an

adequate understanding of the nature and effect of the

transaction and that the surety's consent to the transaction

was a true and informed one."

52. As I read that passage, the question whether a particular relationship falls within the "protected class" will in part turn on the individual circumstances of the persons concerned. Thus the bare fact that surety and debtor are parent and child will not in itself be conclusive. If parents are elderly and poorly educated compared with their adult child, that may be sufficient.

53. I think that relief can also be granted in the present case on this basis. Prudential knew that Mr Urquhart and Mrs Alderton were brother and sister. Prudential I think must also be taken to have known that there was, consequent upon that relationship and in the particular circumstances of the individuals concerned, a likelihood of influence and reliance. Note that this stage of Scott L.J.'s formulation does not speak of "undue" influence. The fact that Mr Urquhart had just arrived in a new country and persuaded his sister to enter into the mortgage to support his business venture is in itself evidence of influence.

54. For the reasons discussed in relation to the agency basis of relief, I think the other requirements of the O'Brien formulation are satisfied. (iv) Unconscionable Conduct

55. In Amadio Deane J, with whom Wilson J agreed, said (151 CLR at 474):

"Unconscionable dealing looks to the conduct of the stronger

party in attempting to enforce, or retain the benefit of, a

dealing with a person under a special disability in

circumstances where it is not consistent with equity or good

conscience that he should do so. The adverse circumstances

which may constitute a special disability for the purposes

of the principles relating to relief against unconscionable

dealing may take a wide variety of forms and are not

susceptible to being comprehensively catalogues. In Blomley

v Ryan (1956) 99 CLR at 405, Fullagar J listed some examples

of such disability: 'poverty or need of any kind, sickness,

age, sex, infirmity of body or mind, drunkenness, illiteracy

or lack of education, lack of assistance or explanation

where assistance or explanation is necessary'. As Fullagar

J remarked, the common characteristic of such adverse

circumstances 'seems to be that they have the effect of

placing one party at a serious disadvantage vis-a-vis the other'."

See also Louth v Diprose [1992] HCA 61; (1992) 67 ALJR 95 at 103.

56. In the present case there was, as I have pointed out, a disadvantageous transaction entered into by the Aldertons without independent advice, assistance or explanation. The terms of the agency loan agreement were not even available to them. It contained unusual terms. They were approached at their respective workplaces and pressed to sign immediately. They were vulnerable and disadvantaged compared with Prudential and Mr Urquhart, both of whom were to benefit from the transaction. Because Mr Urquhart acted as Prudential's agent, Prudential are fixed with his knowledge that the Aldertons did not in fact obtain legal advice. In any event, Prudential did not take reasonable steps to ensure that they received such advice.

58. In my opinion the appropriate relief is to set aside the mortgage. Prudential argued that, at worst, there should only be a variation to the extent necessary to make the mortgage liability conform with that which the Aldertons thought they were incurring, viz a five year interest free loan. I do not agree. A similar argument was rejected by Deane J in Amadio 151 CLR at 481; see also per Mason J at 468. Here the uncontested evidence of the Aldertons was that if the true nature of the liability had been disclosed they would not have entered into the transaction at all. The Aldertons no longer retain any personal benefit from the transaction, they having repaid the $45,000 to Mr Urquhart.

59. There will be an order setting aside bill of mortgage no K307677V dated 24 May 1990 made between the applicants as mortgagors and the respondent as mortgagee and an injunction restraining the respondent from enforcing the powers conferred by the mortgage against the applicants or from dealing with the property the subject of the mortgage. Liberty to apply will be reserved. I order the respondent to pay the applicants' costs including reserved costs.