Gleeson CJ noted two qualifications, one being where the mortgagee, who has obtained registration of a forged instrument, has been guilty of or privy to fraud. The other qualification allows personal equities to operate against a registered proprietor.
94 In the present case it cannot be said that either mortgagee has been guilty or privy to fraud. Mr McVittie, their agent, was aware of circumstances showing that the mortgage loans would not in either case be for the benefit of the plaintiff and that she would be subject to substantial obligations to her detriment. He recognized that in those circumstances Michael's use of the power of attorney was an abuse of the power, in a moral sense (T 101). But he decided that, though doubtful, the use of the power of attorney was probably acceptable because it had been accepted in the Permanent Custodians mortgage. There was obviously an error of judgment in this reasoning, even unconscientious conduct (for reasons explained elsewhere), but in my view there was no fraud for the purposes of s 42. The more difficult issue is whether the conduct of the mortgagee and its agent, Mr McVittie, has given rise to an in personam action by the plaintiff against Conran Associates.
95 Mr Menadue placed particular reliance on the judgment of Hayne J in Vassos v State Bank of South Australia [1992] V Conv R para 54-443. In that case the signature of the mortgagor to an instrument of mortgage had been forged and the mortgagee accepted the mortgage without knowledge of the forgery. Hayne J said (at 65-180-65-181):
"The bare fact that the party has not assented to the transaction recorded in an instrument registered under the Torrens System legislation does not, in my opinion, give that person a right enforceable by in personam action to have the transaction reversed. For my part I consider it is clear that more than the bare fact of forgery (and thus an absence of assent) must be shown to found any in personam action of the kind spoken of in Frazer v Walker [[1967] 1 AC 569] and subsequent cases …. In the present case … it may well be that the bank did not act without neglect but there is in my view no material which would show that the bank acted unconscionably. There was no misrepresentation by it, no misuse of power, no improper attempt to rely upon its legal rights, no knowledge of wrongdoing by any other party. It obtained a mortgage, apparently regular on its face but which was in fact forged. Even if by making reasonable enquiries the bank could have discovered the fact of the forgery I do not consider that that fact alone renders its conduct unconscionable. I do not consider that the plaintiffs have any in personam right against the bank; all they have shown is the mere fact of forgery of the instrument."
96 This passage was approved and applied by Gleeson CJ in Story v Advance Bank, at 736-7. On the other hand, in Mercantile Mutual Life Insurance Co Ltd v Gosper (1991) 25 NSWLR 32, the Court Appeal of New South Wales upheld a finding of personal equity where the mortgagor's signature to a variation of mortgage increasing the amount of the advance was forged and the variation was then registered with the assistance of the mortgagee, who produced the certificate of title and the previous mortgage to the Land Titles Office. The mortgagee held the mortgagor's certificate of title solely for the purposes of the mortgage and was under an obligation not to permit it to be used for any other purpose, and would not be allowed to retain a benefit secured by an act that constituted a breach of its obligations (at 49 per Mahoney JA). It had acted without authority in allowing the certificate of title to be used for registration of the forged instrument, giving the mortgagor a personal equity entitling her to set aside the forged variation of mortgage.
97 In Gosper, Mahoney JA explained the concept of personal equity in some detail, noting that there has been no comprehensive definition of "personal" equity for these purposes, but that two suggestions about the content of "personal" equities were that the interest must not be inconsistent with the terms or policy of the legislation, and that "personal" equities arise only from the acts of the holder of the interest (at 45). In Vassos, Hayne J referred to these observations and continued (at 65, 181): "However whatever the limits may be on such 'personal' equities the very language used to describe the right and the reference to the remedies being 'in personam remedies' is a clear reference to the remedies being available in circumstances where equity would act, i.e., in cases which equity would classify as unconscionable or unconscientious." In Grgic v Australia & New Zealand Banking Group Ltd (1994) 33 NSWLR 202, at 222, Powell JA (with whom Meagher and Handley JJA agreed) referred to Mahoney JA's observations in Gosper and expressed the opinion that the expressions "personal equity" and "right in personam" encompass only known legal causes of action or equitable causes of action, extending to conduct not only of the registered proprietor but also of those for whose conduct he is responsible, including conduct which might antedate or postdate the registration of the dealing which it is sought to have removed the register.
98 It follows that if the holder of the registered interest has engaged in unconscionable or unconscientious conduct "personally" (including conduct through an agent) which gives rise to a cause of action in equity, then that equity may be asserted against the registered interest holder. For reasons set out below, my view is that Conran Associates has engaged in unconscionable conduct giving the plaintiff a remedy in equity. That conduct gives the plaintiff a personal equity permitting her to set the Conran Associates mortgage aside notwithstanding that it has been registered.
(3) Alleged uncertainty of terms and parties
99 In the course of dealing with the plaintiff's submission that she is not indebted under the mortgages, I have considered, and rejected, the plaintiff's contention that the mortgages are void for uncertainty because of the use of the expression "Mortgagor/Borrower" in Annexure A. What remains to be considered is the contention that the Conran Associates mortgage is void because of the absence of a necessary party.
100 In the Conran Associates mortgage, but not in the M & V Endurance mortgage, Sarina Spina is identified as one of the Borrowers in Annexure A. However, she did not sign the mortgage or any of the other mortgage documentation, although she signed the guarantee. Mr Connor SC submitted on behalf of the plaintiff that it was evident from the letter of approval, which stipulated that it was to be signed by every person who was a party to any of the security documents, that it was intended that all parties including Sarina should execute the mortgage. Since she did not do so, he said, the Conran Associates loan agreement/mortgage was void for uncertainty of parties.
101 In Small v Gray, one of the signatures to a mortgage had been forged. It was submitted that all parties had contemplated that there would be no contract until everyone had executed the mortgage, and since that had not occurred, the case was governed by the principle enunciated by Young J in Katsaitis v Commonwealth Bank of Australia (1987) 5 BPR 12,049. According to that principle (at 12,051), "where a document is expressed to be one to be made by more than one person of the one part, such document is subject to a precondition that it will not come into operation until all have signed, if the effect of it coming into operation earlier would be to impose on those who have signed a greater liability that it was ever intended that they should bear." McDougall J said that an answer to this submission lay in s 36(11) of the Real Property Act, according to which a dealing upon registration has "the effect of a deed duly executed by the parties who signed it". The effect of registration was to make the mortgage effective as a deed between the parties who signed it notwithstanding that the intention of one of them was not to be bound unless and until the document was signed by another person. I respectfully agree with this reasoning, and therefore I reject Mr Connor SC's submission.
(4) The plaintiff's contentions based on undue influence and unconscionability
102 Mr Connor SC contended that the loans/mortgage agreements with Conran Associates and M & V Endurance are each void and liable to be set aside in equity, on the grounds that they:
· were obtained by undue influence;
· were unconscionable bargains;
· gave rise to legal rights upon which it would be unconscionable for the mortgagees to rely.
103 In my opinion there is no factual foundation for a case of undue influence here. The equitable doctrine of undue influence depends upon the existence of a relationship that has arisen prior to the impugned transaction: either the relationship is one of the established categories of relationships of influence (such as solicitor and client or parent and child), or it is a relationship which, on the facts, is one of domination on the one part and subservience on the other (see generally, Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th edn, 2002, by RP Meagher, JD Heydon and M. Leeming), paras [15-055]ff; [15-105]ff). It is not contended that the power of attorney itself was procured by undue influence. The allegation is that the mortgage loan agreements were obtained by undue influence. But there was no prior relationship at all between the respective mortgagees and the plaintiff, and no substantial relationship between them and Michael. The facts are far too thin to support any allegation that there was such a relationship between Mr Morgan and Michael. Therefore the submission based on undue influence must fail.
104 As to the case based on unconscionability, in Turner v Windever [2005] NSWCA 73 Giles JA (with whom Bryson JA agreed) adopted the following statement of principle from my judgment at first instance (at [2]):
"105. ... a case of unconscionable dealing involves the following:
(a) the weaker party must, at the time of entry into the transaction, suffer from a special disadvantage vis-a-vis the stronger party;
(b) the special disadvantage must seriously affect the weaker party's capacity to judge or protect his or her own interests;
(c) the stronger party must know of the special disadvantage (or know of facts which would raise the possibility in the mind of any reasonable person);
(d) that party must take advantage of the opportunity presented by the disadvantage; and
(e) the taking of advantage must have been unconscientious.
106. I would only add that, as cases such as Blomley v Ryan [(1956) 99 CLR 362] show, once ingredients (a), (b) and (c) are established, and the improvidence of the transaction is shown, the plaintiff's task is made easier by an equitable presumption to the effect that the improvident transaction was a consequence of the special disadvantage, and that the defendant has unconscientiously taken advantage of the opportunity presented by the disadvantage."
105 More recently the Court of Appeal of New South Wales has made it plain that a transaction may not be set aside on the basis of unconscionable conduct merely on the ground of some general notion of inequality of bargaining power (Australia & New Zealand Banking Group Ltd v Karam (2005) 64 NSWLR 149 at 167, 173 (Beazley, Ipp and Basten JJA).
106 Mr Connor SC sought to establish the factual case for the application of the equitable principle by relying on the following propositions, all of which have, in my view, been proven by the evidence:
(i) the plaintiff's age, 91 years;
(ii) the plaintiff's history, of living in the Cherrybrook property until September 2002 and then moving in with Michael and Sarina at Dundas, and then in March 2003 entering into a nursing home;
(iii) the fact that the Cherrybrook property was unencumbered until March 2003, as Mr McVittie knew;
(iv) the extremely high rate of interest in Michael and Sarina's August 2003 mortgage of the Dundas property to Across Australia Finance, of which Mr McVittie was aware before the Conran Associates transaction was completed;
(v) the real estate appraisal of the Cherrybrook property in October 2003 at $720,000;
(vi) the mortgage of the Cherrybrook property in November 2003 to Permanent Custodians, executed by Michael under the power of attorney, for an advance to Spywing, the balance outstanding being about $400,000 in June 2005, to the knowledge of Mr McVittie;
(vii) the absence of evidence from Mr Shields, who had a prominent role in the transaction and was available to be called;
(viii) Mr McVittie's comprehensive knowledge of the circumstances of the transactions, summarised in detail above;
107 Mr Connor SC submitted that the transactions were wholly improvident ones from the plaintiff's perspective. That, in my view, is plain. They conferred no benefit on her and imposed onerous obligations.
108 In my view the facts establish that at the time of the two mortgage loan transactions the plaintiff suffered from a special disadvantage vis-a-vis the mortgagees, which would have seriously affected her capacity to judge and protect her own interests. The disadvantage arose out of her age, lack of mental acuity, the fact that she was confined to her nursing home room by virtue of her injuries, and her inability to read and write English or even to converse in English except in a rudimentary way. The special disadvantage can be tested by asking whether the equitable principle would have permitted the mortgagees to enter into these transactions if they were dealing directly with her, without taking meticulous precautions that would include ensuring that she had competent independent legal advice. Plainly the answer is that the transactions would have been void in equity in those circumstances. Thus, ingredients (a) and (b) of the case of unconscionable dealing are satisfied.
109 Ingredient (c) is of crucial importance here. To take a hypothetical case, a mortgagee who relies on a power of attorney which on its face authorises the transaction is not required to enquire to ascertain whether the mortgagor who has granted the power is old or senile or able to read and write. In such a case, the existence of a special disadvantage is of no consequence because of the absence of knowledge of the mortgagee. In general terms, that is the kind of case considered by Hayne J in his observations (quoted above) from the Vassos case. But the equitable doctrine applies, according to the formulation quoted above, where the stronger party, though not knowing of the special disadvantage, knows of facts which would raise that possibility in the mind a reasonable person. Here, the relevant knowledge is the knowledge of Mr McVittie, imputed to his clients, as well as the more limited knowledge possessed by Mr Foux and Mr Rohanna respectively.
110 None of them knew that the plaintiff's mental powers were declining, or that she could not read and write or converse adequately in English, or that she was confined by injuries to her nursing house room. They did not know her at all, and did not know where she lived. But Mr McVittie knew that she was an old woman, who had lived at the Cherrybrook property until 2003 without a mortgage, and that Michael was her son. He knew that Michael and Sarina were under financial pressure having regard to the extreme interest and repayment terms of the mortgage they had granted over the Dundas property, and that Michael's business was heavily indebted and in urgent need of further funds. He knew that Michael had his mother's power of attorney which he had used to obtain a business loan in the Perpetual Custodians transaction, although Mr McVittie regarded it as doubtful whether the power of attorney permitted Michael to do so. He knew that Michael was using the power of attorney again for each of the two mortgage loan transactions. He knew that the transactions would not confer any benefit on the plaintiff and would cause her detriment by imposing onerous payment obligations on her. He knew that she had no solicitor and no independent advice in respect of the transactions. Therefore knew that the transactions were highly improvident from her point of view (compare Tyson v Commonwealth Bank of Australia, Supreme Court of New South Wales, unreported, Giles J, 13 December 1989, BC8901343 at BC page 40). In my opinion knowledge of those matters, in the context of the other matters that I have listed above, would have raised not just a possibility but a substantial probability in the mind of any reasonable person that factors constituting special disadvantage were present.
111 Those findings lead to a presumption that the two mortgage loans, being improvident transactions, were made in consequence of the plaintiff's special disadvantage, and that the mortgagees unconscientiously took advantage of the opportunity presented by her disadvantage. In my opinion the facts do not rebut those presumptions, and therefore ingredients (d) and (e) are established in respect of both mortgages. In this case the unconscientious taking advantage occurred on the part of Mr McVittie when, knowing what he did, he allowed the transactions to go forward to the detriment of the plaintiff. In the circumstances, it was incumbent upon him, in his capacity as agent for the mortgagees, to make further enquiries to ensure that the plaintiff understood the transactions and had received independent legal advice about them. He failed to do so.
(5) The Contracts Review Act
112 Section 7(1) of the Contracts Review Act 1980 (NSW) provides as follows:
" Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:
(a) it may decide to refuse to enforce any or all of the provisions of the contract,
(b) it may make an order declaring the contract void, in whole or in part,
(c) it may make an order varying, in whole or in part, any provision of the contract,
(d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that:
(i) varies, or has the effect of varying, the provisions of the land instrument, or
(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument."
113 The word "unjust" is defined in s 4(1) to include unconscionable, harsh or oppressive.
114 The case based on the Contracts Review Act was not fully developed in argument, and in the circumstances it is unnecessary to do so here. In my opinion the reasoning that has led me to the conclusion that the mortgages and associated documentation were unconscionable dealings from the point of view of the mortgagees also leads to the conclusion that the mortgage/loan contracts were unjust in the circumstances relating to them at the time when they were respectively made. In my opinion the appropriate way of avoiding as far as practicable the unjust consequences of those transactions to the plaintiff is to set them aside.
(6) The validity and enforceability of the guarantee by Sarina
115 Since, in my view, the plaintiff is under no obligation under the Conran Associates loan, there is no obligation the performance of which is guaranteed by the instrument of guarantee signed by Sarina on 14 June 2005.
116 Mr Connor SC submitted, in the alternative, that the guarantee is void or liable to be set aside in equity on the ground that it was obtained by undue influence, and/or that it would be unconscionable for Conran Associates to rely on its alleged rights under that instrument. He made a further alternative submission, that the guarantee is an unjust contract and should be set aside under the Contracts Review Act.
117 Before dealing with these submissions, it is necessary to address some factual issues surrounding the execution of the guarantee. In her affidavit made on 4 June 2007, Sarina said that Michael did not talk to her about the Action Fruit Supply business, and if ever she asked about it, he would tell her he wanted to leave business at work and did not want to talk about it at home. However, she said Michael frequently asked her to sign business documents at home, and she always did as requested. She said that in about the middle of 2005 Michael was leaving for work one morning and asked her to sign a document, and she did so. She said no one else was present and in particular, she has never met Mr McVittie. She said she did not take any particular note of the document, and saw no point in asking Michael about it, in view of his general attitude to discussing business at home.
118 Her affidavit continued:
"56. I now recognise that document as the Guarantee which is annexed and marked 'F' (i.e. the Conran guarantee). At the time I signed this document I thought I was probably taking on an obligation for some debt of the business but did not know any more. I had no idea how much the debt was and generally what it was about.
57. All I thought at the time was that Michael obviously needed me to sign the document to keep the business going and therefore I signed it. I did not see the point in querying what the Guarantee was for, or not signing it, as I had signed so many documents in the past and did not think there was any particular reason to change that practice then. Nor did I see any practical alternative to signing the document as I effectively depended on Michael for support."
119 Sarina's evidence about her signing of the guarantee was in conflict with the evidence of Mr McVittie. He said he took the document to Michael and Sarina's home in Dundas (which, he said, was near his own residence) on the evening of 14 June 2005, after making it clear to Mr Foux that he would witness the document but he would not advise Mr and Mrs Spina because he was acting for the lender and not for them. Mr McVittie's evidence was that Michael and Sarina signed the guarantee at their dining room table and he witnessed their signatures. In cross-examination Mr McVittie agreed that he was aware that Sarina did not have any legal advice with respect to the guarantee (T 94), that he was unaware whether Sarina knew that there was a mortgage transaction in progress (T 95), and that he had no basis for assuming that Sarina understood the Conran mortgage documents or the guarantee (T 96). He said he was aware by making company searches that Sarina was a director but not a shareholder of Spywing (T 97).
120 Sarina provided a second affidavit, made on 21 August 2007, in response to Mr McVittie's affidavit evidence. She denied that the meeting alleged by Mr McVittie to have taken place at her Dundas house on 14 June 2005 ever took place, and said she had never met Mr McVittie. She explained that on the occasion when she signed the guarantee document, her husband had woken her up sometime between 3 a.m. and 3:30 a.m. before he left for work at Flemington markets. She said she signed the document in bed and then she went back to sleep. She said she did not read the document or even notice what its heading was.
121 In her second affidavit she sought to resile from her earlier statement that she recognised the document she had signed as the Conran guarantee. She explained that she had meant to say she was certain she had signed only one document in the middle of 2005, and that she had concluded that it must have been the Conran guarantee when she saw that document after the proceedings commenced. She said she had not meant to say that she recognised the Conran guarantee in terms of knowing that she had seen the document previously, for the truth was that she did not notice anything about the document she was asked to sign, when she signed it so early in the morning. She said that having looked at the Conran guarantee again, she was not even certain that the signature on it was her signature.
122 In cross-examination Sarina was taken over this conflicting evidence and generally maintained the position expressed in her second affidavit. But she was not convincing in the witness box, and I regard the position that she articulated in the second affidavit and in cross-examination as much less coherent than what she had said in the first affidavit. In particular, her evidence that she was not aware that the very large BankWest loan secured by a mortgage over the Dundas property owned by her and Michael was for the purposes of the business (T 35) was highly implausible and inconsistent with the statutory declaration that she signed in the course of the liquidation of Spywing; as was her evidence that at the time when she signed the guarantee she did not know how the business was going (T 36). I have reached the overall conclusion that I should prefer her evidence in her first affidavit to the evidence she gave in her second affidavit and in cross-examination.
123 Therefore my conclusion is that Sarina did sign the guarantee, and when she signed the document she knew it was a guarantee and that by signing it, she was taking on an obligation for some debt of the business, in circumstances in which she was aware that the business was in some financial difficulty. It is unnecessary for me to decide whether she signed the guarantee in the evening in the presence of Mr McVittie or early in the morning in bed, in the present only of her husband, given that Mr McVittie does not claim that he or anyone else explained the document to her.
124 Once again, as with the mortgage loans themselves, no case has been made out for the application of the equitable doctrine of undue influence. There was no relationship of influence between the mortgagees or Mr McVittie, on the one hand, and Sarina on the other, either within one of the presumed categories or on the facts. The relationship of husband and wife is not one of the presumed categories and the facts do not establish that the relationship between Michael and Sarina in this case was a relationship of influence. Sarina did not ask Michael about the business and signed the document she was asked to sign, but there is no suggestion in the proven facts that she did so otherwise than in exercise of her free choice.
125 As to whether there was an unconscionable dealing, in my view it has not been shown that in June 2005 Sarina suffered from a special disadvantage vis-a-vis the mortgagors or Mr McVittie, or vis-a-vis her husband. Sarina appeared in the witness box to be an articulate and independent-minded woman, who would have had no difficulty in declining her husband's request to sign a document if she was awoken to sign it early in the morning. She gave evidence the she understood what a mortgage was what a guarantee was, and she had previously done bookkeeping work for the business. She had previously signed a number of mortgages to support the business. There was no suggestion that she would have any difficulty reading or understanding the guarantee document or the Conran Associates mortgage. The evidence does not establish that the Conran Associates mortgage was improvident from her point of view. She was a director of Spywing and was receiving a salary of about $600 per week, and she was aware that BankWest had a mortgage over her property in Dundas to secure the debts of Spywing.
126 In light of all these facts, the present case is longwave from Garcia v National Australia Bank Ltd (1998) 194 CLR 395. The case is closer in this respect to Commonwealth Bank of Australia v Cohen (1988) ASC para 55-681, where Cole J declined to set aside guarantees given by a wife to support business loans to her husband. The wife had signed the documents at home at the request of her husband, in circumstances where the mortgagee did not ensure that she was aware of the parlous position of the company she was guaranteeing or that she received independent legal advice. But Cole J pointed out that the wife benefited from the transactions in the sense that she relied on her husband for income to support herself and her family, and the income was derived from the company, and the wife was aware that it was necessary to give the guarantee to enable the company to continue (at 58,159-58,160).
127 In my opinion, the challenge to the guarantee based on unconscionable dealing cannot be made, on the facts. For the same reasons, the evidence does not establish that the guarantee was an unjust contract within s 7 of the Contracts Review Act. Since, however, the obligation guaranteed by Sarina is void and the mortgage is to be set aside, the guarantee is ineffective although not open to equitable challenge.
Conclusions
128 In the case of each mortgage, the court should declare that the mortgage was not authorised by the plaintiff's power of attorney granted to Michael and is therefore not binding on her. The court should also declare that each mortgage is an unconscionable dealing and it should set aside the mortgage and the associated documents.
129 In the case of the Conran Associates mortgage, which is registered, the plaintiff has a personal equity entitling her to an order for removal of the mortgage from the register. I have not received submissions on the appropriate form of order in such circumstances, but it may be that the order is made under section 138(3) of the Real Property Act. I shall invite the parties to give further consideration to that question. In the case of the M & V Endurance mortgage, which is unregistered, the court should order that the caveat lodged to protect the mortgage be withdrawn.
130 The First and Second Cross-Claims should be dismissed. As to the Third Cross-Claim, there should be a declaration to the effect that there are no obligations to which the guarantee applies.
131 These orders will have the effect that the mortgagees are not entitled to recover their loans or interest on them from the plaintiff, or to realise their ineffective securities over her land. The question whether they have any cause of action, on restitutionary grounds or otherwise, against the estate of Michael, or against Sarina (otherwise than under the guarantee) is not before me for consideration.
132 I shall direct the plaintiff to prepare draft short minutes of orders to give effect to these reasons for judgment, and fix a time to make orders and hear argument on costs.
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