Stern v National Australia Bank Ltd

The background to the dispute 4 The following recitation of facts is taken largely from the Bank's documents which were not the subject of attack in the proceedings. 5 The Bank carries on business not only within Australia but also in the United States of America. On 17 September 1986 it made an interest only loan to Mrs Fani Pollak (an Australian resident and the mother of the appellants) of $3 million repayable on 31 July 1993 or in the event of the application of what the parties referred to as a "due on sale" clause and at the discretion of the Bank at an earlier date. The loan in question was secured by a mortgage over office and residential buildings in the Los Angeles suburb of Van Nuys. The property given as security was held by Mrs Pollak partly in her own right and partly as executrix of the estate of her late husband. The loan was secured by a promissory note which Mrs Pollak gave to the Bank and which bore the date 17 September 1986 and a deed of trust of the same date which gave to the Bank a security interest. The promissory note and trust deed were drafted by attorneys acting for the Bank and were the subject of negotiations between those attorneys and attorneys for Mrs Pollak. Some changes were made to the original draft before execution. No change was made or indeed suggested as a result of these negotiations to the due on sale clause which is clause 2.26 of the trust deed. However a side letter dated 22 September 1986, signed by the Bank and addressed to Mrs Pollak confirmed the Bank's agreement that a distribution or other transfer of the Van Nuys property from Mrs Pollak as executor to Mrs Pollak as widow would not constitute a transfer falling within clause 2.26. 6 Clause 2.26 was in the following terms: "In the event that the interest of Trustor in the Property, or any part thereof, or any interest therein is sold, agreed to be sold, encumbered, conveyed, alienated or otherwise transferred by the Trustor, whether by operation of law or otherwise, the Note, irrespective of the maturity dates expressed therein, at the option of the Beneficiary [the Bank], and without demand or notice, shall immediately become due and payable." 7 Mrs Pollak died on 18 November 1987. Her will appointed Mrs Stern executrix of the estate and left the residue of her property to her two children, Mrs Stern and Dr Pollak. A memorandum of the Los Angeles branch of the Bank addressed to its New York branch noted that the family did not intend to sell the Van Nuys building at that time and prepayment of the loan was not expected. Probate of Mrs Pollak's will was granted by the Superior Court of California on 29 March 1988. Under Californian law, creditors had a period of four months within which to make claims against the estate from the date letters testamentary were filed on 8 April 1988. 8 Among the assets of the estate was commercial real property in Burbank, Los Angeles County. In or about late April or early May 1988 a request was made to the Los Angeles branch of the Bank for a loan of $US1 million to be secured on this building. According to an internal bank memorandum the request for this loan was made by Dr Stern, Mrs Stern's husband. The request was not of real commercial interest to the Bank, which was of the view that valuation of the Burbank property had declined with a decrease in rental occupancy and in the result there would be a cash shortfall after interest on the proposed loan was taken into account. However the Bank ultimately agreed to the advance, inter alia, on the grounds that Mrs Pollak had been a valued client of the Bank and the estate was valued for probate purposes at some $US64 million. 9 An internal memorandum passing between the New York and Los Angeles branches noted that it was the understanding of the New York branch that Dr and Mrs Stern as sole beneficiaries would assume liability for the new advance of $US1 million together with the existing $US3 million term loan once the estate was settled. That note indicates that the New York branch at least was uncertain whether the Bank was entitled to claim repayment of the existing $US3 million term loan having regard to the provisions of clause 2.26 or whether it would have to await the date for repayment of that loan in accordance with the normal date for repayment stipulated in the promissory note. The response of the Los Angeles branch was that it was not intended that the Bank be repaid from the estate in any event. The reference in the New York branch's memorandum to the beneficiaries being Dr and Mrs Stern is of course incorrect as the beneficiaries were Mrs Stern and Dr Pollak. On 29 June 1988 the Bank ultimately gave approval to the new loan subject to certain conditions. One of these conditions was "confirmation that Mrs Stern will become our obligor with respect to both loans when the estate is settled". There is a comment in handwriting against this condition which reads: "No, Mrs Stern and brother". 10 On 11 July 1988 the Double Bay branch of the Bank responded (presumably after discussions with Mrs Stern and Dr Pollak) to the request for confirmation that Mrs Stern had become the obligor in the following terms: "They [ie Mrs Stern and Dr Pollak] are confused with the wording of your memo at point 5, regarding both loans. They are of the opinion that the new loan and existing loan are not to be linked. The beneficiaries have further requested the following clauses be introduced - 1. That the winding of the EOFP in the U.S., the two loans be automatically transferred to the names of the 2 beneficiaries under the existing terms and conditions. 2. Should either of the properties be sold during the term of the loans, the sale proceeds be deposited (or invested) during the remaining term of the loan. 3. That loans be made assumable if either of properties are sold." The reference to EOFP in the Bank's memoranda is a reference to the Estate of Fani Pollak. 11 However a memorandum of 4 August from the Los Angeles branch to the New York branch noted that both Mrs Stern and Dr Pollak would become "our obligor" with respect to both loans where the estate was settled. 12 On 30 August the New York branch of the Bank in an internal memorandum wrote to the Los Angeles branch concerning three outstanding issues. One of these was expressed to be as follows: "How can the Bank be assured that Mrs Stern and Mr Pollak, the beneficiaries of EOFP, will assume the present $US3 million loan and the proposed $US1 million loan, ie. what instruments or documents will evidence or attest to their obligations with respect to these loans? Furthermore what instrument or document will evidence or attest to EOFP's obligations to the Bank, regarding these loans, prior to settlement of the estate?" 13 A file note of the preceding day noted however that the Bank had been assured by its Los Angeles branch that the estate would be the obligor of record and that after settlement of the estate Mrs Stern and Dr Pollak would be the obligors under the loan. The uncertainty that existed was as to the form of documentation to effect this. 14 Formal approval of the $US1 million facility was the subject of a letter dated 2 September 1988. The approval noted that a deed of trust was to be executed by way of security. To this end, the Bank's attorneys forwarded to attorneys, presumably now acting for Mrs Stern and Dr Pollak (the same firm as had acted for Mrs Pollak), a promissory note and deed of trust together with guarantees to be executed by Mrs Stern and Dr Pollak. The documentation of the promissory note and trust deed was based upon that applicable to the loan initially made to Mrs Pollak. In particular a due on sale clause was included. As drafted the clause contemplated that a transfer to Mrs Stern and Dr Pollak would fall within the clause unless Mrs Stern and Dr Pollak completed an assumption agreement in a form which was said to be attached. The copy reproduced in the appeal book had no attachment. Presumably the original did. 15 On 29 November 1988 Miss Cates, Assistant Vice President Americas Administration from the New York branch, made a file note, inter alia, noting: "We still had some questions following our review of the memo dated September 6, 1988 from Los Angeles. We called the office and Steve Kirschbaum clarified the outstanding issues as follows: 1. A) Counsel has drafted an Assumption Agreement which states that the beneficiaries assume the obligation of the $US1 million loan to the EOFP. A similar agreement for the $US3 million loan is being drafted. Meanwhile the beneficiaries have volunteered to guarantee the loans until the assumption documents are drawn up. (We were also informed that the recent $US1 million loan to EOFP was made only upon the condition that the $US3 million loan was assumed.) In summary, for both loans: - obligator: EOFP - during settlement of EOFP: Personal guarantees from Mrs Stern and Mr Pollak - after settlement of EOFP: First lien on properties" 16 A formal letter dated 19 October 1988 (it is referred to in the pleadings as the "letter agreement") prepared by the Bank for execution by Mrs Stern and Dr Pollak and so executed on or around that date is in the following terms: "This letter is to confirm the agreement between you and Lender. The Loan is evidenced by that certain Promissory Note dated September 17, 1986 ("Note") and secured by that certain Deed of Trust and Leasehold Deed of Trust and Security Agreement and Fixture Filing with Assignment of Rents dated September 17, 1986 and recorded October 2, 1986 as Instrument No. 86-1327881 in the Official Records of Los Angeles County, California ("Deed of Trust") covering those certain fee and leasehold estates described therein (the "Property"). You have informed Lender that the interest in the Property of Fani Pollak, as Executor of the Estate of Mihai Pollak, also known as Mihail Pollak, under the Independent Administration of Estates Act, as filed in the Superior Court, County of Los Angeles, Probate Case No. P690628, was transferred to Fani Pollak. You have further informed Lender that Fani Pollak is deceased and title to the Property is currently vested in Ilana Elenka Stern, as Executrix for the Estate of Fani Pollak under the Independent Administration of Estate's Acts filed in the Superior Court, County of Los Angeles, Probate Case No. P721538 ("Stern, as Executrix"). Notwithstanding any provision in Paragraph 2.26 of the Deed of Trust to the contrary, a transfer of the Property to both Elenka Ilana Stern and Joseph Pollak ("Stern and Pollak") shall not constitute a transfer in violation of Paragraph 2.26 of the Deed of Trust if: (i) Stern and Pollak complete, execute and deliver to beneficiary an assumption agreement in the form of Exhibit A attached hereto and a UCC-1 Financing Statement and (ii) cause the issuance of title endorsements insuring the continuing priority of the Deed of Trust on the Property in form and substance reasonably satisfactory to the Lender. Concurrently with the execution of this letter by the parties hereto, Elenka Ilana Stern, an individual and Joseph Pollak, an individual, shall guaranty the Loan pursuant to guaranties of even date herewith ("Guaranties"). The Guaranties shall terminate upon your assumption of the Loan in accordance with the terms of this letter. Please confirm your agreement to the foregoing by the execution of a counterpart of this letter at the place indicated below and return such counterpart to the Lender." 17 The guarantees referred to in the letter were likewise executed. Accompanying the letter was a draft of an assumption agreement providing that Mrs Stern and Dr Pollak would assume jointly and severally all the obligations of Mrs Pollak and agree to be bound by the same terms of those documents as had bound Mrs Pollak. 18 As noted by the learned primary judge nothing much occurred between 1989 and 1992. The Bank sought financial details in respect of Mrs Stern and Dr Pollak but did not receive them. It forwarded also for execution a draft of the assumption agreement which had been annexed to the letter agreement for signature. Dr Pollak sought to have the assumption agreement amended to state specifically that a consequence of the assumption agreement was that he and Mrs Stern were released from their obligations. The amendment was not however consented to. 19 The Van Nuys loan fell due for payment on 31 July 1993. The Bank however extended the maturity date to 30 October 1993 subject to obtaining financial details from Dr Pollak and Mrs Stern. Proceedings for judicial foreclosure were threatened by the Bank. The threat matured ultimately into actual proceedings which were commenced in California by the Bank in February 1994 under s 726 of the Californian Code of Civil Procedure. That section provided: "(a) There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property ... which action shall be in accordance with the provisions of this chapter. In the action the court may, by its judgment, direct the sale of the encumbered real property ... (b) The decree for the foreclosure of a mortgage or deed of trust secured by real property ... shall declare the amount of the indebtedness or right so secured and, unless judgment for any deficiency there may be between the sale price and the amount due with costs is waived by the judgment creditor ... shall determine the personal liability of any defendant for the payment of the debt secured by the mortgage or deed of trust and shall name the defendants against whom a deficiency judgment may be ordered ... In the event that deficiency is not waived ... and it is decreed that any defendant is personally liable for the debt, then upon application of the plaintiff filed at any time within three months of the date of the foreclosure sale and after a hearing thereon at which the court shall take evidence and at which hearing either party may present evidence as to the fair value of the real property or estate for years therein sold as of the date of sale, the court shall render a money judgment against the defendant or defendants for the amount by which the amount of the indebtedness with interest and costs of levy and sale and of action exceeds the fair value of the real property ... sold as of the date of sale." (Emphasis added) 20 Although the appellants filed a general defence to the proceedings, ultimately they did not oppose the judicial foreclosure and judgment was entered in favour of the Bank on 2 May 1995. An order was made at the same time that the appellants were personally liable for payment of the sum secured by the deed of trust and that a deficiency judgment could be ordered following proceedings prescribed by law. 21 Unfortunately, the Van Nuys property was damaged and its value and that of the neighbourhood in which it stood were severely diminished by the earthquake which struck Los Angeles in 1994. In the result when the deficiency judgment was ultimately given, the Bank was found entitled to recover from the appellants the sum of $US 3,813,689 plus fees, costs and interest to which reference has already been made. An appeal to the State of California Court of Appeal taken by the appellants was dismissed.

The appellant's case as pleaded 22 The proceedings brought against the Bank by the appellants were commenced on 23 February 1996. As originally pleaded the case referred to various representations said to have been made. Clause 6 of the initial statement of claim alleged that between January and October 1988 the Bank had represented to Dr Pollak and Mrs Stern: "(a) That the Bank was entitled to enforce the due on sale provision of the Mortgage. (b) That the Bank would not enforce the due on sale provision of the Mortgage if Dr Pollak and Mrs Stern both:- (i) completed executed and delivered to the Bank an assumption agreement in a specified form. (ii) executed the letter agreement dated 19 October, 1988. (iii) concurrently with their acceptance of the offer thereby made by the Bank completed and delivered to the Bank personal guarantees of the obligations of Fani Pollak to the Bank under the Mortgage. Particulars (A) Telephone conversation between Steven Kirschbaum on behalf of the Bank and Dr Pollak between January and March 1988. (B) The terminology of the letter agreement dated 19 October, 1988 as prepared by the Bank." 23 It was then alleged that in reliance upon the representations, Dr Pollak and Mrs Stern had concurrently with the acceptance of the offer, said to have been made by the Bank, completed, executed and delivered to the Bank the assumption agreement and executed the letter agreement. The pleading did not specify that the representations were false although perhaps this could be taken as involving merely a pleading mistake. It was ultimately corrected. 24 The pleadings also claimed that had Dr Pollak and Mrs Stern known of the failure by the Bank to notify in a timely way its claim as creditor the guarantees and assumption agreements would not have been executed. Other representations were also alleged but are not presently relevant. 25 The pleadings remained in this form until an amendment was made in November 1996. In their final form the pleadings alleged, inter alia, that misleading or deceptive conduct on the part of the Bank was constituted by representations made by or on behalf of the Bank in a telephone conversation alleged to have taken place between Mr Kirschbaum on behalf of the Bank and Dr Pollak between January and March 1988 and the letter agreement dated 19 October 1988 being representations: (a) that the Bank was or would be on the distribution of Mrs Pollak's estate entitled to force the due on sale provision; (b) that the Bank would not enforce the due on sale provision if Dr Pollak and Mrs Stern completed and delivered an assumption agreement together with personal guarantees that the promissory note and deed of trust were enforceable according to their terms against the estate. The last mentioned representation was said to be misleading because the promissory note and deed of trust were not enforceable having regard to the failure of the Bank to give notice of its claim in accordance with Californian Probate Code s 700. 26 There were other representations claimed to have been made and said to be false including a representation that Mrs Stern and Dr Pollak would have no personal liability under the assumption agreements. All matters concerning representations were found against the appellants although the additional representations to which reference has but briefly been made were not the subject of the current appeals. It should be said that the case as pleaded in respect of the additional representations appears to have been very weak and the resolution of them adversely to Mrs Stern and Dr Pollak was largely on the basis of findings which were to their credit.

The affidavit evidence of Dr Pollak 27 On 22 February 1996 Dr Pollak filed an affidavit in the proceedings. That affidavit dealt with the conversation alleged to have taken place between Dr Pollak and Mr Kirschbaum between January and March 1988. Dr Pollak said in his affidavit: "At some time between January and March 1988 I had a telephone conversation with an officer of the Bank's Los Angeles office, Mr Steven Kirschbaum, to the following effect: Kirschbaum: 'I am sorry to hear of your mother's death. As can be seen from the documents, the Bank is empowered to call the loan due and payable on the death of the borrower. The Bank has decided not to call the loan due provided you and Ilana sign personal guarantees and assumption agreements. When you sign the assumption agreements that will distinguish your liabilities. Unless you both agree to this we will call the loan due.' I do not recall the exact words spoken during the remainder of the conversation but I do recall that based on what Mr Kirschbaum told me during the conversation, I thereafter believed that the Bank was entitled to call the loan due at any time and that my sister and I had no alternative but to agree to what the Bank had requested in respect of the personal guarantees and the execution of the Assumption Agreements since we were unable to sell the property and were unable to pay the debt."

The Bank's defence 28 In its amended defence relating to the representation said to have been made in the conversation with Mr Kirschbaum the Bank said that it was entitled to demand immediate repayment of the Van Nuys loan as a consequence of the death of Mrs Pollak but otherwise did not admit the allegations. Other representations said to have been made on behalf of the Bank to found a claim for relief were denied. 29 It is necessary here to note that Mr Kirschbaum died before the proceedings and approximately one year after they were commenced and was unavailable to give evidence of the conversation alleged to have taken place with Dr Pollak. 30 Dr Pollak was the subject of extensive cross-examination concerning this conversation. In that cross-examination he was taken through the documentary evidence of the Bank to which reference has already been made. To a large extent the cross-examination was directed at demonstrating the absurdity of the suggestion in its affidavit that in some way Mr Kirschbaum had advised Dr Pollak that execution of the assumption agreement would extinguish all the liabilities of Mrs Stern and Dr Pollak when the obvious intention of the assumption agreement would have to have been that Mrs Stern and Dr Pollak became liable for the amounts that previously had been due by the estate of their mother. The claim that liability was in fact extinguished as a result of the conversation was not mentioned at the hearing.

The decision appealed from 31 The learned primary judge held that the conversation alleged with Mr Kirschbaum did not take place. His Honour's specific reasons for so concluding were as follows: "Dr Pollak does not give evidence as to any part of the conversation with Mr Kirschbaum other than is pleaded as misrepresentation. There are no notes of it by either party and no other records or correspondence were produced in evidence that any such conversation occurred. The absence of any record is surprising given the important assurances attributed to the Bank as to assertion of its entitlement and the indications as to the contents of the Assumption Agreement which, of course, was not drafted until later in the year. This latter circumstance attributes a degree of prescience to Mr Kirschbaum as to the form and contents of legal documents to be drawn up in the future. The Bank's later internal documents indicate lack of certainty in the Bank's understanding as to the form and wording of such documents. During this period Dr Pollak retained Gibson as his Attorney. They had acted in relation to the estate of Fani Pollak. There is no evidence as to advice being sought by the applicants from Gibson as a consequence of the alleged threat made by Mr Kirschbaum to call up the loan. At that time Dr Pollak was a qualified medical practitioner and also a law student, and was certainly not naive in commercial matters. Indeed, his evidence and conduct during 1988 and later years indicates considerable commercial astuteness. He was admitted to the Bar of New South Wales in August 1990. A particularly curious aspect of the alleged statements by Mr Kirschbaum is the assertion that the assumption agreements would extinguish the liabilities of the applicants. One basic purpose of the assumption agreements in terms, as indeed their name suggests, was to ensure that the applicants would assume liability for the debts in their own right. There is no indication that Dr Pollak made any inquiries as to the provisions of any guarantee or assumption agreement of the type allegedly foreshadowed by Mr Kirschbaum at this time. The suggestion that Mr Kirschbaum gave an assurance that any personal liability would be extinguished or that Dr Pollak so understood anything said by Mr Kirschbaum is not accepted. The alleged conversation took place over ten years ago and without the assistance of any record it is clearly difficult to recall the precise terms used. To a large extent the evidence of Mrs Stern was to the effect that she did not recall a number of the matters because they were so long ago and said she relied on her brother. It is apparent from the reference to an "assumption agreement" that the applicants would be obliged to assume liability as borrowers under the loan. This is supported by the fact that Mr Connelly of the Double Bay branch recorded in his Memorandum of 11 July 1989 that the applicants had requested that on the winding up of the estate of Fani Pollak the two loans (Van Nuys and Burbank) be transferred into their names. This record is consistent with an understanding on the Bank's part that there would be an assumption of liability by the applicants. Further, there is a marked failure on the part of Dr Pollak or Mrs Stern to raise any specific assertion about conversations with Mr Kirschbaum and his "assurances" in subsequent dealings with the Bank, and with the lawyers, and in proceedings before the Californian Court. The applicants submit that the Kirschbaum conversation should be accepted insofar as it alleges that he claimed that the Bank was empowered to sell on the basis that the contrary was not expressly put in cross-examination. However, the whole conversation was put in issue in the pleadings and it was apparent that both the occurrence and context of that conversation were in issue. The conversation was only particularised in the pleadings with respect to an allegation that the Bank would not enforce the "due on sale" provision of the mortgage. What Mr Kirschbaum is alleged to have said is not consistent with the express terms of the assumption agreements later signed by them. Further, the applicants in submissions do not seek to rely on the alleged statement that the liability would be extinguished. This is consistent with a conclusion that such a statement by Mr Kirschbaum was highly unlikely, which in turn suggests that the conversation did not take place. Accordingly, it is understandable why the cross-examination was not directed to that part of the alleged conversation which referred to the "due on sale" provision becoming enforceable. In my view, there is no procedural unfairness on this aspect of the matter: cf Browne v Dunn [1894] 6 R 67 at 79; Seymour v Australian Broadcasting Commission (1977) 19 NSWLR 219 at 236 per Mahoney JA; Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1; and In the marriage of L C and T C (1998) 23 Fam LR 75 at 82-83." 32 In a later part of the judgment his Honour dealt with questions of credit. Of both applicants, his Honour said that their evidence was coloured by their interest in the outcome. Of both, his Honour said: "I do not accept either of the applicant's evidence in relation to any matter of significance which is not supported by objective facts; whether in the form of records, corroborative evidence or inherent probability arising from circumstances. ... their abandonment of a number of positions originally taken, when it came to final submissions, tended to indicate a significant degree of improvisation and opportunism in the formulation of their case." 33 Of Mrs Stern his Honour said: " ... a consideration of the transcript of Mrs Stern's evidence lends support to the Bank's submission that she came to Court to present a case rather than to answer questions in an open and direct manner. Her recollection of events was not good." 34 His Honour was particularly scathing about Dr Pollak's evidence relating to matters alleged by him to have taken place in 1992, not the subject of the present appeal. His Honour noted also that, although Dr Stern was mentioned (in the Bank memoranda) in connection with various events, he had not given evidence, although present throughout most of the hearing. 35 His Honour then turned to the letter agreement of 19 October 1988 and the representations said to have been made in it. His Honour was of the view that there was no representation made in that letter as to the enforceability of the due on sale provision. His Honour was of the view that if there had been a representation to this effect it would not have been false because in his Honour's view the due on sale provision was, on its proper construction, applicable to permit the Bank to treat the principal sum under the Van Nuys loan as immediately repayable upon the death of Mrs Pollak. 36 As regards representations, said to be made in the letter agreement, that the Bank had an enforceable claim against the whole of the estate of Mrs Pollak when the Bank was statute barred for not having lodged its claim on the estate within four months of the filing of the letters testamentary, his Honour was of the view that no representation to this effect was made and that the appellants did not, in any event, rely upon the letter agreement to this effect. 37 Representations said to have been made in 1992 were likewise rejected. The present appeal does not concern those representations although his Honour's comments on the credit of Dr Pollak concerning the allegations made by him may be thought to be quite scathing. 38 His Honour found that public policy did not prevent enforcement of the Californian judgment. His Honour rejected defences of the Bank that the proceedings were brought out of time and that the ministerial consent required by s 5 of the Act had not been obtained in accordance with that section and also that there was no need for the appellants to elect between the various proceedings brought. It is unnecessary for us to deal with these and numerous other matters which were agitated at first instance.

The judgment on costs 39 After the judgment was handed down the Bank made an application to the primary judge that costs in the Bank's favour should be ordered on an indemnity basis. This application resulted in a second judgment rejecting the Bank's application.

The issues on appeal 1. The appellants challenged on the appeal his Honour's finding that the conversation between Dr Pollak and Mr Kirschbaum did not take place. In essence it was said that it had never been put to Dr Pollak that this critical part of the conversation did not take place and accordingly, in finding that it had not, his Honour had failed to afford to the appellants procedural fairness as required by the rule in Browne v Dunn. 2. His Honour in rejecting that the conversation took place failed to consider why the appellants would sign documents exposing them to a personal liability unless the Bank had asserted that it was in a position to call up the Van Nuys loan. The individual reasons expressed by his Honour for rejecting Dr Pollak's evidence of the conversation were also the subject of criticism. 3. The appellants challenged his Honour's finding that the representations, said to have been made by Mr Kirschbaum, were not false having regard to the true construction of clause 2.26. 4. It was submitted that the learned primary judge had erred in holding that the letter agreement did not constitute a representation that the promissory note was enforceable in accordance with its terms and this was false. 5. His Honour's findings of non-reliance on the representations said to be contained in the letter agreement were also challenged. 6. Finally, it was submitted that his Honour erred in holding that it would not be contrary to public policy to enforce the Californian judgment. 40 There were numerous other matters which formed the subject of submissions on the appeal. Since, however, we are of the view that the matters to which we refer should be decided in favour of the Bank, it becomes unnecessary to consider these other submissions.

The attack upon his Honour's finding that the Kirschbaum conversation did not take place 41 At the heart of the appellant's submissions is the proposition that it was incumbent upon counsel for the Bank specifically to put to Dr Pollak that the specific parts of the conversation relied upon by him, as set out in the affidavit he had sworn, did not take place. Reliance is placed in particular upon a passage in the judgment of Hunt J in Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 at 22G-23B in the following terms: "There are many reasons why it should be made clear, prior to final addresses and by way of cross-examination or otherwise, not only that the evidence of the witness is to be challenged but also how it is to be challenged. Firstly, it gives the witness the opportunity to deny the challenge on oath, to show his mettle under attack (so to speak) although this may often be of little value. Secondly, and far more significantly, it gives the party calling the witness the opportunity to call corroborative evidence which in the absence of such a challenge is unlikely to have been called. Thirdly, it gives the witness the opportunity both to explain or to qualify his own evidence in the light of the contradiction of which warning has been given and also, if he can, to explain or to qualify the other evidence upon which the challenge is to be based." 42 The rule that in cross-examination it is necessary to put to an opponent's witness the nature of the case proposed to be relied upon in contradiction of his or her evidence, referred to as the rule in Browne v Dunn, is, as the submissions suggest, essentially a rule of fairness. The rule is not however an absolute one. So it will not ordinarily be necessary to put to a party matters which are clearly at issue in the proceedings; see Thomas v van den Yssel (1976) 14 SASR 205 at 207, Phipson on Evidence, 14th edn, 1990 at [12-13] and cf Flower & Hart (a firm) v White Industries (Qld) Pty Ltd (1999) 87 FCR 134 at 148-9. 43 The fundamental importance of matters being put to a witness to allow him or her to deal with them can not be gainsaid. A finding made in breach of the rule will be set aside. But whether in the circumstances of a case there has been a failure to afford fairness to a witness will depend upon the particular circumstances in which the issue arises. 44 The present was not a case where the trial judge had to choose between competing versions of evidence. One of the parties to the alleged conversation was unavailable to give evidence. The pleadings made it clear, however, that the question whether the conversation alleged by Dr Pollak took place and what its terms were was a matter at issue between the parties. 45 As we have already indicated, counsel for the Bank in cross-examination attacked Dr Pollak's evidence of the conversation by pouring scorn upon a particular element of it, namely the suggestion that Mr Kirschbaum had, according to Dr Pollak, suggested that signing the assumption agreements would release Dr Pollak and Mrs Stern from all liability. Because Mr Kirschbaum was not available to give instructions as to what happened the present was a case where counsel for the Bank was under some difficulty in putting the terms of the conversation positively to Dr Pollak. In the present circumstances of this case we do not think that it was incumbent upon counsel to put to Dr Pollak specifically that so much of the conversation as amounted to the representation, alleged by him to have been made, did not take place. Whether it did or did not was a matter which was clearly at issue between the parties. 46 We also do not think that his Honour erred in the comments made as to the specific reasons for not accepting Dr Pollak's evidence. It is not in dispute that there was no record of the conversation kept either by the Bank or Mr Kirschbaum. We accept the submission on behalf of the appellants that some conversation must have at some stage taken place between Dr Pollak and presumably Mr Kirschbaum and that no note of that conversation was discovered. However his Honour's comments about the absence of records being surprising are made in the context of the assertion by Dr Pollak that the assumption agreements would ultimately release Dr Pollak from liability. This aspect of the conversation was clearly a matter which might have been expected to have been the subject of record if as Dr Pollak alleged such a conversation actually took place. Counsel for the Bank did raise with Dr Pollak whether he took a note of the conversation and did so immediately after suggesting Dr Pollak's account of the conversation involved a "bizarre proposition". 47 A submission that there was no evidence that Dr Pollak retained "Gibsons" (ie Gibson Dunn & Crutcher) as his attorney is, likewise, not sustainable. The evidence was that Gibson Dunn and Crutcher initially acted for Mrs Pollak in respect of the loan in 1986. Under the terms of the trust deed any notice given by the Bank to Mrs Pollak had to be sent with a copy to that firm. On Mrs Pollak's death that firm acted for Mrs Stern as executrix in the probate application. Mrs Stern's evidence in the present proceedings was that she left all negotiations with the Bank to Dr Pollak who, with Mrs Stern was the sole residuary beneficiary of the estate. But the firm continued to act for the estate of Mrs Pollak as is indicated in correspondence dated 5 July 1988, 10 August 1988, 9 September 1988, 14 September 1988 and 22 September 1988. Copies of the draft deed of trust guarantees and an assumption agreement were forwarded by the Bank's attorneys to that firm to arrange execution, inter alia, by Dr Pollak. They were returned executed by letter dated 12 December 1988. In the circumstances the inference is clearly available and indeed should in our view be made that Dr Pollak had acting for him, as did his sister, that firm of attorneys in connection with the loan which was supposed to be made for his benefit and that of his sister in connection with the Burbank loan. 48 The finding that no advice was sought concerning the alleged threat made by Mr Kirschbaum to call up the loan is not contested. Indeed Dr Pollak said so much himself. That Dr Pollak was far from naive, but indeed commercially astute, is amply borne out by the evidence. The fact that no attempt was made to raise the conversation with Mr Kirschbaum until the current proceedings were filed is also not the subject of any controversy. Further, to the extent that it was submitted before us that any of these matters needed to be put to Dr Pollak in any greater detail than they were, there was, in our view, no necessity to do so in the circumstances in which the cross-examination proceeded. 49 There is a further difficulty in the way of the appellants in the submissions they make. It is clear that the learned primary judge made an unfavourable finding on Dr Pollak's credit. Indeed his conclusion that the conversation did not take place was clearly dependent upon that finding. The case is not one where the appeal court is in as good a position as the trial judge to make a factual finding whether the alleged conversation took place. 50 Senior counsel for the appellants placed considerable weight upon the rhetorical question of why the appellants would have executed documents such as the guarantee, making themselves personally liable, without a threat of the kind alleged having been made. It will be recalled that his Honour held that the 1988 documents were signed by the appellants because they wanted the Van Nuys property distributed to them. This was his Honour's answer to this question. It was said, however, that there was no compelling reason why this was so and in any event that the ultimate transfer to them took some five years. It was submitted that this pointed to a contrary conclusion. However, if it does, that conclusion is not one that assists the appellants. 51 The evidence suggests quite clearly that the Bank negotiated the question of the Burbank loan together with its requirement that Dr Pollak and Mrs Stern assume liability for the loan secured on the Van Nuys property. While, no doubt, it may not have been the desire of the appellants to "link" the two transactions it clearly was the Bank's intention and that of Mr Kirschbaum so to do. The file note of 29 November 1988 of Miss Cates makes it clear that Mr Kirschbaum had told Miss Cates in the context of the Burbank financing that Dr Pollak and Mrs Stern were to become liable for the amounts of the loans both in respect of the Van Nuys property and Burbank. It is true that the two loans were not cross collateralised if that is what "unlinked" means. The guarantee and requirement that there be assumption agreements executed subsequently were matters that arose in conjunction with the Burbank transaction. A perusal of the Bank's file makes it clear enough that it was proposed at some stage that the estate sell assets although there was no hurry for this to happen insofar as it was decided to realise the maximum price particularly for the Burbank property. In this sense it is no doubt correct, as the primary judge found, that Dr Pollak and Mrs Stern would need and therefore would desire to have the property ultimately transferred to their names. However, it is doubtful that this was the sole reason. What is important is that the circumstances of the Burbank transaction provide an explanation for the need of both Dr Pollak and Mrs Stern to assume liability for this was what the Bank required. In our view, therefore, his Honour's findings that the conversation as alleged by Dr Pollak did not take place must stand.

The construction of the "due on sale" clause 52 It is common ground between the parties that the construction of clause 2.26 is to be determined in accordance with the law of California, a matter upon which expert evidence was given, however the application of the law of California so ascertained to the circumstances of the case is a matter on which no evidence is receivable but rather is for the court of the forum to determine: All State Life Insurance Co v Australia and New Zealand Banking Group Ltd (No. 33) (1996) 64 FCR 79 at 82; United States Trust Co of New York v Australia and New Zealand Banking Group Ltd (1995) 37 NSWLR 131 at 146. For this purpose expert evidence was adduced on behalf of the appellants from Mr Panelli, a former justice of the California Supreme Court in retirement and from Mr Sigman, a practising attorney and former associate professor at the University of Southern California. In the result the primary judge preferred the evidence and conclusion of Mr Sigman to that of Mr Panelli. It was Mr Panelli's view that clause 2.26 did not apply to make the principal of the loan due and payable in the event of the death of the borrower. Mr Sigman was of the view that that clause was activated. 53 It may generally be said that the law governing interpretations of contracts in the United States is little different from that in Australia. Indeed, as California Civil Code s 1636 makes clear, the process is one of seeking to give effect to the mutual intention of the parties. One matter to which reference was made was the Federal statute referred to as the 1982 Garn Act and the case law which preceded that statute. It is not necessary to discuss this in detail. Suffice it to say the statute was introduced to overcome cases such as Fidelity Federal Savings and Loan Association v de la Cuesta 458 US 141 (1982) which had held certain due on sale clauses to be enforceable. Congress in the result passed the Garn/St Germaine Depository Institutions Act of 1982 to restrict enforcement of due on sale clauses in certain circumstances. It was not suggested that this legislation itself had any application to the present cause. The experts differed, however, as to what consequence it might have on the interpretation of a clause after it was passed. Such case law as there was related to leases where the concept of forfeiture of estates is more obvious than in the case where there is an acceleration of an amount due under a mortgage. In our view the passing of the Garn Act has little or no impact on the construction of due on sale clauses which are to be interpreted in no different way to any other provision in a loan contract. 54 Mr Panelli was of the view that the deed of trust should be treated as a contract of adhesion and so interpreted contrary to the interests of the Bank. Mr Sigman took a contrary view. Mr Panelli's view is no longer pressed. Where the experts were in difference was whether, as Mr Panelli said, in interpreting clause 2.26 it should be interpreted contrary to the interests of the Bank as the person who had proffered it (the contra proferendum rule) or whether this should not be the case. 55 The problems of the interpretation of clause 2.26 stem from the awkwardness of the drafting of the clause. It was the submission of the appellants that the clause covered only transfers by the trustor and should not be construed as covering transfers which arose, for example, on death. The submission placed weight upon the fact that the due on sale clause did not refer specifically to transfers which occurred by testamentary devise or descent on the death of the trustor. It was Mr Panelli's view that special language would be necessary to reach this result and to the extent that the provision was ambiguous, the ambiguity should be resolved against the drafter whose document it was. 56 Mr Sigman by contrast was of the view that the fact that Dr Pollak and Mrs Stern took as residuary beneficiaries did not mean that the bequest to them was any less a transfer. He pointed to the Californian Probate Code s 7000 which provides that a bequest in a will vests ownership in the legatee upon death. He concluded that ownership passed directly from Mrs Pollak by virtue of the will rather than by operation of law and that this was relevantly a transfer. 57 Persuasively, Mr Sigman pointed out that the clear intent of clause 2.26 was to permit acceleration where the collateral was no longer vested in full in the trustor, no matter how that came about, and that this intention was achieved by using the broad generic language of the word "transfer". 58 We have no doubt that the clear intention of the parties was that the clause should be widely construed and that acceleration should occur particularly in a case such as a bequest or a devise where equitable ownership no longer resided in the estate. We note, however, that Dr Panelli was of the view that the clause should not be regarded as ambiguous. This may be so but the clause, if not ambiguous, was not drafted as clearly as it could have been. 59 To the extent that the principle of interpretation of contracts, that regard should be had to the intention of the parties, is a principle of Californian law, the application of that principle is as the parties agree one for this Court. We are of the view that the better interpretation of clause 2.26 is that adopted by Mr Sigman because that interpretation gives effect to the acceleration clause in the context in which it appears. We agree, too, with Mr Sigman that there is no particular reason why specific language to be adopted to deal with devises in wills if the clause in its general application and construed in its context produces that result. As Mr Sigman says: "If transfer upon death is excluded from 'transfer by operation of law or otherwise' by not having been specified, so is every other unspecified transfer. The consequence of accepting that argument is to render the 'transfer by operation of law or otherwise' language totally devoid of meaning." 60 Like Mr Sigman we do not think that the contra proferendum rule should lead to a different conclusion. The common law rationale of that rule is, no doubt, that a party who prepares the contract will most likely endeavour to give effect to that party's own interests to the detriment of the other party and that this should be taken account of by construing an ambiguous contract unfavourably to the party who drafted it. Be that as it may, the common law rule has been enacted in statutory form in California Civil Code s 1654 which provides: "In cases of uncertainty not removed by the preceding rules, the language of a contract should be interpreted most strongly against the party who caused the uncertainty to exist." 61 It is no doubt true, as Mr Panelli said, that the rule has greatest applicability where adhesion contracts are involved. This is so because the party seeking to apply the rule has the weaker bargaining power. Where the contract is not an adhesion contract, the parties are separately represented and reach a bargain through independent negotiations, it is hard to see any rationale for the rule applying. In Western Sling and Cable Co Inc v Hamilton 545 So 2d 29 (Ala 1989), a number of cases are cited as exceptions to the contra proferendum rule. These cases are to the effect that contracts, prepared by parties at arm's length after careful consideration, with expert legal advice and extensive exchange of suggested language, provide an exception to the rule that ambiguity can be construed unfavourably to the party who prepared the contract. We think that is the principle to be adopted here. 62 In our view the due on sale clause, properly construed, operated to accelerate liability under the deed of trust/mortgage on the death of Mrs Pollak and thus on the resultant transfer of the estate to Mrs Stern and Dr Pollak as beneficiaries. In these circumstances, even if the conversation which Dr Pollak alleged he had with Mr Kirschbaum had taken place, any representation in it to the effect that the provisions of clause 2.26 operated to accelerate payment of the principal on the death of Mrs Pollak would not amount to misleading or deceptive conduct under s 52 of the Act.

Was the letter of 19 October 1988 misleading or deceptive conduct? 63 To the extent that the letter of 19 October 1988 was alleged to constitute a representation as to the legal effect of clause 2.26, our view as to the interpretation of this clause leads likewise to the conclusion that the letter of 19 October 1988 was not misleading or deceptive or likely to mislead or deceive within the meaning of s 52 of the Act. An alternative case on behalf of the appellants was that the letter was also a representation that the moneys which the estate owed the Bank were enforceable in accordance with the promissory note and security notwithstanding that the Bank had failed within the four months required so to do to make a claim against the estate. 64 Sections 700 and 716 of the Probate Code of California had the consequence under the law of that State that a secured creditor lost recourse against property in the estate other than that over which it had security if it did not file its claim against the estate within four months of the first issuance of the letters of administration, that is to say, in the present case, by 8 August 1988. As already noted it is common ground that the Bank made no claim against the estate within this period. 65 It was the appellants' case before us that the letter of 19 October 1988 was misleading or deceptive within s 52 because it asserted, at least impliedly, that the promissory note was enforceable without limit against all the assets of the estate. An allegation, that the fact that the Bank did not tell the appellants that it had not made such a claim, was itself either misleading or deceptive conduct because there was a reasonable expectation that the Bank would so inform the appellants although advanced at first instance, was abandoned on the appeal. 66 While it is no doubt true that a statement by a person in a letter of that person's legal rights might in a particular case be seen as a representation that those rights exist and if they did not constitute conduct which was misleading or deceptive, whether that is the case will depend upon the factual matrix in question. 67 In our view his Honour was correct in concluding that the letter was not a representation as to the Bank's legal position. The letter does not purport to represent anything at all as to the enforceability of the promissory note or deed of trust. It purported on its face to confirm, and had the purpose of confirming, an agreement that had previously been reached between the Bank and the appellants. It asserted, correctly, the fact that the Bank's loan to the late Mrs Pollak was evidenced by the promissory note and secured by the trust deed. It did not do more than that. Nor did it purport to do more. 68 We agree also with his Honour that the appellants did not in any way rely upon that letter as a representation that the Bank was entitled to payment out of the estate anything greater than the proceeds of the sale in the event of a foreclosure. 69 It is strongly arguable, also, that if the letter did constitute a representation to the effect alleged it was not in any event a representation that was false at the time it was made. So long as the property which was security was worth more than the amount owing, the whole of that amount owing under the promissory note and trust deed was recoverable. There is nothing that suggests that as at the date of the letter that was not the position. Indeed the evidence is to the contrary. The decline in value in the security, which brought about the shortfall to the Bank came much later with the disastrous earthquake which hit California. At the time of the letter the value of the security was considerably in excess of the amount owing. 70 Insofar as the appellants challenge his Honour's finding that there was no reliance on the basis that non-reliance was not put to them, we would reject this challenge for the same reasons as we rejected the challenge to the findings in respect of the conversation alleged to have taken place with Mr Kirschbaum. It was clear from the pleadings that the question of reliance on the letter was a matter at issue between the parties. In the circumstances of the case it was not necessary for counsel for the Bank to put to Dr Pollak and Mrs Stern that their evidence, that they had relied on the alleged representations in the letter, was not correct.

Enforcement of the Californian judgment 71 It follows, from our conclusion that the conduct of the Bank did not constitute a breach of s 52 of the Act, that the case alleged by the appellants that enforcement of the Californian judgment in Australia would be contrary to public policy could not succeed. It is therefore unnecessary to consider the various submissions made by the parties on this matter. It is, likewise, unnecessary to consider whether in California a claim could have been made out by the appellants that the Bank had breached s 52 of the Act such as to give rise to an estoppel in favour of the Bank.

Costs 72 As earlier noted, the Bank cross-claims against the appellants in respect of his Honour's refusal to award to them costs on an indemnity basis. The power to award costs and the basis upon which costs are awarded are matters of discretion to be exercised judicially. To succeed on the appeal it would be necessary for the Bank to show an error of principle: House v The King (1936) 53 CLR 499; Dart Industries Inc v Decor Corporation Pty Ltd (1993) 179 CLR 101. 73 The Court's power in an appropriate case to award costs on an indemnity basis is not in issue. However the Court will not ordinarily order costs to be paid other than on a party and party basis unless the justice of the particular case or some special or unusual feature of it requires a departure from the usual course: Re Wilcox; ex parte Venture Industries Pty Ltd (1996) 141 ALR 727; Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225. In the latter case, approved in the former, Sheppard J summarised some of the circumstances in which departure from the ordinary rule would be warranted. It is unnecessary to repeat here that summary. It suffices to say that while the category of cases in which indemnity costs orders may be made is not closed, the question will always be whether the particular facts and circumstances of the case warrant departure from the ordinary rule. 74 Before the learned primary judge and before us, four matters were relied upon in support of the submission that an order of indemnity costs should be made in favour of the Bank. These were: 1. The allegations of misleading or deceptive conduct sought to be made out by Dr Pollak and Mrs Stern were not merely, as his Honour held, unfounded but were made knowing that they were false. 2. The appellants, although informing the Court that they were anxious to have the hearing expedited, did not prosecute the proceedings with expedition and it should be inferred that their failure to do so was designed to delay enforcement of the Bank's judgment obtained in California. 3. The appellants had not merely delayed the proceedings but had disposed of assets which would cause the Bank to suffer further expense and delay in enforcing the judgment it had obtained. 4. The arguments advanced by the appellants were groundless. 75 The primary judge rejected the first and fourth of these submissions on the basis that he was not satisfied that the allegations were made knowing them to be false or that the appellants' case, weak though it was, could be said to be hopeless or conducted in wilful disregard of known facts or clearly established law. 76 His Honour was likewise not satisfied that the case was unduly prolonged. Nor, in his Honour's view, was there any "misconduct" that could be pointed to as prolonging the hearing. His Honour, rightly in our view, did not accept a submission that failure of an applicant to press for expedition itself constituted a ground for an order of costs on an indemnity basis. 77 Finally his Honour expressed the view that a disposal of assets had, of itself, no significance to the exercise of discretion to order indemnity costs, although relevant to whether the appellants should receive a stay. It may be noted that an application for a stay had been made by the appellants but was refused by his Honour. 78 Two other factors were mentioned by his Honour. First was the fact that the events in question had occurred many years before the hearing so the case was one where the documentary evidence assumed great importance. Second was the fact that the appellants did succeed on a number of issues which occupied substantial Court time but no apportionment of costs had been made. 79 In our view no error of principle is apparent in his Honour's judgment. It was clearly open for his Honour to find that the appellants had not sought to bring groundless proceedings or advance a case on false allegations notwithstanding that the appellants' case had been largely dismissed on grounds of credit and that the evidence of each of the appellants had been not accepted. 80 The cross appeal against the order made by his Honour that costs be awarded on the usual party and party basis should in our view be dismissed with costs. 81 We would order that the appeal itself be dismissed with costs. I certify that the preceding eighty-one (81) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Counsel for Ilana Stern and Joseph Pollak: R B S MacFarlan QC, J W J Stevenson

Solicitor for Ilana Stern and Joseph Pollak: Denes Ebner

Counsel for the National Australia Bank Ltd: R J Burbridge QC, S M P Reeves

Solicitor for the National Australia Bank Ltd: Mallesons Stephen Jacques

Date of Hearing: 7 and 8 February 2000

Date of Judgment: 27 March 2000