Watt v State Bank of NSW t/as State Bank of NSW [2003] ACTCA 7

Court of Appeal (ACT)|2003-03-13|Before: Higgins CJ, Crispin P, Madgwick J, Madwick J, Gray J

1. This is an appeal against a decision of Gray J upholding a claim for possession of a residential property at 3 Barrett Street, McGregor in the Australian Capital Territory as a consequence of default under a mortgage. As His Honour observed, the default was admitted and it was not disputed that the outstanding amount secured by the mortgage was $1,263,020.89. The appellants argued, however, that both the mortgage and the guarantee which it secured should be set aside on the grounds that they had been induced to enter into these transactions by unconscionable conduct on the part of the respondent.

2. The first appellant, Mr Watt, was born on 5 February 1928 and at the time of his retirement in 1987 had been an Assistant Commissioner of the Australian Federal Police. The second appellant, his wife, was born on 29 August 1927 and prior to her retirement had worked as a typist with a number of different companies including one carrying on business as a debt collection agency.

4. The appellants were also asked to provide a mortgage over their home at 3 Barrett Street, McGregor, to secure a loan from the Commonwealth Bank to Dyspurrs. Mrs Watt was apparently reluctant to agree to the provision of a mortgage, but was persuaded to do so by her husband who had suggested that it would only be a temporary arrangement. Mrs Watt claimed that she had left all business arrangements to her husband and that while she had understood that the assistance was to be provided by means of a mortgage, she had not known exactly what that involved. She said that she had trusted her husband and son-in-law and had just signed what had been put in front of her, without seeking to understand the contents of the documents. Despite these protestations, Gray J found that Mrs Watt, as well as her husband, had been aware of at least the general effect of this mortgage.

5. The appellants subsequently assisted in the conduct of the business from time to time, but apparently received no dividends or wages.

6. In February 1991, the appellants left Australia for an extended holiday in Europe. Mr Watt said that prior to their departure he had had discussions with his son-in-law about withdrawing from the business but, despite concerns about Mr Dyer acting as a "one man band" who rarely discussed the financial affairs of the business with him, he did not pursue the matter.

7. In about March or April 1991, Mr Dyer entered into negotiations with the defendant, apparently with a view to obtaining finance at a lower interest rate. The branch manager whom he consulted completed a comprehensive analysis of the business and concluded that it was sound. He referred to some errors that had been made in stock control and in over ordering, but was impressed by the increase in turnover since the purchase by Dyspurrs and concluded that it was "a good cash flow business". Gray J accepted that this was the position.

8. A fixed interest rate term loan of $500,000 and a "come and go" overdraft limit of $50,000 were approved on 25 June 1991 and letters of offer, enclosing the standard loan forms, were duly prepared. The respondent's solicitors also prepared documents providing for a first mortgage on the appellant's residential property, predicated upon a discharge of the existing mortgage to the Commonwealth Bank and a second mortgage in respect of Mr and Mrs Dyer's residential property. All directors were required to give guarantees.

9. Mr and Mrs Dyer apparently anticipated being able to reduce the overall level of indebtedness by about $100,000 over the ensuing twelve months by the sale of classic motor vehicles but, in any event, it did not appear that the refinancing would involve any increase in the company's debts or the appellants' contingent liability.

10. Mr Dyer subsequently took the letters of offer and security documents overseas so that he could obtain the signatures of the appellants. Mr Watt said that he and his wife arrived at the home of their friends in Malmo, Sweden, on 21 July 1991 and were surprised to find that Mr Dyer had already arrived. Mr Watt claimed that after some discussion about the purpose of his trip, Mr Dyer had said words to the effect that "we're going over to the State Bank of New South Wales and they want you to sign some papers". He also explained that the respondent had offered better terms than the Commonwealth Bank. Nothing more was said about the documents that evening, but on the following morning shortly prior to his departure Mr Dyer produced a bundle of documents and said that he had better get the appellants to sign them before he left. The appellants claimed that they had signed the documents without reading them and that they had been unaware that they contained a mortgage over their property or personal guarantees in respect of the business. Gray J was prepared to accept that they had remained unaware of "the particulars" contained in those documents, but was nonetheless satisfied that they had understood that they had been executing documents that effectively transferred their existing liability from the Commonwealth Bank to the Bank of New South Wales.

11. The documents were subsequently returned to the respondent.

12. In mid-August, it came to the attention of the respondent's solicitors that the Commonwealth Bank also held a second mortgage in respect of Mr and Mrs Dyer's residential property. It was necessary for this to be discharged so that they could provide a similar mortgage to the respondent and, rather than delay settlement, it was agreed that the sum of $16,728.23 would be drawn down on the overdraft facility provided to Dyspurrs and the account re-credited a month later on settlement of a personal loan to Mr and Mrs Dyer. The appellants were not informed of this matter, but on settlement, that amount, together with a further sum of $502,269.17 owed by Dyspurrs to the Commonwealth Bank, was paid to that bank on settlement of the transaction.

13. The appellants returned from their overseas trip in November 1991. Some months later, the respondent expressed some concern about the business citing high stock levels and the apparent reduction in turnover. However, in October 1992 it agreed to increase the overdraft facility from $50,000 to $100,000. A document prepared at that time referred to the security over the appellant's property and Mr and Mrs Watt initialled amendments to their names in relation to that security.

14. In late 1992 the proprietors of the Canberra Times decided to deliver the newspapers direct to subscribers, a decision that Mr Watt said had a "disastrous effect on the business". In mid 1994 a further attempt was made to restructure the business finances and the appellants signed an offer by the respondent to extend the loan facilities to $682,000, again on condition of unlimited joint and several guarantees and a third party mortgage over their property.

15. They resigned from their offices as directors of Dyspurrs with effect from 14 November 1994 and, on 17 November 1994, their solicitors wrote to the respondent disputing the validity and enforceability of the mortgage.

16. As Mason J pointed out in Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 at 461, courts have long exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds including fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. Whilst it is true, of course, that all such conduct is unconscionable, the term "unconscionable conduct" is usually used in this sense to refer to conduct in which one party makes unconscientious use of his or her superior position or bargaining power to the detriment of another party who is suffering from some special disability or who is in a position of special disadvantage. Cases of this kind differ from cases of undue influence in that the unconscionability stems not from overbearing the will of the innocent party but from taking unconscientious advantage of the other party's disability or disadvantaged position.

17. In Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649 the High Court considered the application of equitable principles to cases in which wives had been induced to become sureties for debts incurred by their husbands. As Dixon J observed, at 684, there are at least two types of cases in which equity will intervene: firstly, when the wife has entered into the transaction due to her husband's undue influence; and secondly, when there has been no undue influence, but where the husband has failed to adequately and accurately explain a suretyship transaction which is for his economic benefit and not for that of the wife.

18. Mr Aitkin, who appeared for the appellants, sought to invoke the principle applicable in the second type of case, arguing that it was not confined to transactions in which wives had guaranteed the debts of husbands, but could equally apply to transactions in which parents guaranteed the debts of their children. We are unable to accept this proposition.

19. In Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 the High Court overruled a decision of the New South Wales Court of Appeal that the "so called principle in Yerkey v Jones" should no longer be followed in New South Wales. It had been suggested that the principle had been adhered to by only one judge, namely Dixon J, and had been based upon an assumption that married women were, ipso facto, under a special disadvantage in any transactions involving their husbands. In a joint judgment Gaudron, McHugh, Gummow and Hayne JJ said (at 403) that the better view of Yerkey v Jones was that the reasons for the decision of Dixon J in that case were not significantly different from those of the other members of the Court and that it was for the High Court alone to determine whether one of its earlier decisions should be departed from or overruled. Their Honours acknowledged that Australian society, and particularly the role of women in that society, had changed during the previous six decades, but observed that there were still a significant number of women in relationships marked by disparities of economic and other power between the parties. They explained, however, that the rationale of Yerkey v Jones was not to be found in notions based on the subservience or inferior economic position of women, nor upon their perceived vulnerability of exploitation because of their emotional involvement, save to the extent that it may be relevant to an allegation of actual undue influence. Their Honours continued (at 404):

So far as Yerkey v Jones proceeded on the basis of the earlier decision of Cussen J in Bank of Victoria Ltd v Mueller, it is based on trust and confidence, in the ordinary sense of those words, between marriage partners. The marriage relationship is such that one, often the woman, may well leave many, perhaps all, business judgments to the other spouse. In that kind of relationship, business decisions may be made with little consultation between the parties and with only the most abbreviated explanation of their purport or effect. Sometimes, with not the slightest hint of bad faith, the explanation of a particular transaction given by one to the other will be imperfect or incomplete, if not simply wrong. That that is so is not always attributable to intended deception, to any imbalance of power between the parties, or, even, the vulnerability of one to exploitation because of emotional involvement. It is, at its core, often a reflection of no more or less than the trust and confidence each has in the other. It may be that the principles applied in Yerkey v Jones will find application to other relationships more common now than was the case in 1939 - the long term and publicly declared relationships short of marriage between members of the same or of opposite sex - but that is not a question that falls for decision in this case.

20. It is, we think, clear from these passages that the principle in Yerkey v Jones was based upon the need to protect married women from the consequences of improvident transactions entered into at the request of their husbands and in reliance upon the special considerations of trust and confidence that arise from a marital relationship or at least a relationship of a similar kind. It is true that Kirby J (at 431) referred more generally to "a relationship involving emotional dependence on the part of the surety towards the debtor". However, this broad formulation was not adopted by any of the other members of the court. Callinan J (at 442) expressly rejected the view of the House of Lords in Barclays Bank Plc v O'Brien [1993] UKHL 6; [1994] 1 AC 180 that any exceptional rules formerly applicable to guarantees by wives of the debts of their husbands should be extended to transactions involving other cohabitees. Whilst Gaudron, McHugh, Gummow and Hayne JJ were prepared to acknowledge that similar considerations might arise in other relationships similar to a marriage, it is clear from their judgment that the ground for relief is predicated upon the trust and confidence that can be expected to accompany a relationship of or similar to marriage and there is nothing in their Honours' observations to suggest that the principle could be extended to parents who have guaranteed the debts of their children. Mr Aiken was unable to refer the Court to any other case in which the principle in Yerkey v Jones had been extended to relationships of that kind.

21. It may be true that parents often enter into improvident transactions on behalf of children but the relationship between a parent and his or her child or his or her child's partner is obviously quite different from the relationship between a wife and her husband. Parents do not normally leave business decisions to their children or rely unquestioningly on their judgment. On the contrary, the role of parent involves being mentor and guide and parents tend to remain concerned about the wisdom of their children's decisions, even when they have reached adulthood. There are clearly cases in which parents, particularly parents of advanced years, act in uncritical reliance upon advice given to them by children because of trust and confidence similar to that which the High Court was prepared to assume that women might have in their husbands. However, the risk of parents being beguiled into improvident transactions in this manner may not be readily apparent to others. Much may depend upon the circumstances. For example, whilst the risk of a very elderly person unquestioningly accepting advice given to him or her by a son or daughter who was a middle-aged company director might seem obvious, the risk of the middle aged company director acting in unquestioning reliance upon the advice of his or her teenaged son or daughter might elude even the most conscientious bank manager or lending officer. Hence, in our opinion, it cannot be said that the relationship of parent to child or parent to son or daughter-in-law is of such a character that any potential lender who is aware that the debtor is a child or the partner of a child of the surety must by reason of that fact alone be taken to have appreciated that the surety "may well receive from the debtor no sufficient explanation of the transaction's purport and effect" (Garcia at 409 [33]).

22. It might also be observed that the real vulnerability of parents usually stems not from a failure to comprehend the nature of the transactions in which they have been asked to participate or from insufficient information concerning their implications. It stems from their love of their children. Their desire to help and protect them, to advance their interests, to maintain a close relationship, to avoid causing disappointment, hurt or distress, to maintain the relationship may all make it difficult to say "no". The principles in Yerkey v Jones and Garcia offer no protection for people lured into improvident transactions by feelings of this kind.

23. Mr Aiken submitted that even if the principle in Yerkey v Jones were inapplicable to Mr Watt, there was no reason to suppose that it could not be invoked by Mrs Watt. He maintained Mrs Watt had been reluctantly persuaded by her husband to participate in the relevant transactions and that she had ultimately done so in reliance upon the trust and confidence she reposed in him as her husband.

24. For present purposes we are prepared to assume that this may well be true. However, that fact alone would not be sufficient to demonstrate that enforcement of the guarantee would be unconscionable. As Gaudron, McHugh, Gummow and Hayne JJ pointed out in Garcia at 409, the transaction must be one in which the lender "is to be taken to have understood that, as the wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife". Whilst, this may be readily inferred when a wife is guaranteeing the repayment of money borrowed by her husband for the purposes of his business, it does not follow that a similar inference should be drawn when husband and wife are joint guarantors for the debts incurred by one of their children and her partner. In our opinion, the evidence in the present case did not provide an adequate basis for such an inference.

25. Furthermore, even if the principle which Mr Aitkin sought to invoke on behalf of the appellants could be extended to transactions of this kind, it would not provide any basis for setting aside the transactions in question because the grounds upon which such relief may be granted were not established by the evidence.

26. As Gaudron, McHugh, Gummow and Hayne JJ said in Garcia (at 408) "Yerkey v Jones begins with the recognition that the surety is a volunteer: a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee". In the present case, the evidence establishes that Mr and Mrs Watt each held 15 per cent of the shares in Dyspurrs and were directors of that company. It is true, of course, that equity looks to the substance rather than the form of the transaction and the mere fact that a wife was nominally a director and/or shareholder does not prevent a conclusion that she was effectively a volunteer. In the present case, however, each of the plaintiffs had a substantial shareholding and at the time of the relevant transaction, the business appeared to be doing well. The mere fact that they had previously been willing to work in the business without receiving either wages or dividends does not, of itself, demonstrate that their shares had no value or that the value could be dismissed as de minimis. There is no reason to suppose that they would not have received dividends in the future or that if the business had been sold they would not have each received 15 per cent of the proceeds of sale.

27. In any event, the money obtained from the loan by the defendant was used to discharge an existing liability to the Commonwealth Bank, which they had secured by the provision of guarantees and a mortgage over their home. Accordingly, even if the plaintiffs had been able to demonstrate that the transaction did not confer any benefit upon either of them by virtue of their shareholding in Dyspurrs, it would have been apparent that they obtained the benefit of being relieved of their liability to the Commonwealth Bank. Indeed, it appears that the transactions with the defendant were entered into primarily because the interest rate on the loans was lower and hence the liabilities to the Commonwealth Bank from which they were relieved would have been correspondingly more burdensome. Mr Aitkin did suggest that repayment of the monies owed to the Commonwealth Bank may have been of no real benefit to them because they may have been able to avoid the earlier transactions on similar grounds. However, this issue does not seem to have been squarely raised at the trial of the action and such an entitlement was not established.

28. In short, this was not, in our opinion, a case such as Garcia in which, taken as a whole, the evidence could have been said to have demonstrated that the appellants in fact obtained no real benefit from entering into the transaction because they had no real financial interest in the fortunes of the company.

29. Furthermore, the principle justifying relief in the second type of case referred to in Yerkey v Jones is based upon the need to protect people from the consequences of improvident transactions, the effect of which they had not understood. Indeed, Mrs Jones failed in her defence to the action brought against her by Mr and Mrs Yerkey because the Court found that she had understood the nature of the transaction.

30. In the present case, the evidence did not establish that either appellant was mistaken about the effect of the transaction. Whilst Gray J accepted that they had signed the relevant documents without reading them and remained unaware of their particulars, he was satisfied that they understood that they were executing documents which effectively made both them and Dyspurrs liable to the defendant in lieu of the Commonwealth Bank. Those findings were clearly open to his Honour.

31. Whilst Mrs Watt may have been inclined to leave business dealings substantially in the hands of her husband, it was inherently implausible that a person who had been employed at a debt collection agency, albeit as a typist, would not have understood at least in a general sense, that creditors who are not paid may take steps to recover monies they are owed by enforcing guarantees. Further, the appellants had had a number of mortgages including, of course, the one to the Commonwealth Bank and Mrs Watt's claim not to have known that the house could be sold if the debts were not paid, was equally implausible. The fact that the appellants entered into further transactions in late 1992 and mid 1994, effectively increasing their liability under the guarantee and mortgage, also tends to confirm that they were well aware of the essential nature of the liabilities they had undertaken.

32. Finally, Mr Aiken also argued that Gray J had erred in failing to find that the defendant had acted unconscionably in permitting Mr and Mrs Dyer to draw down the sum of $16,728 from the overdraft facility approved for Dyspurrs in order to discharge a second mortgage to the Commonwealth Bank over their own home. It appears, however, that this was done primarily so that the defendants could take a second mortgage over the same property as further security for the loans to Dyspurrs and it was anticipated that the amount would be re-credited to that account when a personal loan was made available to Mr and Mrs Dyer within the next month. In all the circumstances, we are satisfied that his Honour was entitled to take the view that the respondent was under no duty to disclose this aspect of the transaction to the appellants. In any event, the respondents abandoned any claim in respect of this amount and the non-disclosure had no ultimate impact upon the level of the appellants' liability to the respondent.

33. On the other hand, the evidence reveals that the debt to the respondent has been substantially inflated by the imposition of interest rates, apparently varying from 14.5% to 16.15%, charged on loans substantially in arrears. It was suggested in argument that this is common banking practice. If it is, it seems to be a common practice of preying upon the financially vulnerable to achieve a rate of return that would not be otherwise available. We have no doubt that banks would defend the practice on the basis that the high interest rates were applied only when the failure to duly meet repayments had already demonstrated that the loans involved a higher measure of risk than had been initially anticipated. Whilst that may be true, the practice is obviously capable of having a ruinous impact upon people such as Mr and Mrs Watt who have guaranteed the debts of others in good faith. We would hope that the ethical implications of this practice could be reconsidered especially when, as in the present case, the loan has been secured by first mortgages over real estate and the real burden of the debt will be borne not by those primarily in default, but by innocent guarantors. However, there is no principle of law that would have enabled his Honour to intervene in the transaction to effectively reduce the interest rates that the bank was entitled to charge pursuant to its agreements with Dyspurrs and hence to reduce the appellant's level of indebtedness to the respondent.

34. Mr and Mrs Watt are entitled to every sympathy. They did no more than to guarantee a loan to a company formed by their daughter and son-in-law to enable them to operate a family business. They may have had significant misgivings when the first loans were obtained from the Commonwealth Bank and, perhaps, some lingering concern even when the further transactions with the defendant were negotiated. Nevertheless, there is no credible evidence that they did not understand at least the general nature of the obligations thereby undertaken. Like so many parents before them, they clearly wanted to give their daughter and son-in-law every chance to acquire their own business and establish a sound financial footing and were prepared to accept some measure of risk to do so. They now face the loss of their home and, perhaps, the bulk of their life savings. The case provides another sad illustration of the consequences that may ensue when business expectations are not fulfilled or, for some other reason, the child or his or her partner is unable to repay the loans. Unfortunately, in the absence of some fraud, undue influence, unconscionable conduct or some other recognisable cause of action, courts are unable to intervene to relieve people of liabilities they have knowingly incurred.

I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of their Honours Higgins CJ and Crispin P.

IN THE SUPREME COURT OF THE ) No. ACTCA 23-2002

ON APPEAL FROM A JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

AND: STATE BANK OF NEW SOUTH WALES LIMITED ACN 003963228 t/as STATE BANK OF NEW SOUTH WALES

36. I agree with the orders proposed by Higgins CJ and Crispin P and generally with their reasons.

37. Two additional comments might be made. Left to themselves, the courts might perhaps ultimately develop a broad equitable doctrine to the effect that whenever a party seeking to enforce a contract knows or ought to know that there is a serious risk that the party legally liable did not or might not have fully appreciated the ways in which and the extent to which he or she might have become so liable, it is unconscientious behaviour for the creditor to insist on his/her legal rights, against which a court of equity will provide relief. In such an event, any close familial or quasi-familial relationship might be held to provide rebuttable evidence of the existence of such a risk. The law in this country, however, has certainly not yet developed to such an extent. Moreover the methods of judicial legal development are likely to entail an incremental approach. In the latest edition of Meagher, Gummow and Lehane's work on equity (Equity Doctrines & Remedies 4th ed 2002 at p 512-3), the learned authors, commenting on Garcia, do not look beyond quasi-marriage relationships as the possible next step and raise certain practical questions even about such a modest extension of the Yerkey v Jones principle.

38. Given the frequency of litigation involving people who have put themselves in ruinous situations by entering into guarantees to assist others to whom they are in a very close relationship, a better and swifter course might well be for the national parliament to intervene, at least in relation to guarantees in favour of institutional lending corporations. It is difficult to see why, as a matter of modern policy, such a lender should not be obliged, as a condition of enforcing a guarantee, to have taken every reasonable step to advise personal guarantors in plain language of the ways and the extent to which they might become liable and to ensure that they have been independently advised as to the wisdom of entering the guarantee transaction. It is not beyond the wit and competence of such lenders or of independent solicitors to give proper information and advice, and to evidence it. There is no reason to think that the useful provision of credit would be impaired by such a reform.

39. Even with such a reform there would still be sad cases. For example, not a few parents will (as George Bernard Shaw claimed of the women of his day), if shown an opportunity to martyr themselves, kill you in the rush. At least in such cases, there would be no arguable inequity in the law's giving effect to people's choice to risk their financial security.

I certify that the preceding paragraphs numbered thirty-six (36) to thirty-nine (39) are a true copy of the Reasons for Judgment herein of his Honour, Justice Madgwick.

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