Westpac Banking Corporation v Diagne

Supreme Court of NSW|2014-06-05|Before: Ball J

Introduction 1In these proceedings, the plaintiff, Westpac Banking Corporation, as successor in law to St.George Bank Ltd, seeks to recover from the first defendant, Mr Diagne, and the second defendant, Mrs Diagne, an amount of $3,276,039.66 plus interest from 31 May 2014 said to be owing in respect of various loans advanced to Mr and Mrs Diagne or guaranteed by them during the period from October 2000 to November 2006 and to enforce two mortgages given as security in respect of those loans. In this judgment, I will refer to Westpac and St.George interchangeably as "the Bank". 2Various facilities were provided by the Bank and the terms of those facilities were amended from time to time. The principal facilities were a loan obtained by Mr and Mrs Diagne in 1999 for the amount of $463,000 to acquire their home in South Coogee and a Commercial Loan Facility provided to Mr and Mrs Diagne on 17 August 2005 for $670,000 to enable them to buy a property in Enmore from which they proposed to operate a restaurant through a company known as Afrilanka Pty Ltd (Afrilanka). Both loans were secured by registered first mortgages over the relevant properties. 3There is no dispute that the moneys were advanced and have not been repaid. Nor is there any dispute concerning the terms on which the loans were made. However, in a Commercial List Cross Claim Statement filed on 21 October 2013, Mr and Mrs Diagne contend that the Bank made misrepresentations or engaged in misleading or deceptive conduct which caused them loss. They plead an alternative claim based on estoppel. They also make a claim under the Contracts Review Act 1980 (NSW) and claim that the Bank was negligent in advancing money to them and that it breached an implied warranty of fitness for purpose in reducing an overdraft that had been made available to Afrilanka. Finally, Mrs Diagne makes a claim based on the principles stated by the High Court in Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649. In their Summons, Mr and Mrs Diagne sought orders that the Bank's mortgages be set aside, a declaration that the amount claimed by the Bank is not payable and damages. However, it is apparent from correspondence between the parties' solicitors that Mr and Mrs Diagne no longer press for an order that the mortgage over the South Coogee property be set aside and, during the course of final submissions, Mr Diagne, who by that time represented himself and for the most part spoke for his wife, conceded that he and his wife owed the Bank money. The relief they sought was that they be put back in the position they were in before they bought the Enmore property. 4Mr and Mrs Diagne came to represent themselves following an application on the first day of the hearing by their counsel and solicitors that they be given leave to withdraw. I gave that leave. Mr and Mrs Diagne then sought an adjournment in order to obtain other legal representation. I refused that application. The proceedings were originally set down for hearing commencing on 14 April 2014. That hearing date had to be vacated because of the late service of Mr and Mrs Diagne's evidence. I was not satisfied that Mr and Mrs Diagne would be able to obtain alternative legal representation and, consequently, was not satisfied that there would be any utility in granting an adjournment. As a result, Mr and Mrs Diagne represented themselves throughout the hearing. They did, however, have the benefit of affidavits and a detailed Commercial List Cross Claim Statement that had been drafted by their previous legal advisers. 5Also on the first day of the hearing, the plaintiff made an application to amend its response to the Commercial List Cross Claim Statement to raise limitation defences. The evidence was that the Bank had given notice of the proposed amendments on 21 March 2014 at a time when Mr and Mrs Diagne were still legally represented. The limitation defences do not raise any new factual issues. In those circumstances, I allowed the amendments. However, as will become apparent, it has not been necessary to consider the defences based on the expiration of limitation periods.

Background facts 6Mr Diagne was born in Senegal in 1949. After completing high school, he worked in the clothing industry in Dakar. He operated with friends his own small business in that industry for a period of time. He migrated to Australia in 1979. For a time, he worked as a labourer and also as a kitchen hand and in other capacities in various restaurants in Sydney, with the intention of gaining experience so that he could eventually establish his own business. In the mid-1980s, he operated a small business known as "Order-A-Meal" from a house he rented. It is apparent that Mr Diagne worked very hard and was able to save a significant sum of money. He established his first restaurant in Oxford Street near Taylor Square, which was known as "Afrilanka". In or around 1990, he opened up a restaurant in King Street, Newtown known as "Kilimanjaro", which was very successful. 7Mr Diagne married his wife in Senegal in 1994. 8On 31 August 1995, Mr and Mrs Diagne incorporated Afrilanka. They were the company's sole directors and shareholders. That company took over the business of operating the restaurant. It paid Mr and Mrs Diagne salaries. The evidence is that, in the period 2003 to 2005, Mr and Mrs Diagne each earned between $90,000 and $100,000 and that the company itself was profitable. 9In or about May 1999, Mr and Mrs Diagne bought their home in South Coogee. As I have said, for that purpose, they entered into a home loan agreement with St.George Bank, which was termed a Portfolio Loan Facility. On 16 October 2000, they increased their borrowings to $702,000 under that facility. The loan was secured by a registered first mortgage over the property. 10On 19 November 2001, Mr and Mrs Diagne's Portfolio Loan Facility was varied to increase the credit limit from $702,000 to $1,050,000. 11In January 2005, Mr Diagne approached his bank manager, Ms Gail Merry, about obtaining a loan to buy a property in or around Enmore to open a second restaurant, with the intention eventually of selling Kilimanjaro. As a result, the limit of Mr and Mrs Diagne's Portfolio Loan Facility was increased to $1,275,000 in order to provide funds to pay the deposit in respect of the proposed purchase. 12On or about 25 May 2005, Mr and Mrs Diagne bought the property at Enmore. The purchase price was $1,050,500. It was their intention at the time to open an African restaurant at the property, which became known as "Lat-Dior African Eatery". Mr Diagne paid a deposit of $95,500 using funds drawn from the Portfolio Loan Facility. 13Mr Diagne's evidence is that he had previously arranged to borrow $668,500 from Citibank or to borrow $716,250 from Colonial First State to assist with payment of the purchase price of the Enmore property. Some time after contracts had been exchanged, Ms Merry introduced Mr Diagne to Mr Gary Culmer who, at the time, was a relationship manager in the corporate and business banking division of the Bank to discuss the possibility of borrowing the money from the Bank. He and Mr Diagne had numerous conversations concerning a proposed loan. Mr Diagne says that Mr Culmer was very keen to get his business. During their first conversation, Mr Diagne says that Mr Culmer said: We will help you get ahead. We want your business. We will help you. We will not let you go. I have driven past your restaurant many times. The African map on the mural is very attractive and educative. You have been in business for a long time. We want to support you. 14Mr Culmer visited the Enmore premises on at least one occasion before settlement. During the visit, Mr Diagne says that he expressed concern about the size of the downstairs area. He says that he said to Mr Culmer that the restaurant needed to be bigger to be viable and that it would be necessary to have tables upstairs. According to Mr Diagne, the conversation continued: MD: This is what I'm planning to do, to incorporate upstairs and downstairs so that there is a bigger seating capacity. If we open upstairs, we could more than double the seating capacity, to around 50 people. GC: Yes Mohamed, I can see what is needed. We will help you to increase the seating capacity. But let's do it step by step and get your loan approved and then we can get another loan approved for upstairs. Let's get the ball rolling. Let me get your documents ready for settlement. Then we can increase the amount borrowed. Mr Culmer denies the conversation. He says he recalls that, on one occasion, Mr Diagne took him upstairs where there were mattresses. He says that Mr Diagne said to him words to the effect of "workers sleep here". According to him, that is the only conversation they had regarding the upstairs area. 15On 28 July 2005, Mr Culmer wrote to Mr Diagne in which he said: I refer to our telephone conversation of yesterday and confirm that the Bank would consider a loan application for the following: ● A Variable Rate or Fixed Rate loan of $668,000 (70% of $955,000) with principal and interest payments over 15 years. The first year to be interest only payments with the residual debt to clear within the remaining 14 year term. ● A variable rate interest only loan of $95,500 over 3 months to enable the payment of the GST component of the commercial property purchase. This loan is to be cleared in full upon the receipt of your GST refund. A letter from your account [sic] is to be provided to verify/confirm that you are entitled to the GST refund and that you have no outstanding taxation liabilities. ● A variable rate principal and interest loan of $103,000 over 12 months. The letter went on to say that the loan would need to be secured by a first mortgage and guarantees. It also set out some additional information that Mr Culmer required in order "to proceed with the application". Mr Culmer prepared a credit application in support of that loan on 29 July 2005. However, the application was not proceeded with, apparently because Mr Diagne thought that it was inferior to the offer that he had already received from Colonial First State. 16One of the documents sought by Mr Culmer was a statement of assets and liabilities. It appears that Mr Culmer faxed the relevant form to Mr Diagne on 28 July 2005 and that Mr Diagne completed it on that day. Mr Diagne says that he did so under pressure from Mr Culmer. He also says that Mr Culmer told him to state in the form that the value of the property at South Coogee was $2 million, since that would facilitate the approval. Mr Diagne says he followed Mr Culmer's advice, although he thought that the amount was too high. This evidence is disputed by the Bank. Nothing turns on the resolution of that dispute. However, it seems likely that Mr Culmer was in a hurry to obtain the statement for the credit application he prepared the following day. On the other hand, for reasons I explain in the next paragraph, I do not accept that Mr Culmer told Mr Diagne what figures to include in the form. 17It appears that there were further discussions between Mr Culmer and Mr Diagne concerning the facilities the Bank was willing to provide and, on 10 August 2005, Mr Culmer prepared a further credit application. That application included the following commentary: The clients have exchanged contracts on the property and the settlement is schedule [sic] for 3/8/2005. When the clients exchanged the contracts they thought that they would be able to borrower [sic] against the purchase price including GST however they have now realised that this is not the case. To fund the purchase they engaged a broker who has obtained an [sic] Letter of Offer from Citibank for a 5 year interest only commercial loan to purchase the commercial property. Additionally, Citibank will provide resi finance against the house property on the basis of an extension rate of 80%. Mr Diagne believes that, based on current local sales, that the house would value at M$2 however if it only valued the same as our valuation of M$1.7 an extra $85k would be released to him. This extra resi money of at least $85k would enable the clients to pay the GST. If the property valued at M$1.8 then an extra $165k would be released. St George is therefore facing the loss of the existing M$1.275 Portfolio Loan together with the commercial facilities sought. ... Mr Culmer's references to lower valuations and the consequences of those valuations for the application make no sense if he really had told Mr Diagne to include a figure of $2 million for the value of the South Coogee property in his statement of assets and liabilities; and, in my opinion, Mr Diagne's evidence on this matter cannot be accepted. 18The credit application was considered shortly after it was submitted and it appears that Mr Culmer rang Mr Diagne to tell him the result on 12 August 2005, since, on that day, Mr Diagne faxed Mr Culmer a note in which he said: Following our telephone conversation of today, can you please formally put your offer to me in writing and fax it to me. 19Mr Culmer responded to that request on the same day setting out the terms of a facility offer that was said to supersede the Bank's earlier offer. The revised offer was for the following facilities: Commercial Loan - Fixed $670,000 Commercial Loan - Variable $95,000 Commercial Overdraft $45,000 At that stage, it was contemplated that the borrowers would be Mr and Mrs Diagne and that the loans would be guaranteed by Afrilanka. The commercial loan for $95,000 was to pay the GST on the purchase of the Enmore property, which would eventually be refunded and paid to the Bank in discharge of the loan. 20Mr and Mrs Diagne signed the acceptance at the end of that offer on 17 August 2005. The acceptance stated that, by signing the document, Mr and Mrs Diagne accepted the facilities on the terms set out in the offer. The acceptance also contained the following paragraph: We recommend that you get independent legal and financial advice before entering into this facility agreement. Mr Culmer witnessed both their signatures. 21At the same time, Mr and Mrs Diagne accepted an offer to increase the limit on their Portfolio Loan Facility from $1,275,000 to $1,360,000. They also signed declarations that they had received independent legal advice regarding the loan and security documents relating to the Enmore property. Their signatures on those declarations were witnessed by Mr Richard Trayer, a solicitor who had acted for them on the purchase of the South Coogee property. Afrilanka executed a guarantee of the facilities. 22Mr Trayer swore an affidavit in the proceedings. He cannot recall what advice he gave Mr and Mrs Diagne. However, he says that it was his usual practice when giving advice in relation to a standard mortgage or loan agreement to explain the nature of the document and the consequences of not repaying the amounts due. He says he has no reason to doubt that he followed that practice in the case of Mr and Mrs Diagne. Mr Diagne chose not to cross-examine Mr Trayer. 23On 24 August 2005, the sale of the Enmore property settled. 24On 8 September 2005, Mr Culmer submitted a further credit application for a Master Lease Facility of $100,000. It is not clear how that application came about. However, the application includes the following comments in support of the facility: Settlement for the purchase of the Enmore restaurant has been completed and the opening is scheduled for early to mid October 2005. Mr Diagne is currently attending to some minor alterations to the seating, painting and re-location of counters etc. He has requested that we now assist with the leasing of some general equipment items and other items. Some of the items that are required immediately are two tabletop Combi Steamer costing $10,000 each, a hot & cold counter and installation costing $31,273 and some other items costing $3,034. To assist the client, it is intended to provide him with a Master Lease facility for $100k which will cover his immediate requirements as well as his future requirements. 25The facility was approved and was executed by Afrilanka on 13 September 2005. It appears that it was originally contemplated that Mr and Mrs Diagne would guarantee Afrilanka's obligations under the Master Lease Facility. However, no such guarantees were given. 26On 4 November 2005, the overdraft was transferred from Mr and Mrs Diagne to Afrilanka with Mr and Mrs Diagne as guarantors. The credit application in support of that change also noted that Mr and Mrs Diagne had repaid the facility for $95,000 from the GST refund that they had obtained. Mr and Mrs Diagne signed the relevant facility letter as guarantors. Curiously, each of them also purported to sign as witnesses to their own signatures. 27On 5 December 2005, Mr and Mrs Diagne executed a deed of guarantee and indemnity in respect of the liabilities of Afrilanka under the overdraft facility up to a limit of $45,000, together with other amounts payable under that facility. At the same time, they executed declarations that they had received independent legal advice in respect of the guarantee. Those declarations were witnessed by a Justice of the Peace. 28Mr Diagne said in his affidavit that there was no discussion with him concerning the transfer of the overdraft to Afrilanka. The Bank takes issue with that evidence. Little turns on it, since it is clear that Mr Diagne was aware that he had an overdraft. Indeed, one of his complaints in the case is that the overdraft the Bank granted was insufficient for a new business. However, Mr Diagne's evidence is difficult to reconcile with the documents he signed. It is also difficult to reconcile with a declaration of independent financial advice provided to the Bank on 5 December 2005 by Ms Beverley Gough, who was, at the time, Mr and Mrs Diagne's accountant and who prepared tax returns for them and for Afrilanka. Among other things, that declaration records the following: I considered and advised [Mr and Mrs Diagne] about the obligations of the Borrower to St George Bank Limited under the Letter of Offer dated 3 November 2005 [the offer of the overdraft to Afrilanka] and the viability of the borrowing in terms of servicing of interest and repayment. I advised them that matters to be considered included many matters both within and beyond the Borrowers control and these would include fraud or poor management, imprudent business practices, failure to effect proper insurances, over optimistic income and profit projections, changes in interest rates and changes in the market place, economy or law. 29On 16 February 2006, the Bank offered Afrilanka a temporary increase in its overdraft from $45,000 to $70,000 until 16 August 2006 with a reduction of $35,000 in the master lease limit. The credit application in support of that variation records the following: Client recently opened a new restaurant in Enmore and received approval for a Master Lease of $100k to assist with the fit out and equipping of the premises. In an effort to have the restaurant open prior to Christmas, Mr Diagne paid cash for a number of items to the value of $25k rather then [sic] use his Master Lease facility. This was due to the type and low costs of the items involved and timing issues. As a consequence, the company's account is carrying an un-budgeted amount of $25k that was originally supposed to be part of the Master Lease. Mr Diagne has therefore requested a temporary increase in the company's limit of $25k for 6 months to allow him to reduce the $25k from trading. He does not wish to enter into any Sale & Lease Back type arrangement to move the $25k to the Master Lease facility. 30Mr Diagne says in his affidavit that there was no discussion with him prior to the Bank increasing the overdraft. That, however, seems unlikely. As I have said, one of Mr Diagne's complaints in the case was that the overdraft was insufficient. The likelihood is that it is an issue that Mr Diagne raised with Mr Culmer at the time and that the increase in the overdraft was a response to a request made by Mr Diagne, as the credit application records. 31Mr and Mrs Diagne signed the acceptance of the Bank's offer as directors of Afrilanka and signed guarantees of Afrilanka's obligations.Their signatures were witnessed by Mr Diagne's aunt, who also witnessed Mr and Mrs Diagne's signatures on a number of subsequent documents. Mrs Diagne raised in submissions the question whether that affected the validity of the documents, but clearly it does not. 32On 7 March 2006, Mr and Mrs Diagne executed an extension of their guarantee and indemnity in respect of the variation to the overdraft and also executed declarations of independent legal advice. Mr and Mrs Diagne's signatures in respect of the guarantees were witnessed by Mr Diagne's aunt, but again nothing turns on that. The declarations were witnessed by a Justice of the Peace. 33Mr Diagne says in his affidavit that he had a number of conversations by telephone with Mr Culmer in 2006 in which, as part of the conversation, he reminded Mr Culmer of the importance of arranging a loan or extending further credit to enable renovation of the upstairs so that the seating capacity could be increased. He says that he stressed that it was vital that the seating capacity be increased, but that he never received a satisfactory response from Mr Culmer. 34By about 14 June 2006, Afrilanka's overdraft had reached $92,000 and the Portfolio Loan Facility was approximately $8,000 in arrears. On 14 June 2006, Mr Culmer prepared a credit application for a new facility in the name of Afrilanka for $100,000 with a reduction in the overdraft to $20,000. The application records the following reason for the new facility: Client opened his new fast food eatery at Enmore prior to Christmas 2005. The eatery was financed by us (security property S2) which although previously being a restaurant needed refurbishment and renovation. Client also installed new fittings etc which were financed through our Master lease facility. The eatery serves African style foods at low prices of $10-$15 a meal. Client also operates a formal restaurant at Newtown which also serves African style food. Client now realises that he under-estimated the set up costs and this has been reflected in his overdraft usage. He now wants to re-structure the company's borrowings by way of a new $100k P & I variable rate loan over 8 years. These funds will be used to: $92k - clear existing hard core overdraft $8k - clear Portfolio arrears $100k - new loan Client wishes to retain a $20k overdraft limit for come and go use. Client is confident that with the expense of the new eatery behind him and the gradual increase in the new eatery that he will be able to make lump sum reductions to the new variable rate loan over the medium term. Interim financials to April 2006 attached support this. 35Mr Diagne gave evidence in his affidavit that "our" financial difficulties worsened when the overdraft limit was reduced to $20,000. He says that again there was no discussion with him or his wife before the overdraft was reduced. Again, I do not accept that evidence. In my view, it is inconceivable that the Bank did not have discussions with Mr Diagne concerning the fact that Afrilanka had exceeded its overdraft limit by a significant margin. The reduction of the overdraft limit to $20,000 and the offer of a new loan of $100,000 at a lower interest rate was clearly an accommodation offered by the Bank to assist Mr Diagne with the financial difficulties he and his wife and their business found themselves in. It is inherently improbable that the Bank did not discuss that fact with them or that they did not appreciate that what was being offered to them was an accommodation. 36Again, Mr and Mrs Diagne executed extensions of their guarantee and indemnity and declarations of independent legal advice, which were witnessed by a Justice of the Peace. 37On 10 October 2006, Mr Culmer prepared a credit application seeking approval for the following: 1) temporary increase in the company's limit of $25k from $20k to $45k for 4 months to enable the clearance of the portfolio loan excess of $8k and the covering of the existing o/d excess of $12k. 2) bank guarantee for $17,000 for a rental bond 3) a new $10k principal and interest loan to assist with the immigration costs of two family friends who are immigrating from Africa. The request for a bank guarantee for $17,000 was approved. However, approval of the other facilities was refused. 38On 17 October 2006, the Bank wrote to Mr and Mrs Diagne informing them of the Bank's decision. It also stated that any cheques presented in excess of the $20,000 overdraft limit would be dishonoured. Mr Diagne replied to that letter on 1 November 2006. In that reply, he said that the bank guarantee needed to be for $20,020. The increase in the guarantee was approved by the Bank and Mr and Mrs Diagne were told of that approval in a letter dated 3 November 2006. 39On 21 December 2006, the Bank wrote to Mr and Mrs Diagne observing that the Portfolio Loan Facility in respect of the South Coogee property was $20,830.04 in arrears and that the loan in respect of the Enmore property was $8,725.79 in arrears. The letter demanded repayment of all facilities within 30 days. The Bank commenced legal recovery action on 27 February 2007. By that stage, Mr Richard Walker had taken over responsibility for the relationship from Mr Culmer. 40The Bank did not pursue its recovery action. There were negotiations between Mr Diagne and the Bank in relation to proposed repayment schedules and Mr and Mrs Diagne made some attempts to refinance their facilities with the Bank. They put the property at South Coogee up for sale, but the property did not sell. On 4 December 2008, the Bank and Mr and Mrs Diagne reached a forbearance agreement following a without prejudice meeting attended by the Bank's and Mr and Mrs Diagne's solicitors. In the meantime, a dispute developed between Mr and Mrs Diagne and the landlord of the Kilimanjaro premises and ultimately that lease was terminated. 41Eventually, following further negotiations, on 14 January 2011, the Bank issued a notice under s 57(2)(b) of the Real Property Act 1900 (NSW) in respect of the South Coogee property. In response, Mr and Mrs Diagne notified a dispute to the Financial Ombudsman Service (FOS), which had the effect of staying any further enforcement action. FOS issued its determination on 29 May 2013. The Bank served letters of demand on 19 July 2013 and commenced these proceedings on 26 August 2013. 42It is not necessary to describe in detail the negotiations between the Bank and Mrs and Mrs Diagne leading up to the demands issued on 19 July 2013. It is noteworthy, however, that at no time prior to filing their cross summons did either Mr or Mrs Diagne assert that they had been misled by Mr Culmer. In particular, the notice of dispute served on the Bank by FOS described the dispute that had been notified to it in these terms: Dispute summary: The applicants' complaint relates to a default notice they have received from St George bank, regarding loan account XXXXXX. The applicants say that they are the proprietors of two successful restaurants and in the past 12 months they have been in dispute with the landlord of one of these restaurants. They own the other commercial property outright. The dispute is currently before the Administrative Decisions Tribunal. The applicants say that the drain on their financial resources have been considerable. The applicants say that they expect the matter to be settled shortly, and when it is, they will be able to bring the loan up to date.

Mr and Mrs Diagne 43Before addressing the issues in the case, it is necessary to say something about Mr and Mrs Diagne. 44Mr Diagne came across as an intelligent and articulate person. He said in evidence that, at the time he bought the Enmore property, he was naïve and ignorant of banking practices in Australia, that he did not appreciate that he could have negotiated with the Bank concerning the amount of the overdraft and that his English was poorer then than it is now. However, I think that evidence is likely to be exaggerated to some extent. The impression I gained was that Mr Diagne was reasonably sophisticated when it came to business matters and was able to look after his own interests. He had no difficulty in applying to a number of financial institutions for a loan to finance the acquisition of the Enmore property and it is apparent that he used the offers of loans from other banks as a means of negotiating more attractive terms from the Bank. Despite what he said in evidence, before applying for loans in respect of the Enmore property, he had some experience in obtaining a small overdraft from another bank and some form of commercial lease or loan from another financial institution. He was sophisticated enough to ask the Bank to put its offer in writing so that he could consider it; and he had run a successful business for a number of years. He also appears to have had no difficulty in arranging for Afrilanka's overdraft to be increased. It may be that Mr Diagne's English has improved over time. However, there is no evidence to suggest that his knowledge of English prevented him from understanding the nature and consequences of the transactions he was entering into. There are no significant written communications from Mr Diagne at the time he arranged the loans to buy the Enmore property, but his later communications, from late 2006 onwards, suggest that he had an excellent grasp of written English. 45Mrs Diagne swore an affidavit in the proceedings. Through much of the proceedings, she was assisted by an interpreter. When she came to give oral evidence, she said (through the interpreter) that she could read a little English but that she did not really understand written English. It transpired that, although she had been informed of the contents of her affidavit, it had not been translated for her. In those circumstances, I was not prepared to admit her affidavit and she was not cross-examined. She did, however, address the Court in English on the last day of the hearing. Although, on occasions, she was a little difficult to understand and although she lacked confidence in her ability to speak English, she had no difficulty in making the points that she wanted to make or in understanding what was said to her.

The claims based on representations 46The claims based on representations allegedly made by Mr Culmer are put in various ways. It is alleged that the Bank made false or misleading representations in contravention of s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). That section relevantly provides: (1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive. 47It is also alleged that the Bank engaged in misrepresentations at common law. Finally, it is alleged that the representations made by Mr Culmer and the detrimental reliance of Mr and Mrs Diagne gave rise to an estoppel. In each case, the factual basis for the claim is the same. It is alleged that Mr Culmer "misrepresented to [Mr and Mrs Diagne] the extent of the financial accommodation that the Defendants would be offered, leading [Mr and Mrs Diagne] to believe that the [Bank] would financially support renovations to the property to increase the number of tables in the restaurant if [Mr and Mrs Diagne] purchased the Enmore Property". As a consequence, it is alleged that Mr and Mrs Diagne have suffered loss because they have been unable to meet their financial obligations. In the case of the estoppel claim, the detriment they are alleged to have suffered is that they purchased the Enmore property and suffered losses from attempting to operate a restaurant there, including the inability to continue to operate the Kilimanjaro restaurant. 48In my opinion, these claims must fail for two reasons. 49First, I do not accept that Mr Culmer engaged in any misleading conduct. It is likely that he said to Mr Diagne words to the effect that the Bank wanted to assist him and Mrs Diagne. That was a natural thing for Mr Culmer to say, particularly when he knew that Mr Diagne had approached other Banks. Those words were true; and the Bank did assist Mr and Mrs Diagne by making the loans it did to them. It is also likely that Mr Diagne said that he wanted to borrow money to renovate the Enmore premises; and it is quite possible that Mr Culmer told Mr Diagne that it would be better first to process the loan to acquire the property. Again, that is precisely what happened. After the initial loan to purchase the Enmore property, the Bank lent the sum of $100,000 to be used to renovate the property. However, I do not accept that Mr Culmer said anything to Mr Diagne to suggest that the Bank would advance further money to enable him (or Afrilanka) to renovate the upstairs area of the property. There is no written evidence that Mr Diagne made a request for additional funds to renovate the upstairs area of the Enmore property. Nor is there any reason for him to have done so. He could have used the unused portion of the Master Lease Facility to renovate the upstairs area if that is what he really wanted to do. There is no evidence to suggest that the facility was inadequate for that purpose. Mr Diagne's evidence was that he already had enough tables and chairs to put in that area. It is obvious from photographs tendered by Mr Diagne that the upstairs area needed painting and some decorations. But there is no reason to think that the unused portion of the Master Lease Facility was inadequate for that purpose. 50If such a request had been made, the likelihood is that Mr Culmer would have recorded that request in a credit application. He recorded other requests for loans in credit applications, which were rejected, such as the request for a loan to assist with the immigration costs of two family friends who were migrating from Africa. Until these proceedings were commenced, there is no evidence that Mr Diagne ever complained in writing that the Bank had represented that it would advance additional money to enable Mr and Mrs Diagne to renovate the upstairs area. If there was any substance to the complaint, it would have been included in the complaint to FOS. However, it was not. 51Second, this aspect of the case proceeds on the basis that Mr and Mrs Diagne had not bought the Enmore premises at the time the representations on which they rely were made. That was plainly not the case. They had exchanged contracts before Mr Diagne ever met Mr Culmer. In those circumstances, it is very difficult to see what loss or detriment Mr and Mrs Diagne suffered as a consequence of the statements that Mr Culmer is alleged to have made. They were committed to the purchase of the Enmore property. It seems clear that they bought the property to open up a second restaurant. It is not suggested that they could have borrowed more from another financial institution than the Bank ultimately agreed to lend them. 52In the light of those conclusions, it is unnecessary to consider the Bank's limitation defence.

The Contracts Review Act claim 53Section 7(1) of the Contracts Review Act provides: 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. 54Section 6(2) of the Contracts Review Act provides: A person may not be granted relief under this Act in relation to a contract so far as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by the person or proposed to be carried on by the person, other than a farming undertaking (including, but not limited to, an agricultural, pastoral, horticultural, orcharding or viticultural undertaking) carried on by the person or proposed to be carried on by the person wholly or principally in New South Wales. 55Section 9 of the Contracts Review Act sets out the matters that the court is required to take into account in determining whether a contract is unjust in the circumstances relating to the contract at the time it was made. It is not necessary to set those matters out. In the present case, the particulars to para 38 of the Commercial List Cross Claim Statement filed by Mr and Mrs Diagne allege that the contracts relating to the purchase of the Enmore property and all subsequent facilities, variations and guarantees arising from the purchase of that property were unjust because:

The Bank failed to interview Mrs Diagne in relation to the proposed loans, variations of loans and facilities to ensure that she had a reasonable understanding of those loans and the consequences of a failure to meet repayment;
The Bank permitted Mr Diagne to witness Mrs Diagne's signature on all facilities documents with no Bank officer present;
The Bank failed to ensure that Mr and Mrs Diagne had independent legal and financial advice before signing each of the facilities documents;
The Bank incorporated onerous terms in the facilities documents - in particular, requiring Mr and Mrs Diagne to guarantee the debts of Afrilanka in circumstances where it already had a mortgage over the Enmore property and linking the mortgage over the South Coogee property to their business loans in circumstances where it was not necessary to do so;
There was a material inequality of bargaining power between the Bank and Mr and Mrs Diagne;
Mr and Mrs Diagne had little commercial experience and, having regard to their background, levels of education and limited English and consequently were not reasonably able to protect their interests;
The terms and conditions of the facilities were not explained to Mr and Mrs Diagne in an intelligible way by any person before they entered into the facilities. 56A number of these allegations are factually wrong. The critical documents that were signed by Mr and Mrs Diagne in relation to the purchase of the Enmore property were the Commercial Loan Facility letter dated 12 August 2005 (and signed by them on 17 August 2005), which covered the loan to buy the property, the loan to pay the GST amount and the overdraft of $45,000, and the mortgage of the Enmore property that was dated 22 August 2005. Mr Culmer witnessed Mr and Mrs Diagne's signatures on the Commercial Loan Facility and Mr Trayer witnessed Mr and Mrs Diagne's signatures on the mortgage and the certificates of independent legal advice and gave evidence to the effect that he explained the effect of both documents to them. That evidence was unchallenged. Mr and Mrs Diagne did not guarantee Afrilanka's obligations under the Master Lease Facility. They did guarantee the overdraft when it was transferred from them to Afrilanka. Their signatures on those guarantees were witnessed by Mr Diagne's aunt. However, their declarations that they had received independent legal advice were witnessed by a Justice of the Peace. More significantly, Mr and Mrs Diagne obtained independent financial advice from Ms Gough in relation to the guarantees. Finally, it is unclear what is meant by the allegation that the Bank linked the mortgage over the South Coogee property to Mr and Mrs Diagne's business loans. Mr and Mrs Diagne borrowed against the South Coogee property to pay the deposit in respect of the purchase of the Enmore property. However, the loans were not otherwise linked. 57There was a dispute concerning whether Mr Culmer explained the Commercial Loan Facility and mortgage in relation to the purchase of the Enmore property to Mrs Diagne. Mr Culmer said that he did. Mr Diagne gave evidence that Mr Culmer had never met Mrs Diagne. I prefer Mr Culmer's evidence on this point. Mr Diagne's evidence is inconsistent with the fact that Mr Culmer witnessed Mrs Diagne's signature on the Commercial Loan Facility. In any event, it is plain that Mr and Mrs Diagne both received independent legal advice on the Commercial Loan Facility and mortgage. 58In my opinion, there is no merit in the contention that the documents relating to loans advanced in connection with the purchase of the Enmore property and the business carried on at that property were unfair. 59As I have said, Mr and Mrs Diagne agreed to buy the Enmore property and were committed to establishing a restaurant on it before they approached the Bank to finance the acquisition of the property. They had considerable business experience in operating restaurants and had done so successfully. They received independent legal advice in relation to the relevant transactions. They were no worse off when the overdraft was transferred from them to Afrilanka. In any event, they plainly received independent financial advice in relation to the guarantees they gave at that time. In those circumstances, there is no basis for the contention that the agreements concerning the original loan and overdraft were unfair at the time they were entered into. 60The overdraft was increased and eventually a substantial part of it was replaced by a commercial loan. Mr and Mrs Diagne signed certificates on each occasion that they had received independent legal advice in relation to those transactions. There may be a question whether those certificates were accurate. However, in my opinion, the Bank was not required to go behind those certificates: see Provident Capital Ltd v Papa [2013] NSWCA 36; (2012) 84 NSWLR 231 at [114]. Mr Culmer had met with Mr and Mrs Diagne and witnessed their signatures on the original Commercial Loan Facility for the Enmore property. He believed that both were fluent in English as a result of that meeting. That was certainly true of Mr Diagne; and having regard to the submissions that Mrs Diagne made to me, it was a reasonable conclusion to reach in relation to Mrs Diagne. Consequently, the Bank had a reasonable basis for believing that Mr and Mrs Diagne understood the certificates they signed. The claim that the agreement by which the overdraft was increased was unfair appears to be based on a contention that the Bank should not have permitted the business carried on by Afrilanka to incur further debt, or at least should not have lent further money to Afrilanka if the price of doing so was guarantees from Mr and Mrs Diagne. But why that is so is unclear. Although the business was carried on by Afrilanka, it was effectively carried on for the benefit of Mr and Mrs Diagne. It was not unjust, in those circumstances, for the Bank to require Mr and Mrs Diagne to guarantee the debts of Afrilanka. They obtained financial advice on the initial guarantees they signed. They certified that they had received independent legal advice when they gave additional guarantees. There is no reason to believe that they did not understand the effect of those certificates. There is no reason to think that the Bank appreciated that Afrilanka was throwing good money after bad when it increased the overdraft. Indeed, Mr Diagne's principal complaint was that the Bank did not provide Afrilanka with sufficient working capital (and, in particular, a larger overdraft) to enable it to establish a successful restaurant at the Enmore premises. But at no stage did the Bank promise to advance more than it did. Consequently, it is difficult to see how it acted unjustly in not advancing more. 61Having regard to the conclusions I have reached, it is unnecessary to consider whether the operation of the Contracts Review Act is excluded by s 6(2). It is sufficient to observe that the contention faces very serious difficulties in light of the decision of the Full Federal Court in Quikfund (Australia) Pty Limited v Airmark Consolidators Pty Limited [2014] FCAFC 70. 62It follows that the claim based on the Contracts Review Act must fail.

The Yerkey v Jones claim 63The defence that arises from the High Court's decision in Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649 is available where a husband procures a wife to become surety for his debt. As the High Court explained in Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 at [31], in order to make out the defence, a wife must establish that she obtained no financial benefit from the guarantees she gave and must satisfy the following conditions: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her. The defence only applies insofar as Mrs Diagne guaranteed the debts of Mr Diagne or Afrilanka. It cannot apply to the loans made to Mrs Diagne herself. 64Mrs Diagne's claim does not satisfy these requirements. She was not a volunteer. She had an interest and worked in the business in respect of which the loans were made. There is no reason to think that Mrs Diagne did not understand the effect of the guarantees she gave. The Bank required Mrs Diagne to obtain a certificate from an independent accountant that the accountant had explained the guarantees to her, and that certificate was given. The Bank also required Mrs Diagne to sign certificates that she had received independent legal advice in relation to the subsequent guarantees she gave when the overdraft was increased and subsequently converted to a commercial loan. Mr and Mrs Diagne had previously obtained legal advice from Mr Trayer in relation to related transactions. There was no reason for the Bank to doubt the accuracy of the certificates that Mrs Diagne gave. Accordingly, her claim based on Yerkey v Jones must fail.

Negligence 65Broadly speaking, the negligence claim is put in two ways. First, it is alleged that the Bank owed Mr and Mrs Diagne a duty to "[p]rudently investigate the income, assets and liabilities of [Mr and Mrs Diagne] and the proposed business plan of [Mr and Mrs Diagne] in order to determine serviceability". Second, it is alleged that the Bank owed a duty "[t]o take reasonable remedial action when the loans fell into arrears, including investigating the causes of the arrears, working with [Mr and Mrs Diagne] to remedy the problems identified and continuing to monitor the ability of the borrowers and guarantors to adequately service the facilities". Included in that duty was a duty "to appropriately set and alter limits on overdraft facilities". 66It is not clear from the pleading how it is alleged that the Bank breached the first duty, although implicit in the allegation is that the Bank ought not to have made the loans it did. It appears that it is alleged that the Bank breached the second duty by reducing the overdraft without consultation, proper investigation or adequate notice. It is this second beach that is at the heart of Mr Diagne's complaint. 67The allegation that the Bank breached its duty of care in the first way that is alleged was supported by an expert report prepared by Mr John Brewster. Mr Brewster was a retired banker, who, for a large part of his career, had held senior credit and lending positions with Westpac Banking Corporation. Mr Brewster initially expressed the view that the loan to Mr and Mrs Diagne to buy the Enmore premises would not have been made by a responsible banker and that the Bank's delay in taking steps to recover the amount lent to it (thereby increasing the ultimate level of debt) was "well wide of acceptable banking standards". 68There are a number of difficulties with this claim. 69First, I do not accept that the Bank owed Mr and Mrs Diagne a duty of care to investigate their financial circumstances to determine whether the loan that was made was appropriate for them: see Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 at 107-108; Tomlin v Ford Credit Australia Ltd [2005] NSWSC 540. 70Second, there is a tension in Mr and Mrs Diagne's claim. Their real complaint is that the Bank failed to provide sufficient working capital to permit them to establish the business at the Enmore premises. Their complaint is not that the Bank lent them money in circumstances where it should not have done so. That is hardly surprising, given that they had already committed to buying the Enmore property before they approached the Bank for a loan. 71Third, the Bank filed an expert report from Mr Paul Goodman, which was critical of the conclusions reached by Mr Brewster. Mr Goodman concluded that the Bank "acted prudently in approving the original facility to Mr and Mrs Diagne to assist with the purchase of the Enmore property" and that it allowed them "more than sufficient time to rectify the situation". To his credit, after reading that report, Mr Brewster prepared a supplementary report that largely agreed with the conclusions reached by Mr Goodman. The areas of disagreement were minor. 72Fourth, it is difficult to see how the Bank could have done more than it did. The Bank provided Afrilanka with a commercial lease facility to permit it to renovate the Enmore property. When it became apparent that Mr and Mrs Diagne required more working capital, it adjusted the facilities to provide an increase in the overdraft. It permitted the overdraft to increase beyond its limit and replaced it with a commercial loan facility, leaving an overdraft limit of $20,000. Contrary to what is suggested in the Commercial List Cross Claim Statement and some of the evidence filed by Mr and Mrs Diagne, the overall result was that the Bank permitted Afrilanka's borrowings (leaving the Master Lease Facility aside) to increase to $120,000. There is no evidence that would support the conclusion that further borrowings would have permitted Mr and Mrs Diagne to trade out of their difficulties. 73In view of the conclusions I have reached, it is unnecessary to consider the Bank's limitation defence. The claim based on negligence must fail.

Breach of implied warranty of fitness for purpose 74The Commercial List Cross Claim Statement alleges that there was a warranty implied by s 12ED of the ASIC Act that the overdraft facilities would be fit for the purpose for which they were given, namely to assist in the smooth operation of the Lat-Dior African Eatery and the Kilimanjaro restaurant. Section 12ED(2) of the ASIC Act provides: [Where implied warranty exists] If: (a) a person supplies financial services to a consumer in the course of a business; and (b) the consumer, expressly or by implication, makes known to the person: (i) any particular purpose for which the services are required; or (ii) the result that he or she desires the services to achieve; there is an implied warranty that: (c) the services supplied under the contract for the supply of the services; and (d) any materials supplied in connection with those services; will be reasonably fit for that purpose or are of such a nature and quality that they might reasonably be expected to achieve that result, except if the circumstances show that the consumer does not rely, or that it is unreasonable for him or her to rely, on the person's skill or judgment. 75It is alleged that the warranty was breached by the reductions in the overdraft which were made "without consultation, proper investigation and inquiries by the [Bank] and without adequate notice" with the result that "the overdraft was insufficient and inadequate for the purpose, considering the expenses of a new business at the Enmore Property and on-going expenses at the Kilamanjaro [sic]". 76In my opinion, there is no merit in this claim and it contains a number of factual errors. First, the overdraft was not granted to assist with expenses at the Kilimanjaro restaurant. At the time the overdraft was granted, that restaurant was profitable and it was expected that profits from that restaurant would assist in funding the start up of the second restaurant. For reasons that are not explained in the evidence, it appears that unexpected difficulties arose at the Kilimanjaro restaurant. Second, the allegation overlooks the $100,000 commercial loan facility that was granted by the Bank to pay out the existing overdraft. Third, for the reasons I have given, it is not correct to say that the changes to the overdraft were made without adequate notice or consultation. 77These difficulties aside, there is a fundamental problem with the claim. The overdraft about which Mr and Mrs Diagne complain was granted to Afrilanka, not them. Although they guaranteed Afrilanka's obligations under the relevant agreements, Mr and Mrs Diagne were not a party to them. Consequently, any claim for breach of warranty is one that could only be brought by Afrilanka.

Orders 78It follows that the Bank is entitled to judgment for possession of the two properties and for the sum that it claims. There are two outstanding issues. One is costs. The other relates to post judgment interest. 79The Bank claims its costs on an indemnity basis. 80Clause 14.2 of the Commercial Loan Facility relevantly provides: You indemnify us against, and you must therefore pay us on demand for, liability, loss or costs (including consequential or economic loss) we suffer or incur: (a) if you default under an arrangement with us; or ... "Costs" is defined to include "charges and expenses; and costs, charges and expenses in connection with advisers (in the case of legal advisers, on a full indemnity basis or solicitor and own client basis, whichever is higher)". 81The overdraft facility and the commercial loan, which were guaranteed by Mr and Mrs Diagne, contain similar provisions. However, no similar provision is contained in the Portfolio Loan Facility. 82The court is given a discretion under s 98(1) of the Civil Procedure Act 2005 (NSW) to award costs on an indemnity basis. Where a contract provides for payment of costs on that basis, the court ordinarily exercises its costs discretion to give effect to that contractual right: see Rail Corporation NSW v Leduva Pty Ltd [2005] NSWSC 138 at [26]-[34] per Nicholas J; Kyabram Property Investments Pty Ltd v Murray [2006] NSWSC 54 at [17]-[18] per Campbell J; Boreland v Docker [2007] NSWSC 53 at [114]-[117] per White J; National Australia Bank Ltd v Chen-Conway [2008] NSWSC 485. The court, however, is not bound to do so and any costs order remains at the court's discretion: Abigroup Ltd v Sandtara Pty Ltd [2002] NSWCA 45 at [9] per Stein JA (with whom Giles JA and Young CJ in Eq agreed); Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 at [14] per Beazley JA (with whom Hodgson and Ipp JJA agreed). 83In this case, the costs incurred by the Bank, including the costs incurred in defending the claims made in the Commercial List Cross Claim Statement, were costs suffered by the Bank as a consequence of Mr and Mrs Diagne's defaults. There is no reason not to give effect to the relevant contractual indemnities. As I have said, no contractual indemnity was included in the Portfolio Loan Facility. However, few of the costs in the case related to the enforcement of that facility alone. Accordingly, in my opinion, it is appropriate to order that Mr and Mrs Diagne pay the Bank's costs on an indemnity basis. 84As to post-judgment interest, s 101 of the Civil Procedure Act provides that, unless the court orders otherwise, interest is payable on so much of the amount of a judgment as from time to time is unpaid. Interest is payable at the prescribed rate or such other rate as the court may order. In this case, the Bank seeks an order that Mr and Mrs Diagne pay interest on the judgment "at the prescribed rate or at various rates charged by the plaintiff to customers on like accounts (compounded monthly) from the date of judgment on so much of the money as is from time to time unpaid, whichever is the higher". 85In my opinion, it is not appropriate to make an order in those terms. It should be apparent on the face of the order at what rate post-judgment interest is payable. It is not appropriate to make an order that interest be payable at a rate that can only be determined by undertaking a factual enquiry. Nor is it appropriate to make an order that interest be payable at the higher of two rates that need to be ascertained. No submissions were made to the Court concerning an appropriate interest rate or whether this is an appropriate case in which to make an order under s 101. Consequently, in my opinion, no order should be made under s 101, with the result that post-judgment interest will run at the prescribed rate. 86As at the date of this judgment, the total amount owing by Mr and Mrs Diagne is $3,290,558.06. That amount has been calculated by taking the amount set out in the affidavit of debt sworn by Ms Lansom on 2 June 2014, which calculated interest up until 31 May 2014, and adding interest to that amount calculated from 31 May 2014 to the date of judgment at the relevant contractual rates. 87The orders of the Court, therefore, are: (1)The defendants give the plaintiff possession of all the land comprised in certificate of title folio identifier 2/1032744 being the land situated at and known as xxxx, Enmore in the State of New South Wales (Enmore Property); (2)The defendants give the plaintiff possession of all the land comprised in certificate of title folio identifier 9/248060 being the land situated at and known as xxxx, South Coogee in the State of New South Wales (South Coogee Property); (3)The plaintiff has leave to issue a writ of possession in respect of the Enmore Property. (4)The plaintiff has leave to issue a writ of possession in respect of the South Coogee Property. (5)A writ of possession be issued forthwith in respect of the Enmore Property. (6)A writ of possession be issued forthwith in respect of the South Coogee Property. (7)Judgment for the plaintiff against the first and second defendants for the sum of $3,290,558.06. (8)The cross-claimants' cross-claims are dismissed. (9)The defendants/cross-claimants pay the plaintiff's/cross-defendant's costs on an indemnity basis.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 23 June 2014

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