Westpac Banking Corporation v Paterson

background 9 The background to this appeal is long and complicated. The essential elements are as follows. 10 The respondent is the former wife of one David Colin Paterson ("Mr Paterson"). Mr Paterson has remarried. His wife is Tracey Coralie Paterson ("Mrs T Paterson"). 11 On 1 September 1993 Mr Paterson and Mrs T Paterson entered into a loan agreement ("the Loan Agreement") with the appellant ("Westpac"). The Loan Agreement provided that the security for the loan would include a registered mortgage given by Mr Paterson and the respondent over the property known as 22 Barclay Road, North Rocks ("the Property"). It appears that as a result of an order of the Family Court of Australia made following the breakdown of the marriage between the respondent and Mr Paterson, the respondent and her daughter were entitled to reside in the Property until the respondent's daughter attained the age of eighteen years. Thereafter the Property was to be sold and the proceeds of sale divided between the respondent and Mr Paterson. 12 The title to the Property was, as at 1 September 1993, encumbered by a mortgage to Barclays Australia (Finance) Limited ("Barclays"). On 9 September 1993 the respondent and Mr Paterson as mortgagors signed a mortgage over the Property in favour of Westpac ("the Mortgage"). On 6 October 1993 Westpac paid the sum of $176,000 to Barclays, received a discharge of the Barclays mortgage and debited the payout figure to the loan account opened pursuant to the Loan Agreement in the names of Mr Paterson and Mrs T Paterson. 13 On 17 March 1995 Westpac instituted proceedings in the Supreme Court of New South Wales ("the Supreme Court") against Mr Paterson and the respondent. In the proceeding Westpac claimed, in effect, that Mr Paterson and Mrs T Paterson had failed to make payments due under the Loan Agreement and that, as a consequence, Mr Paterson and the respondent were liable under the Mortgage for the whole of the moneys secured by the Mortgage. Westpac claimed an order for possession of the Property and an order that Mr Paterson and the respondent pay to Westpac the sum of $186,687.18. 14 On 21 April 1995 Mr Paterson and the respondent filed a cross-claim in the Supreme Court proceedings. The cross-claim pleaded that the respondent was under a special disability in dealing with Westpac which was or should have been evident to Westpac. The cross-claim further pleaded that Mr Paterson had ascendancy over the respondent by reason of their relationship of "ex-husband and ex-wife" in such a manner that her will was suborned in circumstances such that Westpac was liable for the undue influence of Mr Paterson over the respondent. The cross-claimants sought an order that the Mortgage be set aside. 15 By order dated 6 May 1996, Abadee J of the Supreme Court ordered that the Supreme Court proceeding be transferred to the Federal Court pursuant to the Jurisdiction of Courts (Cross-Vesting) Act 1987 (NSW). 16 On 16 August 1996 Mr Paterson and the respondent filed an amended cross‑claim. The amended cross-claim pleaded, in effect, that Australian Guarantee Corporation ("AGC") had engaged in misleading and deceptive conduct which had, in short, led Mr Paterson to decide to change his personal and corporate banker from Barclays to Westpac. The amended cross‑claim pleaded that further, or in the alternative, Westpac had procured the Mortgage by misleading and deceptive conduct, by economic duress, by undue influence and by unconscionable conduct. 17 It appears that the Court directed, perhaps implicitly, that Westpac's claim against Mr Paterson and the respondent and their cross-claim against Westpac be heard together. When the matter was called for hearing on 25 May 1998 the respondent appeared by counsel but Mr Paterson did not appear. Judgment was entered for Westpac against Mr Paterson and the cross‑claim, to the extent that it was brought by him, was dismissed. Further, a declaration was made that Westpac was entitled to possession of the Property "to the extent of Mr Paterson's interest in those premises". The proceeding so far as it concerned the respondent was adjourned to 30 November 1998 for hearing. 18 Following a two day hearing which commenced on 30 November 1998, the Court made orders requiring the filing of written submissions. Subsequently, the matter was re‑listed for oral submissions and on 26 February 1999 the Court allowed an application for the proceeding to be adjourned pending the delivery of judgment by the Full Court of this Court in a related matter. 19 The proceeding was re‑listed before the Court on 14 May 1999 when submissions were finalised. On 14 May 2001 the Court delivered judgment and the following orders were made by the learned primary judge: "THE COURT DECLARES THAT: 1. The mortgage and loan agreement in respect of 22 Barclay Road, North Rocks, New South Wales between the Applicant/Cross-Respondent and the Second Respondent/Cross-Claimant in this matter is void ab initio. THE COURT ORDERS THAT: 2. The Applicant/Cross-Respondent pay the costs of the Second Respondent/Cross‑Claimant."

reasons of the primary judge 20 The findings and conclusions of the primary judge are set out in the following paragraphs ([85]-[89]) which are the concluding paragraphs of Her Honour's reasons for judgment: "FINDINGS The Court finds that the bank's officers Mr Borg and Ms Joseph were aware that Jonnie and David Paterson were ex-spouses. They remarked that at the time of the mortgage transaction they thought this arrangement unusual. The bank made contact with David Paterson to arrange an appointment with Jonnie Paterson for the documents to be signed; David Paterson brought Jonnie Paterson to the appointment and remained in the room with her during the signing. The bank made no independent contact with Jonnie Paterson. They did not provide her with a copy of the relevant documents before the appointed meeting to sign them. The Court finds that the bank, on notice of the existence of an ambiguous and unusual relationship between the surety and beneficiary of the transaction, failed to assess the independence of the surety and to ensure to a reasonable degree that the surety was acting independently. There was no commercial reason for the bank to avoid this issue and it was unreasonable to do so. The Court accepts Jonnie Paterson's evidence that she was not aware of the consequences of the transaction and finds that it is inaccurate to characterise the signing meeting as simply a mortgage transaction because such a characterisation ignores the context in which the transaction was taking place; the refinancing of the home loan was part of a larger commercial scheme. The Court finds that Jonnie Paterson was unable to assess the business risks inherent in her signing as she was not informed as to the reasons for the refinancing transaction. The Court finds that she misunderstood the nature of the transaction, in particular the risks involved. Once the bank realised that the transaction was unusual (and it is conceded that this is so), they were, in the Court's view bound to ensure that Jonnie Paterson was dealt with at arms length from her ex-husband. The refinancing was of no benefit to the respondent. She did in fact, misunderstand the transaction by not being aware of its context or consequences. The bank was aware of her relationship with David Paterson and they were aware that they had no independent dealings with her. She was in the Court's view in a worse situation than if she had been still married to David Paterson. She demonstrated her "trust and confidence" in him by allowing him to deal with the bank in all respects in relation to the transaction. The bank even permitted him to be in the room while the officers gave an explanation of the documents and process. At no stage, and I so find, did the bank ever deal with Jonnie Paterson independently. They could not, in such circumstances, be said to discharge their obligation to ensure that she was a free and informed agent. This failure establishes the basis for a finding that Westpac's conduct in relation to Jonnie Paterson was unconscionable and the transaction upon which this application to the Court is made should be set aside ab initio by reason of that conduct."

grounds of appeal 21 The notice of appeal sets out the following grounds of appeal: "GROUNDS 2. Her Honour erred in holding that Ms Paterson was not aware of, or misunderstood the nature of, "the transaction", in that: (a) the relevant transaction was the entry into the Mortgage; (b) Ms Paterson did not misunderstand the nature of this transaction and her Honour did not so find. 3. Her Honour erred in holding that: (a) the Bank had an obligation to "ensure that [Ms Paterson] was a free and informed agent" (as distinct from an obligation not to take advantage of any special disability of Ms Paterson of which the Bank was aware); and (b) if the Bank had such an obligation, it failed to discharge that obligation. 4. Her Honour erred in holding that Ms Paterson's entry into [the] Mortgage constituted an unconscionable transaction liable to be set aside in equity. 5. Further and alternatively, her Honour erred in granting equitable relief in circumstances where the applicant was refusing to do equity. 6. Further her Honour erred in purporting to declare that the Loan Agreement was "void ab initio" in that Ms Paterson was not a party to the Loan Agreement and the validity of that agreement was not in issue between the Bank and Ms Paterson. 7. Further her Honour erred in purporting to declare that the Mortgage was "void ab initio" in that David Colin Paterson was also a party to the Mortgage and his challenge to the validity of the Mortgage failed at an earlier point in the proceedings."

consideration 22 At trial only the claim based on the alleged unconscionability of Westpac's conduct was pressed. As it was not contended that either Mr Paterson or Westpac exercised undue influence over the respondent, there is no need for consideration to be given in these reasons for judgment to the principles which are applicable in cases of undue influence. 23 In Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474 ("Amadio") Deane J, with whom Wilson J agreed (and with whose conclusion Mason J agreed), outlined the circumstances in which the equitable jurisdiction to relieve against unconscionability arises. His Honour stated:- "The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or 'unconscientious' that he procure, or accept, the weaker party's assent to the impugned transaction in the circumstances in which he procured or accepted it." His Honour went on:- "Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable: 'the burthen of shewing the fairness of the transaction is thrown on the person who seeks to obtain the benefit of the contract' (see per Lord Hatherley, O'Rorke v Bolingbroke (1877) 2 App Cas 814 at 823; Fry v Lane (1888) 40 Ch D 312 at 322; Blomley v Ryan. (1956) 99 CLR 362 at 428-429)." 24 As Mason J pointed out in Amadio at 462, the type of "special disadvantage" which may justify equitable relief on the ground of unconscionable conduct is one which "seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party." 25 In Garcia v National Australia Bank Limited (1998) 194 CLR 395 ("Garcia") Gaudron, McHugh, Gummow and Hayne JJ at [27]-[30] of their joint judgment rejected the contention that Amadio had subsumed the rules applied in Yerkey v Jones (1939) 63 CLR 649. At [31]-[33] their Honours observed: "The principles applied in Yerkey v Jones do not depend upon the creditor having, at the time the guarantee is taken, notice of some unconscionable dealing between the husband as borrower and the wife as surety. 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. It holds, in what we have called the first kind of case, that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (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. To hold, as Yerkey v Jones did, that in those circumstances the enforcement of the guarantee would be unconscionable represents no departure from accepted principle. Rather, it 'conforms to the fundamental principle according to which equity acts, namely that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct'. It will be seen that the analysis of the second kind of case identified in Yerkey v Jones is not one which depends upon any presumption of undue influence by the husband over the wife. As we have said, undue influence is dealt with separately and differently. Nor does the analysis depend upon identifying the husband as acting as agent for the creditor in procuring the wife's agreement to the transaction. Rather, it depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction, and the creditor being taken to have appreciated that because of the trust and confidence between surety and debtor the surety may well receive from the debtor no sufficient explanation of the transaction's purport and effect. To enforce the transaction against a mistaken volunteer when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable." 26 It can be seen from the above passage from the joint judgment in Garcia that it is not necessary in this case for the Court to reach a decision as to whether the principles in Yerkey v Jones could have application in the context of a relationship between former spouses where, as may be assumed to be the case here, the former wife is financially dependent on her former husband and retains trust and confidence in him, at least so far as financial matters are concerned. 27 First, the respondent was not a volunteer in respect of the Mortgage. The funds advanced pursuant to the Loan Agreement, which required the Mortgage as security, were used to discharge the liability of Mr Paterson and the respondent to Barclays under an earlier mortgage registered on the title to the Property. 28 Secondly, the evidence does not support a finding that the respondent was mistaken about "the purport and effect" of the Mortgage. Her evidence at trial was that she understood at the time that she signed the Mortgage that she was signing a document which made the Property security for a loan to her former husband and his wife and that if her former husband and his wife did not repay the loan, Westpac could take the Property. 29 Thirdly, officers of Westpac who were present when the respondent signed the Mortgage gave evidence, which was not challenged to any substantial degree, that one of the officers (Mrs Grace Joseph) explained the nature and effect of the Mortgage to the respondent and suggested to her that she obtain independent legal advice. The evidence of the officers, which is supported by a contemporaneous Westpac file note, was that the respondent replied to the effect that she had obtained legal advice when she had signed similar documents with Barclays and that there was no need for her to do so again. The officers were not directly challenged with respect to this aspect of their evidence. 30 Robert John Stewart ("Mr Stewart"), solicitor, gave affidavit evidence, confirmed by a contemporaneous file note, that on 13 December 1991 he had personally attended on the respondent for the purpose of giving her independent legal advice about a mortgage. Annexed to Mr Stewart's affidavit is a copy of the Barclays mortgage. Mr Stewart deposed to that mortgage, together with his certificate of independent advice, providing the principal bases for his discussion with, and advice to, the respondent. Mr Stewart's file note records that he explained to the respondent that "if her husband's business goes bad or he can't pay off the mortgage she could lose the house and everything". The file note further records that "she trusts him and understands what would happen if the mortgage couldn't be repaid." Although the primary judge made no express findings in relation to Mr Stewart's evidence, the evidence was unchallenged (he was not required for cross‑examination) and her Honour may be assumed to have accepted it. 31 The respondent gave affidavit evidence that there was no mention of solicitors in the conversation that she had with bank officers at the time that she signed the Mortgage. However, no explanation was advanced on behalf of the respondent as to how the Westpac officers were able to record that she had said that she had obtained legal advice before signing the Barclays mortgage unless she had in fact done so. In our view, it may again be assumed that the primary judge accepted that the respondent told the officers of Westpac who were present when she signed the mortgage that she had received legal advice concerning the Barclays mortgage and that she did not wish to receive further legal advice. 32 Having regard to the matters referred to in [29]-[31] this was not a case in which the creditor did not itself explain the relevant transaction to the surety and did not know whether a third party had done so. 33 For the above reasons, no further consideration need be given to the principles in Yerkey v Jones and further consideration of this matter can be restricted to the principles enunciated in Amadio. 34 Was the respondent under a "special disadvantage" as that expression was used in Amadio, in dealing with Westpac? As Deane J pointed out in Amadio at 474-475: "The adverse circumstances which may constitute a special disability for the purposes of the principles relating to relief against unconscionable dealing may take a wide variety of forms and are not susceptible to being comprehensively catalogues [sic]. In Blomley v Ryan, Fullagar J listed some examples of such disability: 'poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary.' As Fullagar J remarked, the common characteristic of such adverse circumstances 'seems to be that they have the effect of placing one party at a serious disadvantage vis-ŕ-vis the other'." (citation omitted). 35 In our view it is open to serious doubt whether the respondent was under a "special disadvantage" in the relevant sense in dealing with Westpac with respect to the Mortgage. As she frankly acknowledged, she understood at the time that she signed the Mortgage the nature and effect of the Mortgage. Moreover, she had on an earlier occasion received independent legal advice in respect of a comparable mortgage. 36 However, there is no need for this Court to resolve the issue of whether the respondent was relevantly under a special disadvantage. There was no evidence before the primary judge to show that any special disability that she may have been under was "sufficiently evident to [Westpac] to make it prima facie unfair or 'unconscientious' that [Westpac] procure, or accept, [the respondent's] assent to [the Mortgage] in the circumstances in which [Westpac] procured or accepted it" (see Amadio per Deane J at 474). The officers of Westpac were aware that the respondent was Mr Paterson's former wife. However, when it was suggested to her by an officer of Westpac, before she signed the Mortgage, that she should obtain independent legal advice, she declined to do so on the basis that she had obtained such advice before signing the Barclays mortgage. The officers of the Bank knew that the respondent's liability to Westpac under the Mortgage was similar in nature to, and would replace, her existing liability to Barclays. 37 Even if it were the case that it was prima facie unfair or "unconscientious" for Westpac to accept the respondent's assent to the Mortgage, a further issue was required to be considered. That issue was whether any relief should have been conditional upon the respondent doing equity? As Deane J pointed out in Amadio at 481: "Where an order is made setting aside the whole of a transaction on the ground of unconscionable dealing, the order will, in an appropriate case, be made conditional upon the party obtaining relief doing equity." 38 The primary judge gave no consideration to whether in this case the order made should have been conditional upon the respondent doing equity. Her Honour's declaration had the effect that no moneys had at any time been owing by the respondent to Westpac under the Mortgage and that the Mortgage was not enforceable to the extent of the respondent's interest in the Property. Yet the Barclays mortgage was discharged by funds advanced by Westpac and secured by the Mortgage. 39 As the High Court pointed out in Vadasz v Pioneer Concrete (SA) Pty Limited (1995) 184 CLR 102 at 114: "…unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party obtaining an unwarranted benefit at the expense of the other." 40 In Maguire v Makaronis (1997) 188 CLR 449, a case in which the High Court found that a mortgage was liable to be set aside by reason of the mortgagee's breach of their fiduciary duty to the mortgagors, Brennan CJ, Gaudron, McHugh, and Gummow JJ at 475 observed: "Here, given the undisclosed role of the appellants as mortgagee, the breach of duty went to the identity of the parties having the benefit under the mortgage both of the security and of the covenants to pay money. To set aside the mortgage purely in its operation as a security, without conditioning that upon repayment, would be to reform the transaction in an impermissible fashion. It would be to strike down the security interest without ensuring repayment of that which was paid in return for it. The respondents would be left with the fruits of the transaction of which they complain, whereas their equity was to have the whole transaction rescinded and, so far as possible, the parties remitted to their original position." 41 In this case the Mortgage formed part of a complex refinancing scheme. As the hearing proceeded in the absence of the respondent, we did not receive the benefit of full submissions on the question of what might have been involved in the circumstances in the respondent's doing equity. For this reason, and because we are persuaded, for the reason identified in [36], that the appeal should be allowed and the orders identified above made in lieu of the orders made by her Honour, we do not consider it appropriate to give further consideration to this issue. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Court.

Counsel for the Appellant: Ms R S McColl SC with Mr T G R Parker

Solicitor for the Appellant: Allens Arthur Robinson

Date of Hearing: 5 November 2001

Date of Judgment: 5 November 2001