ABL Nominees Pty Ltd v Mackenzie (No 2)
[2014] VSC 529
•22 October 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2009 4756
| ABL NOMINEES PTY LTD (ACN 106 756 521) In its corporate capacity and as Trustee for the Lighthouse Warehouse Trust No. 8 (Environinvest Finance) AND OTHERS (according to the schedule attached) | Plaintiffs |
| v | |
| CAROLINE MACKENZIE | Defendant |
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JUDGE: | DERHAM AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 8 & 13 October 2014 |
DATE OF JUDGMENT: | 22 October 2014 |
CASE MAY BE CITED AS: | ABL Nominees Pty Ltd v MacKenzie (No. 2) |
MEDIUM NEUTRAL CITATION: | [2014] VSC 529 |
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PRACTICE AND PROCEDURE – Application to amend pleadings – New defences sought to be raised – Principles relevant to an application to amend – Test for determining whether amendment futile – Late application to amend to include defence of unconscionable conduct by lender – Garcia v National Australia Bank Ltd (1998) 194 CLR 395 – Whether pleading discloses a viable defence – Application allowed.
PRACTICE AND PROCEDURE – Whether waiver of client legal privilege by defendant - Application to subpoena files of solicitor formerly acting for defendant to allow testing of the accuracy and credit of defendant’s evidence - Application to test evidence of applicant to amend defence by cross-examination – Whether in the interests of the just, efficient, timely and cost effective resolution of the proceeding – Application refused.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J Delany QC with Dr O. Bigos | Allens Linklaters |
| For the Defendant | Mr RM Garrett QC with T.G. Moloney | Foundation Legal |
HIS HONOUR:
Introduction
By summons filed on 7 October 2014 the defendant (Caroline or the defendant) applies for leave to file and serve a Further Amended Defence. In the related proceeding between the plaintiff and Euan Pescott (Euan) (proceeding S CI 2009 4804) the same application is made by a summons filed the same day. I will deal with both applications together in these reasons.
The plaintiffs’ claims arise under loan agreements entered into in June 1999 (in the case of Euan) and June 2000 (in the case of Caroline) between the first plaintiff’s ultimate assignor, which in Caroline’s case is Blackburne Pty Ltd (Blackburne), and in Euan’s case is BEP Finance Pty Ltd (BEP). The loan agreements were assigned to Environinvest Limited, the fourth plaintiff (EIL) and then to Primary Yield Finance Pty Ltd, the third plaintiff (PYF) and from PYF to the first plaintiff (ABL).
The substantial defence in the existing Third Further Amended Defence (after denials of the assignments alleged) is that under a put and call option between the defendant and EIL—the defendant was granted a put option, and EIL a call option—under which EIL could be required to buy certain property, or could call on the defendant to sell that property (presumably the woodlots acquired with the loan moneys) and in consideration pay out the loan. The defendants in each proceeding allege that on 20 September 2007 they, via Roger Pescott (Roger), exercised the put option and in consequence the loan agreements were discharged.
On 17 September 2014 I dismissed an application by each of Caroline and Euan to file a further amended defence.[1] Those applications concerned defences based primarily upon the principles in Commercial Bank of Australia Ltd v Amadio.[2]
[1]ABL Nominees Pty Ltd v MacKenzie [2014] VSC 460, and ABL Nominees Pty Ltd v Pescott [2014] VSC 461.
[2](1983) 151 CLR 447, 462 (‘Amadio’).
This time the defendants in each proceeding have filed further affidavit material and seek to rely upon related, but different, defences which include that the loan agreements are voidable under the principles referred to in Garcia v National Australia Bank Ltd,[3] and the authorities referred to in that case, and as well that the loan agreement should be set aside because of:
[3](1998) 194 CLR 395.
(a) a breach of fiduciary duty by Roger; and
(b) misleading or deceptive conduct engaged in by Roger,
in each case acting on behalf of the original lender and for the benefit of EIL.
In this way it is said that the defendant does not seek to repeat the application to amend the defence made earlier.
The plaintiffs response was to contend that the recent affidavits of the defendants in support of the application for leave to amend gave rise to a waiver of client legal privilege under s 122 of the Evidence Act2008[4] and that before granting any amendment they should have the opportunity to subpoena the files of the solicitors previously acting so as to be in a position to test, by cross-examination of the defendants, the evidence now given to explain why the application to amend is made at such a late stage.
[4]Mann v Carnell (1999) 201 CLR 1, [29]; see s 122 of the Evidence Act 2008.
For the reasons which follow I have concluded that it is appropriate to allow the amendments, and to refuse the plaintiffs leave to subpoena the files of the solicitors previously acting and to refuse leave to cross-examine the defendants on their affidavits.
Amendments Sought
The defences in Caroline’s proposed Further Amended Defence are put in the following way:
19. Further and alternatively:
(a)The loan by Blackburne to the Defendant was voidable by reason of the matters thereinafter set forth; and
(b)Each other plaintiff has no better claim than Blackburne has by reason that the assignment by Blackburne and each assignment thereafter was subject to the Defendant’s rights to avoid the loan.
20.The Defendant’s execution of the Loan Agreement was procured by Roger Pescott (“Roger”):
(a) For and on behalf of Blackburne;
(b)To permit him to effectuate the purchase of the Property for the benefit of Environinvest Ltd.
21. At all material times, Roger was;
(a)A director of each of the second, third and fourth plaintiffs and of Environinvest Ltd;
(b)The husband of the Defendant;
(c)The financial advisor to the Defendant; and
(d)A person in whom the Defendant placed complete trust and confidence.
22. At the time of execution of the Loan Agreement the Defendant:
(a) Was inexperienced in matters of finance and business;
(b)Was entirely reliant on Roger for guidance in matters of finance and business;
(c)Was occupied with the upbringing of her children, and recovering from the birth of her second child by caesarean section on 22 May 2000;
(d)Did not understand the purport or effect of the Loan Agreement;
(e)Had not had the benefit of legal advice in relation to the Loan agreement;
(f)Was unable to service the loan contemplated by the Loan Agreement;
(g)Had no need for the Property.
23.Further, the Defendant’s execution of the Loan Agreement was procured by conduct on the part of Roger which was misleading and deceptive in that Roger did not disclose to the Defendant the nature and extent of the obligations imposed by the Loan Agreement and represented to her that the execution of the Loan Agreement was routine and unremarkable, when that was not the case.
Particulars
Roger asked the Defendant from time to time to sign documents saying that they were “for the businesses” or the like, meaning that they were administrative or routine in kind. No explanation was given as to the nature or effect of the Loan Agreement before the Defendant was asked to sign it.
24.Roger, and through him Blackburne, engaged in the said conduct in trade and commerce and thereby contravened s.9 of the Fair Trading Act 1999 (Vic) and s.52 of the Trade Practices Act 1974 (Cth).
25.In reliance upon the said conduct the Defendant signed the Loan Agreement.
26.Further, at all material times Roger was the Defendant’s financial adviser and the Defendant deferred to Roger’s expertise in financial and investment matters.
27.In the circumstances Roger owed fiduciary obligations to the Defendant to act only in her interest and not in the interest of any other in relation to financial and investment matters.
28.In procuring the Defendant to sign the Loan Agreement on behalf of Blackburne and purchase the Products with the moneys thereby lent Roger breached his fiduciary obligations to the Defendant.
Particulars
In procuring the Defendant to enter into the Loan Agreement acted in the interest of himself, Blackburn and Environinvest and not in the interest of the Defendant.
29.Blackburne knew, by reason of the hereinbefore pleaded conduct of Roger, of the said misleading and deceptive conduct, abuse of trust and confidence, and breach of fiduciary duty.
30.In the premises the Loan Agreement was voidable and has been avoided, alternatively is hereby avoided.
31.The Defendant has received no benefit in respect of the Loan Agreement.
COUNTERCLAIM
By way of counterclaim the Defendant refers to and repeats the admissions and positive averments in her Defence.
The difference between Caroline’s proposed further amended defence and Euan’s lies primarily in the pleading of the circumstances at the time of execution of the loan agreement (paragraph 22 in the above quote), although there are other minor differences (for example, that Euan is Roger’s brother). In Euan’s case it is also paragraph 22, which reads:
22. At the time of execution of the Loan Agreement the Defendant:
(a) [was] profoundly deaf;
(b) was inexperienced in matters of finance and business;
(c)was entirely reliant on Roger Pescott for guidance in matters of finance and business;
(d)did not understand the purport or effect of the Loan Agreement;
(e)had not had the benefit of legal advice in relation to the Loan Agreement;
(f)was unable to service the loan contemplated by the Loan Agreement;
(g)had no need for the financial products which Roger Pescott intended purchasing with moneys lent pursuant to the Loan Agreement.
The Proceeding History
The proceedings were commenced in 2009 and the statements of claim to which the proposed further amended defences will plead was filed on 1 September 2011. On 18 February 2014, Associate Justice Daly made pre-trial directions, and the trial was fixed for 20 October 2014 on an estimate of 3-4 days. The proceedings are to be heard at the same time.[5] Trial directions have apparently been complied with and the Court Book compiled and filed.
[5]The orders to this effect were made by Daly AsJ on 11 May 2010. That order relates also to other proceedings.
Although the proceeding is listed for trial on 20 October 2014, my enquiries of the listing Associate Judge indicate that it is by no means certain that it will be reached on that day, or the next few days. That depends on whether there is a judge available.
Affidavits in Support
Caroline has filed an affidavit sworn on 7 October 2014. That affidavit refers to her earlier affidavit sworn on 8 September 2014. Her earlier affidavit adduced the following evidence:[6]
[6]The following summary includes some matters not referred to in my reasons for judgment concerning the application that was dismissed on 17 September 2014: see ABL Nominees Pty Ltd v MacKenzie [2014] VSC 460 at [8]. The reason for that is the focus of the defences has changed.
(a) She retained her current solicitors on 22 August 2014. Before that she represented herself with the assistance of her husband, Roger Pescott. Before that she was represented by Millens, solicitors, until June 2013. She ceased using those solicitors because of a lack of funds;
(b) She had instructed Millens at some unspecified time that her defence was that she did not understand the loan agreement or its consequences and that she had been hospitalised after the caesarean birth of her second child shortly before the date of the loan agreement. Apart from a defence filed in September 2010 when Aldgate Lawyers were acting, none of these instructions are reflected in any defence filed by Millens;
(c) The reason for seeking the advice of her current solicitors was that her husband had, on her behalf, sought certain documents from the solicitors for ABL relevant to the due diligence undertaken by it before the assignment of the loan, and other loans, from EIL to ABL. The response was that those documents were not relevant to the issues in the proceeding. On discovering that ABL’s response to the request was correct, the defendant then realised that the pleading did not raise the matters that she had thought she had instructed were to be raised, in particular, the Amadio defence;
(d) She confirms the facts relevant to her earlier proposed further amended defence. Those matters include:
(i) she did not understand the loan agreement or its consequences;
(ii) that just before the date of the loan agreement (3 June 2000) she had been hospitalised with the birth by caesarean section of her second son from which she took two months to recover, and she was completely absorbed with the care of her newborn son and her other child, then 21 months old, during the period in question;
(iii) she always followed her husband’s advice and direction in relation to all legal and financial matters. She signed whatever he asked her to sign and did not ask him to explain except in a general sense. She trusted him completely to act in her best interests;
(iv)in 2000 she had a vague understanding that Environinvest , a company of which her husband was a director, was expanding and it was to its advantage to have her purchase allotments of trees in order to assist its expansion;
(v) she never appreciated that this assistance was to involve her borrowing over $750,000 for which she was to be personally liable and it was never explained to her that she was to be personally liable to repay the loan from her own funds;
(vi)she now understands that she should have had independent advice about her obligations and entitlements in reference to any such agreement. She was not aware of this entitlement until a few weeks before she swore the affidavit;
(e) She says she does not recall signing the loan agreement or ever having her signature witnessed by Carol McErvale, who was her house cleaner. But she concedes, in effect, that she may have signed it. She recognises her signature and her husband’s handwriting on the loan application form and the witness to her signature on that form. She says that the information in the loan application form of her financial position is incorrect and that she never understood that she was to borrow over $750,000.00 for which she was to be personally liable; and
(f) In essence she says that she has no financial qualifications or experience in financial or legal matters and has never operated a business or been self-employed. From the time she left school to the time she was married she was never financially independent. She gave evidence about her upbringing and education so as to establish her lack of financial acumen and experience.
Caroline’s affidavit of 7 October 2014 introduces further evidence to the following effect:
(a) She produced 5 defences filed, obtained by a search of the Court file. She has no recollection of having seen any of them. The first 3 are signed by one J Richardson. She has never met or heard of that person. She has never given instructions ‘in reference to any document filed or the conduct of the proceedings’.[7] Apart from giving instructions to Tony Melville of Aldgate Lawyers and Michelle Sharp of Counsel, she never discussed the ‘equitable defences’ with anyone at Millens. She was not even aware that Aldgate Lawyers had taken over the defence of the proceeding from Millens. Nor was she aware that shortly after the September 2010 defence was filed the matter was taken over again by Millens. She was not aware of it at the time and gave no instructions about it;
[7]Affidavit of Caroline MacKenzie sworn 7 October 2014 at [8].
(b) She is now aware of the defence raising equitable defences that was filed by Aldgate Lawyers in September 2010. She had never seen that defence, nor the loan agreement, the lease agreement, the ‘put and call agreement’ or the loan application until she started having conferences with her present solicitors;
(c) She is now aware that by a Second Further Amended Defence filed 17 October 2011, the ‘equitable defences’ in the September 2010 defences were deleted. She never instructed Millens or anyone else to remove these defences. She never discussed this with Millens and never instructed it to be filed. No one has ever explained to her why they were removed. They were struck out without her knowledge when Millens were retained and in funds; and
(d) In the 17 October 2011 Second Further Amended Defence the defence arising out of the exercise of the put and call option was also removed. She never instructed her solicitors to do this.
Roger Pescott also swore an affidavit in support of the earlier application.[8] That affidavit was also sworn in support of the application made in the other proceeding between ABL and Euan (S CI 2009 4804). In that affidavit:
[8]Affidavit sworn 9 September 2014.
(a) He refers to a letter that he drew for his wife to send to ABL’s solicitors in July 2014 seeking discovery of documents relating to the due diligence conducted by ABL before acquiring the loans from EIL, and the response received on 30 July 2014;
(b) He says that the investment in the EIL projects by both Caroline and Euan were ultimately intended to be available to be purchased by EIL under the put and call option agreements. At the time of the loans to Caroline and Euan, respectively, the Pescott family owned 100% of EIL and the lenders (in the case of this proceeding that was Blackburne and in the case of Euan’s proceeding it is BEP Finance);
(c) He says that at the time the loans were made he was running all of these entities and organised the purchase of some forestry scheme allotments both in his own name, in the name of a family trust and then the names of Euan and Caroline;
(d) He did not see any risk associated with these loans because of the ability to discharge the liabilities by executing the call option;
(e) He says that in 2007 he executed the options on behalf of Caroline and Euan as a sale of EIL was then proposed;
(f) He says that Caroline and Euan were oblivious to the way EIL administered the loan and EIL’s subsequent failure to apply the sale proceeds to their loans. EIL paid the instalments due under the loans and attended to the administration of them; and
(g) He confirms Caroline’s lack of financial acumen and her medical condition at the time of the execution of the loan agreement, and that he never gave her the opportunity to seek advice as he was not concerned about her personal liability given the put and call option.
Euan also swore an affidavit on 7 October 2014. He too referred to his earlier affidavit sworn on 9 September 2014.[9] Much of what he says is a reflection of what Caroline deposes. The following is noted:
[9]Referred to in ABL Nominees Pty Ltd v Pescott [2014] VSC 461 at [8].
(a) He received a letter from the plaintiff dated 11 December 2008 which demanded payment of the outstanding debt due under the loan agreement. He sent it to Roger who, together with his accountant Jason Bresnehan responded by fax dated 22 December 2008 (directed to the plaintiff) that the demand was an error as EIL’s records will show the loan was repaid in full in July 2007;
(b) He was served with the writ on 3 March 2009 and immediately spoke to Roger who said he would organise his solicitor Ross Millen to take care of it;
(c) On 6 March 2009 Roger told him to send a fax to Mr Allan Friday of PPB (accountants) formally authorising Jason Bresnehan to act on his behalf with regard to a matter raised in a letter dated 25 February 2009. That letter is not in evidence but it is assumed to relate to the claim by the plaintiff against Euan. Euan says that he knew that Jason Bresnehan was Roger’s financial advisor but had not met him. He did not ask why Roger requested an authority nor about the effect of the letter referred to. He simply did what Roger asked and trusted him to pursue his best interest;
(d) Roger told him that Ross Millen would be his solicitor and would defend the case. But Euan did not choose Millens. He subsequently received a letter from Millens dated 16 March 2009, curiously marked to Euan’s attention but addressed to Roger, containing a disclosure statement and costs agreement. He did not sign or return the costs agreement. He told Roger he had received it but otherwise did nothing about it;
(e) On 2 April 2009 Roger told him to send a fax to Ross Millen confirming his instructions to act on his behalf and to take instructions from Roger and Jason Bresnehan. He did not ask why this authority was needed and Roger gave no explanation. He simply trusted Roger. Because he is profoundly deaf he did not have the skill or experience to act for himself;
(f) He attended the offices of Millens on one occasion only at Roger’s direction to sign documents in an unrelated family matter. He received emails from Michelles Groves, who worked at Millens, advising him when the matter was in Court, but these emails never requested information or sought instructions. He received emails from Ross Millens which enclosed bills which he paid at Roger’s direction;
(g) He never spoke at length or in detail about the matter with any lawyers other than Tony Melville from Aldgate Lawyers on one or two occasions and with Noel Magee QC on one occasion in chambers. Because of his deafness he could not follow this conference properly. He depends upon lip reading. Roger spoke for him;
(h) He did not have any face-to-face conferences with anyone at Millens. At no stage was he able to speak directly with a solicitor or ask questions or give instructions. He never saw or discussed the loan agreement, the application for the loan or any other documentation until he was shown them in the course of conferences with his present solicitors;
(i) The only way he can effectively communicate is in writing or in face-to-face conversation where he depends upon lip reading. Where a conversation is about unfamiliar matters using unusual words he is in great difficulty because he needs to lip read;
(j) In the short conferences with Tony Melville, Roger was present and spoke on his behalf. It was only in August this year that for the first time any solicitor or barrister has dealt clearly with him about the facts, allegations and documents in this proceeding. He has never discussed the removal of the defences previously pleaded (the Amadio defences) with anyone, including Roger;
(k) He received correspondence from Aldgate lawyers in 2010 including a letter giving advice and seeking instructions; and
(l) He never saw a defence or draft defence reflecting what Roger had instructed on his behalf to Tony Melville or Noel Magee QC, and he never discussed his disability with anyone at Millens. He has never heard of Jamie Richardson who signed the first three defences. He was never consulted about any defence and never gave any instructions about filing further defences. He never instructed Millens to strike out the Amadio defence from his Second Further Amended Defence filed on 17 October 2011.
Applicable law
Amendment[10]
[10]The following summary is taken largely from my reasons in ABL Nominees Pty Ltd v MacKenzie [2014] VSC 460.
The power to amend in r 36.01 (1) of the Supreme Court (General Civil Procedure) Rules 2005 (Rules) authorises the Court to order that a party have leave to amend any pleading for the purpose of determining the real question in controversy between the parties to any proceeding, correcting any defect or error or avoiding multiplicity of proceedings.
It is common ground that an amendment which is futile because it is obviously bad in law will not be allowed: Commonwealth v Verwayen.[11] Similarly, if a proposed pleading would be liable to be struck out if it had been contained in an original pleading, either because the pleading is bad in law or is defective as a pleading, then leave to file the proposed pleading will not be allowed: Horton v Jones (No.2);[12] Gimson v Victorian WorkCover Authority.[13] The Court, on this type of application, will not engage in an examination of the merits of the case foreshadowed by the proposed amendment, but where that amendment introduces a patently hopeless issue for determination then its inclusion will be futile and that will be a significant, and probably decisive, matter in the exercise of the Court’s discretion.[14]
[11](1990) 170 CLR 394, 456.
[12](1939) 39 SR NSW 305, 310.
[13][1995] 1 VR 209, 215.
[14]Matthews v SPI Electricity Pty Ltd (Ruling No 6) [2012] VSC 70, [33].
As J Forrest J observed in Matthews v SPI Electricity Pty Ltd (Ruling No 6),[15] having regard to the terms of the Civil Procedure Act 2010 (CPA), the test is best expressed in the words of s 63 of that Act: if the amendment has no real prospect of success at trial then that would be a highly relevant factor in the exercise of the discretion to refuse the application.[16]
[15][2012] VSC 70, [34].
[16]As to the test see Lysaght Building Solutions Pty Ltd v Blanalko Pty Ltd [2013] VSCA 158 at [29] per Warren CJ and Nettle JA (Neave JA agreeing).
In Namberry Craft Pty Ltd v Watson,[17] Vickery J summarised the relevant factors to be considered, as a result of the decision in AON Risk Services Australia v Australian National University,[18] as follows:
[17][2011] VSC 136.
[18](2009) 239 CLR 175 (‘AON’).
[T]here are to be limits placed upon re-pleading. The High Court in AON referred to a range of other considerations which need to be weighed in the balance in the exercise of the discretion to grant an amendment to a pleading. The High Court made reference to the following factors:
(a)Whether there will be substantial delay caused by the amendment;
(b)The extent of wasted costs that will be incurred;
(c)Whether there is an irreparable element of unfair prejudice caused by the amendment, arising, for example, by inconvenience and stress caused to individuals or inordinate pressures placed upon corporations, which cannot be adequately compensated for, whatever costs may be awarded;
(d)Concerns of case management arising from the stage in the proceeding when the amendment is sought, including the fact that the time of the court is a publicly funded resource, and whether the grant of the amendment will result in inefficiencies arising from the vacation or adjournment of trials;
(e)Whether the grant of the amendment will lessen public confidence in the judicial system; and
(f)Whether a satisfactory explanation has been given for seeking the amendment at the stage when it is sought.[19]
[19]Ibid [38]. Equuscorp Pty Ltd and Sintoff Pty Ltd v Acehand Pty Ltd & Ors [2010] VSC 89, [19].
This list of factors is not exhaustive. It is made against the background of the earlier decision of the High Court in Queensland v JL Holdings Pty Ltd,[20] and the authorities that preceded it, including the famous case of Cropper v Smith,[21] where the liberal approach to the amendment of pleadings finds its lead in the dissenting judgment of Bowen LJ.
[20](1997) 189 CLR 146.
[21](1884) 26 Ch D 700.
On the other hand, pleadings are not an end in themselves. They are a means of ensuring that real issues of controversy are raised for determination in a way that is procedurally fair, both to a plaintiff and a defendant. This allows claims and defences to be clearly articulated, granting parties an opportunity to present their case properly prepared, on clear notice of allegations and defences raised in the proceedings. On this basis, the authorities clearly establish that, absent extraordinary circumstances, leave to amend will be granted.[22]
[22]ACN 074 971 109 & Anor v The National Mutual Life Association of Australasia Ltd, [2010] VSC 186, [28].
The New Defences
Mr Garrett QC explained the logic of the new defences proposed as follows:
(a) Whether the assignments to the plaintiff are legal or equitable, they are subject to the ‘equities’ having priority over the right of the plaintiff as assignee. The ‘equities’ to which an assignment will be subject is, in the case of the assignment of a chose in action, given a wide meaning so that the assignee can be in no better position than the assignor was prior to the assignment;[23]
[23]Meagher Gummow & Lehane’s Equity, Doctrines and Remedies, 4th Ed. Paragraphs 6-490 to 6-505; and Property Law Act 1958, s 134.
(b) Roger owed fiduciary duties to Caroline and Euan. He was the financial advisor to them both. They reposed trust and confidence in him and relied on him utterly for advice, guidance and protection.[24] They had no experience in such matters, no opportunity to obtain independent advice and no ability to service the loan;
[24]Commonwealth Bank of Australia v Smith [1991] 42 FCR 390.
(c) Roger had a manifest conflict of interest and duty, or duty and duty. Interest in the advancement of EIL and its business, and duty to protect the interests of the defendant; alternatively, duty to EIL and its businesses and duty to protect the interests of the defendants;
(d) The transactions were misrepresented by Roger to the defendants. He told them there was no risk to them and they would be making no payments under the loan agreements, which would all be met by EIL;
(e) Roger knew that neither Caroline nor Euan had any independent advice about the proposed loan. He also knew they had no significant financial or business experience and that they did not have the means to service the loans. Indeed they were never intended to do so;
(f) The loans and related transactions were entered into for the benefit of EIL and its related companies, and Roger Pescott, and not in the interest of each of the defendants. This put the defendants in the position of a volunteers, receiving no benefit from the loans and somewhat akin to the role of a surety; and
(g) Neither Caroline nor Euan had any need for the investment.
This brief summary is, Mr Garrett QC contended, sufficient to show that the loans were vulnerable to be set aside on three grounds. First, misrepresentation. Secondly, abuse of trust, or as it is sometimes called the Garcia grounds. Thirdly, breach of fiduciary duty. Each ground considered independently would suffice to justify an application to set aside the transaction. Together, it was submitted, they gave rise to a very strong case.
The principles to be extracted from Garcia[25] are summarised in the following passages from the reasons of Gaudron, McHugh, Gummow and Hayne JJ:
[25](1998) 194 CLR 395.
[31] 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.
[32] 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".33
[33] 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.
[34] We acknowledge that the statement that enforcement of the transaction would be "unconscionable" is to characterise the result rather than to identify the reasoning that leads to the application of that description. But that the description of "unconscionable" can and should be applied in these circumstances is supported by reference to other circumstances in which that description has been applied. (footnotes omitted)
The unconscionability relied on by the defendants is that described by the plurality in the quotation above as the second kind of case, the first kind being one of undue influence. The added component in this case is that it is alleged that Roger acted, in effect, as agent of the lender and in the interest of EIL, although that may be alleged as much for the purpose of showing that the defendants were in the position of volunteers.
At the time that it was sought to amend the defences to include the Amadio defence the position was that the right of the defendants to relief was not articulated or sufficiently developed factually to warrant the amendments being allowed. The position now is different. It is now alleged that Roger was acting for and on behalf of the lender and for the benefit of EIL. The lender in each case was controlled by Roger. So too was EIL. When they executed the loan agreements, the defendants were both inexperienced and entirely reliant upon Roger for guidance in such matters.
Further, the execution was procured by the misrepresentation that there was no personal financial risk or other consequence for the defendants as a result of signing the loan agreements, because, it was said, the defendants would never be personally liable to make any repayments of capital or interest: the loan was to be serviced by EIL. The lender knew, by reason of Roger’s involvement, that each of these matters was false (unless of course the put and call option were validly exercised). The defendants say that they executed the loan agreements in reliance on the misrepresentations made by Roger.
On the other hand, the plaintiffs contended that Garcia, and indeed Yerkey v Jones, are both guarantee cases. No authority was advanced that would extend the principles to a case where a wife and brother receive the benefit of loan moneys, which is the case here.
The answer to that, at the level of an application to amend, is the same as the point put in Garcia and addressed in the High Court. First, at the factual level, namely who is volunteer, one of the issues in Garcia concerned whether the wife had benefited from the moneys that had been advanced (and were secured by her guarantee and mortgage) because the wife was a director and shareholder of the company through which the husband ran the business. That was determined at factual level by the primary Judge’s finding that in reality she received no benefit at all; she was a volunteer.[26] It is the ‘volunteer’ aspect of the matter that is critical, not that the defendants are not sureties. Further, this is a matter that would need to be pleaded in answer to throw up the issue for determination, including whether to do equity the defendants must themselves give credit for any benefit they received.
[26]Garcia at [43].
Then the plaintiffs submitted that it is not clear that the claim of a breach of fiduciary duty is applicable here because it is not clear that Roger had a conflict. The answer to that at this stage is that it is arguable on the facts that he was procuring the transaction for his purposes, and his duty was not to use his wife or his brother's position in order to advance his own interest. He was, at the same time as he advanced his own interest or the interest of EIL, dealing with the defendants’ financial interests, by implication giving them advice, and his duty was to look only to their interests.
The plaintiffs then threw up the answer that the claim of misleading or deceptive conduct is undoubtedly extinguished by the expiry of the limitation period. However, the High Court pointed out in Wardley Australia Ltd v Western Australia[27] that merely entering into a contract, even an unsatisfactory contract, on the basis of misrepresentation is not to sustain loss. The loss comes subsequently or may come subsequently. Where the loss is a contingent loss or liability, as may be the case here, the time of accrual of the cause of action is when the payment is required to be made or the loss otherwise actually crystallises. In a very clear case, the loss may be suffered when the unfavourable contract is entered into, but that is a matter to be established on the facts. And that is why the Court said that these limitation points are not to be taken at an interlocutory stage unless they are abundantly clear.[28]
[27](1992) 175 CLR 514.
[28]Wardley Australia Ltd v Western Australia, (1992) 175 CLR 514.
Timing of the Application
The factors relevant to the exercise of the discretion include whether a proper explanation has been proffered by the applicant for amendment and whether the proposed amendments will cause prejudice which cannot be met in some way.
There are a number of differences between the circumstances considered in my previous reason for refusing leave to the defendants to amend their defences to include the Amadio defence, and the circumstances before the Court on this occasion:
(a) Although it was clear that Roger had arranged the legal representation for the defendants, it was not claimed that the instructions given to the previous lawyers had not been independently obtained;
(b) Apart from the occasional conversation with a solicitor and a conference with Noel Magee QC and Michelle Sharp in 2000, there were no other conferences of significance;
(c) At none of the conferences were the documents gone into nor were there instructions sought; and
(d) This shows that the defendants had not had a reasonable opportunity to put on a proper defence.
It was a part of the material before the Court on the last occasion that there had been a previous pleading of the Amadio defence which had been abandoned. It is now clear that at the time of that application the defendants were not even aware that that defence had been raised and abandoned. They did not have in their possession the previous defences and had never been shown them until they were produced by the plaintiffs.
On the last occasion it was also at the forefront of the reasons for refusing leave to amend, that the amendments as pleaded were futile. On this occasion the position is different. The bases for the defences are clearly arguable. The considerations to which I have referred deriving from the decision in AON need to be balanced against the very important consideration of the nature and importance of the amendments sought to be made and the explanation given for seeking the amendments at such a late stage.[29]
[29]See the observations of the plurality in Aon (2009) 239 CLR 175, [102].
It was submitted that the other factors to which I have referred (taken from the decision of Vickery J in Namberry),[30] in particular whether the grant of the amendment will lessen public confidence in the judicial system or result in inefficiencies arising from the vacation of the trial date, are not applicable in this case. In my view that is correct. If there is a risk of a lessening of public confidence in the judicial system in this case, it is equally a consequence of the amendments sought not being made as it is a consequence of making the amendments. There is now no disruption to the listing of cases and no resultant inefficiency, save for the fact that this quite old proceeding will not be tried for a little while yet.
[30][2011] VSC 136, [38].
Another factor is the extent of the waste of costs. The costs that have been incurred in making application to amend will inevitably have to be paid by the defendants. There will be some further costs involved in providing further discovery by both parties in each proceeding. But balanced against the nature and importance of the amendments to the defendants’ cases it has to be said that the balance weighs in favour of allowing the amendments, even at this late stage.
It was conceded by the plaintiffs that the application to amend, and the cross application to subpoena the files of the lawyers previously acting for the defendants and to cross-examine the defendants (to which I refer below), must lead to the trial date being vacated. That consequence seems to me to be inevitable.
ABL had previously given notice[31] that in the event that the previous Amended Defences were allowed, not only will it need to plead in response, but it will require substantial discovery of materials relevant to the circumstances (including the financial circumstances) then underpinning the disability alleged.
[31]By letter dated 12 September 2014.
This is likely to be the case with respect to the current proposed Amended Defences, and will give rise to some delays and costs. I found in the previous application that the delay and further costs incurred would cause irreparable, unfair prejudice to ABL, having particular regard to a number of factors that I then listed.[32]
[32]ABL Nominees Pty Ltd v MacKenzie [2014] VSC 460, [40].
Having regard to the fact, however, that there is an arguable defence that the defendants desire to raise, the balancing of the interests of the plaintiff and the interest of justice to the defendants, leads me to conclude that it is appropriate to allow the amendments.
It is a matter of some significance to the prejudice that the plaintiffs might be thought to suffer that the defendants concede that it is their onus to establish an equity: a sufficient equity to warrant the Court setting aside or reforming the loan agreements. That involves establishing, amongst other things, that they are volunteers. If they cannot produce their tax and other records to show they received no or little benefit, then they risk failing to establish that they were volunteers.[33] If on the basis of the evidence adduced by the defendants at trial there is a significant doubt about whether they obtained financial benefits from the transaction, then they will fail. Moreover, they have to persuade the Court of their lack of knowledge and understanding of the transaction, and the absence of benefit.
[33]Transcript, 13 October 2014, p. 144.
The defendants in each proceeding submitted therefore that there is no great prejudice or disadvantage confronting the plaintiffs if they cannot, by reason of the elapse of time since 2000, get tax records and other documents that might show tax benefits received or the interests the defendants may have had in the enterprise operated by EIL.
Further, in order to reduce the prejudice to the plaintiffs I propose that hereafter the proceeding will be under judicial management in the Commercial Court so as to limit the delays and the costs occasioned by delay.
Application to Cross-Examine
Mr Delany QC, who appeared with Dr Bigos for the plaintiffs, submitted that the recent affidavits of the defendants give rise to a waiver of client legal privilege. The plaintiff wishes to subpoena the legal representatives previously engaged by the defendants so as to test the veracity of the evidence now given as to their ignorance of the prior steps in the proceeding. The purpose of the subpoenas would then be to enable cross-examination of the defendants in determining whether it is appropriate for these amendments to be made.
Applicable Principles
The cross-examination of deponents of affidavits in interlocutory applications is regulated by r 40.04 of the Rules. I had occasion to consider the cases dealing with this Rule in Matthews v SPI Electricity Pty Ltd & Ors (No 6)[34] and I will not repeat all that I said there.
[34][2013]VSC 422 at [23]-[29].
An examination of the authorities[35] shows that the variety of circumstances in which it may be appropriate to allow cross‑examination in interlocutory applications varies according to the nature of the application and the facts of the case. The overriding principle is that of procedural fairness. In Victoria there is a tendency to view cross-examination in these applications with scepticism. There are, however, a number of factors that have been found relevant to granting leave to cross-examine, as follows:
[35]Palmer Tube Mills (Aust) Pty Ltd v Semi [1998] 4 VR 439; Scanlon v American Cigarette Company (Overseas) Pty Ltd(No 1) (1987) VR 261; Friends of Hinchenbrook Society Inc v Minister for Environment (No 1) (1996) 69 FCR 1; Wu v Avin Operations Pty Ltd (No 3) [2006] FCA 1321; Talacko v Talacko (No 2) (2009) 25 VR 613; Yunghanns v Elfic Pty Ltd (2000) 1 VR 92; Dale v Clayton Utz [2012] VSC 577.
(a) Where the credit of the witness is important to resolving the interlocutory application;[36]
[36]Scanlon (1987) VR 261, 273; Palmer Tube Mills [1998] 4 VR 439, 448; Dale v Clayton Utz [2012] VSC 577, [88]–[89].
(b) The interlocutory application requires the establishment of material facts;[37]
(c) There is a relevant factual dispute which requires cross‑examination for its resolution;[38] and
(d) The interlocutory application is unusual and it is difficult to know what issues will eventually be relevant.[39]
[37]Scanlon (1987) VR 261, 272–3; Palmer Tube Mills [1998] 4 VR 439, 448.
[38]Dale v Clayton Utz [2012] VSC 577, [79], [83] and [92].
[39]Talacko v Talacko (No 2) (2009) 25 VR 613, 617 [15].
There are, of course, factors that will exclude or limit cross‑examination, including:
(a) That the application is not made bona fide to test an issue of material fact on the interlocutory application, but rather to engage in a rehearsal of issues relevant to the trial;[40]
[40]Scanlon (1987) VR 261, 273.
(b) The extent to which the pressure of the business of the Court permits cross-examination;[41]
[41]Talacko v Talacko(No 2) (2009) 25 VR 613, 617 [16].
(c) The factors referred by Warren J (as she then was) in Yunghanns v Elfic Pty Ltd,[42] that is:
[42](2000) 1 VR 92, particularly at [18] (‘Yunghanns’).
(vii) insofar as there are inconsistencies in the evidence, that they are appropriate for submission;
(viii) insofar as there is an allegation of recent invention, this also is appropriate for submissions;
(ix) it is undesirable except in special compelling circumstances for a court to permit a party to have the opportunity at an interlocutory stage to cross-examine an opposing party upon the issue of fact that goes to the core of the proceeding. This would enable a dress rehearsal of a vital component of evidence to be ventilated at trial; and
(x) that the Court would not be assisted by the cross-examination.
Consideration
The plaintiffs’ Counsel, Mr Delany QC, contended that his client should have the opportunity to test all the evidence advanced in support of the present application to amend and, after subpoenaing the solicitors files, have an argument about waiver of privilege and to what it extended and, in effect, then have a mini trial at which each of Caroline and Euan are cross-examined. He pointed to the factors relevant to whether cross-examination should be allowed, including that-
(a) The application requires the establishment of material facts; and
(b) The credit of the defendants is important to resolving the application.
Mr Garrett QC submitted that:
(a) The matters the subject of the proposed cross-examination will encompass the issues to be explored at trial, and explored with the benefit of all the discovery that will have to be made by reference to the new defences;
(b) The credit of the defendants is not at this stage critical to the resolution of interlocutory application. There can be no real doubt that the defendants did not know of their equitable rights before very recently;
(c) There is no easy way to limit the issues in any cross-examination to one or two discrete matters relevant to the application to amend the defences;
(d) The whole investigation of the matter would take days, and that would be a disproportionate use of court resources; and an unfair one because it will entail, in effect, a pretty thorough cross-examination on the interlocutory application ahead of what will then be a second cross-examination at trial of much the same issues. That gives rise to real unfairness; and
(e) In any event, whether there is a waiver of client legal privilege arising out of the affidavits of Caroline and Euan is a matter independent from the question of whether leave to amend should be granted. Whether there is a waiver depends upon whether there is inconsistency of the kind identified by the High Court in Mann v Carnell.[43] It would be wrong to assume that every document that a solicitor has on its file is one that the plaintiff is entitled to inspect.
[43](1999) 201 CLR 1 at [29]; see s 122 of the Evidence Act 2008.
In a broad sense the greatest objection to the course the plaintiffs seek to take is that it would mean there had to be a trial before the trial of the proceeding, involving a significant delay whilst subpoenas were issued and returned, the files were inspected by the lawyers for the defendants, argument over the waiver of privilege, followed by cross-examination of the defendants concerning their basis and reasons for the defences now sought to be raised, and their explanation for why they were not previously raised. That in my opinion is a most undesirable course to follow and is contrary to the overarching purpose in s 7 of the Civil Procedure Act2010 of facilitating the just, efficient, timely and cost-effective resolution of the real issue in dispute.
The issues the subject of this mini-trial, and therefore the application for leave to cross-examine on this interlocutory application, involved a significant overlap with the issues the subject of the proposed amendment. That is, the cross-examination would go to the very issues of fact that the amendments would raise for trial, and thus go to the core of the proposed defences. This would enable a dress rehearsal of a vital component of evidence to be ventilated at trial if the amendments are allowed. Indeed that was the purpose of the plaintiffs’ application because they identified inconsistencies in the evidence of the defendants in support of the new defences.[44] That, however, is a most unproductive use of resources and it would be better simply to allow the amendments, and have the proceeding managed carefully to trial.
[44]Mr Delany QC identified a number of inconsistences in the defendants’ evidence. I have taken them into account in my assessment of where the balance lies in relation to the application for leave to defend, but I have not dealt with them in these reasons as they will be issues at trial.
Conclusion
I have therefore concluded that:
(a) The amendments sought by Caroline and Euan should be allowed; and
(b) The plaintiffs’ application for leave to subpoena the files of the solicitors previously acting and to cross-examine the defendants on their affidavits should be refused.
It is now necessary to vacate the trial. The matter will be the subject of directions and then be referred to the Commercial Court for management to trial.
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SCHEDULE OF PARTIES
| S CI 2009 04756 | |
| BETWEEN: | |
| ABL NOMINEES PTY LTD (ACN 106 756 521) (in its capacity as Trustee of the Lighthouse Warehouse Trust No 8 (Environinvest Finance)) | First Plaintiff |
| BLACKBURNE PTY LTD (ACN 071 416 870) (in liquidation) | Second Plaintiff |
| PRIMARY YIELD FINANCE PTY LTD (ACN 110 168 833) (in liquidation) (receivers and managers appointed) | Third Plaintiff |
| ENVIRONINVEST LIMITED (ACN 080 743 791) (in liquidation) (receivers and managers appointed) | Fourth Plaintiff |
| - and - | |
| CAROLINE MACKENZIE | Defendant |
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