Australia and New Zealand Banking Group Ltd v Dzienciol
[2001] WASC 305
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD -v- MOSZKO MEJER DZIENCIOL by his guardian ad litem PHILLIP DZIENCIOL & ORS [2001] WASC 305
CORAM: McLURE J
HEARD: 20-28 JUNE 2001
DELIVERED : 9 NOVEMBER 2001
FILE NO/S: CIV 2448 of 1992
BETWEEN: AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD (005 357 522)
Plaintiff
AND
MOSZKO MEJER DZIENCIOL by his guardian ad litem PHILLIP DZIENCIOL
First DefendantPHILLIP DZIENCIOL as representative of the estate of the late LEAH DZIENCIOL
Second DefendantDKD HOLDINGS PTY LTD
Third Defendant
Catchwords:
Claim for possession of land pursuant to mortgages - Whether mortgagee engaged in unconscionable dealing - Whether a special disability known to the mortgagee - Whether substantive unconscionability when mortgagors also
principal debtors - The Garcia principle - Relationship with the doctrine of survivorship - Nature and extent of duty of disclosure in equity, at law, and pursuant to the Trade Practices Act - Whether claims statute barred
Legislation:
Trade Practices Act 1974, s 52, s 80, s 87
Transfer of Land Act 1893, s 116
Limitation Act, s 38(1)(v), s 40
Supreme Court Rules
Result:
Plaintiff's claim successful
Defendants' counterclaim dismissed
Category: B
Representation:
Counsel:
Plaintiff: Mr C J L Pullin QC & Ms K F Banks-Smith
First Defendant : Mr P G McGowan
Second Defendant : Mr P G McGowan
Third Defendant : Mr P G McGowan
Solicitors:
Plaintiff: Freehills
First Defendant : Solomon Brothers
Second Defendant : Solomon Brothers
Third Defendant : Solomon Brothers
Case(s) referred to in judgment(s):
Adenam v Buise [1984] WAR 61
Bank of South Australia v Ferguson (1998) 72 ALJR 551
Blomley v Ryan (1956) 99 CLR 362
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Bridgewater v Leahy (1998) 194 CLR 457
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Commercial Bank of Australia Ltd v Amadio (1982) 151 CLR 447
Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84
Darley Main Colliery Co v Mitchell (1886) 11 App Cas 127
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Fraser v NRMA Holdings Ltd (1995) 55 FCR 452
Fry v Lane (1888) 40 Ch D 312
Garcia v National Australia Bank Ltd (1998) 194 CLR 395
Garner v Wingrove (1905) 2 Ch 233
Gregg v Tasmanian Trustees Ltd (1997) 143 ALR 328
Hawkins v Clayton (1988) 164 CLR 539
ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248
King v Coupland [1981] Qd R 121
Kirby v Leather [1965] 2 QB 367
Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458
Lord Abergavenny's Case (6 Co. Rep 78(b); 77 ER 373)
Maguire v Makaronis (1997) 188 CLR 449
Morgan v Banning (1999) 20 WAR 474
Multi Group Distribution Services Pty Ltd v TNT Australia Pty Ltd [2001] FCA 226
Page v Commonwealth Bank of Australia, unreported; CA NSW; CA40746 of 1994; 6 October 1995
Perre & Ors v Apand Pty Ltd (1999) 198 CLR 180
Petelin v Cullen (1975) 132 CLR 355
Purnell v Roche (1927) 2 Ch 142
Ralik Pty Ltd v Commonwealth Bank of Australia, unreported; NSW SCt; 14 August 1990
Ratcliffe v VS & B Border Homes Ltd (1987) 9 NSWLR 390
Re Allingham; Allingham v Allingham [1932] VLR 469
Rhone‑Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477
Sent v Jet Corporation of Australia Ltd (1986) 160 CLR 540
Smith v Town & Country Bank and Ors, unreported; FCt SCt of WA; Library No 970716; 18 December 1997
Stone James v Pioneer Concrete (WA) Pty Ltd [1985] WAR 233
Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514
Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97
Wright v Gibbons (1948) 78 CLR 313
Yerkey v Jones (1939) 63 CLR 649
Case(s) also cited:
Alati v Kruger (1955) 94 CLR 216
Alec Lobb Ltd v Total Oil GB Ltd [1983] 1 All ER 944
Antonovic v Volker (1986) 7 NSWLR 151
ANZ Banking Group v Barry [1992] 2 Qd R 12
Armstrong v Commonwealth Bank of Australia [1999] NSWSC 588
Australia & New Zealand Banking Group Pty Ltd v Petrik [1996] 2 VR 638
Barclays Bank v O'Brien [1993] QB 109
Beneficial Finance Corporation v Karavas (1991) 23 NSWLR 256
Bosnjak v Farrow Mortgage Services Pty Ltd (1993) ASC 56-225
Brighton v Hollingdale [1965] 1 All ER 540
Bylander v Multilink [2001] NSWCA 53
Cockerill v Westpac Banking Corporation (1996) 142 ALR 227
Commonwealth Bank of Australia v Khouri [1998] VSC 128
Cranfield Pty Ltd v Commonwealth Bank [1998] VSC 140
Dobbs v National Bank of Australasia (1935) 53 CLR 643
Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218
Familiar Pty Ltd v Samarkos (1994) 115 FLR 443
Guthrie v ANZ Banking Corporation [1989] NSW ConvR 55,463
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83
James v Australia & New Zealand Banking Group Ltd (1986) 64 ALR 347
Kimberley NZI Finance v Torero Pty Ltd (1989) ATPR (Digest) 46,054
Leister Permanent Building Society v Shearly [1951] ChD 90
Lenin v Australian Bank Ltd, unreported; SCt of NSW; 21 June 1991
McLaughlin v Daily Telegraph Newspaper Co Ltd (1904) 1 CLR 243
Morlend Finance Corp (Vic) Pty Ltd v Luke [1991] ASC 56-095
Nolan v Westpac Banking Corporation (1989) 51 SASR 496
Penny Nominees Pty Ltd v Fountain [No 3] [1991] NSW Conv R 55-561
Re Shannon's Transfer [1967] TAS SR 245
Smith v Elders Rural Finance Ltd (1996) 41 NSWLR 296
Taylor v Johnson (1983) 151 CLR 422
Teachers Health Investments Pty Ltd v Wynne (1996) ASC 56-356
Tepco v Water Board [2001] HCA 19
Warburton v Whiteley (1989) NSW ConvR 58,283
Westwill Pty Ltd v Heath (1989) 52 SASR 461
INDEX
Introduction................................................................................................... 6
The Bank's Claim and Counterclaim............................................................... 7
Mr and Mrs Dzienciol's Defence and Counterclaim....................................... 12
Background - Mr and Mrs Dzienciol and Family and the Company................ 20
Background - The Bank and Its Officers........................................................ 22
Mr and Mrs Dzienciol and the Bank - 1983 to December 1988....................... 24
The Residential Mortgage Transaction.......................................................... 28
The Bentley Tavern Transaction................................................................... 30
January 1990 - 1992..................................................................................... 46
The Medical Evidence.................................................................................. 55
The Factual Basis for the Expert Opinions..................................................... 70
Evidence of Others Who Dealt with Mr Dzienciol......................................... 79
The Bank's Claims........................................................................................ 87
Unconscionable Conduct - Legal Principles................................................... 89
The GarciaPrinciple.................................................................................... 93
The Equitable Principle and the Doctrine of Survivorship.............................. 94
Unconscionable Conduct - Issues and Findings - Mr Dzienciol - Wellington Street Mortgage.................................................................................................................... 95
(i) Special Disability.................................................................................. 95
(ii) Bank's Knowledge.............................................................................. 113
(iii) Whether Transaction Fair, Just and Reasonable.................................. 114
Unconscionable Conduct - Residential Mortgage - Mr Dzienciol.................. 122
Unconscionable Conduct - Findings - Mrs Dzienciol................................... 124
Relief for Unconscionable Conduct............................................................. 127
Contract..................................................................................................... 130
Negligence................................................................................................. 131
Trade Practices Act.................................................................................... 132
Limitation - Contract, Tort and Trade Practices Act..................................... 134
Conclusion................................................................................................. 138
McLURE J:
Introduction
The plaintiff bank ("Bank") is seeking possession of the property at 403 Wellington Street, Perth pursuant to its registered mortgage E256675 ("Wellington Street Mortgage"), possession of the property at Unit 1, 470 Crawford Road, Dianella pursuant to its registered mortgage E002700 ("Residential Mortgage") and judgment for the sum of approximately $2,376,135 which the Bank says is secured by both the Wellington Street Mortgage and the Residential Mortgage.
At the relevant times, Mr Moszko Dzienciol and his wife Mrs Leah Dzienciol were the registered proprietors as joint tenants of the property at 403 Wellington Street, Perth (the "Wellington Street premises") and Unit 1, 470 Crawford Road, Dianella (the "residential premises").
The Residential Mortgage was signed by Mr and Mrs Dzienciol on 12 January 1989. The Wellington Street Mortgage was signed by Mr and Mrs Dzienciol on 5 December 1989. The Wellington Street Mortgage was provided to the Bank to secure a loan of $650,000 from the Bank to Mr and Mrs Dzienciol to assist in the purchase by a partnership (which included Mr and Mrs Dzienciol and the third defendant) of the Bentley Tavern.
Mr Dzienciol suffers from Alzheimer's disease and appears in these proceedings as first defendant by his eldest son and guardian, Mr Phillip Dzienciol ("Phillip"). Mrs Dzienciol died in July 2000. Phillip is now the second defendant in this action as the representative of the estate of his mother.
Mr Dzienciol was born in Poland on 14 July 1914. At the time he signed the Residential Mortgage he was 74 years old and he was 75 when he signed the Wellington Street Mortgage. Mrs Dzienciol was born in Russia on 27 March 1921. At the time she signed the Residential Mortgage she was 67 years old and was 68 when she signed the Wellington Street Mortgage.
The third defendant, DKD Holdings Pty Ltd ("the Company") was registered on 17 March 1982. Mr Dzienciol was a director of the Company from 18 March 1982 until 21 July 1991. Mrs Dzienciol was a director of the Company from 21 July 1991 (the date her husband ceased to be a director) until 21 July 2000.
The Company has three issued shares. Mr Dzienciol, Mr Bruce Allan Kennedy and another of Mr and Mrs Dzienciol's sons, Bray Dzienciol ("Bray"), each hold one share. At all material times the Company was the trustee of the Pelco Unit Trust trading as Pells Surplus Stores. The business of Pells Surplus Stores was at all material times carried on in Western Australia at the Wellington Street premises.
Mr and Mrs Dzienciol and the Company were customers of the Bank from approximately 1982 until at least 1992 when these proceedings commenced. At all material times the accounts were held at the Bank's Town Hall branch. From September 1983, Mr Raymond Kensitt, a senior officer of the Bank, was primarily responsible for the accounts of Mr and Mrs Dzienciol and the Company. He was assisted for part of that time by Mr Ryan.
Mr Dzienciol was diagnosed with Alzheimer's disease in January 1992. The defendants allege that Mr Dzienciol was, to the Bank's knowledge, suffering from Alzheimer's disease at the time of the grant of the Residential Mortgage and the Wellington Street Mortgage in 1989. The defendants also allege that the Bank was in possession of information which should have been disclosed to Mr and Mrs Dzienciol.
The first and second defendants resist the Bank's claim on the grounds that the Wellington Street Mortgage and the Residential Mortgage were obtained in circumstances which were unconscionable and rendered the Mortgages void and counterclaim against the Bank for breach of contract, negligence and for misleading and deceptive conduct in breach of s 52 of the Trade Practices Act.
The Bank's Claim and Counterclaim
In its statement of claim the Bank seeks judgment for moneys said to be due and owing by the first and second defendants and an order for possession of the Wellington Street premises. The Bank's money claim rests on two separate albeit related legal bases. The first is the personal covenants in the Wellington Street Mortgage. The second is an oral Loan Agreement made in November 1989 between the Bank and Mr and Mrs Dzienciol pursuant to which the Bank advanced the sum of $650,000 to Mr and Mrs Dzienciol to assist in the purchase of the Bentley Tavern ("the Loan Agreement").
It is not in dispute that the moneys secured by the Wellington Street Mortgage include:
(a)all moneys and the amount or balance which would for the time being be owing or unpaid by Mr and Mrs Dzienciol to the Bank in respect of:
(i)all loans, advances, credits or banking accommodation already, now or hereafter advanced, paid, created or given by the Bank to, for or on account or at the request of Mr and Mrs Dzienciol;
(ii)any indebtedness of Mr and Mrs Dzienciol on any account whatsoever;
(b)all commissions, stamp and other duties, postage and other lawful and accustomed charges made by the Bank to any account of Mr and Mrs Dzienciol with the Bank (together referred to as "Fees");
(c)all costs, charges, expenses and outgoings which the Bank may incur, inter alia, in:
(i)consequence of any defaults made by Mr and Mrs Dzienciol in the:
A.payment of any moneys intended to be secured by the mortgage; or
B.performance or observance of any covenant or agreement expressed or implied in the mortgage or about or in relation to the ascertainment, exercise or enforcement or attempted exercise or enforcement of any of the powers, rights, or remedies conferred on the Bank under the mortgage or any other security held by the Bank;
and in relation to all costs chargeable under the mortgage, including costs of or incidental to any proceedings in any Court, computed on a solicitor and own client basis.
(d)interest upon the moneys referred to in paragraphs (a), (b) and (c) above, or on so much as shall remain owing or unpaid.
(i)at such rate or rates as the Bank might from time to time charge in respect of similar loans or advances;
(ii)accruing from day to day from and including the day on which such moneys become owing or unpaid to the date preceding the date of payment.
It is also not in dispute that in relation to interest, the Wellington Street Mortgage provides that:
(a)interest calculated as aforesaid may, from the date that it becomes due as aforesaid, be capitalised and added to the principal sum upon which interest shall then become payable.
(b)the provisions contained in the mortgage as to the moneys on which interest is payable should continue to apply so long as any of such moneys might remain unpaid, notwithstanding, inter alia, any judgment obtained against the first and second defendants or either of them owing at the rate or rates from time to time usually charged by the plaintiff to its customers in respect of similar loans or advances.
The Bank claims that on 7 September 1992 the amount owing and unpaid by Mr and Mrs Dzienciol was approximately $668,530 and, notwithstanding written demand was made of Mr and Mrs Dzienciol for payment of that sum, they failed to pay.
The first and second defendant's defence is that by reason of the Bank's conduct, the Wellington Street Mortgage is void, alternatively, should not be enforced.
The alternative basis for the Bank's money claim is the Loan Agreement. The Bank claims the Loan Agreement was oral and contained terms that:
(a)the Bank would advance the sum of $650,000 ("Loan") to Mr and Mrs Dzienciol by means of a bank bill facility;
(b)Mr and Mrs Dzienciol would repay the sum of $650,000 to the Bank on 15 July 1990;
(c)the loan moneys would be secured by the Wellington Street Mortgage;
(d)Mr and Mrs Dzienciol would pay to the Bank all the Bank's usual costs, charges, expenses in regard to the bank bill facility;
(e)the bank bill facility would be a variable rate facility for a term expiring on 15 July 1990.
The Bank says that pursuant to the Loan Agreement, Mr and Mrs Dzienciol by their attorney the Bank (pursuant to a power of attorney executed by Mr and Mrs Dzienciol on 11 August 1988) signed bills of exchange in favour of the Bank which were to mature on 12 March 1990 ("the first set of bills"). On 11 December 1989 the Bank purchased from Mr and Mrs Dzienciol the first set of bills at a discount and credited the amount to Mr and Mrs Dzienciol's account number 423355487 at the Bank's Town Hall branch ("the Dzienciol Account"). It is pleaded that three sets of bills were drawn and signed by Mr and Mrs Dzienciol and purchased by the Bank at a discount. The third set of bills matured on 13 July 1990 two days prior to the contractual date for repayment of the Loan.
The Bank says the Loan Agreement was varied to extend the repayment date of the loan from 15 July 1990 to 13 August 1990 by "rolling over" the third set of bills ("the first variation of the Loan Agreement"). The roll over occurred by Mr and Mrs Dzienciol drawing and signing bills in favour of the plaintiff ("the fourth set of bills") with a maturity date of 13 August 1990 and the Bank purchasing those bills at a discount.
The statement of claim then follows the same format in relation to the drawing and purchase of further bills at the maturity date of the immediately preceding bills covering what is described as the fifth and sixth set of bills together with two further agreements to vary the Loan Agreement to extend the repayment date until the maturity date of the fifth and sixth set of bills respectively.
Mr and Mrs Dzienciol admit the loan of $650,000 but otherwise put the Bank to proof of all matters relating to the Loan Agreement, the variations to the Loan Agreement and the consequential rollover of bills.
The Bank also claims that in the period October 1990 to November 1990 the Bank and Mr and Mrs Dzienciol agreed to further vary the Loan Agreement ("the Overdraft Agreement") on terms, inter alia, that:
(a)the sum of $650,000 would on maturity of the sixth set of bills be advanced by way of overdraft facility rather than bank bill facility;
(b)on the maturity date of the sixth set of bills (12 October 1990) the sum of $650,000 would be debited to the Dzienciol Account by way of an overdraft facility;
(c)Mr and Mrs Dzienciol would pay interest on the outstanding debit balance of the Dzienciol account on a daily basis at the plaintiff's reference rate for overdraft facilities plus 1 per cent.
(d)Mr and Mrs Dzienciol would repay to the Bank the sum of $650,000 together with interest by no later than January 1991.
The Bank says that the Overdraft Agreement was varied by the Bank and Mr and Mrs Dzienciol agreeing to extend the repayment date to 28 February 1991 ("the first variation to the Overdraft Agreement"). The Bank also relies on a second variation to the Overdraft Agreement to extend the repayment date to 15 March 1991 on the further terms that if there was default in payment on that date:
(a)interest on the outstanding debit balance on the Dzienciol Account would be debited on a daily basis at the Bank's reference rate for overdraft facilities plus 2 per cent; and
(b)that interest rate would be reviewed and fixed by the plaintiff monthly thereafter.
In April 1991 the Bank reviewed the interest rate and fixed it at the Bank's reference rate for overdraft facilities plus 4 per cent from 15 April 1991. The Bank again reviewed the interest rate in May 1991 and fixed the rate at the Bank's reference rate for overdraft facilities plus 5 per cent rate from 15 May 1991.
The first and second defendants deny all of the Bank's claims relating to the Overdraft Agreement and the variations thereto.
The Bank by way of counterclaim to the defendants' counterclaim claims that the moneys advanced by the Bank pursuant to the Loan Agreement are also secured by the Residential Mortgage. The Bank says that on 10 February 1997 the amount owing and unpaid by Mr and Mrs Dzienciol in relation to the Loan Agreement which was secured under the Residential Mortgage was approximately $1,334,416 and despite written demand being served on Mr and Mrs Dzienciol under the Residential Mortgage, they failed to pay the amount demanded. On the basis of that plea, the Bank seeks possession of the residential premises and solicitor client costs.
Mr and Mrs Dzienciol's Defence and Counterclaim
The first and second defendants plead in their defence that the Wellington Street Mortgage is void and of no legal effect. The basis for this claim is the plea of unconscionability in pars 15 and 16 of the counterclaim. Those pleas are in the following terms:
"15.The conduct of the plaintiff in taking the said mortgage was unconscionable by reason of the facts that:
(a)the plaintiff and the defendants were not contracting upon an equal footing in that the defendants were at a special disadvantage as against the plaintiff; and
(b)the plaintiff was aware of such disadvantage by reason of the matters pleaded in paragraph 16 yet took advantage of those circumstances and proceeded with the taking of the said mortgage.
(c)the plaintiff was not satisfied that the defendants were able to service the loan and had doubts that the lessee would be able to meet the premium payment in terms of the contract between the tenant and the defendants and others whereby the tenant agreed to purchase the leasehold interest in the Bentley Hotel ("the Lease Contract");
(d)the plaintiff contacted its subsidiary Esanda Finance Corporation ("Esanda") on or about 14 November 1989 and was advised by Esanda that:
(i)Esanda was also not satisfied that the defendants were able to service the loan;
(ii)Esanda also had doubts that the lessee would be able to meet the premium payment in terms of the Lease Contract;
(iii)the lessee was well known to Esanda.
(e)At all material times, the plaintiff knew from information provided to it by or on behalf of the defendants that:
(i)the sum of $650,000 was required by the defendants to purchase the Bentley Hotel; and
(ii)the lessee's payments were the sole or primary source of funds to be applied to the payment of interest and/or capital in relation to the loan.
(f)At all material times the plaintiff considered the Bentley Hotel to be overpriced and considered the acquisition of the hotel to be an imprudent investment.
(g)The plaintiff did not advise the first defendant of the facts and matters set out in sub‑paragraphs (c), (d) and (f) above and did not advise the first and second defendants to seek independent legal advice in relation thereto.
Particulars of Special Disadvantages
The defendants were at a special disadvantage as against the plaintiff because neither of them understood the nature of the effect of the mortgage transaction being entered into by them with the plaintiff for the following reason:
(a)the first defendant did not understand the transaction because he was of elderly age and suffering from Alzheimer's disease and/or dementia and could not form any independent judgment about the mortgage.
(b)the first defendant was not capable of understanding the mortgage document because English was not his native language and he had only a limited knowledge and understanding of the English language.
(c)the first defendant had poor eyesight and was consequently unable to read the mortgage document properly.
(d)the second defendant did not understand the transaction into which she was entering because she did not read the mortgage document no one explained to her the nature and effect of such transaction. She executed the mortgage because she was requested by her husband to do so and in reliance upon his advice.
(e)the second defendant was of elderly age and not capable of understanding the mortgage document because she had only a limited knowledge and understanding of the English language.
16.The plaintiff knew or should have known that the defendants did not understand the nature and effect of the mortgage transaction as pleaded in paragraph 15.
Particulars
The plaintiff knew or should have known as alleged because:
(a)in the case of the first defendant:
(i)it was obvious to anyone speaking to him in December 1989 that he was suffering from mental illness and was unable to understand business principles; and
(ii)the plaintiff's officers and in particular Messrs Kensitt and Ryan spoke to and met with the first defendant prior to the execution of the mortgage and should have observed that he was suffering from mental illness; and
(iii)Messrs Kensitt and Ryan knew or should have known that English was not the first defendant's native language and that he had only a limited knowledge and understanding of the English language;
(iv)Messrs Kensitt and Ryan knew or should have known that the first defendant was
unable to read the mortgage document because of his poor eyesight;
(v)Messrs Kensitt and Ryan knew or should have known that the first defendant executed the mortgage without any independent advice; and
(b)in the case of the second defendant;
(i)for some years the defendants had banked with the plaintiff;
(ii)the plaintiff's officers and in particular Messrs Kensitt and Ryan knew or should have known from their dealings with the defendants that the second defendant had a very limited knowledge and understanding of the English language and of commercial matters and relied upon the first defendant absolutely in all business matters and did not have any understanding or exercise any independent judgment in respect of such business matter;
(iii)Messrs Kensitt and Ryan were present when the mortgage was executed and observed that the second defendant did not read the document and the effect of it was not explained to her; and
(iv)Messrs Kensitt and Ryan knew or should have known that the second defendant executed the mortgage without any independent advice and by reason of the reliance pleaded in 16(b)(ii) hereof."
The Bank denies the allegations in par 15 of the counterclaim. It also pleads a positive case to the effect that in the event the Court finds that Mr and Mrs Dzienciol were at a special disadvantage, the Bank denies it took advantage of any special disadvantages and says that:
(a)it took the Wellington Street Mortgage as security for the loans it made to Mr and Mrs Dzienciol (as pleaded in the statement of claim); and
(b)such loans were made to Mr and Mrs Dzienciol personally for their personal benefit.
The Bank also denies the allegations in par 16 of the counterclaim and says further that Mr and Mrs Dzienciol offered the Wellington Street property as security for the loans.
The first and second defendants also attack the validity of the Residential Mortgage. They plead that the Bank took the Residential Mortgage to support the acquisition by the defendants of a half share in a failing import business known as G R International Pty Ltd and the Bank's conduct in taking the Residential Mortgage was also unconscionable. The pleading of unconscionability is in the following terms:
"18.By reason of the matters pleaded below the conduct of the plaintiff in taking the mortgage over the residential property was also unconscionable.
Particulars
(I)The conduct of the plaintiff in taking the mortgage over the residential property was unconscionable by reason of the facts that:-
(a)The plaintiff and the defendants were not contracting upon an equal footing in that the defendants were at a special disadvantage as against the plaintiff.
(b)The plaintiff was aware of such disadvantage by reason of the matters pleaded in paragraph 16 yet took advantage of those circumstances and proceeded with the taking of the mortgage over the residential property.
(c)The defendants were at a special disadvantage as against the plaintiff because neither of them understood the nature or the effect of the mortgage over the residential property being entered into by them with the plaintiff for the following reasons:
(A)the first defendant did not understand the transaction because he was of elderly age and suffering from Alzheimer's disease and/or dementia and could not form any independent judgment about the mortgage over the residential property.
(B)the first defendant did not understand the transaction because English was not his native language and he had only a limited knowledge and understanding of the English language.
(C)the first defendant was of elderly age and unable to read the mortgage document properly because of poor eyesight.
(D)the second defendant did not understand the effect of the transaction into which she was entering because she did not read the mortgage document and no one explained to her the nature and effect of such transaction. She executed the mortgage over the residential property because she was requested by her husband to do so and in reliance upon his advice.
(E)the second defendant was not capable of understanding the transaction because she had only a limited knowledge and understanding of the English language.
The defendants plead that the Bank knew or should have known that the defendants did not understand the nature and effect of the Residential Mortgage and rely on substantially the same particulars as pleaded in par 16 of the counterclaim. The Bank's defence to the unconscionability claim in relation to the Residential Mortgage is a denial of the allegations and a positive plea that in the event that Mr and Mrs Dzienciol were at a special disadvantage and the Bank was aware of such disadvantage, the Bank did not take advantage of any special disadvantage and says:
(a)Mr and Mrs Dzienciol offered the Residential Mortgage to the Bank as security for loans to them, the Company and G R International;
(b)the Bank took the Residential Mortgage as security for loans made to the Mr and Mrs Dzienciol, the Company and G R International;
(c)at all material times Mr Dzienciol was a director and shareholder of the Company until 21 July 1991 and from that date Mrs Dzienciol was a director of the Company.
Paragraph 19 of the counterclaim contains a plea of loss and damage and is in the following terms:
"Further, by reason of the unconscionable conduct of the plaintiff as pleaded in paragraphs 15 and 25 herein, the defendants were able to enter into business transactions which would not otherwise have been possible and as a result of which they have suffered significant financial loss."
On 18 April 2001, Auxiliary Justice Pidgeon ordered that the hearing of the issues in par 19 be adjourned pending the determination by the Court of all other pleaded issues.
On 1 June 2001 I gave the defendants leave to amend the defence and counterclaim to add subparas (c) to (g) of par 15 of the counterclaim and to add causes of action in tort, contract and for breach of s 52 of the Trade Practices Act. As the trial was listed to commence on 20 June 2001 and as the defendants had previously secured from the Full Court a last (and last minute) adjournment of earlier trial dates and had not prepared their damages claim because of the order made on 18 April 2001, the amendments were permitted on the basis that the contractual and tortious liability issues (the existence and breach of duty) would be determined at the trial and the question of damages would be deferred. However, I ordered the defendants to file particulars of their contractual and tortious damages claims because limitation issues may arise at trial.
The first and second defendants say that by reason of the facts pleaded in par 15(a) to (g) of the counterclaim, the Bank owed Mr and Mrs Dzienciol a duty of care to inform them of the facts, matters, knowledge and opinions pleaded in par 15(c), (d), and (f) of the counterclaim, that the Bank was in breach of its duty by failing to inform Mr and Mrs Dzienciol of those matters and as a result of the breach, they suffered loss and damage.
The contract claim is based on an implied term of the Loan Agreement to the effect that the Bank would advise Mr and Mrs Dzienciol of the matters pleaded in par 15(c), (d) and (f) of the counterclaim, the
Bank breached its duty to inform them of those matters and as a consequence they suffered loss and damage.
The Bank's defence to the tort and contract claims is to deny the allegations and to plead that in the event any loss or damage was suffered, the causes of action in tort and contract are statute barred.
The trade practices plea is in the following terms:
"24The plaintiff is a corporation within the meaning of the Trade Practices Act ('TPA').
25The first and second defendants had a reasonable expectation that the plaintiff would inform the defendants of the facts, matters, knowledge or opinion pleaded in paragraphs 15(c), (d) and (f) if they existed or were known or held.
26The plaintiff failed to inform the first and second defendants of the facts, matters, knowledge and opinions pleaded in paragraphs 15(c), (d) and (f)
27The plaintiff's conduct pleaded in paragraph 26 above amounts to misleading and deceptive conduct in trade or commerce in breach of section 52 of the TPA.
28By reason of the plaintiff's breach of section 52 of the TPA the first and second defendants have suffered and are continuing to suffer loss and damage and seek a mandatory injunction pursuant to s.80 further or alternatively s.87(1) of TPA requiring the plaintiff to discharge the Mortgage as defined in paragraph 2 of the statement of claim and cancel the Loan Agreement as defined in paragraph 13 of the statement of claim."
In relation to the plea in par 25 of the counterclaim, the defendants state in particulars that the facts giving rise to the reasonable expectation are those pleaded in par 15(a) to (g) inclusive of the counterclaim. The Bank admits it is a corporation within the meaning of the Trade Practices Act but otherwise denies the allegations in pars 25, 26, 27 and 28 of the counterclaim. The Bank says further that if Mr and Mrs Dzienciol had a special disability as pleaded, they could not have held a reasonable expectation.
The relief claimed by the defendants includes orders setting aside the Wellington Street Mortgage and the Residential Mortgage, a claim for equitable damages and a mandatory injunction pursuant to s 80 of the TPA, alternatively pursuant to s 87(1) of the TPA, in the terms set out above. It is to be noted that the defendants do not claim or seek equitable relief on the basis that the Loan Agreement is unconscionable.
Background - Mr and Mrs Dzienciol and Family and the Company
Mr Dzienciol was born in Poland and emigrated to Australia in 1939. He married Mrs Dzienciol in 1940 or 1941 and had three sons, Phillip, Simon and Bray (the youngest). Mr Dzienciol was said to have had a very acute memory and been excellent at mental arithmetic. At all material times in 1989, Mr Dzienciol wore spectacles for reading and on occasions used a magnifying glass.
Mr Dzienciol started the business known as Pells Surplus Stores ("the Pells business") in around 1970. At the time he started the Pells business he and his wife had another business in Barrack Street, Perth which was an auction mart and furniture store. From around 1948 Mr Dzienciol was involved in buying and selling properties and businesses. He had had a string of businesses, mainly supermarkets, which he purchased, built up and sold. He was a self‑made financially successful businessman.
According to Phillip, Mr Dzienciol had a very strong personality, a short temper and was very dominant. Mr Dzienciol was always the head of the family and would not accept any advice or interference from anybody. Phillip had never been involved with or worked in the family businesses and said he could not tolerate working with his father because his father was always in full control, barking orders to everyone and demanding action. Phillip accepted that his father did not value his (Phillip's) opinions and told Phillip on various occasions that he did not regard him as a businessman.
Phillip's description of his father was confirmed by Bray who described Mr Dzienciol as pretty strict and powerful and a person who liked to be in control of everything.
Mrs Dzienciol was born in Russia and emigrated to Australia when she was 5 years old. She left school at age 14. Mrs Dzienciol died before the trial. In a signed witness statement (exhibit 27) Mrs Dzienciol said that:
"We [Mr and Mrs Dzienciol] have been involved in a number of business ventures over the years. I have run a number of businesses owned by my husband and me which have included self‑service stores and more lately a frock shop, Sabrina Salon. Over the years my husband discussed with me every detail of our business ventures. I was an equal partner with my husband in his ventures.
I always followed my husband's advice in business matters."
In answers to interrogatories (exhibit 5/175) Mrs Dzienciol swore that her level of understanding of English in the spoken and written form was good and that she was involved in the business of the Sabrina Frock Salon "over many years until 1990". The business names extract of the name "Sabrina Frock Salon" (exhibit 5/165) shows that the business commenced on 29 August 1983 and was carried on by the Company until 1989.
Mr and Mrs Dzienciol were the joint owners of their business and private assets. In particular, they were the registered proprietors as joint tenants of the Wellington Street premises and the residential premises as well as joint creditors of the Bank in relation to their accounts.
In 1976 Mr Bruce Kennedy entered into partnership with Mr and Mrs Dzienciol which partnership thereafter carried on the Pells business. In the 1970s Bray managed the Melbourne branch of the Pells business and some time in the late 1970s joined the partnership.
In 1982 the partnership ceased to carry on the Pells business and the Company commenced to do so. The Company was the trustee of the Pelco Unit Trust. At the material times in 1989 its directors were Mr Dzienciol, Mr Kennedy and Bray who each held one share in the Company. There were thirty issued units in the Pelco Unit Trust, ten of which were held by ATA Investments Pty Ltd as trustee for the MM & L Dzienciol Family Trust, ten by Cardavian Pty Ltd as trustee for the Bray Dzienciol Family Trust and ten by Tammas Investments Pty Ltd as trustee for the Bruce Kennedy Family Trust.
The 1980s the Company carried on the Pells business and the Sabrina Frock Salon business. It was also involved in other investments which are detailed later in these reasons. The defendants say the Company is in possession of the Wellington Street premises.
Background - The Bank and Its Officers
In 1982 Mr and Mrs Dzienciol and the Company ("the Dzienciol Group") transferred their banking business from the National Australia Bank to the Bank. At all material times from September 1983, Mr Ray Kensitt was the bank officer primarily responsible for the Dzienciol Group accounts.
Mr Kensitt worked for the Bank for approximately 43 years until he retired in 1995 at age 59. For 17 years until 1983 he was a manager of various branches of the Bank. In 1983 Mr Kensitt became a Commercial Accounts Manager in which position he was, in effect, the lending manager for 21 Bank branches and directly responsible for approximately 12 accounts including the Dzienciol Group accounts. As Commercial Accounts Manager, Mr Kensitt had discretionary authority to approve loans up to a maximum of $250,000. For borrowings in excess of his discretionary limit, Mr Kensitt was required to prepare a loan proposal with a recommendation which was referred to the Bank's area manager or state manager depending on the size of the proposed borrowing.
The Bank had no set criteria for a particular Bank client coming under the control of a Commercial Accounts Manager. It would occur if a customer was difficult or because of recurrent requests for funds in excess of a branch manager's discretionary limit.
In 1986 Mr Kensitt became the Manager, Commercial Accounts in the Bank's commercial banking unit, subsequently known as the Business Banking Division. In this position, he ceased to have control of any branches. Four managers, including Mr Kensitt, were appointed to the new commercial division of the Bank and each manager was appointed to look after approximately 40 to 45 accounts. A client's lending requirements generally determined whether the client would be looked after by the commercial banking division of the Bank. At some stage after this time, Mr Kensitt's discretionary limit was increased from $250,000 but later returned to $250,000 as a result of changes in Bank policy. Mr Kensitt was unable to recall the period in which he had a higher discretionary limit.
In the period under consideration, it was the Bank's practice to keep two files for each client (or client group), a diary note file and a memoranda file.
The diary note file was the prime record of a customer's history with the Bank `. If there was an oral communication, in person or by
telephone, between a bank officer and a client concerning banking business, the event and the substance of the communication was summarised by the bank officer in handwriting usually on the day the communication occurred or, at the latest, the next day. The handwritten diary note would be sent for typing and the typed version would be checked for accuracy by the author of the diary note and initialled. Usually the handwritten note would then be destroyed.
On the occasions that Mr Kensitt met with representatives of the Dzienciol Group either at the Wellington Street premises or at the Bank concerning banking matters, he would usually be accompanied by an assistant. In those circumstances, the assistant would take notes and arrange for them to be typed. The typed diary note would then be checked and, if accurate, initialled by both Mr Kensitt and his assistant.
The diary note system was not only used for recording communications with Bank's clients. It was also used for recording a bank officer's assessment of a proposed transaction or as part of a regular (annual) review of customer accounts.
The diary notes were typed on a stationery item containing the printed words "diary note, name of account" and on the right‑hand side of the page in a rectangular box, the printed word "page number". Mr Kensitt's assistant would usually put the page number on the diary note. In some instances the page numbers of diary notes in evidence were altered in manuscript. Mr Kensitt's explanation for the alteration to the numbers was that it would occur if a diary note was out of the file for actioning by somebody and other diary notes were inserted and numbered. The diary notes would need to be renumbered when the diary note being actioned was returned to the file.
Mr Kensitt first met Mr Dzienciol in September 1983 in the company of his predecessor, Mr Steer. Mr Dzienciol was 69 years old at this time. Mr Kensitt saw Mr Dzienciol approximately six times a year. If he had not seen or spoken with Mr Dzienciol for some time, Mr Kensitt would drop by the Pells store in the course of a walk around the city in his lunch break. If Mr Kensitt called on Mr Dzienciol in this informal way and there was nothing of any consequence discussed or raised with or by Mr Dzienciol or nothing of consequence for Mr Kensitt to follow up, he would not prepare a diary note.
On some occasions when Mr Kensitt dropped in to see Mr Dzienciol during his lunchtime walk, he would also visit Mrs Dzienciol at the Sabrina Frock Salon which was around the corner from the Pells store.
Mr Kensitt also had social contact with Mr and Mrs Dzienciol. It was Mr Kensitt's recollection that he went to dinner with Mr and Mrs Dzienciol and others on two occasions in the 1980s. Mr Kennedy's recollection is that Mr Kensitt's social contact with Mr and Mrs Dzienciol and others including Mr and Mrs Kennedy was "probably a couple of times a year I guess".
In the period between March 1989 to December 1990 Mr Kensitt's assistant was Mr John Ryan. They shared the same office. Mr Ryan has been employed by the Bank since 1979. In 1990 he was appointed as the manager of the Wickepin branch of the Bank. In January 1991 Mr Kinnimont became Mr Kensitt's assistant and in that capacity attended at meetings with Mr Dzienciol and others.
Mr and Mrs Dzienciol and the Bank - 1983 to December 1988
The evidence of what occurred in this period is not contested and emerges primarily from the Bank's diary notes.
As stated earlier, Mr Kensitt's first contact with Mr Dzienciol was in September 1983. A diary note (exhibit 2/19) about the visit is dated 6 September 1983 and records that one of the issues discussed with Mr Dzienciol was the cost associated with borrowings in the name of the trustee Company (estimated at between $6500 and $7000). This issue arose in the context of whether a proposed new Melbourne shop and warehouse was to be purchased in the name of the trust or in the joint names of the "partners" (in which case the estimated cost of borrowings was $4000). Mr Dzienciol advised that he would discuss the implications of ownership with his accountants.
On 14 September 1983 Mr Dzienciol advised Mr Kensitt that valuers were looking at the Melbourne property and if he received a favourable report from them, he and his wife would fly to Melbourne to make the final decision as to whether to purchase the property. Mr Dzienciol also advised, following discussions with his accountant, that if the purchase of the Melbourne property proceeded, it would be in the name of the Company.
The next recorded contact was on 20 December 1983 when Mr Kensitt delivered Bank offer letters of finance to Mr Dzienciol for the purchase of the Melbourne property. However, Mr Dzienciol advised that the Vendor had increased the asking price of the Melbourne property by $80,000 which he (Mr Dzienciol) refused to pay. It appears the purchase of that property did not proceed.
On 6 January 1984, Mr Kensitt (in the company of his account's officer, Mr Kirkup) met with both Mr Dzienciol and Mr Kennedy. Mr Dzienciol was to go to the UK and possibly the US on a buying trip and required a loan of $50,000 to purchase stock in the United Kingdom and a further $50,000 if he travelled to the United States. It is recorded that Messrs Dzienciol and Kennedy would accept a commercial bill acceptance discount ("CBAD") facility but to avoid solicitor's costs in the preparation of securities, they required the CBAD in the name of the partners. The diary note also contains a summary of Mr Kensitt's consideration and analysis of the application for finance which includes the existing security held by the Bank, the proposed security for the further advance, the terms of the borrowings and his decision to approve the application. The existing security was a registered mortgage over unidentified property which appears to have been owned by Mr and Mrs Dzienciol and Mr Kennedy and the proposed security was a second registered mortgage over an investment property in Wray Avenue, Fremantle (the first registered mortgage being Perpetual Trustees). Further, the directors of the Company had already provided guarantees which were supported by letters of acknowledgment and deposits of certificates of title for each of the Directors' residences.
Mr Kensitt and Mr Dzienciol met again on 23 October 1984 in relation to an offer made by Mr Dzienciol to purchase property at 122 Barrack Street, Perth for $373,000 which he said he would increase to $400,000 if necessary. Mr Dzienciol was seeking a term loan of $200,000 payable over 10 years to assist in the financing of the purchase. Mr Kensitt records in his diary note:
"Conservative people. Will only purchase property at 'the right price' is demonstrated on past occasions of making offers - all, so far, not accepted. No action until directors advise acceptance of offer."
The purchase did not eventuate because the vendor's counter‑offer was not acceptable.
In November 1984 Mr Dzienciol telephoned the Bank to request a loan of $250,000 to enable him to place a cash offer to purchase property at Balcatta/Balga comprising eight shops and doctor's surgery. The loan was approved. Mr Kensitt could not recall whether the purchase proceeded.
Mr Kensitt visited Mr Dzienciol at his request on 1 February 1985. Mr Dzienciol wanted the Bank's approval in principle to borrow $770,000 to enable him to bid up to $1,000,000 for a Melbourne property. After a detailed analysis of the application recorded in his diary note, Mr Kensitt recommended giving approval. Subsequently Mr Dzienciol advised Mr Kensitt that the Melbourne property was passed in at auction for $1.8 million and had been sold to the highest bidder at $2,000,000. Mr Dzienciol's maximum offer was $1,000,000.
In May 1985, Mr Dzienciol called at the Bank with an offer and acceptance document to purchase a block of nine shops called the Balga Shopping Centre for $385,000 which he said had been negotiated down from $435,000. The purchaser was to be the Company and Mr Dzienciol requested a loan of $290,000 repayable over 10 years. Once again Mr Kensitt recorded an analysis of the loan application including the security and the Dzienciol Group's financial position. Security included a registered first mortgage over the shopping centre. Mr Kensitt recommended approval. That purchase proceeded.
When Mr Kensitt called on Mr Dzienciol and Mr Kennedy on 23 October 1985 they were looking at the purchase of the Rosemount Hotel for $700,000. They asked if the Bank would consider 100 per cent funding on the existing securities plus a first registered mortgage over the hotel. Mr Dzienciol stated that he did not want to introduce his personal assets as security for the lending to the Company. It is recorded that the current lessee of the Rosemount Hotel was to remain and that Messrs Dzienciol and Kennedy were to "check lease term and be satisfied lessee is financially sound". This purchase did not proceed.
At some stage Mr Kensitt told Mr Dzienciol that because of the amount of work the Bank was devoting to considering and approving his requests for finance on transactions which did not proceed, in future the Dzienciol Group would have to pay 25 per cent of the standard loan approval fee if the transaction did not proceed. Thereafter Mr Dzienciol generally stopped coming to Mr Kensitt with his various proposals.
In February 1987 the Town Hall branch manager discussed term deposit rates with Mr Dzienciol. Mr Dzienciol was unhappy with what was offered, threatened to take his term deposits away and so the Bank increased the interest rate by .5 per cent.
The Balga Shopping Centre had been purchased in the name of the Company. In May 1987 Mr and Mrs Dzienciol purchased the Balga Shopping Centre from the Company for $397,000 with Mr and Mrs Dzienciol assuming responsibility for the repayment of moneys owed to the Bank in relation to the purchase of that property. Mr Kennedy and Bray explained that the Company sold the Balga shopping centre to Mr and Mrs Dzienciol because the property was not living up to income expectations and it was thought it may not sell at a profit.
On 11 August 1988 Mr and Mrs Dzienciol signed a power of attorney in relation to commercial bills (exhibit 2/32). The power of attorney is stated to apply to bills of exchange required to be drawn by Mr and Mrs Dzienciol pursuant to existing and future commercial bill facilities. Mr and Mrs Dzienciol appointed officers of the bank to draw, present and sign bills of exchange. Pursuant to cl 5 of the power of attorney, Mr and Mrs Dzienciol agreed that it would not be revoked unless by mutual agreement until all commercial bill facilities provided by the Bank were terminated.
In 1988, Mr and Mrs Dzienciol sold the Balga Shopping Centre at a profit. When that property was sold, Mr Dzienciol had intended to prepay a fixed rate facility with the Bank. However, that course would have cost him more in interest forfeited than what he would get for the same amount of money on an interest‑bearing term deposit. Mr Kensitt discussed this with Mr Dzienciol. He let the fixed rate facility run and put the sale proceeds on deposit with the Bank over which the Bank took security.
On 30 December 1988 the Company signed an offer to purchase the Ballajura Shopping Centre for $1,875,000 (exhibit 2/33.2). The offer was subject to finance approval from the Bank. Eva Wilczewski was a business broker employed by Richardson and Wrench who were acting as the agents for the vendors of the Ballajura Shopping Centre. It was Phillip's evidence that his father had just sold the Balga shopping centre or was about to sell it and was looking around for another investment. Phillip inspected the Ballajura shopping centre in early December 1988 with Mr Dzienciol, Bruce Kennedy, Bray and Eva Wilczewski. That deal did not proceed.
The Residential Mortgage Transaction
There is very little evidence about the underlying transaction which resulted in the Residential Mortgage being given as security. There is an undated diary note (exhibit 1/1) confirmed by Mr Kensitt which refers to a new partnership account at the Town Hall branch of the Bank, the partnership being between the Company and GR International Agencies Pty Ltd ("GRI"). The partnership had an overdraft facility of $40,000 supported by unlimited guarantees from Mr and Mrs Kennedy, Mr and Mrs Dzienciol, Bray Dzienciol and his wife, and Mr Guido Di Paola and Claudette Di Paola. The guarantee (exhibit 2/33) is dated 29 December 1988 and signed by the persons identified above. Mr and Mrs Dzienciol's signature is witnessed by a Bank officer, Mr Kevin Udy.
A diary note (exhibit 2/33.1) dated 30 December 1988 signed by Mr Udy and Andrew Lower is in the following terms:
"Called on Bruce Allan Kennedy, Sandra Lee Kennedy, Moszko Mejer Dzienciol, Leah Dzienciol, Guido Di Paola and Claudette Di Paola for them to execute proposed guarantee on the account of GR International Agencies Pty Ltd and DKD Holdings Pty Ltd.
Prior to signing, the guarantee document was given to them and they were given the opportunity of reading it there or elsewhere and to obtain legal advice as to their position. The purport of the document and their liability thereunder was explained to them in general terms by Kevin Udy in the presence of Andrew Lower and they were advised that execution of the acknowledgment in the guarantee would mean that they had read the document and understood the implications thereof.
They then signed the guarantee in our joint presence."
The undated diary note confirmed by Mr Kensitt also refers to the partnership's application (the Company and GRI) for a CBAD facility of $288,000. For that further facility the Bank required, inter alia, the Residential Mortgage. The diary note confirms that Mr and Mrs Dzienciol had previously granted a registered mortgage over "C/T 1279/301 and 1277/903". A letter offering the facility and outlining the security requirements was sent but is not in evidence. Thereafter, Mr and Mrs Dzienciol signed the Residential Mortgage which is dated 12 January 1989. Mr Dzienciol's signature was witnessed by Mr Udy and
Mrs Dzienciol's signature was witnessed by Bank officer, Denise Kelly (now Scott).
Denise Scott and Andrew Lower signed a diary note dated 12 February 1989 (exhibit 2/34.1) in the following terms:
"Denise Kelly and Andrew Lower called on Leah Dzienciol to execute a proposed guarantee mortgage on the account of GR International Agencies Pty Ltd and DKD Holdings Pty Ltd. Prior to signing, the guarantee mortgage was given to Leah Dzienciol and she was given the opportunity of reading it here or elsewhere and to obtain legal advice as to their position. The purport of the document and her liability thereunder was explained to her in general terms by Denise Kelly in the presence of Andrew Lower. Leah Dzienciol then freely signed the guarantee mortgage in the presence of Denise Kelly and Andrew Lower."
The Residential Mortgage is an all moneys security. The Bank claims that it is entitled to possession of the residential premises under the Residential Mortgage as a result of the defendants' default in payment of the moneys owing under the Loan Agreement. It is not claiming the moneys owing by the Company/GRI partnership.
Phillip gave evidence about this matter. According to him, the Company borrowed from the Bank to buy into an already failing business which was on the verge of bankruptcy. However, Phillip confirmed in cross‑examination that he had no involvement with his father's business dealings and that Mr Kennedy was reluctant to divulge information to Phillip. However, he received "snippets" of information about this transaction from Mr Dzienciol and Mr Kennedy. There is no evidence the Bank knew of those matters.
The documentary evidence discloses that there was infrequent contact between the Bank and Mr Dzienciol (or Mr Kennedy) in the period January 1989 to September 1989. Mr Kennedy and Mr Dzienciol were telephoned requesting instructions concerning the rollover of existing term deposits in March and April 1989. In April 1989 Mr Kennedy was spoken to concerning excesses on the CBAD the Company/GRI partnership. There was further discussion with Mr Kennedy concerning excesses again in August 1989.
The Bentley Tavern Transaction
Save where indicated, the following evidence is not contested. It emerges primarily from the Bank's diary notes and other documentary evidence. The vendor of the Bentley Tavern was Narge Pty Ltd ("Vendor"). It was represented by real estate agents Richardson and Wrench. In September 1989 the Tavern was still in the course of construction but very close to completion. At some time prior to the purchase, Mr Kennedy was provided with a sales brochure in relation to the Bentley Tavern (exhibit 15). The sales brochure contained a sales, expenditure and profit analysis of the Bentley Tavern business. Mr Kennedy showed the sales brochure to Mr Dzienciol and they discussed the purchase and inspected the property. Mr Dzienciol and Mr Kennedy also discussed the funds for the deposit. It was only after Mr Kennedy knew that Mr Dzienciol was prepared to enter into the proposed transaction to purchase the Bentley Tavern and to allow his funds to be used in relation to the deposit that Mr Kennedy signed an offer and acceptance for the purchase of the Bentley Tavern.
By an offer and acceptance dated 19 September 1989, the Company (40 per cent) and Mr and Mrs Dzienciol (60 per cent), offered to purchase the Bentley Tavern for $4.2 million. It was a cash offer. The offer document was executed by the Company but not by Mr and Mrs Dzienciol.
After the partial execution of the offer and acceptance document, the Vendor's solicitors, Claudio Russo Shaw, prepared a formal contract of sale of the Bentley Tavern between the Vendor and Mr and Mrs Dzienciol and the Company as purchasers which was executed by the parties on 22 September 1989 ("first contract"). The Company purchased two undivided fifth shares in the property in its capacity as trustee of the Pelco Trust. Mr and Mrs Dzienciol, as joint tenants, purchased three undivided fifth shares in the property. The first contract provided for the purchase of the land on which the Bentley Tavern was constructed and surrounding land, the liquor licence and business name for the Bentley Tavern and all chattels situated on the premises. The purchase price was $4,200,000 to be paid as follows:
(a)a deposit of $1,000,000 of which $420,000 was to be paid within three days of acceptance of the offer by the Vendor and the balance of $580,000 within two days of the date on which the Vendor notifies the purchaser of the satisfaction of cl 8;
(b)the sum of $2,200,000 on the settlement date (defined as within three days of the latest of the architect's certificate of practical completion in respect of the hotel, the date of approval of the transfer of the liquor licence or the date on which the Vendor gives notice to the purchaser that he is ready, willing and able to complete settlement);
(c)the balance of $1,000,000 on the date of commencement of the term of a lease of the property to be granted by the Purchaser to a third party on terms satisfactory to the Purchaser;
The first contract was not conditional on the purchasers obtaining finance. Clause 8 of the first contract (which affected the date of payment of the second moiety of the deposit) provided that the first contract was "subject to and conditional upon the Vendor's contract for the sale of the property to Warwelt Pty Ltd being terminated or being at an end on or before 9 October 1989".
The first recorded contact with the Bank concerning the purchase of the Bentley Tavern was a telephone call from Mr Kennedy to Mr Kensitt on 25 September 1989, three days after the execution of the first contract. The communication is recorded in a diary note (exhibit 2/40). Mr Kennedy told Mr Kensitt that they had executed a contract to purchase the Bentley Tavern and required the Bank to release term deposits to pay the $1,000,000 deposit. The diary note also records a request that Mr Kensitt peruse the contract of sale and make comment.
The diary note records details of the purchase price and the payment schedule. It also notes that Mr Kensitt checked out the term deposit position of the Company and Mr and Mrs Dzienciol. The Company had $298,722 on term deposit and Mr and Mrs Dzienciol had $986,823 together totalling $1,285,545. However, some of the term deposits of both the Company and Mr and Mrs Dzienciol were held as security and the only funds available for the payment of the deposit was $850,859. Mr Kensitt records that he alerted Mr Kennedy to this position and was advised by Mr Kennedy that he and Mr Dzienciol had assumed that all term deposits were available for the purchase of the property. Mr Kennedy requested, and Mr Kensitt agreed, to arrange for prepayment of term deposits totalling $420,000 (in the ratio of 40%:60% from the Company and Mr and Mrs Dzienciol respectively) to pay the first moiety of the deposit. The diary note also records:
"Took opportunity to advise Bruce that unless sale of lease were to occur simultaneously to the settlement for purchase of the property, ie, the payment of $2.2 million, then because income to meet interest costs was not in place then it would be unlikely that the bank would be able to assist. In any event advised him the bank would consider any proposal put to us but that approval would depend on repayment capacity and security coverage."
Mr Kennedy said that his recollection was that he approached the Bank to see if it was interested in financing the transaction after the execution of the offer and acceptance dated 18 September 1989 but before the execution of the first contract. I regard the contemporaneous diary note as a more reliable guide to the timing of events than Mr Kennedy's unaided recollection of an event occurring over 11 years ago.
By letter dated 26 September 1989 signed by Mr Dzienciol to the Bank, he requested that specified term deposits be prepaid on 27 September 1989. The Bank took the necessary steps to arrange for the prepayment of the term deposits for both the Company and Mr and Mrs Dzienciol.
The next contact between Mr Kensitt and Mr Dzienciol was on or about 5 October 1989. Mr Kensitt called on Mr Dzienciol and Mr Kennedy at their request. He was advised that the previous offer by the other party (which I take to be a reference to the contract with Warwelt Pty Ltd referred to in cl 8 of the first contract) to purchase the property had lapsed. Mr Kensitt was advised that the purchase of the property by the Company and Mr and Mrs Dzienciol was to proceed and that they required the remaining deposit of $580,000 on the following day, 6 October 1989. In particular, Mr Dzienciol and Mr Kennedy requested the prepayment of all Mr and Mrs Dzienciol's term deposits (except for the sum of $285,000) and to allow an excess of approximately $100,000 on the Company's account until there had been revaluation of Mr Kennedy's house. Mr Kensitt agreed to allow the excess because of the substantial asset position of Mr and Mrs Dzienciol.
The Bank immediately took steps to arrange for the prepayment of Mr and Mrs Dzienciol's term deposit on 6 October 1989. Mr Dzienciol signed a cheque dated 6 October 1989 for $473,000 on behalf of himself and his wife in favour of the Vendor and Mr Kennedy, on behalf of the Company, signed a cheque dated 6 October 1989 for $107,000 payable to
the Vendor. The total of the two cheques, $580,000 was for the balance of the deposit.
On 11 October 1989, Mr Kensitt had a telephone conversation with Mr Kennedy and Mr Dzienciol who advised of an injunction obtained by the previous purchaser of the property (Warwelt) and requested the Bank to stop payment of the Company cheques (two) and of Mr and Mrs Dzienciol's cheques (two) for the deposit totalling $1,000,000 all of which were made payable to the Vendor. Mr Dzienciol and Mr Kennedy advised that the Vendor was to endeavour to have the injunction overturned the following day and requested that the funds the subject of the stopped cheques be lodged on a seven‑day term deposit. Mr Kensitt authorised the stop on the cheques and instructed a Bank officer to arrange the term deposits.
On 13 October 1989, Mr Kennedy advised Mr Kensitt that the problems with Warwelt had been sorted out and a new deal had been struck for the purchase of the Bentley Tavern. A deposit of $1,000,000 was required on 16 October to meet the terms of sale. The deposits were paid by the Company and Mr and Mrs Dzienciol in proportion to their interests in the property.
The Company and Mr and Mrs Dzienciol as purchasers of the Bentley Tavern were represented by solicitors Warren Harrison, in particular, Mr P Huston and Ms M Hopkins of that firm. In a letter dated 16 October 1989 from the Vendor's solicitors Claudio Russo Shaw to Warren Harrison, the Vendor's solicitors advised that the Vendor and Warwelt had settled their action on 13 October 1989 and the settlement was recorded in a deed of release which was provided to Warren Harrison. The deed of release is not in evidence. There is no evidence concerning Warwelt's arrangements with the Vendor or why the purchase of the Bentley Tavern by Warwelt did not proceed or how it came about that Warwelt subsequently became the lessee of the Bentley Tavern. The Vendor's solicitors confirmed that their client was now free to enter into a contract with Warren Harrison's clients and enclosed a draft of a new contract, also noting that the contract had been amended in accordance with amendments requested by Warren Harrison in their letter of 13 October 1989. The Warren Harrison letter is not in evidence. However, the purchasers under the new contract were Mr and Mrs Dzienciol 50 per cent, the Company 40 per cent and Eva and Gerry Wilczewski 10 per cent. Mr and Mrs Wilczewski became involved in the Bentley Tavern transaction as a result of an approach made to Mrs Wilczewski by Mr Dzienciol, of which more later.
The parties subsequently executed a new contract of sale ("the second contract of purchase"). The second contract of purchase in evidence does not clearly identify the day in October 1989 when it was executed by the parties. There are very few differences between the terms of the first contract and the second contract of purchase save that the purchasers under the second contract were the Company as to four undivided tenth shares, Mr and Mrs Dzienciol as joint tenants of five undivided tenth shares and Mr and Mrs Wilczewski as to one undivided tenth share as tenants in common. The purchase price remained $4,200,000 of which a deposit of $1,000,000 had to be paid on or before 17 October 1989. A sum of $2.2 million was to be payable on the settlement date and the balance of $1,000,000 on the date of commencement of the term of a lease of the Bentley Tavern property to be granted by the purchasers.
However, the second contract of purchase required that the $1,000,000 deposit be immediately released to the Vendor who was to provide security in the form of a second unregistered mortgage over the Bentley Tavern property. The purchasers' solicitors (Warren Harrison) prepared mortgage E216377 dated 17 October 1989 between the Vendor as mortgagor and the purchasers as mortgagees and signed by all the parties, including Mr and Mrs Dzienciol, to secure the deposit of $1,000,000. The 1988 joint form of general conditions of sale were deemed to be incorporated in the second contract of purchase which (like the first contract) was not conditional on the purchasers obtaining finance approval.
On 18 October 1989, Mr Kensitt had discussions with Mr Dzienciol and Mr Kennedy regarding the ongoing financial requirements of the business. It was the annual review of the financial position of the Dzienciol Group. The diary note of the review identifies the existing Bank facilities in favour of the Company (trading as Pells Surplus Stores and Sabrina Frock Salon), the Company/GRI partnership and the moneys owed personally by Mr and Mrs Kennedy and Mr and Mrs Dzienciol. The diary note also records that Mr Kennedy advised that the existing facilities were adequate for their needs and requested the Bank to extend the limits for a further 12 months. Consideration is also given to the Company's profitability and financial stability by reference to its balance sheet and profit and loss statement for the year ending 30 June 1988.
Mr Kennedy advised that the Company had sold the Melbourne store and was considering the sale of the Sabrina Frock Salon. Mr Kensitt also did a management ability and a safety assessment of the Company,
Mr and Mrs Kennedy, Mr and Mrs Dzienciol and the Company/GRI partnership. In terms of management ability, Mr Kensitt records:
"Business is essentially run by Bruce with Maurie providing assistance where necessary. Net profit of $172K for the year after allowing for extraordinaries is considered a good result and attributable to close attention to margins by Management."
As a result of this review, Mr Kensitt decided to extend the limits of the borrowing of the Dzienciol Group for a further 12 months. The stated justification for the decision was the "long history of profitable trading and business acumen of Directors".
Warren Harrison continued to act for the purchasers. In particular, they were involved in the transfer of the Bentley Tavern liquor licence to the purchasers and matters relating to settlement of the sale generally.
The next recorded communication between the Bank and Mr Dzienciol about the Bentley Tavern transaction is a letter dated 10 November 1989 from the Bank addressed to Messrs Dzienciol and Kennedy. The letter was written by Mr Kensitt and refers to a telephone discussion earlier in the week and says, "We now advise interest in your proposal to finance the purchase of the Bentley Tavern." Mr Kensitt said in the letter that before a decision could be made it was necessary to receive and fully assess the following information:
"1.Copy of the lease to your tenants.
2.Cash flow forecast showing monthly inflow and outgoings for your investment, including interest at a rate of 19 per cent per annum and lump sum progressive payments by the lessee.
3.Statements of financial position of all directors.
4.Balance sheet and profit and loss accounts for the Pelco Unit Trust to 30/6/89, if available.
5.Evidence of ability of lessee to meet the lump sum payments of $50,000 per month in addition the monthly rental together with the balloon payment of $950,000 in six months.
6.Valuation by Baillieu Knight Frank to be instructed by the Bank at cost to yourselves."
The letter identifies what appears to be three alternatives for funding:
"1.Fund $2,660,000; ... ;
2.Fund the first $1,200,000 with an outside party advancing the ongoing borrowing of $1,500,000;
3.Fund the ongoing borrowing of $1,500,000 with an outside party providing a bridging facility of $1,200,000. ... ."
The Bank's letter refers to the lessee meeting specific payments. There is no evidence of the background circumstances leading to the Bentley Tavern purchasers entering into a lease of the Bentley Tavern with Warwelt. An agreement to lease initialled by the parties is in evidence (exhibit 17) ("Lease Agreement"). Warwelt (the failed purchaser of the Bentley Tavern) is the lessee. The Lease Agreement is undated. It provides for a payment by Warwelt of a premium of $1,450,000 to be paid in the following manner:
(1)$200,000 upon the commencement of the term of the lease;
(2)$300,000 by way of six instalments of $50,000, the first payment to commence on 15 January 1990;
(3)$950,000 on 15 July 1990.
The Lease Agreement provides for Warwelt to grant a debenture charge over its assets and undertakings for the period that the premium or any part of it remained unpaid. It also provides that Hedley O'Meara, a director of Warwelt, was to provide a deed of guarantee as further security for the moneys owing by Warwelt to the purchasers.
The parties subsequently entered into a lease dated 1 December 1989 ("Lease"). The provision in the Lease for payment of the premium mirrors the clause in the Lease Agreement. The rent was $260,000 per annum payable in equal monthly instalments of $21,666.66. The Lease does not identify the commencement date. Mr O'Meara is a party to the Lease as guarantor of Warwelt's obligations.
The purchasers' solicitors, Warren Harrison, in a letter dated 15 November 1989 to the Company confirmed that they had forwarded a copy of the Lease Agreement to Warwelt's solicitors and Mr Ray Weir and that the draft Lease and security documents (debenture charge and deed of guarantee) had been forwarded by the solicitors to the Bank. I
infer from this letter that the Lease Agreement had been executed by mid November 1989 at the latest.
Mr Kensitt in a diary note of 14 November 1989, records the receipt of a proposal to fund the purchase of the Bentley Tavern from finance broker Mr Raymond Weir of Austrafin . Austrafin was a licensed finance broker and consultant. On instructions from the Bentley Tavern purchasers, Austrafin prepared a document entitled "Application for a Mortgage Loan of $3,000,000 on Behalf of DKD Holdings Pty Ltd, M M and L Dzienciol and G R and E Wilczewski" (the "Austrafin Application"). The Austrafin Application describes the property in the following terms:
"The property consists of a new and very modern tavern, which has a freestanding TAB agency situated in the carpark which will be leased rent free from the borrowers. Adjoining the tavern on the highway frontage is a subdivided vacant commercial lot of 1512 square metres which will be onsold or redeveloped within 6 months. At the rear, ... is a vacant multi‑residential lot of 2666 square metres which will be developed with home units within 6‑12 months.
The borrowers are only interested in the freehold component of the property, as they have arranged immediate onsale of the leasehold for 20 years for a premium of $1,450,000. The purchaser of the goodwill and lease is Warwelt Pty Ltd which also owns the Victoria Park Hotel and Food Hall, and the Hurlingham Hotel in South Perth."
The Austrafin Application states that at settlement on 6 December 1989 "the borrowers expected the property valuation to be $2,850,000". Funding of $3,000,000 was sought which (it said) would be reduced primarily from payments due under the Lease and any shortfall would be met by the substantial other income of the borrowers.
Attached to the Austrafin Application was a copy of a valuation dated 11 September 1989 from Hillier Parker. That valuation was not in evidence. However, the Austrafin Application states it valued the land and business at $4,550,000. Following the grant of the Lease to Warwelt, the only security available was over the Bentley Tavern land.
Also attached to the Austrafin Application were the personal particulars for Mr and Mrs Dzienciol, Mr and Mrs Kennedy and Bray. Only Mr and Mrs Dzienciol's personal particulars are in evidence. It
shows Mr and Mrs Dzienciol had a surplus of assets over liabilities of $4,483,300 which assets included the Wellington Street premises, the residential premises, a third interest in property at the corner of Pier and Wellington Street, Perth, cash and investments of approximately $400,000 and a half interest in a Melbourne store.
Mr Kensitt's diary note of 14 November 1989 states that the proposal would be that the Bank fund $1,700,000 of the amount required and a bridging portion of $1,250,000 would be supplied by Esanda or other. The diary note records:
"Esanda funding 1.25 million to cover premium to be paid by lessee to acquire 20‑year lease term for tavern and licence."
At the material time, Esanda was a wholly owned subsidiary of the Bank. Mr Kensitt notes that the Bank had indicated to Mr Kennedy that a valuation showing the breakdown in the freehold value and the licence value of the Bentley Tavern would be required if the Bank was to proceed with the proposal after initial analysis. There is no evidence that the Bank obtained or received a valuation of the land. The diary note then states:
"SERVICING ABILITY
Evidence of ability to service interest cost of either the ANZ facility or the Esanda facility has not been provided and from assessment made it appears an overall shortfall of $125,000 will occur in the first year with a shortfall in the ANZ facility in the second year of $46,000.
Our previous advices to customer by telephone, when he (Kennedy) requested we consider, was to also provide monthly CFF (cash flow forecast) for 2 years to show all income and outgoings from date of settlement to evidence ability to meet all commitments. This was not included with the proposal.
ESANDA
Referred copy of proposal to Esanda with approval of finance broker who had had tentative discussion with Brian Hartley (we referred to John Orr).
Advised Orr of our concern on servicing ability.
Reply by Esanda, after consideration is to decline - also unable to be satisfied on Customer Servicing ability, also have doubts
on lessee's ability to meet premium payment in terms of contract - lessee well known to Esanda. Principal of lessee company is Hedley O'Meara.
Esanda have advised broker they will reconsider if additional security was available, CFF and balance sheet etcetera to 30/6/89 were provided and satisfied servicing ability.
DECISION
Declined in present state. Telephone Kennedy and advised he seek an outside lender to bridge proposal to enable his timing plan to settle urgently (by end of next week is sought). Bank will reconsider long‑term lending after clearance of short‑term facility by lessee payments for a premium and conditional on financial data evidencing servicing ability."
Mr Kensitt said he would have explained to Mr Kennedy why the loan was declined which was that he did not believe they had the ability to meet the repayments.
There were also communications between the purchasers' solicitors Warren Harrison and their finance broker Mr Weir. By letter dated 15 November 1989, Mr Weir advised Warren Harrison that Mr Kennedy and Mr Weir had had a meeting with Mr Forbes at Esanda Finance Corporation Ltd. Mr Weir advised that Mr Forbes said Esanda would only consider advancing funds against the freehold of the Bentley Tavern. The letter from Mr Weir to the purchaser's solicitors continues:
"The minimum estimated valuation of the freehold component is $2,750,000, and based on lending to 80 per cent of that figure, a loan of $2,200,000 would be considered. Based on our client's minimum requirement of $2,860,000, this would leave them $660,000 short. Esanda will consider advancing the additional $660,000 provided additional security is available to them.
The only solution immediately apparent to me is for Mr and Mrs Dzienciol to offer security for the $660,000 advance by way of registered mortgage over their interest in the unencumbered property at 403 Wellington Street, Perth.
In my conversation with Mr Dzienciol this morning, I am aware that he is not in favour of this suggestion, but I cannot otherwise
In the circumstances, the Bank did not engage in misleading or deceptive conduct as alleged.
Limitation - Contract, Tort and Trade Practices Act
For the sake of completeness I deal with the limitation issues that arise on the pleadings. In June 2001, I granted leave to the defendants to amend the counterclaim to include causes of action in contract, tort and for breach of the TPA. It was apparent at the interlocutory hearing that limitation issues may arise. The defendants were ordered to provide particulars of loss and damage to facilitate determination of any limitation defence if it was pleaded by the Bank. The Bank filed an amended defence to the counterclaim to raise, inter alia, limitation defences to the contract and tort claims. The grant of leave to amend a pleading cannot alter the operation or effect of a statutory period of limitation: Morgan v Banning (1999) 20 WAR 474 at 476 and 483.
The Court did not have jurisdiction to grant leave to amend the pleading pursuant to O 21 r 5(5) of the Supreme Court Rules. For that subrule to apply, there must be a sufficient factual overlap between the existing and proposed pleading so that the new causes of action can fairly be said to arise out of substantially the same facts as the old cause of action: Stone James v Pioneer Concrete (WA) Pty Ltd [1985] WAR 233 at 241 ‑ 242. The primary factual basis for each of the contract, tort and trade practice claims is the Bank's alleged failure to disclose the Bentley Tavern matters. The Bentley Tavern matters were not pleaded at any time until the application for leave to amend in June 2001.
Under s 38(1)(v) of the Limitation Act 1935 the defendants had to commence proceedings in contract (whether by action or counterclaim) within six years from the accrual of the cause of action. A cause of action in contract accrues at the date of the breach. The breach relied on by the defendants is the failure by the Bank to disclose the Bentley Tavern matters prior to entry into the Loan Agreement. Thus, the cause of action accrued in November‑December 1989. Prima facie, the limitation period expired in November‑December 1995.
The question is whether the defendants can avail themselves of s 40 of the Limitation Act. Section 40 provides:
"If any person entitled to any such action as is referred to in subsection (1) of section thirty-eight was at the time of the cause of action accrued within the age of eighteen years or
insane, then such person may commence the same within such time as is before limited after being of full age or sane as if that was the time at which the cause of action accrued."
Section 40 does not apply to Mrs Dzienciol. Accordingly, her contractual claim is statute‑barred. Section 40 only applies to extend the limitation period if the person was insane when the cause of action accrued. Time is not extended if the limitation period has begun to run and the person subsequently becomes disabled: Purnell v Roche (1927) 2 Ch 142 at 149; Garner v Wingrove (1905) 2 Ch 233.
The Limitation Act does not define the word "insane". Legislation elsewhere refers to a person being of unsound mind: Kirby v Leather [1965] 2 QB 367; King v Coupland [1981] Qd R 121. Lord Denning in Kirby v Leather said of the expression "of unsound mine" (at 383):
"... So here it seems to me in this statute a person who is 'of unsound mind' when he is, by reason of mental illness, incapable of managing his affairs in relation to the accident as a reasonable man would do. It is similar to the test where a guardian ad litem or a next friend is appointed under the new RSC 0 80 r 1. That states that a person under a disability means 'a person who by reason of mental disorder is incapable of managing and administering his property and affairs'. So here it seems to me that David Kirby was of unsound mind if he was, by reason of mental illness, incapable of managing his affairs in relation to this accident."
There is no material distinction between the expressions "insane" and "unsoundness of mind" for these purposes.
Although Mr Dzienciol was in the very early stages of an Alzheimer's type dementia in late 1989, I have found that he understood the relevant transactions and was able to protect his own interests. Accordingly, I find that Mr Dzienciol was not insane in November‑December 1989. Indeed, I am not persuaded that Mr Dzienciol was insane before January 1992. Accordingly, Mr Dzienciol's, contract claim is also statute‑barred.
A cause of action in negligence accrues when loss first occurs. However, the damage must be more than minimal: Ratcliffe v VS & B Border Homes Ltd (1987) 9 NSWLR 390. When there is one cause of action which has accrued it covers all subsequent loss and damage which is attributable to the same cause, even if that loss and damage only
manifests itself later on by stages: Darley Main Colliery Co v Mitchell (1886) 11 App Cas 127 at 132.
A claim for economic loss may take a variety of forms and to answer the question when a cause of action for negligence causing economic loss accrues may require consideration of the precise interest infringed by the negligent act or omission: Wardley Australia Ltd v Western Australia(1992) 175 CLR 514 at 527; Hawkins v Clayton (1988) 164 CLR 539 at pp600 ‑ 601.
It is the defendants' case that if the Bank had performed its duty it would not have advanced the Loan in which case the defendants say they would have been unable to complete the Bentley Tavern transaction. The defendants claim two categories of loss in their particulars. The first is the loss arising from completion of the Bentley Tavern transaction in December 1989 (which appears from the particulars to be the reliance or wasted expenses) and the second is the interest paid under the Loan Agreement from September 1991. Further, Mr Dzienciol commenced proceedings against Custom Credit in relation to the Bentley Tavern transaction in 1991.
Based on the defendants' formulation and particularisation of the damages claim for negligence, the tortious claim is also statute‑barred.
I turn now to the Trade Practices Act ("TPA") issues. The defendants do not seek monetary damages or compensation under the TPA. The defendants claim relief under s 80 and s 87(1) of the TPA for a mandatory injunction requiring the plaintiff to discharge the Wellington Street Mortgage and to cancel the Loan Agreement.
Section 87(1) of the TPA materially provides:
"Without limiting the generality of section 80, where, in a proceeding instituted under, or for an offence against, this Part, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged ... in contravention of a provision of Part ... V the Court may, whether or not it grants an injunction under section 80 ... make such order or orders as it thinks appropriate against the person who engaged in the conduct ... if the Court considers that the order or orders concerned will compensate the first‑mentioned person in whole or in part for the loss or damage or prevent or reduce the loss or damage."
The authority to grant relief under s 87(1) arises if two conditions are satisfied. The first is that the person claiming relief is a party to a proceeding instituted under Pt VI and the second is that the person has suffered or is likely to suffer loss or damage by conduct of another person in contravention of, inter alia, Pt V. Thus, relief under s 87(1) of the TPA is ancillary or additional to other relief which a court might grant in a proceeding under other provisions of Pt VI (although the power to grant s 87(1) relief is not dependent on the grant of relief under another provision of Pt VI): Sent v Jet Corporation of Australia Ltd (1986) 160 CLR 540 at 543. In this case the first condition is satisfied in that the defendants' counterclaim for a breach of Pt V of the TPA for which it is seeks relief by way of injunction under Pt VI of the TPA.
An applicant for relief under s 80 of the TPA for an injunction is not subject to an express statutory time limit: Multi Group Distribution Services Pty Ltd v TNT Australia Pty Ltd [2001] FCA 226; Gregg v Tasmanian Trustees Ltd (1997) 143 ALR 328 at 365. Accordingly, a claim for relief under s 87(1) ancillary to the claim for injunctive relief is not subject to an express statutory limitation period. Once there is a finding of an actual or proposed contravention of Pt V which is necessary to found an injunction pursuant to s 80 under Pt VI, then the jurisdiction to make orders under s 87(1) is enlivened if actual or likely loss or damage is found.
As I have not made any finding concerning damage, and in particular I have not made a finding that the defendants have suffered or are likely to suffer loss and damage by reason of the Bank's contravention of s 52, the power under s 87(1) of the TPA does not arise.
That leaves the question whether, if a breach was found, I would order a mandatory injunction under s 80 of the TPA in the terms sought by the defendants. The jurisdiction to grant injunctive relief pursuant to s 80 of the TPA is not expressed to be compensatory and does not depend on proof of loss and damage. Section 80 is intended to protect broad public interests. As a result, some of the traditional rules relating to injunctive relief do not always apply. For example, s 80(4) empowers the Court to grant an injunction to restrain conduct whether or not it appears that the conduct is likely to continue. In ICI Australia Operations Pty Ltd v Trade Practices Commission (1992) 38 FCR 248 Lockhart J said (at 256 ‑ 257):
"Injunctions are traditionally employed to restrain repetition of conduct. A statutory provision that enables an injunction to be
granted to prevent the commission of conduct that has never been done before and is not likely to be done is a statutory enlargement of the traditional equitable principles. But this is because traditional doctrine surrounding the grant of injunctive relief was developed primarily for the protection of private proprietary rights. Public interest injunctions are different ... This does not mean that the traditional equitable doctrines are irrelevant. For example, it must be relevant to consider questions of repetition of conduct or whether it has ever occurred before or whether imminent substantial damage is likely: but the absence of any one or more of these elements is not fatal."
In this case the conduct complained of (the omission to advise or warn) will not be repeated. Further, this is a case about the protection of private rights in which equity would look to what is practically just. Even assuming a proven breach of Pt V of the TPA, it would not be just for the defendants to be relieved of their obligations to repay the Bank if they in fact suffered no causally related loss or damage. That matter has been deferred and cannot be answered at this stage. Accordingly, even if the defendants had been successful in establishing a breach of the TPA, I would not grant injunctive relief at this stage.
Conclusion
For these reasons, the defendants fail in their claims for unconscionable dealing, breach of contract, negligence and breach of the TPA. Accordingly, the defendants' counterclaim will be dismissed. I have found the Bank's claim proven and I propose to make orders for possession of the Wellington Street premises, the Residential premises and for payment of the moneys secured by the Wellington Street Mortgage and the Residential Mortgage. The amount of the judgment sum will be finally determined in accordance with a further Dobbs certificate from the Bank.
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD -v- MOSZKO MEJER DZIENCIOL by his guardian ad litem PHILLIP DZIENCIOL & ORS [2001] WASC 305 (S)
CORAM: McLURE J
HEARD: 20-28 JUNE & 19 DECEMBER 2001
DELIVERED : 9 NOVEMBER 2001
SUPPLEMENTARY
DECISION :14 FEBRUARY 2002
FILE NO/S: CIV 2448 of 1992
BETWEEN: AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD (ACN 005 357 522)
Plaintiff
AND
MOSZKO MEJER DZIENCIOL by his guardian ad litem PHILLIP DZIENCIOL
First DefendantPHILLIP DZIENCIOL as representative of the estate of the late LEAH DZIENCIOL
Second DefendantDKD HOLDINGS PTY LTD
Third Defendant
Catchwords:
Costs - Personal liability for costs of guardian ad litem - Presumption of reasonableness in relation to indemnity costs
Legislation:
Supreme Court Rules, O 70, O 66
Result:
Costs awarded
Category: B
Representation:
Counsel:
Plaintiff: Mr C P Blaxill
First Defendant : Mr A Atkinson
Second Defendant : Mr A Atkinson
Third Defendant : Mr A Atkinson
Solicitors:
Plaintiff: Freehills
First Defendant : Solomon Brothers
Second Defendant : Solomon Brothers
Third Defendant : Solomon Brothers
Case(s) referred to in judgment(s):
Amalgamated Mining Services Pty Ltd v Warman International Ltd (1988) 19 FCR 324
Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 18 ACSR 662
Australia and New Zealand Banking Group Ltd v Moszko Mejer Dzienciol by his guardian ad litem Phillip Dzienciol & Ors [2001] WASC 305
Bolton v Bolton (1884) 28 Sol Jo 737
Gore‑Booth v Gore-Booth (1953) 2 All ER 1000
Morgan v Morgan (1865) 12 LT 199
Murray v Kirkpatrick (1940) 57 WN NSW 162
NSW Insurance Ministerial Corporation v Abualfoul (1999) 94 FCR 247
Rutter v Rutter (1921) P 136
Surrey Insurance Co Ltd v Nagy [1968] SASR 437
Vivian v Kennelly (1890) 63 LT 778
Willey v Synan (1935) 54 CLR 175
Case(s) also cited:
Catt v Wood [1908] 2 KB 458
Halligan v Lawson (1993) 9 SR (WA) 166
Harrison v O'Donnell [1919] WN 104
Hooper v Mckenzie, The Times, January 23, 1901
Huxley v Wootton (1912) 29 TLR 132
Koh v Tay [1999] WASC 228
Masling v Motor Hiring Company (Manchester) Limited [1919] 2 KB 538
MGICA (1992) Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236
NMFM Property Pty Ltd v Citibank Ltd (No 11) [2001] FCA 480
O'Brien v The Herald and Weekly Times Limited [1937] VLR 135
Pryor v Hennessy & Cham [1973] VR 221
Rhodes v Swithenbank (1889) 22 QBD 577
Steeden v Walden [1910] 2 Ch 393
McLURE J: This is the plaintiff's application for the costs of the action. I handed down my reasons in this matter on 9 November 2001 (Australia and New Zealand Banking Group Ltd v Moszko Mejer Dzienciol by his guardian ad litem Phillip Dzienciol & Ors [2001] WASC 305).
I foreshadowed in my reasons that I proposed to dismiss the defendants' counterclaim and to make orders in favour of the plaintiff for possession of property owned by the first and second defendant which was mortgaged to the plaintiff and a money judgment, the quantum of which was to be determined in accordance with a further Dobbs certificate from the plaintiff.
The matter came on again before me on 19 December 2001 in which the orders foreshadowed in the reasons were made. However, the plaintiff's application for costs was contested. The plaintiff sought the following orders:
"5.The plaintiff's costs of the action and counterclaim:
(a)be paid by Phillip Dzienciol the Guardian ad litem of the first defendant (without prejudice to any right of indemnity which he may have against the first defendant and his property) taxed:
(1)on a party and party basis for those costs incurred by the Plaintiff from 8 June 1994 to 6 March 2001; and
(2)on an indemnity basis for those costs incurred by the Plaintiff from 7 March 2001.
With certificates:
(A)for transcript;
(B)for second counsel;
(C )for interrogatories;
(D)that the maximum recoverable by the Plaintiff in relation to getting up (item 13) is $54,000; and
(E)for the order 38 deposition of Dr Gubbay of 8 June 2001.
(b)be paid by the said first defendant Moszko Mejer Dziencil and by and out of the said real and personal estate of Leah Dzienciol taxed on a solicitor and own client basis so that all costs incurred by the plaintiff of and incidental to the action and counterclaim (including the costs of second counsel, transcript and interrogatories) are to be allowed (irrespective of the limits of the scale) except insofar as they are of an unreasonable amount or have been unreasonably incurred.
Such costs are to be presumed to have been:
(1)reasonably incurred if they were incurred with the express or implied approval of the plaintiff;
(2)reasonable in amount if the amount was expressly or impliedly approved by the plaintiff; and
(3)unreasonably incurred, if in the circumstances of the case, they are of an unusual nature.
PROVIDED THAT the total costs recoverable by the plaintiff shall not exceed the value of the costs under paragraph 5(b) above."
Paragraph 5(b) relies on standard provisions in the mortgages for the payment of solicitor/client costs. The defendants opposed proposed order 5(a) and consented to proposed order (b) save for the presumptions referred to in (1), (2) and (3) thereof.
Phillip was appointed guardian ad litem of the first defendant, Moszko Mejer Dzienciol, by order of the Court dated 8 June 1994. The question in issue is whether a court can, and if so on what grounds, order that a guardian ad litem be personally liable for the costs which would otherwise be payable by the defendant.
Order 70 of the Supreme Court Rules ("SCR") deals with persons under a disability suing or defending court proceedings. Pursuant to O 70 r 2, a person under a disability must have:
(a)a next friend in order to bring or make a claim in any proceedings;
(b)a guardian ad litem to defend, make a counterclaim or intervene in any proceedings.
The position in relation to a next friend is clear. A next friend, although not a party to the proceedings, is personally liable for costs awarded against the plaintiff: NSW Insurance Ministerial Corporation v Abualfoul (1999) 94 FCR 247 at 254. Indeed, it is said that one of the purposes for requiring a person under a disability to sue by a next friend was so that there would be a person answerable to the defendant for costs: NSW Insurance Ministerial Corporation (supra) at 254. However, the principal purpose must be the protection of the rights of people with a disability.
The position regarding the personal liability for costs of a guardian ad litem is unclear. It was conceded by Mr Atkinson (properly in my view) that the Court has the power to award costs against a guardian ad litem. However, it was submitted that a court in the exercise of its discretion should only award such costs in exceptional circumstances such as for gross misconduct of the defence. There is some authority for that position, albeit without fully reasoned analysis: Morgan v Morgan (1865) 12 LT 199; Murray v Kirkpatrick (1940) 57 WN NSW 162.
There is also authority which arguably supports the proposition that the discretion is not confined to exceptional circumstances: Bolton v Bolton (1884) 28 Sol Jo 737; Vivian v Kennelly (1890) 63 LT 778.
The plaintiff also relied on Rutter v Rutter (1921) P 136 in support of its claim. However, that was a case in the divorce division of the English Court in which the rules describe the claimant's representative as a guardian ad litem when in fact it is the equivalent of a next friend in other divisions of the English Court ( and in this jurisdiction).
However, it is suggested in Seaman Civil Procedure (at par 70.2.1) that the same purposes, including personal liability for costs, lie behind the appointment of a next friend and guardian ad litem.
In the circumstances, it is necessary to determine this question as a matter of principle with little assistance from the authorities.
A next friend and guardian ad litem have features in common. A person with a disability cannot sue or be sued without a next friend or guardian ad litem respectively. In the case of a defendant with a disability where no guardian ad litem has been appointed, all steps in the action including a judgment will be taken to be irregular and set aside: Surrey Insurance Co Ltd v Nagy [1968] SASR 437 at 439; Gore‑Booth v Gore-Booth (1953) 2 All ER 1000 at 1005.
Accordingly, the Rules entitle a plaintiff to apply to the court for an order appointing a guardian ad litem: O 70 r 5. Order 66 r 6 of the SCR makes specific provision in relation to the costs of a solicitor appointed by a court as a guardian ad litem or a solicitor who acts without a court order. The court is given a discretion to direct that the costs incurred in the performance of the duties of the office of guardian ad litem by a court appointed solicitor shall be borne and paid by either of the parties, or by one or more of the parties or out of any fund in court. The court's discretion in relation to a solicitor who acts without an order of the court is in more general terms.
It seems there are at least two material differences between the position of a plaintiff/next friend and defendant/guardian ad litem combination. A plaintiff has a choice as to whether or not to bring or continue proceedings with that choice the responsibility of the next friend. Further, a factor in determining whether to take proceedings is usually (albeit not perhaps in this case) the financial capacity of the proposed defendants to pay any judgment and costs awarded against them. On the other hand, a defendant has no real control over his or her involvement in the proceedings.
Further, and most importantly, it is against a defendant's interest for a next friend to be appointed (thereby enabling suit) whereas it is very much in the interests of a plaintiff for a guardian ad litem to be appointed. Indeed, in the event a guardian ad litem does not (from the plaintiff's perspective) volunteer to assume the office, a plaintiff may need to secure the services of an independent person who will no doubt seek protection in relation to costs.
In these circumstances, I see no reason why a guardian ad litem who is in substance and effect defending a claim should be made personally liable for costs orders in favour of a plaintiff unless the guardian has acted unreasonably, whether in the conduct of the defence or otherwise. The plaintiff does not suggest that Phillip acted unreasonably in this case.
However, the plaintiff says that in the particular circumstances of this case the order should be made because Phillip ran the litigation which included a counterclaim for, inter alia, equitable damages. In fact, the relief sought by the defendants in their counterclaim included:
(a)an injunction forbidding the sale of the mortgaged property;
(b)an order setting aside in equity the mortgages;
(c)equitable damages;
(d)a mandatory injunction under the Trade Practices Act requiring the plaintiff to discharge the Wellington Street Mortgage; and
(e)damages for breach of contract and negligence.
It is correct that the counterclaim in form is not defensive. It does not reflect or mirror the defence. However, the court is concerned with substance not form. I am assisted on this question by the authorities relating to security for costs. Security is payable by a defendant/plaintiff by way of counterclaim where the counterclaim does not arise out of the claim made by the plaintiff. So too if the counterclaim of a defendant with a guardian ad litem went beyond the plaintiff's claim then there is no reason in principle why the guardian should not be held personally responsible for the costs of that aspect of the counterclaim.
In my opinion the defendants' counterclaim in this case is generally responsive (and defensive) to the plaintiff's claim notwithstanding the claims for relief and in particular the claim for equitable damages. The claim for damages was in effect to neutralise the impact of a requirement for restitutio in integrum in the event the defendants were successful in their unconscionable conduct defence (see par 411 of my earlier reasons).
However, if a guardian ad litem was acting in substance as a next friend because the defendant was in effect the attacker then I see no reason why in the exercise of the Court's discretion the guardian ad litem should not be made personally liable for the costs of the action.
The notion of a plaintiff being nominally so but really defending itself against an attack from the defendants is also well recognised in the law relating to the discretion to order security for costs. Security for costs will not generally be ordered where the plaintiff is the party attacked and is really in the position of the defendant: Willey v Synan (1935) 54 CLR 175 at 184-5; Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 18 ACSR 662.
In such cases a Court is also guided by the substance and not the form of the matter. There is usually some pre litigation act of the defendant which is the trigger for the commencement of proceedings. Thus, if a defendant serves a statutory demand under the Corporations Act, it will not be entitled to security for costs if the plaintiff debtor applies to set aside the statutory demand: Aquatown (supra).
The principle was also applied by Wilcox J in Amalgamated Mining Services Pty Ltd v Warman International Ltd (1988) 19 FCR 324. In that case Warman's solicitors wrote to a third party (QMS) complaining that QMS had been offering to supply parts made by AMS for Warman pumps thus infringing Warman's copyright in the drawings. The letter concluded by saying that unless QMS desisted, Warman would take proceedings. AMS commenced proceedings against Warman for a declaration that the threats made by Warman were unjustifiable under the Copyright Act 1968. Warman applied for security for costs. The Court rejected the claim on the basis that AMS was in a practical sense forced to take legal action. Wilcox J said (at 328-9):
"If one applies the homely test adopted by Scrutton LJ of asking who, in the litigation, was the attacker and who was the defender, I think it must be said that the first attack came in a letter from [Warman's solicitors]. Although the letter was not written directly to [AMS], it is that company which has an interest in defending and, in a commercial sense, probably has very little alternative other than to take that course."
There is little evidence concerning the events leading up to the commencement of the action by the plaintiff. However, it was admitted on the pleading that the third defendant was in possession of the Wellington Street premises. It is probably the case that the plaintiff had no practical alternative but to obtain orders for possession as a result of a failure to deliver up possession pursuant to the mortgages. In that sense, the plaintiff's action is responsive to the defendants' omission or refusal to deliver up possession. However, in my view that is not enough to make the plaintiff in effect the defendant. Some positive act by a defendant is required.
For the reasons detailed above, I refuse in the exercise of my discretion to make a costs order against Phillip. Further, I see no justification for the plaintiff having the benefit of the presumptions in items (1), (2) and (3) of proposed order 5(b). The reasonableness or otherwise of the amounts paid by the plaintiff should, in the event of a dispute, be determined without the application of presumptions. Accordingly I will make an order in terms of proposed order 5(b) save for the presumption and the proviso, which is unnecessary in the circumstances.
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