Australian Scholarships Group v Zhang
[2011] VCC 455
•6 May 2011
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| IN THE COUNTY COURT OF VICTORIA | Revised |
Not Restricted
AT MELBOURNE
COMMERCIAL LIST
BANKING & FINANCE DIVISION
Case No.CI-10-01820
| AUSTRALIAN SCHOLARSHIPS GROUP | Plaintiff |
| FRIENDLY SOCIETY LIMITED ACN: 087 648 879 | |
| v | |
| XIAO WEI ZHANG | Defendant |
| & | |
| BERKELEY PROPERTY MANAGEMENT | Third Party |
| PTY LTD ACN: 134 802 930 |
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| JUDGE: | HER HONOUR JUDGE KENNEDY |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 4-5, 7-8, 11 & 13 April 2011 |
| DATE OF JUDGMENT: | 6 May 2011 |
| CASE MAY BE CITED AS: | Australian Scholarships Group v Zhang & Anor |
| MEDIUM NEUTRAL CITATION: | [2011] VCC 455 |
REASONS FOR JUDGMENT
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Catchwords: Loan agreement and mortgage- whether transactions should be set aside because plaintiff engaged in unconscionable conduct at common law or under the Trade Practices Act 1974 - whether plaintiff entitled to amount sought in restitution in any event- whether defence of change of position
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr B. Carew | Gadens Lawyers |
| For the Defendant | Mr P.S Noonan | Canaan Lawyers |
| For the Third Party | No Appearance | No Appearance |
i
HER HONOUR:
1 The plaintiff (ASG) seeks the repayment of $340,000 and interest, advanced pursuant to a loan agreement entered into with the defendant, Mr Zhang, in September, 2007. In the alternative, ASG seeks the amount on the basis that the defendant has been “unjustly enriched.”
2 ASG also alleges that pursuant to a mortgage given by Mr Zhang dated 21 December 2007, Mr Zhang mortgaged all his estate and interest in units 11 and 20, 70 Gladesville Boulevard, Patterson Lakes. Mr Zhang purchased these units, which formed part of a retirement village, from a company, Peruncorp Pty Ltd.
3 ASG did not seek possession of these units, but relied on a certificate given pursuant to clause 31.10 of the Memorandum of Common Provisions AA689 (MCP) to the mortgage to the effect that the moneys secured and owing as of 29 March is $411,384.79.[1]
[1] Certificate of Kevin Paul Brown, General Manager Finance & Investment of ASG
4 The defendant admits to the loan of $340,000 being provided to him[2] and admits to the existence of the mortgage.[3] However, he says:
[2] Defence to the Plaintiff’s Amended Statement of Claim dated 7 April 2011 (Defence) at
[3] Defence at paragraph 6
(a) that in entering the agreement and mortgage ASG “took unconscientious advantage of the defendant’s special disadvantage”[4] with the result that the defendant is entitled to rescission;
[4] Defence at paragraph 3N
7 (b) that ASG had engaged in unconscionable conduct pursuant to s51AC of the Trade Practices Act (as in force in July 2007 to 28 February 2008) (TPA) and that the Court should refuse to enforce the agreement and mortgage;5
(c) that any enrichment was not unjust and that the defendant had changed its position; further that, if the plaintiff was entitled to restitution any remedy should be framed so that the defendant did not have to return the funds but gave the plaintiff the title to the two properties.
5 Although there was no formal admission as to quantum, the certificate is prima facie evidence of the moneys secured by the mortgage under clause 31(10) of the MCP. No submissions were advanced to challenge the amount claimed in the certificate with the result that the quantum of the amount claimed is established.
6 Berkeley Property Management Pty Ltd was the third party in the proceeding. As will be seen below, it took no part in the trial and did not prosecute its defence once its solicitors ceased to act earlier in the year. It will be referred to later in these reasons.
It followed that the issues in the case are: set aside on the basis of the doctrine of unconscionability at common law and/ or because the plaintiff had engaged in unconscionable conduct pursuant to s51AC of the TPA;
(b) if yes to (a), whether ASG was alternatively entitled to the
amount sought in restitution.Witnesses
8 Only two witnesses were called in the case, Ms Vicki Jane Mason, a mortgage officer with ASG, and Mr Zhang.
9 Ms Mason had little independent recollection of relevant events and some criticism was made of her evidence by the defendant. Ms Mason did appear to lack some memory for the detail of the transaction and there was some unsatisfactory evidence, for example, as to whether she received legal advice. However, she was a generally straightforward witness and I am satisfied that any inconsistencies are explicable by the passage of time.
10 Mr Zhang presented as an intelligent, grounded, and mature, 55 year old man. He was born in China, but has been in Australia since 1988. During that time, he has purchased 7 properties, 5 of which are investment properties (including the units, the subject of this proceeding).
11 Mr Zhang gave his evidence through an interpreter and I will say more about his English proficiency later in these reasons. However, there were aspects of his testimony which were unsatisfactory. Thus, for example, although in examination-in-
4
chief he readily admitted that he was told that entry into the transaction would involve a “top return,” he later sought to deny this under cross examination which matter was of some significance given the allegations made in the case. I also did not find credible his suggestion that he “did not understand” the content of a lease document which appeared to be made only after an intervention from the bench. He ultimately conceded that he could “understand the overall content” and that he “basically understands” what the lease meant, and I accepted this evidence.
12 Given then, some unsatisfactory aspects of the oral evidence, the objective material in the case was therefore of significance.
Facts Principal actors
ASG
13 As indicated already, Ms Vicki Mason was the mortgage officer called as a witness on behalf of ASG.
14 Mr Kevin Kelly was a contractor with ASG who had handled more of the difficult files. He had been with ASG prior to when Ms Mason commenced in 1998 and reported to the manager who was Simon Pratt ( at least in late 2007). Mr Kelly is an elderly gentleman and retired from ASG some three years ago.
15 The defendant suggested that Mr Kelly ought to have been called by the plaintiff and that “an appropriate Jones v Dunkel
5
inference will arise.”[6] However, the defendant did not squarely identify which issue Mr Kelly would have assisted with in circumstances where much of Mr Kelly’s actions are well documented in contemporaneous material that speaks for itself. In those circumstances, I do not accept the defendant’s submission.
[6] Defendant’s written closing submissions at paragraph 11
16 For similar reasons a complaint about the fact that neither Mr Pratt nor Mr Benson was called is not substantiated. Again, it was unclear how either could have assisted further. Moreover, Mr Benson was an employee of the finance broker, Credit Connect Pty Ltd. The evidence did not suggest that he was in ASG’s “camp.”
Peruncorp
17 Peruncorp Pty Ltd had liquidators appointed pursuant to a creditor’s voluntary winding up in May 2009.
18 Mr Zac Andrejic was a director of Peruncorp and also of Armour Capital Ltd which had also advanced monies to Mr Zhang. He was also a director of a related company, 84th Templestowe Pty Ltd.
ASG Loan to Peruncorp
19 In April 2007, some months prior to the loan the subject of this proceeding, Peruncorp sought to obtain a debt facility from ASG to refinance the purchase of some 33 units in the Patterson Lakes Retirement Village. The approach was made by email of 12 April 2007, from Credit Connect to ASG which attached a memorandum proposing that “the debt will be repaid via the individual sale of the properties.”
20 Perencorp’s business model at that time was to:
• Sell the units to investors; • Lease back the units for 25 years with an annual rent of between 6 to 8 per cent of the price; • For 84th Templestowe (Peruncorp’s management company) to manage the units under a management agreement; • For residents to occupy the units under licence agreements under which they paid ingoing contributions or bonds in the range of $200,000 to $250,000.[7] [7] See facsimile from Peruncorp’s lawyers, Cutler Hughes and Harris of 17 May 2007
21 In these circumstances ASG appeared to be enthusiastic about the model. For example, in an internal memo of 15 May 2007, Mr Kelly noted that not only did an investor get a return of 6 to 8 per cent but the deal was as a “win/win” for Peruncorp.[8] Thus, Peruncorp got their debt repaid by the sales, as well as a substantial bond and good management fees. Mr Kelly further stated that he had “not personally come across one of these before” and later noted that a solicitor for Peruncorp (Bernard Tan of Cutler Hughes and Harris) had in fact purchased one of the units himself suggesting that “he sees them as good investments.”[9] The deal was generally seen as attractive for everyone, including investors, for example, Kevin Kelly at one point describes the investor getting “a good well located investment and a return which on the face of it, is above market.”[10]
[8] See also a later memo of 2 August 2007 from Mr Kelly to Ms Mason and Mr Pratt
[9] Memorandum of Kevin Kelly and Simon Pratt of 22 May 2007 to Terry O’Connell of ASG
[10] Internal correspondence dated 16 October 2007
22 The following agreements were then entered into on 21 June, 2007:
•
a facility agreement of 21 June 2007, wherein ASG advanced $4.2 million to Peruncorp which was to be repaid by the termination date (being 12 months from the initial advance date of 21 June 2007). The agreement also provided that at each settlement of a unit, Peruncorp was to pay ASG 100% of the greater of the valuation or sale proceeds unless otherwise agreed;[11]
•
a fixed and floating charge over the assets of Peruncorp was created and registered in respect of all monies owing to ASG;
•
a mortgage was given by Peruncorp to ASG over various units (which included units 11 and 20).
[11] Item 12 of the Schedule to the facility agreement
ASG Loan to Mr Zhang
23 The evidence of Mr Zhang was that Maggie Ren “introduced him” to the units. Mr Zhang described her as the representative of Peruncorp “to promote or to sell those units to customers.” As indicated already, in examination he said that she described it as a “very good investment opportunity” and that he would get a “top return.” She also mentioned that “this return covers one hundred years return- [from the] lease…” and that the units were government subsidized.
24 He was also told by Ms Ren that all the work, including the work of a solicitor and finance arrangements would be taken care of by her and Peruncorp.
contract
25 By a contract of sale of 15 July 2007, Mr Zhang purchased unit 20 for an amount of $250,000 and unit 11 for an amount of $240,000 from Peruncorp.
26 It was readily apparent that the contracts were not simple standardised documents. Rather, each contract of sale contained various components as follows:
• A contract with various special conditions; •
A proxy and power of attorney from Mr Zhang given to the company secretary of Peruncorp to do things he could do as a member of the Body Corporate ;
•
A 25 year lease to Peruncorp with three further terms of 25 year each;
•
A management agreement between 84th Templestowe and Mr Zhang wherein he appointed 84th Templestowe to manage the units and to receive relevant amounts from the residents under the Licence to Occupy;
• A common property lease and management agreement;
9
•
A Vendor’s Statement which showed that the title to each property was affected by a statutory charge under section 29 of the Retirement Villages Act 1986 (RV Act) which charge was dated 14 July 1987.
27 Item 22 of the Schedule to the lease contained a number of special provisions, and, in particular highlights the potential liability of the owner/lessor to refund owner contributions. Thus, Clause 3 provides for the lessee to indemnify the lessor for any refund of licence fees to an outgoing resident which was not to be construed as a “contracting out” of the responsibilities of the owner subject to the RV Act.
28 Pursuant to clause 6 of the management agreement the manager was entitled to retain all licence fees but, under clause 7, gave an indemnity to the owner with respect to any claims arising from such retention. Clause 13.2 of the management agreement also provided that the owner was required to obtain the prior written approval of the Manager before selling the unit.
29 The vendor’s statement contains a signed acknowledgment by Mr Zhang that he had been given a copy of the statement signed by the vendor before he signed any contract for the sale of land. Further, in terms of the statutory charge noted therein, Section 29(1) of the RV Act provides that if a refundable in-going contribution has been paid for a residence right in a retirement village there is created on the application date a charge to secure that contribution on all retirement village land used for the village. The charge is a first charge with priority over all encumbrances created or arising after its creation (s29(3)).
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loan
30 Mr Zhang had no direct contact with ASG in relation to the loan. Rather, he left the finance arrangements to Ms Ren and Peruncorp.
31 However, prior to 20 August 2007, he completed an application for a loan which Credit Connect forwarded to ASG by email of 20 August. His evidence was that he completed some of this document in his own handwriting.
32 He subsequently received a typewritten loan offer dated 11 September from Credit Connect and called Ms Ren who advised him that the loan was approved and asked him to sign and fax the letter back to her.
33 The letter of offer from ASG was for $340,000 or 70% of the valuation whichever is the lower. Clause 9 of Part B of the letter of offer states that “The Society recommends that you obtain
independent legal advice.”
34 The offer also contains a signed declaration that the loan was to be applied wholly or predominantly for business or investment purposes.
35 The offer was accepted under Mr Zhang’s signature on 21 September 2007 directly below the statement “I/We have
received, read and understood this Loan Offer and Financial Statement/General Terms and Conditions and accept all the terms and conditions of the approval.”
36 Immediately below this section is another section which makes
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provision for a mortgagor to sign and provide details of the solicitors to whom mortgage documentation should be forwarded “OR” to indicate that the mortgagors “do not intend to engage solicitors” and that the mortgage documentation should be sent direct. Neither option is completed.
Events up to December 2007
37 Marketline subsequently provided valuations for various units, including units 20 and 11 on request from ASG. That valuation as at 4 October 2007 was $250,000 and $240,000 respectively. In each case the valuation contained the following statement:
“The terms of the lease will restrict the ability of an owner (and a mortgagee in possession) to freely give vacant possession in the event of a sale. Accordingly, we recommend independent legal advice should be sought by the lender in respect of the terms, conditions and effect of the relevant lease in relation to the suitability of the property as mortgage security. Should the actual lease procured differ from any of the summary details noted herein, please refer this back to us for further comment and possible valuation review.
It must be acknowledged by the Lender that the property being valued is subject to a long term tenancy. The rental and lease terms and conditions have been set on the basis of the operator’s business model and do not reflect rental levels [which] could be achieved if the property was offered with vacant possession…
This valuation has been prepared on the basis of the lease details provided, in terms of the cash flow to the owner….In summary this property has a risk profile directly linked to the operator’s ability to run a profitable, well managed business.”
38 It appears that a copy of the valuation reports, at least in relation to units 32 and 14, were forwarded to the solicitors for
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Peruncorp.[12]
[12] As evident in correspondence from Cutler Hughes and Harris of 16 October 2007 and 25
39 By correspondence of 30 October, ASG then refer the matter for “independent advice” pursuant to the valuer’s recommendation to McConnell and Jaffray.
40 By correspondence of 15 November and 22 November McConnell Jaffray then gave advice.
41 The 15 November advice highlighted that it was not clear where Peruncorp would obtain its income from to make lease payments given the residents’ licence fees and other payments were all paid to 84th Templestowe Pty Ltd as manager. Accordingly:
“In our opinion the better structure would be for 84 Templestowe Pty Ltd to be the lessee from the investor and have that lease guaranteed by Peruncorp. In that way the obligation to pay the lease payments to the investor and the right to receive payments from the residents under the Licence to Occupy rest with the same company.”
42 The advice also highlighted that an investor could be required to find money to repay the resident the adjusted entry contribution fee it was obliged to pay in the event Peruncorp and 84 Templestowe got into financial difficulties (in which case any indemnities would be worthless).
43 Finally, the advice dealt with the issue that the long term lease prevented ASG from obtaining vacant possession. However, it stated that “if the borrower defaulted and ASG were to exercise a power of sale, an incoming purchaser would be buying as an investment in a retirement village and therefore the lack of vacant possession would not be detrimental.”
44 The defendant alleged that these advices were passed on to Peruncorp and not Mr Zhang. Given the many references to Mr Tan,[13] it appears that the substance of the advice was at least discussed.
[13]
45 The final documents executed were not before the court. However, two executed Deeds of Assignment of Guarantee were before the court whereby the defendant assigned the benefits of a guarantee given by Peruncorp in the event of any default by the defendant. On the basis of these deeds the substantial amendment ultimately made as a result of the obtaining of advice appears to be that the identity of the lessee was now 84th Templestowe (not Peruncorp) with Peruncorp the guarantor of the lease. As recommended by McConnell Jaffray, this change provided the tenant with direct access to cash flow (through licence fees and other fees paid to the Manager) to meet its rent obligations which, in turn, made it more likely that the loan payments could be made. This was to the advantage of both Mr Zhang and ASG.
46 The letter of 22 November, however, did note that risks still remained in terms of the possible obligation on an owner to repay resident contributions and states:
“…The other risk is, as stated previously, if both Peruncorp and 84 Templestowe got into financial difficulties and the Management Agreement terminated, unless a receiver appointed a new operator to run the Village, the investor would be required to repay the resident the adjusted entry contribution and still be liable to ASG for the repayment of the loan.”
47 ASG then write to McDonald Slater and Lay, also solicitors for ASG, and receive correspondence of 30 November recommending that
“84th Templestowe Pty Ltd grants to the investor as mortgagor, a floating charge over the revenue stream attributable to each unit and assign the benefit of that charge to ASG. This would enable the investor to more quickly enforce his security and would enable ASG to be in a position where it was precisely in the position of the investor as mortgagor.”
48 However, the idea (which is seen as identifying a credit risk rather than a security issue) is ultimately rejected by ASG, after consultation with McConnell Jaffray, in correspondence of 4 December.
Events of 21 December 2007
49 The mortgage and transfers were executed on 21 December 2007 and a lease was entered into between Mr Zhang and 84th Templestowe in respect of each unit (as reflected in recital B of the Deed of Assignment of Guarantee documents).
50 The proceeds of sale, net of costs (some of which appear to have been met by Peruncorp) of $312,318.20 were used to pay the Peruncorp loan.
51 The Peruncorp mortgage was subsequently discharged in about January 2008 when the total sum of $1,403,153.55 was paid
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through the sale of a number of other units to investors.
Events subsequent to sale
52 Mr Zhang’s evidence was that he was paid lease payments for 6-9 months. However, the lease payments then stopped. He further said that he found it “difficult” to sell the units. He consulted Ms Ren to try to sell the units and his “understanding” was that the units were purchased “within a few families, that’s what I heard” and also that these properties are “not worth that much.” Had he known this he would not have proceeded with the transaction.
53 However, no evidence was adduced at all as to what, if any, precise steps had been taken to sell the units, nor even the current status of the village, including whether residents are still there. There was also no evidence as to whether the defendant has been actually called upon to repay any residents’ entry contribution.
54 In any event, following the loan falling into default, from 21 July 2009 ASG forwarded letters of demand to Mr Zhang and ultimately issued this proceeding on 22 April 2010.
Unconscionability
Principles
Common law
55 The concept of unconscionability is not universally defined. However, the essence of the unconscionability doctrine was
16
usefully summarised by Mason J in Commercial Bank of
Australia Ltd v Amadio as follows:
“… if A having actual knowledge that B occupies a
situation of special disadvantage in relation to an
intended transaction, so that B cannot make a judgment
as to what is in his own interest, takes unfair advantage
of his (A’s) superior bargaining power or position by
entering into that transaction, his conduct in so doing is
unconscionable. And if, instead of having actual
knowledge of that situation, A is aware of the possibility
that the situation may exist or is aware of facts that
would raise that possibility in the mind of any
reasonable person, the result will be the same.”[14]
[14]
56 In Turner v Windever,[15] Austin J set out a summary of the element as follows:
[15] [2003] NSWSC 1147 at [105]
• The weaker party must, at the time of entering into the transaction, suffer from a special disadvantage vis-a vis the stronger party; • the special disadvantage must seriously affect the weaker party’s capacity to judge or protect his or her own interests; • the stronger party must know of the special disadvantage, or know of facts which would raise the possibility in the mind of any reasonable person; • the party must take advantage of the opportunity presented by the disadvantage; and • the taking of advantage must have been unconscientious.
57 These factors were approved on appeal[16] and were generally accepted by the parties. On appeal, Giles JA, in the leading judgment, also added that once the first three ingredients are established, and the improvidence of the transaction is shown, the plaintiff's task is made easier by an equitable presumption to the effect that the improvident transaction was a consequence of the special disadvantage, and that the defendant has unconscientiously taken advantage of the opportunity presented by the disadvantage.[17]
[16] [2005] NSWCA 73
[17]
58 Once the essential elements are established, the onus is then on the plaintiff to show that the transaction was fair, just and reasonable.[18]
[18] NC Seddon and MP Ellinghaus, “Cheshire and Fifoot’s Law of Contract” 9th ed at p759
59 A similar formulation was recently described in the case of Christodoulou v Christodoulou & Anor,[19] wherein Kaye J says the following in relation to the concept of a “special” disability:
“the plaintiff must first demonstrate that she was under a relevant special disability or disadvantage, viz a viz the defendant, in respect of the particular transaction. The authorities have used the adjective “special”, to qualify the requisite disability or disadvantage of the party claiming to be the subject of unconscionable conduct, so as to repudiate any suggestion that the principle might apply, whenever there is some difference in the position or bargaining power of the parties. In particular, the nature of the disadvantage or disability must be “special” in the sense that it must be one which “… seriously affects the ability of the innocent party to make a judgment as to his own best interests …”.[20]
[19] [2009] VSC 583
[20] Citing Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 462 per Mason
60 Justice Kaye also emphasized that there are two elements of the “knowledge” component by stating:
“In Commercial Bank of Australia Ltd v Amadio, Mason J identified that element of the doctrine as requiring that the other party (the recipient) ‘… knows or ought to know of the existence of that (special) condition or circumstance and of its effect on the innocent party.’ It is important to note that, thus stated, the element contains two composite parts. First, the recipient must know, or have constructive knowledge of, the special disability or disadvantage of the donor. Secondly, the recipient must know (or have constructive knowledge) of the effect of that disability or disadvantage on the ability of the innocent party to make an appropriate judgment, as to whether the transaction was in his or her best interests.” (emphasis added) [21]
[21] [2009] VSC 583 at [82]
Trade Practices Act
61 The law applicable to s 51AC was conveniently summarised by Foster J in ACCC v Allphones Retail Pty Ltd (No 2):[22]
[22] [2009] FCA 17at [113]-[114]
There is a body of authority in this Court which establishes the following propositions:
(a) The scope of s 51AC is wider than that of s 51AA. The meaning of unconscionable for the purposes of s 51AC is not limited to the meaning of the word according to established principles of common law and equity.
(b) The ordinary or dictionary meaning of unconscionable, which involves notions of serious misconduct or something which is clearly unfair or unreasonable, is picked up by the use of the word in s 51AC. When used in that section, the expression requires that the actions of the alleged contravenor show no regard for conscience, and be irreconcilable with what is right or reasonable. Inevitably the expression imports a pejorative moral judgment.
(c) Normally, some moral fault or moral responsibility would be involved. This would not ordinarily be present if the critical actions are merely negligent. There would
ordinarily need to be a deliberate (in the sense of
intentional) act or at least a reckless act.
The above statements of principle provide useful guidance as to the content of the concept of unconscionability or unconscionable when used in s 51AC of the TPA. Of necessity, the authorities to which I have referred do not prescribe a precise definition which would be able to be applied to every set of circumstances presented to the Court for consideration. The application of the meaning accorded to the concept will always be a matter of judgment in every case and will depend upon a careful consideration of the circumstances of each case (emphasis added)
62 This summary of the law has since been quoted with approval in both the Supreme Court of Victoria[23] and in the Federal Court.[24]
[23] Perpetual Trustees Australia Ltd v Schmidt [2010] VSC 67 at [196] per Forrest J
[24] Australian Competition and Consumer Commission v Dukemaster Pty Ltd (ACN 050 275
63 Section 51AC(3) contains a non-exhaustive list of matters that the Court is to take into account in determining unconscionability. The defendant highlighted the following:[25]
[25] Defendant Submission at paragraph 8
(a) the relative strengths in the bargaining positions of the
supplier and the business consumer;
…
(c) whether the business consumer was able to understand any documents relating to the supply or possible supply of the goods or services;
(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the business consumer or a person acting on behalf of the business consumer by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the goods or services;
…
(i) the extent to which the supplier unreasonably failed to
disclose to the business consumer:
(i) any intended conduct of the supplier that might
affect the interests of the business consumer; and
(ii) any risks to the business consumer arising
from the supplier's intended conduct (being risks
that the supplier should have foreseen would not
be apparent to the business consumer);
…
(k) the extent to which the supplier and the business
consumer acted in good faith.
Defendant’s case
64 A wide range of matters was raised in the Defence on the issue of unconscionability. However, in written and oral submissions Counsel raised the following circumstances in particular: [26]
[26] Defendant Submission at paragraphs 37-40
• There was a lack of understanding and limited ability to read, write or speak english; • There was a lack of understanding of what was a complicated transaction; • That Peruncorp (and not Mr Zhang) was the “moving party” ; • That ASG “interfered with” the elements of the transaction so as to exacerbate the defendant’s disadvantage vis a vis Peruncorp 65 Accordingly, before considering the question of unconcsionability, it is necessary to make findings of fact about the above matters.
66 Another factor on which both parties made submissions was the question of Mr Zhang’s access to legal advice. This factor will also be considered, below, in conjunction with the issue of Mr Zhang’s understanding.
67 A further issue in the case was the time at which the unconscionability defence should be assessed. The defendant emphasized that although the loan document was executed in September, the moneys were only advanced in the context of the mortgage, transfer and other documents which were entered into on 21 December 2007. The oral evidence of Ms Mason was also that she did not consider herself bound by the loan in late September which was all subject to the valuation.
68 Given that making of the loan was subject to a valuation (clause 2 of Part B) and receipt of a mortgage (clause 6), and that the monies were not advanced until 21 December upon the simultaneous execution of the transfer and mortgage, I will generally consider events, not just as in September, but up to 21 December as the defendant maintained.
Special Disadvantage
English/ background
69 Mr Zhang gave his evidence through an interpreter. He alleged that his English was good enough on a so-so level, but reading and writing English was difficult for him. On one occasion, although he was also invited to leave the court room for the hearing of an objection, he actually walked towards the witness box.
70 However, a court room can be a confusing place for any lay person. Moreover, having had an opportunity of observing the defendant giving evidence in examination and cross examination, there were times when he appeared to be
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generally following the documents put in front of him, even prior
to any translation.
71 I accept that he has some difficulties with English, which is not his first language. However, he had been in Australia for a considerable period at the relevant time. Moreover, given he had completed at least part of the loan applications and direct debit request in his own handwriting in English, and my own observations of him (including his announcement of his address in English without the aid of the interpreter) I am satisfied that he had a basic working knowledge of the language.
72 In terms of his background, the defendant’s evidence was that he left school at 18 and had undertaken no post-school education. His current job was as a bus driver and his job at the time of the transaction was as a worker in a tyre factory.
73 However, an employee pay advice for June 2007 shows his year to date gross taxable income at $73, 974.43. His evidence was also that he owned three properties at the time of the transaction which included a residence at Coolaroo and two investment properties (an apartment in the city and in Wreckyn Street North Melbourne) ; his loan application discloses that he was receiving rent from the two investment properties.
74 The defendant had also signed contracts of sale and had borrowed money to buy his other properties. He now has seven properties including the two units and three other investment properties from which he receives rent. He was readily able to identify which was his best investment property.
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Understanding of the transaction
75 I accept the defendant’s own evidence as to his understanding as follows:
• He understood the case was about a mortgage and loan and had signed mortgages and loans previously; • He understood he had the obligation to pay the loan back as he received the rental and that if he could not get the money back from the lessee then ASG had the right to possess the properties; • He understood basically what a lease was and knew the rent was “very important” to him because without receiving the income from the units he would be unable to pay back the loan; • He was told that he would obtain a “top return” on entering the transaction (I reject his later attempt to resile from this evidence). 76 The defendant also claimed that he was not specifically aware that any of his other assets were “at risk.” However, he knew that if he was not receiving rent then he would be unable to pay back the loan in which case ASG had the right to possess the properties. Given his level of understanding enunciated already and his experience with commercial transactions, I am therefore satisfied that he was generally aware that the transaction carried “risks” which went with the “top return.”
77 Much was made of the fact that ASG received particular advice
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as to the risks of the transaction, including the advice from the valuer that there was no vacant possession and the advice from the lawyers that the owner might become liable for the return of the contribution to the resident.
78 There is no evidence from Mr Zhang that he did not understand these sorts of risks as he was not specifically asked about these matters.
79 Moreover, he must have understood that there was no vacant possession given he clearly understood the concept of a lease and had executed a 25 year lease in this case (with a further term up to 100 years). His evidence was also that he was specifically told that the return covered “one hundred years” from the lease.
80 The vendor’s statement also contained clear notice of the existence of the statutory charge of the resident.
Legal advice
Previous dealings with lawyers
81 There was evidence that Mr Zhang had retained lawyers on other occasions which evidence I accept. For example:
•
A solicitor acted for him in respect of the purchase of a residential premises at Coolaroo;
•
He gave the contract in relation to the purchase of a city apartment (which was quite a lengthy document) to a lawyer;
• He used a lady called “May” when he purchased the
25
property at Wreckyn street.
82 Although the evidence was that “May” was not a solicitor, the defendant had clearly obtained legal assistance in the past. Further, although the defendant sought to emphasize that, in the case of the city apartment, the lawyer was looking after many Chinese people, his evidence was that the lawyer did have “a look of the document and said there’s no big problem with it.”
Legal advice in relation to this transaction
83 The defendant also claimed that no-one ever told him to get legal or financial advice. However, the loan document contained an explicit recommendation that he obtain independent legal advice. The defendant was also told by Ms Ren that all the work, including the work of a solicitor and finance arrangements would be taken care of by her and Peruncorp. He thus appears to have been content to leave Peruncorp to arrange such advice.
84 There was correspondence from De Marco Lawyers dated 21 September, 2007 addressed to Mr Zhang which thanks him for his “instructions to act on your behalf.” However, the defendant’s evidence was that he was told by Ms Ren to see a lawyer to sign documents but he did not get any legal advice from this lawyer.
85 Given the reference in this letter to “this conveyancing matter” I accept Mr Zhang’s evidence to the effect that the services obtained were essentially conveyancing and I do not accept the plaintiff’s submission that I should draw some adverse inference from the absence of someone from De Marco as a witness.
26
86 However, this was a matter of the defendant’s own choosing. This was particularly the case given that legal advice was recommended (in the loan offer) and that he had actually received a blank “Certificate from a Legal Practitioner” document which he chose not to complete. [27]
[27] Thus, whenever documents were mailed to him he put them in a big envelope for storage
87 More particularly, there was nothing stopping him from accessing further advice (legal or financial), including advice as to risks to his other assets should he have so wished, particularly given documents were sent via mail and there was no evidence of time or other pressure being exerted. Indeed, there was ample opportunity between the loan application and the settlement of the transaction for Mr Zhang to obtain legal advice.
Moving Party
88 I accept that it was in both ASG’s and Peruncorp’s interests that the units be sold and that ASG had an entitlement to receive 100% of whatever Mr Zhang paid.
89 However, this was not necessarily to the detriment of the defendant. In particular, ASG was also interested in ensuring that the investor/defendant had a sufficient income stream so as to be able to meet his loan commitments.
90 Moreover, I accept the general submissions of the plaintiff, that Mr Zhang appears to have chosen himself to constitute Ms Ren as his agent in the transaction to completely arrange finance, legal assistance and advice in circumstances where he knew she was the representative of Peruncorp to promote or to sell those units to customers.
Interference
91 The defendant alleged there was “ASG interference” in the transaction which served to put Mr Zhang at a “further disadvantage.”[28]
[28] Defendant Submission at paragraph 40
92 It is true that, as set out already, ASG engaged in discussions with Peruncorp in late 2007 wherein it appears to have shared aspects of its own advice. However, this was understandable given ASG were clearly trying to gain assistance in understanding a business model that was unfamiliar to it. Counsel for the defendant also fairly conceded that there was “no precedent” that such circumstances pointed to a special disadvantage.
93 In any event, I am unable to be satisfied that any such discussions put Mr Zhang at any “further disadvantage” in the circumstances of this case. More particularly, the transaction appears to have been altered to provide a benefit to Mr Zhang as he was given direct access to income streams from the residents, due to the change in the identity of the lessee to the manager, 84th Templestowe (who was actually receiving income streams from the residents).
94 Further, although it is true that the extra charge (suggested by McDonald Slater and Lay) might have provided extra security for the defendant, this was essentially a credit risk issue faced by ASG as well as the defendant. The defendant was given ample opportunity to make his own assessment of the credit risks.
Summary of findings
95 In considering whether there is “special” disadvantage all of the above findings are important, but they may be summarised as follows:
•
the defendant has some difficulties with English, which is not his first language, but had a basic working knowledge of the language;
•
the defendant had little formal education, but presented as an intelligent man who had previously purchased investment property, received rent, and borrowed money;
•
the defendant basically understood the loan, and mortgage transactions;
•
The defendant knew that if he was not receiving rent then he would be unable to pay back the loan in which case ASG had the right to possess the properties. He was generally aware that the transaction carried “risks” which went with the “top return”;
•
The defendant was not specifically asked about the issue of vacant possession and of the possible obligation to pay an outgoing resident’s contribution. However:
29
o The defendant must have understood there was no vacant possession given he understood the concept of a lease and had executed a 25 year lease in this case (with a further term up to 100 years). His evidence was also that he was specifically told that the return covered “one hundred years” from the lease;
o
The contractual documents also put him on notice of the existence of the statutory charge which he could have investigated further had he so wished;
• The defendant has accessed lawyers in the past, including for advice, and must have understood this option was available. Although it appears that he did not obtain legal advice in relation to this transaction, this was a matter of his own choosing; • Although Peruncorp might be seen as the “moving party,” the defendant essentially consented to this course; • I am not satisfied that any “interference” in the transaction exacerbated or created any disadvantage given, particularly, that the substitution of 84th Templestowe actually benefitted the defendant as well as ASG. 96 In my view, then, considered individually or cumulatively, there is no “special” disadvantage and certainly none that seriously affected the defendant’s capacity to judge or protect his own interests.
30
Knowledge of ASG
97 Even if there was a special disadvantage, ASG also had limited knowledge of the relevant circumstances.
background
98 Although ASG knew that the defendant’s occupation was non- skilled as a tyre builder (from the loan application), it was also aware that he had purchased two other apartments; and that the loan was to be applied wholly or predominantly for business.
99 In an internal diary note of 28 August 2007 about Mr Zhang’s proposed loan, Mr Kelly also referred to a conversation with Brett Haywood wherein it was suggested that Chinese “coming here” are “generally the more financial ones… often they pay cash for their home and this has seemingly happened in this case.” In a further memorandum from Kevin Kelly of 25 October 2007 to Mr Pratt and Ms Mason, he stated that ASG knew that there was a “preponderance of Asians (Chinese) doing these deals” He further suggested that “no doubt there are significant tax concessions” in what these investors were doing who were generally “very security conscious and at the same time keen to repay their borrowings as quickly as possible.”
100 The references above do not suggest that ASG knew, or ought to have known, that any of the investors, including Mr Zhang, were under a special disadvantage in terms of financial knowledge.
101 In terms of language, although ASG knew the defendant was
31
from a non-english speaking background, the evidence of Ms Mason was that she did not know he did not speak English. I accept this evidence as there was nothing on the documentation (such as an interpreter’s certificate) to suggest that ASG should have been aware of any english limitations.
Understanding of transaction
102 There was simply no evidence to suggest that ASG knew, or should have known, of any lack of understanding of the transaction, particularly given the loan application was completed in English and that there was no direct contact with the defendant. Indeed the acknowledgment stated that the defendant had read and understood the loan offer and financial statement.
Legal advice
103 In terms of legal advice, Ms Mason gave evidence that she did not know Mr Zhang had not received legal advice.
104 The highest the evidence went was that there were facts by which ASG might have inferred that Mr Zhang had not received legal advice. This was because of the absence of solicitor’s details in the loan offer and also that no executed “acknowledgment of receipt of legal advice”[29] and/or Certificate of a Legal Practitioner appeared to be have been retained.
[29] Referred to in a pro forma letter dated 6 December 2007 from McDonald Slater and Lay
105 However, even if ASG should have inferred that no legal advice had in fact been obtained, no authority was produced which suggests that a financier cannot provide finance in circumstances where the other party has not obtained legal advice recommended to it. In fact Counsel for the defendant fairly conceded that he did “not say” that the cases have got to the point where a financier always has to make sure that someone has legal advice. Such a proposition would adversely affect the ordinary running of business affairs. It also seems particularly inappropriate where a party seeks finance in order to gain a return for himself rather than where the party is a guarantor for another.
106 It was also not clear that the sort of matters raised by McConnell Jaffray would have been the subject of legal advice in any event. There is no duty on a financier to provide a borrower with commercial advice.[30] This is consistent with the terms of the blank Certificate which states that the solicitor is to inform the borrower “in very clear terms” that the solicitor was not expressing any opinion nor advising on the “viability of the transaction” or the borrower’s ability to make the required payments.
[30] Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 at 276
Moving party
107 Although Peruncorp was the “moving party,” this may have put a heavier onus on Peruncorp, and particularly Ms Ren, who dealt with the defendant, but does not of itself give rise to actual or constructive knowledge of special disadvantage on the part of ASG which was clearly a novice in relation to Peruncorp’s business model.
“Interference”
108 In terms of the issue of “interference”, ASG was aware that it had shared some of its advice with Peruncorp. However, such “interference” was not of itself special disadvantage for reasons already given. Further, there is no evidence that ASG knew, or ought to have known, of the effect on Mr Zhang ( whatever that is since the issue was not the subject of evidence).
109 For all of the above reasons, even if there is special disadvantage, I am not satisfied that ASG had actual or constructive knowledge of anything constituting special disadvantage and no actual or constructive knowledge of any effect on Mr Zhang’s ability to make an appropriate judgment.
110 It follows that the unconscionability defence at common law fails.
Unconscionability under TPA
111 Based on the above factual findings, I am also not satisfied that there was unconscionability under the TPA, having regard to the principles cited earlier. In particular, I am not satisfied that the plaintiff engaged in any “deliberate” or “reckless” conduct wherein a “pejorative moral judgment” is appropriate.
112 In relation to the factors specified in 51AC(3):
•
In terms of bargaining positions, both ASG and the defendant were vulnerable to Peruncorp. However, as indicated already, the defendant permitted Peruncorp to run the transaction from his point of view;
34
•
I have already made findings to the effect that the defendant was able to understand the basis components of the transaction;
• No undue influence or pressure was exerted by ASG; •
Although ASG did not disclose its legal/commercial advices, there was no reason for it to foresee that the matters therein would not be apparent to Mr Zhang or any advisors retained by Mr Zhang;
• There is no lack of good faith on the part of ASG. 113 It follows that the defence based on unconscionable conduct, both at statute and under common law, is unsuccessful and that the plaintiff is therefore entitled to judgment.
Restitution
114 Given the above finding, the consideration of restitution in this instance is unnecessary. However, particularly given there are other proceedings pending before this court (issued by ASG against other investors) I will provide a brief summary of my views.
115 According to generally accepted analysis a successful
restitutionary claim requires proof of the following:[31]
[31] Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 at 568
1. There is enrichment of the defendant;
2. Such enrichment is gained at the expense of the plaintiff;
3. There is an unjust factor which requires the reversal of the benefit;
4. No recognised defence can be shown by the defendant
116 The defendant submitted that there was no “unjust” enrichment as he never had access to the fund for any purpose other than for the purchase of the units (which also gave an entitlement to rent). Further, that if the plaintiff was entitled to restitution, it was not entitled to a return of the moneys but to the title to the two units.[32]
[32]
117 However, the primary defence raised by the defendant was change of position.[33]
[33]
118 Accordingly, the issues were:
(a) whether an entitlement to restitution is, prima facie,
established;(b) whether the defence of change of position is made out;
(c) if an entitlement to restitution is established, what remedy is
appropriate.Elements of claim
119 Under the first element, the benefit received by the defendant was the sum of $340,000.00 being the loan amount provided to him from ASG.
120 In terms of the second element, the case of Roxborough v Rothmans of Pall Mall Australia Ltd stated that the “subtraction from the plaintiff’s wealth enables one to say that the defendant’s unjust enrichment has been ‘at the expense of the plaintiff.’”[34] In the current matter the benefit (the sum of $340,000.00) was thereby conferred on the defendant, Mr Zhang, at the expense of the ASG.
[34] (2001) 208 CLR 516 at 529 citing Commissioner of State Revenue (Vic) v Royal Insurance
121 Finally, in order to satisfy the third element, the conferral of the benefit must be unjust. In David Securities Pty Ltd v Commonwealth Bank of Australia[35] the joint judgment provided that for the benefit to be unjust there must be the existence of a “qualifying or vitiating factor such as mistake, duress or illegality.”[36] Established unjust factors also include “a total failure of consideration.”[37] In Roxborough, the majority stated ”consideration…embraces payment for a purpose which has failed as, for example, where a condition has not been fulfilled or a contemplated stated of affairs has disappeared.”[38]
[35]
[36]
[37] Winterton Construction Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363 at 374 per
[38] Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 208 CLR 516 at 525.
122 In the present case, given that the restitution claim would only arise where the transaction has been found to be void due to unconscionable conduct, the loan and mortgage would be set aside. Consequently, the sum of $340,000.00 would have been provided in exchange for no consideration and the “unjust” element would be established.
123 It follows that the three elements are satisfied and the claim for restitution would be, prima facie, established.
Change of position defence
124 In terms of the change of position defence, in David Securities Pty Ltd v Commonwealth[39] the High Court recognised the defence and stated that the defence is relevant to enrichment because “its central element is that the defendant has acted to his or her detriment on the faith of the receipt.” The majority in David Securities did not think it appropriate to seek to exhaustively define the circumstances in which the defence of change of position might be made out, but emphasised that the defence of change of position was necessary to ensure that the enrichment of the payee “is prevented only in circumstances where it would be unjust.” [40]
[39] David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 at 385.
[40] (1992) 175 CLR 353 at 385; their Honours’ emphasis
125 Some recognised elements are conveniently described in K Mason, J W Carter & G J Tolhurst Restitution Law in Australia (2nd ed) (2008)[41] as follows:
[41] LexisNexis Butterworths to be the following at [2407], p860
a) The onus of establishing the change of
position defence, including the necessary reliance, lies
upon the defendant.
b) The defence may be applied pro tanto.
c) Mere expenditure does not constitute a change of
position.
d) The defence is not available where the defendant has
simply spent the money received on ordinary living
expenses.
e) Money spent solely in reliance on the payment, from
which the defendant no longer retains a benefit,
constitutes a good defence.
f) The defence is available only to those who act in good
faith.
g) The expenditure made in reliance must be irreversible.
126 In my view, reliance on the defence is misplaced. Thus the defendant was not the innocent recipient of funds mistakenly paid, rather the sum was received as all involved intended it to be received. It is therefore difficult to see how the defendant acted to his “detriment” as discussed in David Securities where he has applied money in pursuance of a scheme which all saw as beneficial and in circumstances where he clearly understood the need to repay.[42]
[42] Equuscorp v Bassat [2007] VSC 553 per Byrne J at [136].
127 There are moreover at least two other obstacles to the defence.
128 Thus, as indicated above, the evidence as to the defendant’s alleged “difficulties” in selling the units was vague. The absence of vacant possession was not clearly a problem given the letter from McCononell Jaffray of 15 November previously cited (even if there is such an absence which is far from clear). There is also no evidence of any actual attempts made to sell the units. Rather, there was only evidence of the defendant’s “understanding” that that they were “not worth much.”
129 In these circumstances, the defendant has not discharged his onus in showing that the expenditure was “irreversible.” To the contrary, the courts have generally found that where a defendant purchases an asset in reliance on the receipt of funds, the change is reversible because the asset can be sold.[43]
[43] James Edelman & Elise Bant ‘Unjust Enrichment in Australia,’ 2006 at page 325
130 Given the state of the evidence I am also not satisfied that the defendant “no longer retains a benefit” as alleged.
131 In such circumstances, the defendant has not established the defence of change of position.
Remedy
132 In Maguire and Another v Makaronis and Another,[44] the parties were also in a creditor/debtor relationship by way of a loan secured by property. The borrower failed to make several loan repayments and the lender sought to enforce the loan agreement and take ownership of the properties provided as security. The trial judge made an order that the mortgage be set aside unconditionally. However, the High court (by a majority) held that to set aside the mortgage (and thereby destroy the personal covenants of the borrower to pay the monies loaned) would leave the respondents [borrowers] “with the fruits of the transaction of which they complain, whereas their equity was to have the transaction rescinded and so far as possible, the parties remitted to their original position.”[45] The Court thereby endorsed the decision of the dissenting judgment of Brooking J in the Victorian Court of Appeal as to the repayment of the advance and commercial interest.
[44] Maguire and Another v Makaronis and Another (1997) 188 CLR 449
[45] Maguire and Another v Makaronis and Another (1997) 188 CLR 449 at 475
133 This case was also applied in Permanent Mortgages Pty Ltd v Vandenbergh[46] by Murphy J who stated, “in the case of a secured loan, the party seeking rescission should do equity by repaying the monies it received, secured by the mortgage plus interest.”[47]
[46] [2010] WASC 10
[47] [2010] WASC 10 at [391]
134 On the basis of these principles, the plaintiff would also be entitled to the amount sought (which includes interest at 8.66%) on the basis of its restitution claim even if, contrary to my earlier findings, the loan and mortgage were to be set aside.
Third party
135 By third party notice dated 21 July 2010 the defendant claimed that it was entitled to be indemnified by the third party or alternatively was entitled to contribution from the third party against any judgment including costs which the plaintiff may obtain in this proceeding.
136 The basis of the claim was that the third party (who succeeded Peruncorp as lessee) was in default of lease payments under a lease agreement which rental was to be used by the defendant to repay his loan with the plaintiff.
137 The third party was originally represented and filed a defence However, by order 1 of 4 February, 2011, leave was granted for Moores Legal to file notice ceasing to act and the matter was listed for further mention on 28 March 2011. By order 3 , the third party was to file and serve an affidavit of documents and further (in the light of its non contact and non attendance) was to write to the parties and the Court advising whether it intended to defend the third party proceeding. By order 4 , if the third party failed to comply with order 3, then an order could be made by the trial judge striking out the third party’s defence.
138 Although the order of 4 February 2011 was served,[48] the third party did not write to the court (or the parties) or file (and serve) an affidavit of documents. It also did not attend on 28 March.
[48] Affidavit of Service of Pui San Chia of 28 March 2011
139 In all the circumstances, then I am satisfied that the third party’s defence should be struck out pursuant to the orders of 4 February.
140 Given that the plaintiff is entitled to judgment, the defendant is thereby also entitled to judgment in default of a defence pursuant to its third party notice.
Conclusion
141 The plaintiff is entitled to judgment in the amount of
$411,384.79.
142 The defence of the third party is struck out and the third party is to pay the defendant the sum of $411,384.79.
143 I will hear from the parties as to the precise form of final orders including costs.
---
Certificate
I certify that these 42 pages are a true copy of the reasons for decision of Her
Honour Judge Kennedy, delivered on 6 May 2011.
Dated: 06 May 2011
Sonja Mileska
Associate to Her Honour Judge Kennedy
paragraph 4
2
5 The Defence at paragraph 3P actually cites s52AC but both parties accepted that this was a
typographical error and proceeded on the basis that S51AC was the applicable provision. They also accepted that the former TPA applied (and see Trade Practices (Australian Consumer Law Act) (No2) 2010 Item 6 of Schedule 7 and definition of “commencement” in s2)
3
6
7
8
October 2007
13 For example, there is a handwritten note in the advice of 15 November to “refer to Zac;” the
letter of 22 November refers to a “meeting with Bernard Tan”; the ASG letter of 29 November refers to “liasing” with Mr Tan and the “revamping” of documents; the letter of 30 November of ASG’s other solicitors, McDonald Slater and Lay is marked “attn: B. Tan” and has his contact details on the front
14 (1983)151 CLR 447 at 467
17 [2005] NSWCA 73 at [2]
citing Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 474 per Deane J
J and Louth v Diprose (1992) 175 CLR 621 at 628-9 per Brennan J
18
19
226) [2009] FCA 682, per Gordon J at [16] to [17]
20
21
and this blank certificate was one of the documents from that envelope
27
28
32 Defence at paragraphs 15(a),(b) and (d); and note that no submissions were ultimately
made to the effect that repayments had not been accounted for despite a suggestion of this
in paragraph 14
33 Defence at paragraph 15(c)
Australia Ltd (1994) 182 CLR 51 at [52] per Mason CJ.
35 (1992) 175 CLR 353.
36 (1992) 175 CLR 353 at 379 (Mason CJ, Deane, Toohey, Gaudron & McHugh JJ).
Gummow J.
37
38
39
40
41
42
0
17
0