Commercial Base Pty Ltd v Watson
[2013] VSC 334
•27 June 2013
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 6580 of 2011
| COMMERCIAL BASE PTY LTD (ACN 068 771 817) | Plaintiff |
| v | |
| ROBERT NOEL WATSON AND HELEN MARY WATSON | Defendants |
---
JUDGE: | ALMOND J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 12-14,18-19 March 2013 | |
DATES OF JUDGMENT: | 27 June 2013 | |
CASE MAY BE CITED AS: | Commercial Base Pty Ltd v Watson & anor | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 334 | |
EQUITY – Duress – Unconscionable dealing – Whether the loan agreement or mortgage signed by the first defendant was signed under duress or in circumstances where the plaintiff unconscientiously took advantage of the first defendant’s financial circumstances – Whether the loan agreement constituted an attempted to bind the first defendant to loans which were not approved, agreed, discussed or connected with him.
MONEY – Payment – Whether the first defendant is jointly and severally liable for advances made by the plaintiff – Whether the plaintiff settled or compromised the debt with the first defendant.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | C R Northrop | GSM Lawyers |
| For the Defendants | The first defendant The second defendant | Appeared in person Appeared in person |
HIS HONOUR:
In 2002, the first defendant, Robert Noel Watson, and the first third party, Frederick Charles Gibson, and companies associated with them brought proceedings in the Federal Court of Australia against Robert James Forbes and companies associated with Mr Forbes. The litigation concerned allegations that Mr Forbes and his companies were in breach of obligations under joint venture arrangements. Claims were made against the Forbes interests for breach of contract, breach of fiduciary duties and under the Trade Practices Act 1974 (Cth)[1] (“the Federal Court proceeding”).
[1]Gibson Motorsport Merchandise Pty Ltd & ors v Robert James Forbes & ors [2005] FCA 749, [13] and [14].
The applicants’ claims in the Federal Court proceeding were partially successful. The applicants appealed in respect of claims which did not succeed at first instance. The Federal Court appeal was dismissed in March 2006. [2]
[2]Gibson Motorsport Merchandise Pty Ltd & ors v Robert James Forbes & ors [2006] FCAFC 44.
In separate litigation brought in the Supreme Court of Victoria in 2003, Mr Watson and Mr Gibson and companies associated with them brought proceedings against their legal practitioners Ebsworth & Ebsworth, and Mr Phillip Battye, a solicitor, alleging breaches of fiduciary duty and seeking damages for economic loss suffered (“the Supreme Court proceeding”). These claims were dismissed in 2008.[3] An appeal to the Court of Appeal was dismissed on 10 December 2010.[4] An application for special leave to appeal to the High Court was dismissed on 2 September 2011.[5]
[3]Watson & ors v Ebsworth & Ebsworth [2008] VSC 510.
[4]Watson & ors v Ebsworth & Ebsworth [2010] VSCA 335.
[5]Watson & ors v Ebsworth & Ebsworth [2011] HCA Trans 246.
Commercial Base Pty Ltd (“Commercial Base”), the plaintiff in this proceeding, says that it provided funding from 2003 to 2011 to Mr Watson and Mr Gibson for the Federal Court proceeding, the Supreme Court proceeding, the subsequent appeals of each and the application for special leave.
Had the litigation been successful, and had damages been recovered, Commercial Base would have been repaid in full, including interest for the total amount advanced. Unfortunately the litigation was, on the whole, unsuccessful.
Commercial Base seeks repayment of sums it says it advanced and possession of land at 832 Esplanade, Mornington which was provided to Commercial Base as first mortgage security for the advances.
In this proceeding there are two named defendants: Mr Watson and his estranged wife Helen Mary Watson. Mrs Watson who requested that she be referred to as Ms Heard, represented herself at trial and settled with the plaintiffs several days into the hearing on disclosed terms, which included her consent to the plaintiff taking possession and selling the mortgaged property with the net proceeds of sale being paid to the plaintiff. The Court was informed, in substance, that the settlement was on the basis that the plaintiff would have no further recourse to the second defendant. Thereafter, the case proceeded solely against the first named defendant, Mr Watson.
Mr Watson, by counterclaim, seeks a declaration that the loan agreement and mortgage are unconscionable dealings and should be set aside; an order that the loan agreement and the mortgage are void; and an order varying or refusing to enforce the loan agreement and mortgage.
In addition, by statement of claim annexed to a third party notice, Mr Watson seeks indemnity or contribution against third parties Mr Gibson and his wife, Christine Gibson, in respect of any judgment which the plaintiff may obtain against him in such amount as the court considers just and equitable.
The first named third party, Mr Gibson, attended the trial for several days. He was not called as a witness and declined the opportunity to ask questions or make submissions. On the second day of the trial, the Court was informed that a sequestration order had been made against Mr Gibson in the Federal Magistrates Court.
The second named third party, Mrs Gibson, did not attend the trial. On the first day of the hearing, the Court was informed by the solicitors, then on the record for the third parties, that Mrs Gibson was aware of the trial but had elected not to attend.[6]
[6]Part way through the first day of trial the solicitors for Mr and Mrs Gibson sought and were granted leave to cease to act for Mr and Mrs Gibson in the proceeding.
The substantive issues in dispute raised in Mr Watson’s defence and counterclaim and in submissions made by him at trial may be summarised as follows:
1.Was the loan agreement or the mortgage, each dated 27 August 2009, signed by Mr Watson under duress or in circumstances whereby Commercial Base unconscientiously took advantage of Mr Watson’s financial circumstances?
2.Is Mr Watson jointly and severally liable for the advances made by Commercial Base during the period 30 October 2003 to 26 October 2011?
3.Did the loan agreement comprise an attempt to bind Mr Watson to loans which were not approved, agreed or discussed with him and had no connection with him?
4.Did Commercial Base settle or compromise the amount of the loan outstanding on the basis that it would accept a payment of $3.2 million with Mr Watson and Mr Gibson each to contribute $1.6 million?
5.Is Mr Watson entitled to indemnity or contribution from Mr Gibson and Mrs Gibson?
1. Was the loan agreement or the mortgage signed by Mr Watson under duress or in circumstances whereby Commercial Base unconscientiously took advantage of Mr Watson’s financial circumstances?
The circumstances in which the loan agreement and the mortgage came to be signed on 27 August 2009 need to be understood in their historical context.
On 17 December 2008, Mr Watson had a meeting with the National Australia Bank to review his business with the bank. At that meeting, officers of the bank informed Mr Watson that the bank was “keen to claw back [its] overdraft facility”, which at that stage was approximately $2.56 million in debit.
During the first half of 2009, Mr Watson investigated ways to obtain funds to pay out the National Australia Bank, including an approach to Westpac Banking Corporation in March 2009 which, according to Mr Watson, resulted in Westpac giving him approval to borrow $1.75 million. The plaintiff disputed that Westpac had given approval to Mr Watson to borrow $1.75 million at any relevant time. It is not necessary to decide this issue. Whether the discussions with Westpac matured sufficiently to constitute approval or were merely indicative discussions falling short of approval is of no ultimate consequence as it is common ground that Westpac did not lend any money to Mr Watson to refinance the National Australia Bank loan facility in whole or part.
Early in July 2009, Mr Adams had a meeting with Mr Watson and Mr Gibson, during which refinancing of the NAB loan and the provision of some additional working capital was discussed. Though Mr Adams indicated broadly the terms upon which he would be willing to lend additional funds, no agreement was reached at this meeting. Following the meeting, Mr Adams asked a valuer to provide kerbside valuations of the Gibson and Watson homes.
On 17 August 2009, Mr Watson and Mr Gibson met Mr Adams at his office. At this meeting, Mr Watson requested a loan of additional funds and said that his lawyers could prepare the documents and that if Mr Adams was not happy (with them) his lawyers could prepare the documents.
The following day, 18 August 2009, Mr Tim Dixon, Mr Watson’s solicitor, sought instructions from Mr Watson as to the name and address of the lender, the names of the borrowers, the amount to be borrowed, the term, security and any other conditions. By the early afternoon of 19 August 2009,[7] a draft loan agreement and draft mortgages over the Gibson and Watson properties had been prepared. It appears that the draft documents were sent later that afternoon directly by Mr Watson to Mr Adams’ office ‘for review and if suitable to be signed’.[8]
[7]Exhibit D1. Draft Loan Agreement (part of), Exhibit P3.
[8]Exhibit P10.
On or about 21 August 2009, by a minute of consent orders executed by their legal representatives, Mr Watson and Ms Heard gave their consent to NAB taking possession of their home in the event that the NAB debt was not paid by 3.00pm on 26 August 2009.[9]
[9]CB12.
On Tuesday 25 August at 3.18pm, Mr Watson emailed his solicitors, Mr Tim Dixon and Mr Adam Cooke, of a legal firm then named Voitin Walker Davis, stating that he had been advised that the proposed revisions to the agreement “should be sent to us shortly to review”.[10] At 3.34pm, Mrs Cynthia Adams (Mr Adams’ wife and personal assistant) emailed Mr Watson attaching two loan agreement documents described as “two documents as per George’s request” and requested the time and place of settlement and the amount payable to National Australia Bank by return email.[11]
[10]Exhibit P11.
[11]Exhibit P20.
It is evident from this email that the solicitors for Commercial Base, GSM Lawyers, had prepared two loan agreements. These were to be executed as deeds, the first relating to loans previously made by Commercial Base (defined in the agreement as “Loan Amount 1” of $855,687 and “Loan Amount 2” of $3,314,093) and the second relating to a loan of $3 million to re-finance the NAB loan ($2.4 million), and for additional working capital ($600,000).
Mr Watson testified that he did not recall seeing two draft loan agreements. He recalled there was one attachment to the relevant email which related to the loan agreement for $3 million. In support of this proposition, Mr Watson referred to Mrs Adams’ email sent at 3:34pm which showed that although there were two attachments, both were titled “loan agreement_001.pdf” and that the subject line of the email was “loan agreement” which is in the singular rather than in plural.[12] Mr Watson also relied on his contemporaneous email to Mr Cooke and Ms Anne- Marie Flanagan (an associate at Voitin Walker Davis) which referred to “loan agreement” and “revised document”, each in the singular.[13] I accept that these documents are consistent with and provide some support for Mr Watson’s recollection.
[12]Exhibit P20.
[13]Exhibit P12.
Nevertheless, the contemporaneous documents must be viewed as a whole. The email from Mrs Adams sent at 3.34pm on 25 August 2009 expressly refers to two documents, and Mr Watson conceded that he signed two loan agreements, one with respect to loans previously made, the other with respect to the loan amount of $3 million, together with a mortgage which expressly refers to two loan agreements.[14] Although I accept that Mr Watson genuinely does not now recall having received both loan agreements, considering the evidence as a whole I am satisfied on the balance of probabilities that Mr Watson was provided with the two loan agreements at some time in the afternoon on 25 August 2009.
[14]Exhibit P21.
On the morning of 26 August 2009, Mr Watson sent an email to his solicitor Mr Dixon, omitting formal parts, in the following terms:
We had little choice but to sign, (might I add under extreme duress) otherwise we were out of business and out of home today. Adam explained to me very clearly and precisely the revisions. However, we have to take a deep breath and as you said on Friday, let’s just concentrate on going forward and growing the Chocolate Company. There has been enough stress created around all this and we just need to move on as best we can and make sure we give the Appeal the absolute best shot we can.[15]
[15]Exhibit P12.
Mr Watson gave evidence that the person referred to as “Adam” in this communication is Mr Adam Cooke, then an associate with the legal firm Voitin Walker Davis. Mr Watson recalled having been taken through revisions in the $3 million loan document but did not know whether he was taken through the revisions to the other loan document. In my view, it is highly likely that Mr Watson received both loan agreements on 25 August 2009 and at least had the opportunity to obtain legal advice and a full explanation of each document before signing them. Mr Watson did recall that the documents that he had signed were withdrawn and replaced with a new loan document on 26 August 2009. During the trial, this document was referred to as the “amalgamated loan agreement”. It included in the one deed loan amounts representing the amount outstanding with respect to previous advances (loan amounts 1 and 2), and the loan to be made of $3 million (loan amount 3).
At some time during the afternoon of 26 August 2009, GSM Lawyers provided this loan agreement, mortgages and a solicitor certificate to Mr Cooke for execution by relevant persons.
Mr Dixon, who was at that time a principal of the legal firm Voitin Walker Davis, gave evidence that he took instructions exclusively from Mr Watson and had obtained a written direction from Mr Gibson to take instructions from Mr Watson; that his firm received from GSM Lawyers some documents to be signed by the Gibsons and the Watsons, that he took the documents home to Mornington on the evening of 26 August 2009 and the following morning took steps to have the documents signed by the Watsons and the Gibsons.
At about 7.15am on 27 August 2009, Mr Dixon went to the Watsons’ home. Initially, Mr Dixon spoke to Ms Heard and noted that Ms Heard looked distressed. He proceeded to explain to Ms Heard the formal reasons he was there, the necessity for him to explain the general nature and effect of the documents he was asking her to sign and the fact that he was required to provide a solicitor’s certificate. Mr Dixon then took Ms Heard through each paragraph of the loan agreement, explaining the essence of each paragraph and answering her questions. Ms Heard signed the loan agreement and the mortgage. Her signature was witnessed by Mr Dixon. Mr Dixon then went to the kitchen towards the rear of the house and had a brief conversation with Mr Watson, saying words to the effect, “You know all about this”. According to Mr Dixon, Mr Watson agreed with him and signed the relevant documents.
Under cross-examination by Mr Watson, he was asked whether an email transmission from GSM Lawyers on 26 August 2009 was transmitted at 5.46pm. Mr Dixon gave evidence that this may well have been so. He recalled it being late in the day, and said that he did not disagree with the proposition that the set of documents arrived after the time that settlement had been scheduled to occur with the NAB on the afternoon of 26 August 2009.
Mr Watson gave evidence that after receiving the loan documents on 26 August 2009 he had a telephone conversation with Mr Adams. Mr Adams agreed that there was a conversation but could not remember whether it occurred on 26 or 27 August 2009. Mr Adams recalled in substance that the Watsons were being pressured very heavily by their bank and that Mr Watson was not happy with the documents that had been produced; that he said to Mr Watson that if he was not happy they did not have to proceed, he could just leave it. Under cross-examination, it was put to Mr Adams that Mr Watson said, “What choice do I have, we have just missed the NAB deadline by four hours”. Mr Adams said he did not recall that conversation but did recall saying that if Mr Watson did not want to take the money no one was forcing him to take it, that he had the option to take the money. Under cross-examination, Mr Watson referred to the fact that he called Mr Adams when he received the loan documents but did not elaborate about the content of the conversation.
The following day, 27 August 2009, Mr Watson signed a loan agreement which superseded the two loan agreements previously signed. The loan agreement signed on 27 August 2009 comprises a re-finance of previous loan amounts: Loan amount 1 ($855,686.99) and Loan amount 2 ($3,314,093.05) and the new loan amount, Loan amount 3, for $3 million. The loan agreement and the mortgage were signed in the circumstances outlined by Mr Dixon early on 27 August at Mr Watson’s home.
In Mr Watson’s defence, Mr Watson claims that he signed the loan agreement for loan amounts totalling $7,169,780.04 and the mortgage in circumstances in which Commercial Base has taken unconscientious advantage of his financial circumstances since: Mr Watson had no reasonable alternative but to sign as he would otherwise be left in default to the NAB and the NAB would take possession of his home; and the terms of the loan agreement were unfair in that they incorporated debts for which Mr Watson believed he was not liable for and interest terms which compounded interest prior to the date of the loan agreement. Mr Watson also claims in his defence that Commercial Base had engaged in unconscionable conduct in contravention of the Trade Practices Act 1974 (Cth) and the ASIC Act 2001 (Cth) and/or general law. For the same reasons, Mr Watson claims that he signed the loan agreement and mortgage under economic duress in that the pressure exerted on Mr Watson by Commercial Base amounted to compulsion of his will and that the pressure exerted was illegitimate.
Although Mr Watson did not make any submissions during the trial about the applicable legal principles and statutory provisions, I deal with them briefly below.
Relevant principles – economic duress and unconscientious dealing
The concept of economic duress in Anglo-Australian law was considered by the New South Wales Court of Appeal in Australia & New Zealand Banking Group v Karam & ors.[16] After reviewing the relevant case law, Beazley, Ipp and Basten JJA held that the terms “economic duress” and “illegitimate pressure” should be abandoned in favour of equitable concepts relating to unconscionability and undue influence. Beazley, Ipp and Basten JJA stated:
The vagueness inherent in the terms “economic duress” and “illegitimate pressure” can be avoided by treating the concept of “duress” as limited to threatened or actual unlawful conduct. The threat or conduct in question need not be directed to the person or property of the victim, narrowly identified, but can be to the legitimate commercial and financial interests of the party. Secondly, if the conduct or threat is not unlawful, the resulting agreement may nevertheless be set aside where the weaker party establishes undue influence (actual or presumptive) or unconscionable conduct based on an unconscientious taking advantage of his or her special disability or special disadvantage, in the sense identified in Commercial Bank of Australia Ltd v Amadio. Thirdly, where the power to grant relief is engaged because of a contravention of a statutory provision such as s 51AA, s 51AB or s 51AC of the Trade Practices Act (Cth), the Court may be entitled to take into account a broader ranger of circumstances than those considered relevant under the general law. Pursuant to both provisions of the Trade Practices Act (Cth) and the Contracts Review Act, the relative strengths of the bargaining positions of the parties, and their ability to negotiate terms, will be relevant. However, it does not follow that because, for the purposes of s 9(2)(a) of the Contracts Review Act, there was a material inequality of bargaining power, a contract between such parties will necessarily be set aside. Most “contracts of adhesion” will fall into that category, but most will be valid. [17]
[16](2005) 64 NSWLR 149 (“Karam”).
[17]Ibid 168.
This approach effectively renders the concept of economic duress redundant and limits the circumstances in which a court would intervene in equity to set aside contracts and other transactions procured by lawful economic pressure to the established equitable doctrines of undue influence and unconscionable dealing of the type set out in Commercial Bank of Australia v Amadio.[18]
[18](1983) 151 CLR 447. Note discussion in P Vout, Unconscionable Conduct – The Laws of Australia (2nd Ed.) 302-303.
As to unconscionable dealing, the elements required to be proven to claim equitable relief are well established. For present purposes, it is sufficient to say that the party seeking relief must at the time of entering into the transaction, suffer from a special disability vis-à-vis the other party; the special disability must seriously affect the party’s capacity to judge or protect his or her own interests; the other party must know of the special disability; that party must take advantage of the opportunity presented by the disability; and the taking of advantage must have been unconscientious.[19]
[19]Blomley v Ryan (1956) 99 CLR 362; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; Louth v Diprose (1992) 175 CLR 621.
The party seeking relief on the basis of undue influence (where there is no antecedent relationship of influence) must prove some illegitimate, wrongful or unfair conduct which was exerted in such a way as to leave the other party to the transaction without a free and voluntary choice.[20] While there is overlap between unconscientious dealing and undue influence, undue influence looks to the quality of the consent or assent of the weaker party while unconscionable conduct looks to the attempted enforcement or retention of the benefit of a dealing with a person under a special disability.[21]
[20]P Vout Unconscionable Conduct – The Laws of Australia (2nd Ed.), 337-339. Also see Johnson v Buttress (1936) 56 CLR 113, 134 per Dixon J.
[21]Bridgewater v Leahy (199) 194 CLR 457, [73]-[74]; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, 474 per Deane J.
Despite the uncertainty of the concept of economic duress as an independent basis for equitable relief, it is nevertheless clear from the authorities that mere commercial pressure does not amount to either economic duress or unconscionable conduct, even where a party’s conduct is “commercially harsh and exacting” and “driving a hard bargain”.[22] Further, inequality of bargaining position alone is not grounds for relief since the person in the inferior bargaining position may not lack the capacity to make a judgment about his or her own best’s interests.[23] In Karam, the Court of Appeal said that:
The fact that one party is in financial difficulties, of which the other party is aware, as in the present case, will be relevant, but not sufficient to establish unconscionable conduct on the part of the stronger party. Something more is required and may be sought in the terms of the particular transaction. However, even unusual terms will not necessarily demonstrate taking unconscientious advantage of the situation of the weaker party.[24]
[22]See, for example, Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 565; Wardley Australia Ltd v McPharlin (1984) 3 BPR 9500.
[23]Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51.
[24]Karam, (2005) 64 NSWLR 149, 169.
Applying these principles, I am not persuaded that Mr Watson signed the loan agreement or the mortgage on 27 August 2009 under duress or that Commercial Base took unconscientious advantage of his financial situation.
The first significant difficulty is that Mr Watson had signed the two loan agreements on 25 or 26 August 2009 after having taken the opportunity to obtain legal advice.[25] He did so without protest and without the additional “pressure” of which he now complains of having failed to attend the settlement arrangements with National Australia Bank on the afternoon of 26 August 2009. In each of these loan agreements Mr Watson agreed to be jointly and severally liable for all money payable to the lender.[26] In the loan agreement executed early on 27 August 2009, the term as to joint and several liability is identical.[27]
[25]Exhibit P 21; Exhibit P 12.
[26]Clause 5, Loan agreements signed on 25 August 2009 “Exhibit P21”.
[27]Clause 5, Amalgamated loan agreement signed on 27 August 2009, CB153 at 158.
Second, Mr Watson had his solicitor, who was a family friend, present on 27 August 2009 and therefore had the opportunity to obtain legal advice at the time he signed the loan agreement and the mortgage.
Third, in September 2009 Mr Watson borrowed additional amounts (Loan amount 4, Loan amount 5 and Loan amount 6) from Commercial Base by entering into an agreement to vary the loan agreement. In my opinion, variation of the loan agreement necessarily involved its adoption. It is significant that at the time of the variation there was no allegation of duress or of the taking of unconscientious advantage with respect to the loan amounts 1, 2 or 3.[28]
[28]Deed of Variation of Loan Agreement, CB 180-184.
Fourth, in my opinion Commercial Base did not impose any onerous obligations on Mr Watson in the loan agreement. The unchallenged evidence of Mr Adams was to the effect that interest was charged, either at the same rate as the cost of funds to Commercial Base or at the rate equivalent to the amount Commercial Base was earning on funds invested. Similarly, there are no onerous obligations in the mortgage which is in standard form and incorporates the Memorandum of Common Provisions under s 91A Transfer of Land Act 1958 (Vic).
Fifth, there is no doubt that Mr Watson was in relatively dire financial circumstances; he was under significant pressure from NAB and was at risk of losing his home, having given consent to the bank to enter into possession if NAB was not repaid by 26 August 2009. However, those circumstances were not brought about by Commercial Base. In my view, Commercial Base pursued a legitimate commercial interest by offering to re-finance the amount outstanding to NAB and provide additional working capital to enable Mr Watson to pursue separate commercial interests in a company named The Incredible Chocolate Company.
Sixth, although it was obvious that Mr Watson required funds urgently, Mr Adams did not exert pressure on Mr Watson to accept funds from Commercial Base.
For all of these reasons, I am not satisfied that the loan agreement or the mortgage was signed under duress imposed by Commercial Base or that Commercial Base took unconscientious advantage of Mr Watson’s financial circumstances.
2.Is Mr Watson jointly and severally liable for the advances made by Commercial Base during the period 30 October 2003 to 26 October 2011?
Mr Adams testified that he was approached by his friend Mr Gibson who informed him at a meeting at his office in 2003 that Mr Gibson and Mr Watson were involved in a court case but were running short of funds. Mr Gibson asked if Mr Adams could assist by lending him and Noel Watson some money to fund a court case which, according to Mr Gibson, they thought would be successful.
Mr Adams said he agreed to give Mr Gibson and Mr Watson any financial assistance that they needed to help them until they obtained judgment and could re-pay the money. Subsequently, in early 2004, Mr Gibson introduced Mr Watson to Mr Adams. Mr Adams testified that at that meeting there was a discussion about the court action “that Mr Watson was looking after on behalf of Mr Gibson” and “what the position was with the court action”. Mr Adams said he discussed the terms of the loans that he was giving them, including the term that the loans were to be joint and several. As to interest rates, Mr Adams said the interest rates on all the loans were whatever he procured the money for or whatever he was earning from the bank as a deposit rate; that he agreed to charge them without a loading. Specifically, Mr Adams testified that he had to borrow funds to make the advances and the interest he charged was the same as the borrowing rate.
Mr Watson also told Mr Adams that he had a very successful chocolate company with the rights to market chocolates into America and England. Mr Watson discussed putting a proposal to Mr Adams that he invest in his company to take it forward. Subsequently, Mr Watson provided some cash flows and projections but Mr Adams decided not to invest as it departed from his land business and farming interests.
Mr Adams gave evidence of having made 39 payments at the request of Mr Gibson during the period 30 October 2003 to 6 October 2011. On some occasions when requests were made for further funds Mr Watson attended at Mr Adams’ office and brought Mr Adams up to date with where the litigation was at the time.
The requests were made orally by Mr Gibson, usually alone, but sometimes with Mr Watson present. Mr Gibson met with Mr Adams on a regular basis at least once a fortnight and, in some instances, once a week during the period 2005 to the middle of 2006. Mr Adams met Mr Gibson with Mr Watson approximately every six to eight weeks.
According to Mr Adams, on one occasion in May 2005, Mr Gibson attended Mr Adams’ office and told Mr Adams that they had huge fees to pay because of the litigation and would need a loan of up to $1 million. Mr Adams requested security, and it was agreed that Mr Gibson would provide security over an industrial building in Dandenong. On that basis, Mr Adams agreed to advance $1 million, which was secured by a first mortgage given by Angora Tower Pty Ltd, the owner of the land. Mr Adams gave evidence that Mr Watson was not present at the meeting when Mr Gibson made the request for $1 million.
On another occasion in April 2006, Mr Adams signed a cheque for $50,000 made payable to “F C Gibson”. The precise circumstances of the making of this loan is not clear. No evidence was given to explain why in this instance the payee of the relevant cheque was “F C Gibson” and not “Gibson Motorsport Merchandise”.
Save for the cheques made payable to Angora Tower and F C Gibson, cheques were made payable to GMM or to third party legal practitioners or their firm trust accounts.
In my view, there is considerable evidence to support the proposition that Commercial Base made loans to Mr Watson and Mr Gibson jointly and severally, including the fact that:
· Mr Watson went with Mr Gibson to see Mr Adams at his office every six weeks or so during the relevant period.
· Mr Watson signed acknowledgements that he was a borrower on a joint and several basis with Mr Gibson of the amounts of $500,000 and $300,000 respectively.[29]
[29]See loan facility acknowledgment dated July 2004 at CB 85 and loan facility acknowledgement dated March 2005 at CB 89.
· There was a delegation of responsibilities in connection with the litigation. Mr Watson gave evidence that he supervised the management of the litigation for the benefit of himself and Mr Gibson whereas Mr Gibson undertook the management of the funding of the litigation.
· The litigation was prosecuted for the benefit of both Mr Watson and Mr Gibson, both parties in the litigation and directors and equal shareholders of GMM, which was also a party in the litigation.
· Each of the loan agreements entered into August 2009 (whether for loan amounts 1 & 2 and loan amount 3 in the two separate loan agreements signed on either 25 or 26 August 2009 or for loan amounts 1, 2 & 3 in the amalgamated loan agreement signed on 27 August 2009) state that each borrower “is jointly and individually liable” for all loan amounts payable.[30]
· Mr Watson borrowed additional funds in September 2009 on a joint and several basis as a variation to the 27 August 2009 loan agreement.[31]
[30]Clause 5 in two loan agreements: Exhibit P21, CB153 at 158; Clause 5 loan agreement, CB 153 at CB 158.
[31]Deed of Variation of Loan Agreement, CB 180-184.
I am satisfied that Mr Gibson had authority from Mr Watson to borrow funds from Mr Adams for the purpose of funding the litigation on the basis that Mr Gibson and Mr Watson would be jointly and severally liable for those advances. In my view, the authority was of a general kind and was not limited to loans from Mr Adams personally. That the loans were ultimately made by Commercial Base, an entity associated with Mr Adams, an entity of his choosing, is of no significance. In my view, just as Mr Gibson was bound by Mr Watson’s management of the litigation, so Mr Watson was bound by Mr Gibson’s management of the funding as long as it was provided and used for the intended purpose of funding the litigation.
Initially I had reservations about whether the loan arranged by Mr Gibson from Commercial Base to Angora Tower Pty Ltd was within the scope of Mr Gibson’s authority. There is no evidence to suggest that Mr Watson was specifically consulted in relation to this loan prior to the loan being made. At trial, Mr Watson denied knowledge of the circumstances of the arrangement of the $1 million loan. Angora Tower Pty Ltd is an entity associated with Mr Gibson.
Further, Mr Watson gave evidence that there was no single amount of $1 million paid from Angora Tower into the accounts of GMM. No evidence was given by Mr Gibson to elucidate the circumstances of the loan to Angora Tower and as to whether he had discussed this loan with Mr Watson prior to the loan being made. In the circumstances, I accept that this loan was not discussed with Mr Watson prior to the loan being made.
The balance sheet of GMM shows that there is a loan account in the name of Angora Tower which exceeds one million dollars as at 30 June 2006 from which I infer that Angora Tower advanced funds to GMM.[32] In the GMM balance sheet as at 30 June 2011, the Angora Tower loan account balance is $1,142,272.72. Under cross-examination, Mr Watson agreed that this amount had been paid by Angora Tower to GMM. There is no breakdown of these loan account balances in the balance sheet to indicate how the funds were allocated.[33] However, I am satisfied on the balance of probabilities that the Angora Tower loan was used for the intended purpose of funding the GMM litigation as the only activity of GMM during this period was prosecuting its litigation.
[32]Exhibit P 17.
[33]Gibson Motorsport Merchandise Pty Ltd balance sheet as of June 2011, Exhibit P 13.
On the other hand, there is no evidence from which I could infer that the payment of $50,000 made payable to F C Gibson found its way into the accounts of GMM. There is a loan account in the name of Fred Gibson shown in the balance sheet with a loan balance substantially exceeding $50,000 but it is not possible to say whether the $50,000 is included in that balance.
At trial, there was evidence given that Mr Gibson and Mr Watson were to be jointly and severally liable for all loans arranged through Mr Adams.
Mr Adams testified that at a meeting on 6 July 2009 “it was discussed that I would want the documentation to show that they were joint and severally joined in all the loans –the previous ones, the current one if I advance it to them, and any future loan – and both parties agreed”. Mr Adams sought to rely on diary entries to corroborate the plaintiff’s case that there had been a discussion between Mr Adams and Mr Watson and Mr Gibson to the effect that Mr Adams would want documentation to show that both Gibson and Watson were jointly and severally liable for all loans. Until it was produced at trial the diary had not been discovered. The Court was informed that the diary had only been located within the week before the trial.
Mr Adams said the relevant meeting where this discussion took place occurred around 6 July 2009. The diary entry for 6 July states:
Fred Gibson and Noel, Noel unable to get Westpac loan for NAB required $3 million dollars. All loans to be brought up to date and covered by loan documents. Past, NAB and future loans. Both okay.
The diary entry of 6 July 2009 has no reference to, and does not otherwise indicate, that the issue of joint and several liability was discussed.
Before being allowed to rely on the diary entries Mr Adams was asked whether he kept the 2009 diary on a day-to-day basis. Mr Adams gave evidence that all his diary entries were made on a daily basis.
The plaintiff was then taken to a diary entry from 30 July 2009.
COUNSEL TO WITNESS: Could you go to 30 July please. Is there a note at the foot of that page?---Yes there is a note at the bottom of the page. It is 3 p.m. in the afternoon, my meeting.
Now, could you just read out word-for-word what that note says?---“Fred Gibson at Greenvale. Both spoke to Tony. Fred’s house 750,000-825. Noel’s house 2.9m to 3.1. Beach house”, which is actually a breach hut on the water, “180,210. Fred to relay to Noel, ‘advance of funds would be on condition that all loans previous, now and future, would be joint and several and would be covered in the new documents’”.(emphasis added)
HIS HONOUR (to witness): That is on the 30th, is it? 30 July?---Yes, it is Your Honour.
Can I have a look at the diary please. Well, the photocopy document I have in front of me is different to the original diary entry Mr Northrop.
COUNSEL: Perhaps I’ll ask – could the witness be shown the photocopy too please.
HIS HONOUR: So there’s been an additional sentence added to that document Mr Adams. What is your explanation for that? You can see the photocopy doesn’t have the same recording?---I have no explanation to that, Your Honour.
It is obvious that the additional words have been added after that photocopy has been made, isn’t it?---Well, it’s quite obvious from the – both documents that – I don’t know whether the photocopy didn’t copy it, but certainly I didn’t make any other additions, Your Honour.
What is your explanation for the additional sentence Mr Adams?
Do you have an explanation?---No, I don’t, Your Honour.
The matter was then stood down to enable counsel to take instructions. When the matter resumed, the following exchange took place:
HIS HONOUR: You will see the entry on the photocopy ends on the third line, with the word “Noel”, “Relay to Noel”?---Yes it does.
When was that photocopy taken?---Several weeks ago.
The words that are now in the diary do not appear on the photocopy?---That’s correct.
Can you say when – were those words added?---Yes they were.
By you?---They were added by me.
When did you add them?---Probably when – when I went through and tagged all my diaries, all my meetings with Noel Watson and Fred Gibson in the last six to seven days, Your Honour. It was a recollection of what I discussed on the day so I put it in the diary.
HIS HONOUR: When I asked you earlier whether all the entries in that diary were made on the day, you were wrong?---It is quite evidence that I lied to Your Honour.
Yes, you did?---Yes I did lie to you.
Are there any other additions that you have made to the diary?---No, Your Honour.
The transcript reveals that despite initially telling the court that all diary entries were made on a daily basis, that he had no explanation for the discrepancy between the photocopy diary entry and the original diary entry and that he did not make any additions to the diary entries, Mr Adams admitted that the diary entry of 30 July 2009 was altered after the fact by him six or seven days prior to the trial to note that “the documentation would record that there would be joint and several liability for past, present and future loans.”
I reject Mr Adams’ explanation that “it was a recollection of what I discussed on the day so I put it into the diary”. At trial, Mr Adams demonstrated that he had a very poor recollection overall of the precise detail of any of the conversations he had had with Mr Gibson and Mr Watson. In my view, it is highly unlikely that he had a recollection of having had a discussion of imposing a condition to the effect that all loans, past, present and future would be joint and several, and, even if he had had such a conversation, that he could recall that precise detail four years later in March 2013. The only notes which were made contemporaneously made no reference to this purported aspect of the discussion.
In my view, the explanation that he had a recollection of what he had discussed on 30 July 2009 was a blatant attempt by Mr Adams to bolster the plaintiff’s case. The plaintiff’s case was compelling enough without the attempted embellishment.
In the result, and despite falsification of the diary entry, I have concluded that Mr Watson is jointly and severally liable for the advances made by Commercial Base during the period 2003 to October 2011, save and except for the advance of $50,000 made payable to F C Gibson.
3.Did the loan agreement comprise an attempt to bind Mr Watson to loans which were not approved, agreed or discussed with him and had no connection with him?
Mr Watson submitted that the loan agreement of 25 August 2009 was a sham; that it comprised an attempt to bind him to loans which were not approved, agreed or discussed with him or had no connection with him.
I am not persuaded by this submission.
The loan agreement was expressed in straightforward terms. It was prepared by the solicitors for Commercial Base and was submitted to the solicitors for Mr Watson. Both parties appear to have been represented by experienced solicitors. It contained express acknowledgements that Commercial Base had previously lent money to Mr Watson and Mr Gibson and that as at 1 July 2009 the loan amount owing was equal to loan amount 1 ($855,616.99) and loan amount 2 ($3,314,093.05); that the borrower wished to re-finance those amounts into a new loan as well as borrow an addition $3 million; and that in consideration of the borrower agreeing to re-finance loan amounts 1 and 2 the lender agreed:
· To accept and grant a re-finance on the terms and conditions of the loan agreement;
· To lend loan amount 3 on the terms and conditions of the loan agreement.
If there was any issue about whether the amount advanced by the lender to the borrower was approved, agreed or discussed then it could and should have been raised at the time. Instead, Mr Watson acknowledged that the loan amounts had been advanced, and did so after taking legal advice.
It is highly likely that Commercial Base proposed to re-finance loans previously made for litigation funding to better secure its position. In my view, this does not constitute an unconscientious taking advantage of a situation. It seems to me that Commercial Base had a legitimate commercial interest to obtain security for earlier unsecured loans as a condition of its agreement to lend the further considerable sum of $3 million. The conduct was not disproportionate or unreasonable. The interest rate for the new $3 million loan was 7% per annum compounding quarterly, which was not oppressive. The interest rates for the previous loan amounts were 13.5% per annum compounding quarterly for loan amount 1 and 10.5% per annum compounding quarterly for loan amount 2.[34] Neither of these interest rates appear to me to be unreasonable for litigation funding purposes. Litigation funding is an inherently risky enterprise, as the background to this case demonstrates.
[34]Reference to loan amount 1 in clause 1.1.8(b) appears to be erroneous and should be a reference to loan amount 2.
Mr Watson voluntarily chose not to take issue with or specifically enquire about the aggregate monetary amounts of loan amounts 1 and 2. Indeed, he went further and acknowledged that those amounts had been advanced, that those amounts were the amounts owing, and by doing so, disqualified himself from later complaint on those issues.[35]
[35]Loan Facility Acknowledgments dated July 2004 and March 2005,CB 85 and CB 89 respectively
There are also telling admissions made by Mr Watson as to the amount advanced in a document he prepared in about October 2011 in which he referred to the total Commercial Base loans in the amount of “$6,000,000 (rounded)”.[36]
[36]Commercial Base loan document, CB110. The actual amount outstanding was approximately $6.3 million dollars, Exhibit P9.
Under cross-examination, Mr Watson said:
I acknowledge that the $6 million were moneys that Fred and Fred and I borrowed.
And owed to him?---Yeah. We – that’s not in dispute. There was moneys owed to him. How that money came about, I didn’t know all the detail for but at this point in time we acknowledged that Mr Adams had advanced to us individually and together certain amounts of money.
$6m capital, in round terms?---Well, that was the figure that we were talking about on that – at this meeting.
Considering the evidence as a whole, I am not satisfied that the loan agreement was a sham. I accept Mr Adams’ evidence that the loans were requested by Mr Gibson from time to time acting as Mr Watson’s agent for the purpose of funding litigation being prosecuted by the Watson and Gibson interests principally through GMM. Save for the $50,000 loan to F C Gibson, I am satisfied that the loans provided by Commercial Base were all directed to the intended purpose of funding the litigation. As previously indicated, Mr Watson was a director and an equal shareholder of the central protagonist in the litigation, was himself a party and ultimately stood to benefit, had the litigation been successful. Save for the $50,000 loan to FC Gibson, I am satisfied that all loans reflected in the amounts referred to in the loan agreement had a direct or indirect connection to Mr Watson.
4.Did Commercial Base settle or compromise the amount of the loan outstanding on the basis that it would accept a payment of $3.2 million with Mr Watson and Mr Gibson each to contribute $1.6 million?
This question arose in final submissions though it was not pleaded as a defence. For completeness I will refer to it briefly. As I understood the argument, the essence was that in October 2011 Mr Watson and Mr Gibson agreed with Mr Adams to pay Commercial Base $3.2 million, the combined value of the two home properties if they were sold at a point in time. Mr Watson gave evidence as follows:
That’s why we met with Mr Adams after we were unsuccessful in our High Court application and if I recall that was in October 2011 and we had only assets that amounted to $3.2 million between Mr Gibson and myself and that was why the proposal I put forward was, “Well, our assets are worth $3.2 million for Mr Adams and we will pay half each and then we will repay that to you in full and final settlement of…”.
HIS HONOUR: That was the proposal?---Well, that was the basis.
HIS HONOUR: But it wasn’t a proposal that was accepted, was it?---Well, it was. The point is that it was accepted because we were sent away to find the money...and because my clear understanding was that we were sent away to provide Mr Adams with documentation to say that we could pay the $1.6 million each.
On this issue, Mr Adams gave evidence in general terms as follows:
Mr Watson, we already had a meeting, the three of us and you agreed, you put a proposal to me for the sale of your house with Mr Gibson and showed me appraisals on the house and we agreed on a price.
In my view, despite Mr Adams’ reference to “price” it has not been established that Mr Adams (for and on behalf of Commercial Base) agreed to accept any specific monetary amount or the value of Mr Watson’s residential property in full and final settlement of Mr Watson’s liability, although I do accept that there was discussion about the Gibsons and the Watsons selling their homes and evidence to corroborate this as appraisals of value were obtained with respect to both properties.
Mr Watson gave evidence that he and Mr Gibson were sent away “to provide documentation to say that we could pay the $1.6 million each”, that he provided the information requested but that was the last communication he had with Mr Adams despite making telephone calls to his office and sending him emails. I found the evidence of the alleged compromise vague and unpersuasive. In light of the plaintiff’s past conduct in documenting transactions I would have expected any compromise to be documented. The fact that it was not and the fact that the first defendant did not plead the compromise as part of his defence, though he was represented by solicitors at the time he filed his defence and counterclaim, all tend to suggest the implausibility of this defence. I am not satisfied that any compromise was reached.
5.Is Mr Watson entitled to indemnity or contribution from Mr Gibson and Mrs Gibson?
In third party proceedings, Mr Watson claims against Mr Gibson and Mrs Gibson:
(a)indemnity and/or contribution in respect of any judgment, including costs, which Commercial Base may obtain from Mr Watson, in such amount as the court considers just and equitable;
(b)alternatively a declaration that Mr Gibson is liable to indemnify Mr Watson and/or make contribution in respect of any such judgment.
After the trial had concluded but before judgment was delivered, the Court was advised that a sequestration order was made against Mr Watson on 30 April 2013. This has consequences for the third party proceeding.
Section 60(2) of the Bankruptcy Act 1966 (Cth) (‘the Act’) provides an action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.
In the circumstances, by operation of s 60(2), the counterclaim brought by Mr Watson against the plaintiff and the third party proceeding brought by Mr Watson against the Gibsons are each stayed until the trustee makes election, in writing, to prosecute or discontinue the actions (subject to deemed abandonment under s 60(3) of the Act.
There is, however, a further complication in relation to Mr Gibson. On the first day of trial, 12 March 2013, a sequestration order was made against Mr Gibson.
Section 58(3) of the Act provides that:
Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:
(a)to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or
(b)except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.
Section 82 of the Act provides relevantly:
(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation occurred before the date of the bankruptcy, are provable in his or her bankruptcy
…
(8) In this section, liability includes:
(b)an obligation or possible obligation to pay money or money’s worth of the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and
(c)an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money’s worth, whether the payment is:
(i)in respect of an amount – fixed or unliquidated;
(ii)in respect of time – present or future, or certain or dependent on a contingency; or
(iii)in respect of the manner of valuation – capable of being ascertained by fixed rules or only as matter of opinion.
Mr Watson’s claims for indemnity and/or contribution from Mr and Mrs Gibson or alternatively a declaration that Mr and Mrs Gibson are liable to indemnify and/or make contribution to Mr Watson are claims framed on the basis of joint and several liability arising out of clause 5 of the loan agreement. Contractual claims whether liquidated or unliquidated are “provable debts” under s 2 of the Act.
Mr Watson conducted his own defence. He did not make any formal or informal submissions for relief against Mr and Mrs Gibson on the third party proceeding, save to say in substance that he would like the third party proceeding to remain on foot.
In my view Mr Watson’s third party claim is a legal proceeding in respect of a provable debt within the meaning of s 82 and s 58(3) of the Act and accordingly it was not competent for him to take any fresh step in the third party proceeding against Mr Gibson after he became a bankrupt except with leave of the Court. No application for leave to proceed was before the court.
Conclusion
I am satisfied that Commercial Base advanced the loan funds as alleged for the purpose of enabling the Watson and Gibson interests to prosecute litigation. The litigation proved to be unsuccessful. The amounts advanced together with interest and allowing for any repayments total $10,150,909.49 as at 29 April 2013 (the day before the first defendant was made bankrupt) according to the plaintiff’s calculations which I accept. This amount includes the repayment from Mr Gibson following the sale of the Gibsons’ residential home, and excludes the loan of $50,000 made payable to F C Gibson. I have concluded that the loan agreement and the mortgage were not signed under duress or as a result of any unconscionable conduct and are accordingly enforceable. I am also satisfied that no settlement or compromise of the debt was reached between Mr Adams and Mr Watson. In the circumstances, and allowing for the terms of settlement with the second defendant, the Plaintiff is entitled to take possession of the secured property at 832 Esplanade Mornington and to exercise its rights as mortgagee under the mortgage.
I will hear submissions as to the appropriate form of orders and any declarations.
2
9
0