Commonwealth Bank of Australia v Starrs

[2012] SASC 222

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

COMMONWEALTH BANK OF AUSTRALIA v STARRS

[2012] SASC 222

Judgment of The Honourable Justice Peek

17 December 2012

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS

GUARANTEE AND INDEMNITY - THE CONTRACT OF GUARANTEE - CONSTRUCTION AND EFFECT - GENERALLY

GUARANTEE AND INDEMNITY - ACTIONS AGAINST SURETY - GENERALLY

BANKING AND FINANCE - INSTRUMENTS - LOAN FACILITIES

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - HARSH AND UNCONSCIONABLE CONTRACTS AND STATUTORY REMEDIES

BANKING AND FINANCE - BANKS - LIABILITIES OF BANKS - FRAUD, UNDUE INFLUENCE AND UNCONSCIONABLE CONDUCT

EQUITY - GENERAL PRINCIPLES - UNDUE INFLUENCE AND DURESS - PRESUMPTION OF UNDUE INFLUENCE FROM RELATIONSHIP OF PARTIES - SPOUSES

The two defendants are married - the second defendant, as sole director of a company controlled by both defendants, entered into a loan contract with the bank for large advances to purchase a business - the defendants executed personal guarantees secured by three properties owned by them - the company defaulted - two of the security properties were sold leaving a substantial deficit which the bank claimed under the guarantees.

Whether the guarantees should be enforced - whether liability was limited to the value of the securities - whether the Code of Banking Practice applied - whether the bank had complied with the Code - whether the rule in Yerkey v Jones/Garcia v National Australia Bank Ltd applied to the first defendant - whether the first defendant understood the purport and effect of the transactions - whether the first defendant was a volunteer - whether the guarantees should be construed as being conditional upon the bank registering its interest over the securities.

Held: The guarantees should be enforced - by their acts of signing the guarantees the defendants assumed a legally binding obligation to adhere to their terms and conditions - on proper construction the guarantees did not limit liability to the value of the securities - the Code of Banking Practice did not apply to the guarantees - even if it did apply, the Code is largely a collection of guiding principles for banker's conduct and a breach would not necessarily of itself wholly invalidate the guarantees - the first defendant was unable to raise a defence based on the rule in Yerkey v Jones/Garcia v National Australia Bank Ltd - there was ample evidence of his substantial qualifications and business experience and that he understood the purport and effect of the transactions - the first defendant's medical conditions did not prevent him from arriving at that understanding - the first defendant was not a volunteer - the guarantee properly construed was not conditional upon the bank registering its interest over the securities - the securities did not emanate from a third party and the guarantee expressly provided that the absence of registration of securities by the bank would not affect or prevent liability of a guarantor - Greer v Kettle [1938] AC 156 considered.

Code of Banking Practice clauses 28, 40; Trade Practices Act 1974 (Cth) ss 51AA, 51AB, 51AC; Competition and Consumer Act 2010 (Cth) Sch 2, ss 20, 22; Supreme Court Act 1935 (SA) s 130(2); Supreme Court Civil Rules 2006 Rules 10, 117, referred to.
L'Estrange v F Graucob Ltd [1934] 2 KB 394; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Equuuscorp Pty Ltd v Glengallan Investments (2004) 218 CLR 471, applied.
Garcia v National Australia Bank Ltd (1998) 194 CLR 395; Agripay Pty Limited v Byrne [2011] 2 Qd R 501; Agripay Pty Limited v The Estate of Murray Andrew Byrne [2010] QSC 189; Greer v Kettle [1938] AC 156; Chambers v Rankine [1910] SALR 73, distinguished.
State Bank of New South Wales Ltd v Chia (2000) 50 NSWLR 587; Ryan v Urban Construct (SA) Pty Ltd [2012] SASC 128; Re Kwan; Ex parte Hastings Deering (Solomon Islands) Ltd (1987) 15 FCR 264, discussed.
Saunders v Anglia Building Society [1971] AC 1004; Petelin v Cullen (1975) 132 CLR 355; Bank of Western Australia v Abdul [2012] VSC 222; Commercial Bank of Australia v Amadio (1983) 151 CLR 447; Yerkey v Jones (1939) 63 CLR 649; Leslie v GE Commercial Corp (Australia) Pty Ltd [2007] WASCA 65; Radin v Commonwealth Bank of Australia [1998] FCA 1361; Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20841, considered.

WORDS AND PHRASES CONSIDERED/DEFINED

"supporting security", "small business", "individual" and "volunteer"

COMMONWEALTH BANK OF AUSTRALIA v STARRS
[2012] SASC 222

Civil

1. PEEK J.    Action for enforcement of guarantees.

   PART A:  INTRODUCTION

2. The plaintiff, the Commonwealth Bank of Australia (the bank), seeks judgment against the first defendant, Dr Christopher Damien Starrs (Dr Starrs), and the second defendant, Mrs Janine Ruth Starrs (Mrs Starrs) jointly and severally on two deeds of guarantee they respectively signed on 27 November 2006 in conjunction with two subsequent variations each entitled “Consent and Acknowledgement to Extension of Guarantee” (sometimes referred to as the first and second “variations” or “extensions”).[1]  

   [1]    The word guarantee(s) will generally be used to mean the original guarantee(s) as varied by the subsequent variations but the documents will be separately considered when it is important to do so.

3. The guarantees were given to secure facilities granted by the bank to Starrs & Co Pty Ltd and comprised an initial loan agreement whose terms and conditions were varied on two subsequent occasions by the offer and acceptance of variation agreements.  The variations essentially related to the structure, monetary limits and the security schedules of the facility and corresponded to the two guarantee variations.  The purpose of the original facility was to acquire and operate the distressed business of Truscotts Pty Ltd (Truscotts), then in receivership. 

4. In conjunction with the guarantees, the defendants each gave security by executing mortgages over three properties, two of which have since been sold by mortgagee sale, the proceeds of which sales have been received by the bank.  The total amount claimed against the defendants (additional to the proceeds of sale) is, at the date of reservation of judgment, $2,345,176.25 (including interest computed by reference to the terms of the loan agreement).

   The course of the proceedings and the trial

5. The plaintiff commenced proceedings against the two defendants on 28 October 2009 by filing an inter partes summons and statement of claim.  Various interlocutory proceedings followed.

6. On 23 February 2012, the third defence was filed by Mr DeRuvo, of Fox Tucker Lawyers, solicitor for both defendants.  This remained unamended until after the trial commenced.

7. On 2 March 2012, a certificate of readiness for trial was signed by Mr Leydon, the solicitor for the plaintiff, and Mr DeRuvo for the defendants.  The trial was later set down to commence on 17 October 2012.

8. A final directions hearing was scheduled in the normal way for 11 October 2012, being about a week prior to trial.  Immediately prior to this hearing, a notice of acting in person was filed by the defendants jointly, advising that they would both be unrepresented at trial.

9. On 11 October 2012, at the directions hearing, Mr Howard appeared for the plaintiff.  Mr Ross-Smith sought leave to appear that day in order to indicate that he had limited instructions to appear on the first day of the trial to open the case for the defendants at the conclusion of the plaintiff’s opening, and then to withdraw from the proceedings.  He indicated that Fox Tucker Lawyers would also withdraw as the solicitors of record for the defendants and that both Dr Starrs and Mrs Starrs would, subject to the above arrangement, be appearing unrepresented at trial.  No explanation was given for these developments.

10. On 16 October 2012, the Court received a document entitled “Statement of Issues sought to be ventilated by the Defendant” which purported to indicate which of the matters pleaded in the third defence would actually be relied upon.

    The opening address for the defendants

11. On 17 October 2012, the first day of trial, Mr Howard appeared for the plaintiff and Mr Ross-Smith appeared for both defendants on the basis referred to above.  Mr Howard opened his case in the normal way and tendered a large number of documents during his opening with the consent of Mr Ross-Smith.  At the conclusion of the plaintiff’s opening, Mr Ross-Smith opened for both of the defendants, a process helpfully agreed to by Mr Howard.  Mr Ross-Smith indicated in his opening that the defences relied upon would be as follows.

12. The first line of defence, was that both defendants would contend that their liability only extended up to the realisable value of the securities.[2]  Thus, he summarised:[3]

    The defendants’ case is that the effect of their guarantee was that they undertook - if that language is not too broad - to ensure that the formal securities that they gave were available to the bank for the bank’s recovery upon the customers’ default, and that was the limit of their liabilities under the guarantees.  So it’s not an all-moneys liability, it’s limited to the recoveries on the other securities described in the loan instruments.  That’s the first defence.

    [2]    T61-64; 77-81.

    [3]    T61.

13. In the context of the above defence, Mr Ross-Smith asserted that the bank was aware that the defendants had not received legal advice about the guarantees and that the bank was aware that Dr Starrs was in ill health at all relevant times.

14. I should note here for the sake of clarity that the plaintiff’s case was never that the guarantee involved an “all-moneys liability”.  Rather the guarantee plainly stated that liability was up to a stated maximum amount, in the original guarantee, namely $3,000,000.  This figure was later varied upward to a higher stated maximum but the guarantee was never suggested to be an “all-moneys guarantee”.

15. The second line of defence was that both defendants would contend, based on the decision of the House of Lords in Greer v Kettle[4] (the Greer v Kettle defence) that there was a variation between the securities actually held by the bank and the securities as described in the guarantees, which variation invalidated the guarantees.[5]  Mr Ross-Smith asserted that, although mentioned second in his opening, this previously unpleaded defence had now become “the primary defence” of both defendants in the case.[6]  He later provided an amendment to the third defence to raise this matter, later incorporated in the consequent fourth defence.

    [4] [1938] AC 156.

    [5]    T64-77.

    [6]    T77.

16. The third line of defence was that, in the alternative to the second line of defence, an amount of approximately $100,000 should be deducted from the plaintiff’s claim owing to the following circumstances.  On 14 July 2009, when the second mortgage on the North Adelaide property remained unregistered, an unpaid supplier of goods to Starrs & Co Pty Ltd placed a caveat on that property[7] and only after that did the bank belatedly register the second mortgage.  The bank then, without any authorisation by the defendants, purported to settle the supplier’s claim for a debt of $198,967.12 by a payment of approximately $100,000 from the proceeds of sale of the defendants’ property in return for the supplier withdrawing the caveat.  The bank then claimed that amount of $99,466.13 (as shown in exhibit P63) as part of an outstanding balance owing by the defendants.  Accordingly, the defendants contended that the plaintiff had not been authorised to pay that money to the supplier and that sum should be deducted from the quantum of the plaintiff’s claim.

    [7]    Exhibit P37.

17. It is to be noted that Mr Ross-Smith said nothing during his opening about a defence based upon Garcia v National Australia Bank Ltd (Garcia).[8]  Indeed, no such defence has even now been formally pleaded on behalf of either of the defendants.  The only pleading that might be said to make a nod in its general direction was the following paragraph [3.2.6] of the fourth defence:

    [8] (1998) 194 CLR 395.

    3.2.6          The Second Extension was executed by Dr Starrs under coercion.

    Particulars

    3.2.6.1At the time of executing the Second Extension, Dr Starrs was informed by Ms Starrs that their business, Truscotts Casual Living (the Business) required additional funds in order for it to continue and without those funds the Business would cease to operate.

    3.2.6.2The Plaintiff did not and/or failed to properly explain to Dr Starrs’ his obligations under the Guarantee and the Extensions.

    3.2.6.3As a result of the facts set out in paragraph 3.2.6.1 to 3.2.6.2 above, Dr Starrs felt coerced and/or pressured into signing the Second Extension.

18. It is interesting to note that this pleading complains of circumstances surrounding the second extension only, thereby specifically refraining from making any such suggestion concerning the execution of the original guarantee.

    The subsequent course of the trial

19. At the conclusion of the defendants’ opening, Mr Ross-Smith retired and the case proceeded with the defendants unrepresented but both doing a reasonably competent job of cross-examining the bank’s witnesses and with Mrs Starrs giving evidence on her own behalf.

20. On the afternoon of 23 October 2012, Mr Ross-Smith appeared again on behalf of Dr Starrs only.  He sought leave to appear for Dr Starrs during his forthcoming examination-in-chief and also to appear at a later date in order to deliver the closing address for Dr Starrs.[9]  He then retired and the case resumed with the defendants unrepresented.

    [9]    T480.

21. On 24 October 2012, I granted an application by the defendants for waiver or remission of court fees associated with the supply to them of a transcript of the whole of the proceedings to assist them generally, including to enable Mr Ross-Smith to prepare for his future parts in the case.[10] Pursuant to each of s 130(2), Supreme Court Act 1935; Rules 10 and 117, Supreme Court Civil Rules 2006; and the inherent jurisdiction of the Supreme Court, I made an order for one copy of the transcript of the trial to be supplied to the defendants without charge on the basis of their impecuniosity.

    [10]   T586.

22. On 24 October 2012, Mr Howard tendered by consent as exhibit P73 a revised statement of quantum abandoning a number of items previously claimed as to which there had been a good deal of dispute up to that point in the trial.  Amongst these items was the amount of approximately $100,000 paid by the bank to the unpaid supplier in the circumstances complained of in the defendants’ opening address, as referred to above.  I was informed that disputes as to quantum were now resolved, leaving the matter of liability still to be resolved.[11]

    [11]   T527.

23. On 25 October 2012 (day seven of trial), the matter of Garcia was alluded to for the first time at trial[12] when Mr Howard mentioned that a document he sought to tender was relevant on the basis that it went to “an issue that is likely to arise in the event that the defendants seek to rely on the decision of Garcia v The National Bank”.

    [12]   T647.

24. On 30 October 2012 (day ten of trial), Garcia was alluded to for the second time in the trial[13] when Mr Ross-Smith stated in his closing address for Dr Starrs (referring to Mr Howard’s written final submissions which had addressed Amadio since that had been pleaded):[14]

    MR ROSS-SMITH:      The last point derives from p 12, para 55.  If para 55 of Mr Howard’s submission are addressing an Amadio liability - and I don’t need to address it, because we’re not making an Amadio unconscionability submission, we are making a Yerkey v Jones/Garcia case.

    HIS HONOUR:           You opened for both defendants, didn’t you?

    MR ROSS-SMITH:      I did.  Our short point, I’m proposing to address it, if it’s convenient, in this way, is that in a Yerkey and Jones Garcia unconscionability defence, notice of the impairment of the guarantor is not an element of the defence and that proposition is made good from Garcia itself …

    [13]   T647.

    [14]   T968.

25. The plaintiff acquiesced in the case proceeding on that basis and did not suggest that an amendment to the pleadings should be made.  I should add that it was agreed by all parties that Mrs Starrs did not (and could not) seek to rely on the Garcia principle.

    Summary of the position as to the asserted defences at the end of the trial

26. By the end of the trial, the defendants’ respective positions were finalised as follows:

    ·First, both defendants asserted a failure of the bank to perfect its security – the so called Greer v Kettle[15] defence (the primary defence);

    ·Second, both defendants asserted that liability only extended to the realisable value of the properties offered as security;

    ·Third, Dr Starrs asserted that the doctrine(s) in Garcia[16] applied to him on the basis that he had been subservient to his wife at all relevant times; he also relied generally on his medical conditions at all relevant times as a matter relevant to this defence; and

    ·Fourth, both defendants asserted breaches of the Code of Banking Practice (the Code) presumably as relevant to one or more of the above defences.

    [15] [1938] AC 156.

    [16] (1998) 194 CLR 395.

27. I foreshadow that I have determined that all defences fail and that the bank has established liability against each defendant.  My reasons follow.  (When I hereafter state during the course of the reasons that I am satisfied, find or make a finding about a fact or matter, I mean I am satisfied, find or make a finding that a fact or matter is proven on the balance of probabilities.)

    PART B:  BACKGROUND FACTUAL MATTERS

28. I find that the following facts and matters referred to in this Part B to be proven on the balance of probabilities.

    The marriage of Dr Starrs and Mrs Starrs

29. Dr Starrs and Mrs Starrs were married on 29 April 2000 and had been a couple well before that.  In late 2000 their daughter was born.  At the time of signing the guarantees the subject of this action in November 2006, they were living in a substantial residence at 32 Northcote Terrace, Gilberton, South Australia (the Northcote Terrace property).

    Real estate owned by the defendants

30. The defendants owned three properties in South Australia which are of relevance to these proceedings.  Dr Starrs was the registered proprietor of the Northcote Terrace property.  In addition, the defendants owned jointly a property at 3-5 Dudley Street, Semaphore (the Dudley Street property) and at 123 Jeffcott Street, North Adelaide (the Jeffcott Street property).

    Seniors Care Services Pty Ltd

31. The contract to which the guarantees related was a loan facility whereby the bank advanced credit to a company then called Seniors Care Services Pty Ltd for the purpose of it purchasing the assets of a business in receivership, Trustcotts.

32. Seniors Care Services Pty Ltd was a company which had originally been used by Dr Starrs[17] to run a business (“Amber Lodge”) which involved residential care for aged persons.  Dr Starrs was the sole shareholder in this company at all times and Mrs Starrs was the sole director and sole secretary at all times.  The Amber Lodge business had been sold and the company Seniors Care Services Pty Ltd had become inactive.

    [17]   Mrs Starrs stated at T517 that “we had a business called Amber Lodge” and at T522 that she handled the financial side of the business.  She stated at T662-663 that she was not “extensively” involved in that business.

33. Dr Starrs and Mrs Starrs later decided to use that company for the purpose of acquiring and running the Truscotts business and two major changes were proposed in that connection.  The first was that the company’s name be changed to Starrs & Co Pty Ltd, the previous name being unsuited to the new venture; this change only occurred after the loan agreement and other documents had been executed in the name of Seniors Care Services Pty Ltd.  The second change was that the company became trustee for the “Chris Starrs Family Trust No 2” since it was decided that a family trust would be the most advantageous vehicle by which to run the Truscotts business.

    Starrs & Co Pty Ltd

1. The name of Seniors Care Services Pty Ltd was changed to Starrs & Co Pty Ltd on about 28 November 2006.  (Henceforth I will sometimes use the term “the Company” to refer to the company which was initially called Seniors Care Services Pty Ltd and later called Starrs & Co Pty Ltd).  Dr Starrs remained the sole shareholder and Mrs Starrs remained the sole director and sole secretary of the company at all times.

   The Chris Starrs Family Trust No 2

2. On 17 November 2006, the Chris Starrs Family Trust No 2 was established by a deed executed by the settlor and by the Trustee, Seniors Care Services Pty Ltd.[18]  The eligible beneficiaries of the trust were stated to be the “specified beneficiaries” (being declared to be Dr Starrs and Mrs Starrs) and “any child, grandchild, grandparent, parent, brother, sister, nephew or niece of a specified beneficiary or spouse of a specified beneficiary”.  An “appointor” was defined to mean Dr Starrs and Mrs Starrs[19] and an appointor was given power to appoint any person in addition to or in substitution for the original appointors and a new or additional trustee(s), and to remove a trustee.

   [18]   Exhibit P74.

   [19]   And successively any person appointed in addition to or in substitution for the original appointors.

3. Of course, as from the time of the change of the name of Seniors Care Services Pty Ltd, the trustee was to be known as Starrs & Co Pty Ltd but the trustee’s identity remained the same.  There is no evidence of any change in the position relating to the identity of the trustee, beneficiaries and appointors.

   The Truscotts asset sale and subsequent difficulties of Starrs & Co Pty Ltd

4. On 17 November 2006, Mrs Starrs on behalf of the company signed an asset sale agreement with Truscotts (exhibit P59).  There was a final stock take on 29 November 2006 and settlement occurred on 30 November 2006 when the company effectively took over the Truscotts business, employing various of the ex-Truscotts employees.  As mentioned above, the company changed its name to Starrs & Co Pty Ltd at about that same time.

5. Although there was a period of profitable trading, conditions deteriorated and on 2 July 2009 a supplier, Retravision (WA) Ltd, served a Notice of Default on the defendants for defaults under securities given by the Company (by then called “Starrs & Co Pty Ltd” and trading as Trustcotts).[20]  On 10 July 2009, receivers and managers were appointed to the Company, which appointment triggered a default of the loan agreement.  Identical letters of demand for the amount of $3,192,577.57, dated 18 September 2009, were sent by the bank to both Dr Starrs and Mrs Starrs.  Two of the mortgaged properties offered as security under the guarantee and the extensions were later sold by mortgagee sale but a deficit remained as stated above.

   [20]   These matters became the subject of litigation in Western Australia which is referred to in the unreported decision in Starrs v Retravision (WA) Ltd [2012] WASCA 67. Mr Ross-Smith instructed by Fox Tucker Lawyers appeared in those proceedings for the defendants.

   The bank facilities granted over the period 2006 to 2008

6. The facilities granted by the bank comprised an initial loan agreement whose terms and conditions were varied on two subsequent occasions involving the offer and acceptance of variation agreements.  The variations essentially related to the structure, monetary limits and the security schedules of the facility.

7. The bank facilities and the variations were each secured by mortgages to be registered over the three properties owned by the defendants: the Northcote Terrace property, the Dudley Street property, and the Jeffcott Street property.

8. The acceptance document in relation to each variation was signed only by Mrs Starrs who remained the sole director and sole secretary of the Company.  Each acceptance document acknowledged on its face receipt of “the booklet of Usual Terms and Conditions for Commercial Lending Facilities”; this separate booklet set out the precise terms current at the relevant times.

9. In each such booklet, a default of the agreement was defined to include the appointment of a receiver or receiver/manager “over the undertaking or any part of the undertaking of a borrower …”.  One of the consequences declared to follow such a default was the power of the bank to formally declare that the borrower is in default.  Following such formal declaration of default, there were a number of further consequences.  One was that all amounts then owing to the bank became immediately repayable.  Another was that the borrower became liable for various fees and charges associated with such repayment including “legal costs (both solicitor and client and party and party)”.

10. In each set of terms and conditions, one of the disclaimers was as follows:

    17.5   The Bank takes no responsibility for any decision the Borrower makes:

    (a)     to enter into the Contract;

    (b)     to obtain any Facility; or

    (c)     about the kind of interest rate (for example, fixed or variable interest rate) or Bill Rate the Borrower wants under the Contract.

    The Bank’s officers and agents do not have the Bank’s authority to:

    (aa)    make any predictions about what might happen to interest rates or Bill Rates;

    (bb)   advise the Borrower what kind of interest rate or Bill Rate would best suit the Borrower; or

    (cc)   make any other representation, prediction or statement of opinion about any other matter or thing affecting the Contract or the Security.

    If the Borrower has any doubt at all about any of these matters, the Borrower should seek help from a financial counsellor or obtain legal advice or both.

    The original bank facility - offer dated 22 November 2006

11. On 22 November 2006, Mr Gregory Morris, at that time a Relationship Manager with the bank, sent a “letter of approval” to Mrs Starrs at 32 Northcote Terrace, Gilberton South Australia 5081 confirming that the bank had approved the making of an offer of a facility of an overdraft in the amount of $3,000,000.  Formal offer and acceptance documents (exhibits P1 and P2) were enclosed which indicated that the facility was offered to “Seniors Care Services Pty Ltd ACN 057 365 090 as trustee for Chris Starrs Family Trust No 2”.  The security was stated in the security schedule as follows:

    Security is to be to the Bank’s satisfaction and is to comprise:

    ·A Registered Equitable Mortgage by Seniors Care Services Pty Ltd ACN 057 365 090 as trustee for Chris Starrs Family Trust 2 over the whole of its asset(s) and undertaking(s) including uncalled capital.

    ·A Guarantee limited to $3,000,000.00 by Janine Ruth Starrs supported by:

    -    A Second Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over residential property situated at 123 Jeffcott St North Adelaide SA 5008

    -    A First Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over commercial property situated at 3-5 Dudley St Semaphore Park SA 5019

    ·A Guarantee limited to $3,000,000.00 by Christopher Damien Starrs supported by:

    -    A Second Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over residential property situated at 123 Jeffcott St North Adelaide SA 5008

    -    A First Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over commercial property situated at 3-5 Dudley St Semaphore Park SA 5019

    -    A First Registered Mortgage by Christopher Damien Starrs over residential property situated at 32 Northcote Tce Gilberton SA 5081

12. The guarantee documents referred to above were not enclosed with that same letter from Mr Morris but were forwarded separately by an interstate department of the bank by separate letters to Dr Starrs and Mrs Starrs respectively.  Both were addressed to PO Box 442, Edwardstown South Australia and dated 24 November 2006, that day being a Friday.

    The signing of the original facility documents at Northcote Terrace in November 2006

13. There is a lack of clarity as to the exact date on which the original facility documents (being the acceptance document and the associated mortgages and guarantees) were signed by the defendants.

14. The evidence given by the defendants and the witness to the signatures on the documents, Ms Janet Rowe (a person who had no connection with the bank and was a friend of Dr and Mrs Starrs), was that the documents were all signed at the matrimonial home at 32 Northcote Terrace one evening.  (This occasion will be referred to as “the occasion of the signing of the original facility documents at Northcote Terrace”).[21]

    [21]   Mrs Starrs said at about 6pm to 7pm; Ms Rowe said “at night, 7:30 or 8 o’clock” (T917).

15. The documents were apparently returned to the bank by about Monday 27 November 2006 (which is the date noted by the bank on the guarantees as the date of their return[22]).

    [22]   The signatures on the signed copies of the guarantees returned to the bank are not accompanied by a date but they each bear the bank notation at the bottom of the signing page: “BANK USE ONLY: Received by the Bank on the 27 day of November 2006” (the date being in handwriting).

16. On the above state of the evidence, both counsel for the bank and the defendants agreed that the documents addressed to the post office box address were in fact either collected from the bank by the Starrs, or delivered to the Starrs’ premises by someone from the bank, on Friday, 24 November 2006.

17. In any event, I find that all of the documents including the acceptance document, the mortgages and the guarantees, were signed at Northcote Terrace on an occasion between about Friday, 24 November 2006, and about Tuesday, 28 November 2006, and that they were returned to the bank on about Monday, 27 November 2006.

18. In making those findings, I take into account the somewhat incongruous fact that the mortgages, which are the only documents which assert a positive date of signing on their face (as distinct from a bank notation of the date of the receipt of the signed document), are dated 27 November 2006,[23] which may appear inconsistent with it being signed in the evening at about 6-7pm if they were returned to the bank on Monday, 27 November 2006 during business hours (prior to 6-7pm).  While this is something of a loose end, there are a number of possible innocent explanations for it.  However, it is of no significance since it is admitted by the defendants that the documents were in fact signed by them at about this time, were witnessed by Ms Rowe and were returned to the bank shortly thereafter.

    [23]   The mortgage over the Northcote Terrace property (exhibit P57) was signed by Dr Starrs.  The mortgage over the Jeffcott Street property (exhibit P58) was signed by both Dr Starrs and Mrs Starrs.  The mortgage over the Dudley Street property (exhibit P71) was signed by both Dr Starrs and Mrs Starrs.

19. It is pointless to pursue the matter further.  However, in light of the presence in the Code of certain provisions requiring a 24 hour period between receipt of an unsigned document from the bank (for example by a proposed guarantor) and the provision of the signed document to the bank,[24] I should make express what is obvious.  I am satisfied and positively find that all relevant documents signed by the defendants in this case were provided by the defendants to the bank in a signed condition after more than a 24 hour period had elapsed from the time of the prior delivery of the unsigned documents to the defendants.[25]

    The original deeds of guarantee

    [24]   See eg Code of Banking Practice cl 28.5.

    [25]   In any event, I find below that the Code has no application to the transactions in this case.

20. The original deeds of guarantee signed by Mrs Starrs and Dr Starrs are respectively exhibits P14 and P15 and are identical in their terms.  In accordance with the original loan facility described above, the borrower was described as “Seniors Care Services Pty Ltd ACN 057 365 090”.  The first page of each guarantee was as follows:

    Commonwealth Bank
    Commonwealth Bank of Australia

    ABN 48 123 123 124

    Deed of Guarantee – Limited

    Deed of Guarantee in favour of Commonwealth Bank of Australia ABN 48 123 123 124 (“we/us”).

    Relevant provisions of the Code of Banking Practice apply to this guarantee.

    The Details

    GuarantorJANINE RUTH STARRS of PO BOX 442 EDWARDSTOWN SA 5039

    BorrowerSENIORS CARE SERVICES PTY LTD ACN 057 365 090

    Our contact details  Business Lending Support NSW

    Address  Level 1
      16-24 Elsie Street

    Burwood NSW 2134

    Telephone Number  [phone]

    Facsimile Number  1300 361 730

    Amounts secured by this guarantee     All amounts OWING by the BORROWER under the GUARANTEED AGREEMENT to which this guarantee initially applies and every future CREDIT CONTRACT between us and the BOROWER.  In addition to credit given to the BORROWER under the GUARANTEED AGREEMENT, the amounts OWING include interest, costs, fees and charges debited to the BORROWER’S account and the reasonable costs of enforcing this guarantee.

    GUARANTEED AGREEMENT     The credit contract resulting from the

    to which this guarantee   BORROWER’S acceptance of our offer dated initially applies  22/11/2006 for credit of $3,000,000.00

    MAXIMUM AMOUNT we can    $3,000,000.00 plus our enforcement expenses
    ask you to pay us under this         under clause 5 of this guarantee.

    guarantee

    Supporting security  Registered mortgage over the property situated at 123 JEFFCOTT STREET NORTH ADELAIDE SA 5008 by JANINE RUTH STARRS and CHRISTOPHER DAMIEN STARRS

    Registered mortgage over the property situated at 3-5 DUDLEY STREET SEMAPHORE PARK SA 5019 by JANINE RUTH STARRS and CHRISTOPHER DAMIEN STARRS

    By signing this guarantee you ask us to:

    - give credit to the BORROWER;

    - release security we hold in relation to the BORROWER’S existing credit; or

    - refrain from exercising our rights and remedies in relation to any such credit.

    When we do one of these things we do so in return for your guarantee.

    RL26DDS 7/03

21. There followed six pages of terms and the additional signing page.  The first three pages of terms consist of terms and definitions set out in the usual legal format.  Important terms of present relevance include the following.

    What you undertake in giving this guarantee

    Guarantee

    1.1You guarantee that the BORROWER will pay us all amounts OWING under any GUARANTEED AGREEMENT.  Your guarantee continues until all these amounts have been paid.

    1.2Until you have paid us the MAXIMUM AMOUNT each time we ask, you must pay us any amount which the BORROWER does not pay us when it is due under the GUARANTEED AGREEMENT.  In some circumstances we need not ask the BORROWER first to pay us.

    Indemnity

    2.1You indemnify us against, and must therefore pay us, when we ask, for loss we suffer because:

    (a)     the BORROWER does not pay us in accordance with a GUARANTEED AGREEMENT; and

    …

    Extent of your liability

    3We cannot ask you to pay more than the MAXIMUM AMOUNT.  You should note that we can enter into further CREDIT CONTRACTS with the BORROWER without further reference to you.  Such contracts will be covered by the Guarantee, subject to you being liable to us only for the MAXIMUM AMOUNT.

    Joint and separate liability

    4You undertake liability for all the obligations under this guarantee separately on your own and jointly with any one or more other PERSONS named in this guarantee as “Guarantor”.

    …

    Our rights are protected

    10.1Our rights and your liabilities under this guarantee are not affected by any act or failure to act by us or by anything else that might otherwise affect our rights or your liabilities under law relating to guarantees, including:

    (a)     the fact that we vary the GUARANTEED AGREEMENT;

    (b)     the fact that we give the BORROWER a concession, for example, more time to pay;

    (c)     the fact that we release, lose the benefit of or do not obtain any SECURITY or other guarantee;

    (d)     the fact that we do not register any SECURITY which could be registered;

    (e)     the fact that we release any PERSON who guarantees the BORROWER’S obligations under a GUARANTEED AGREEMENT;

    (f)    the fact that the obligations of any PERSON who guarantees the BORROWER’S obligations under a GUARANTEED AGREEMENT may not be enforceable;

    (g)     the fact that any PERSON who was intended to guarantee (either in this guarantee or under another guarantee) the BORROWER’S obligations under a GUARANTEED AGREEMENT does not do so or does not do so effectively; or

    (h) the death, mental or physical disability or INSOLVENCY of any PERSON including you or the BORROWER.

    …

    15.1We may use any money we receive under this guarantee towards meeting any part we choose of the amounts the BORROWER has agreed to pay us under a GUARANTEED AGREEMENT.

22. Pages four to six of the terms consist of warnings and explanations to a person considering whether to execute the guarantee in what might be fairly described as “plain English” format.  Important portions include the following.

    WHAT IT MEANS TO BE A GUARANTOR

    This is an important document.

    Read it carefully – if necessary have it translated and be sure you understand what it tells you.

    Commonwealth Bank of Australia is the credit provider, and in this statement is referred to as “the Bank”.

    In this statement, and in the guarantee, the person who is obtaining credit under the CREDIT CONTRACT with the Bank is referred to as “the BORROWER”.

    This statement tells you about some of the rights and obligations of yourself and the Bank.  It does not state the terms and conditions of your guarantee.

    Prior to the execution of the guarantee, you must note the following:-

    (a)you should seek independent legal and financial advice on the effect of this guarantee;

    (b)     you may refuse to provide this guarantee;

    (c)     there are financial risks in providing this guarantee;

    (d)     you are permitted to limit your liability under the guarantee; and

    (e)you may request information from the Bank regarding the CREDIT CONTRACT which is being provided to the Borrower.

    (f)We can change the GUARANTEED AGREEMENT or enter into additional Guaranteed Agreements with the BORROWER without reference to you.  This may increase the amount secured by the guarantee.  However it will not increase the MAXIMUM AMOUNT you are liable to pay us under the guarantee.  That MAXIMUM AMOUNT can only be increased if you agree to the increase in writing.

    The Bank will not ask you to sign the guarantee, nor will the Bank accept the guarantee, unless:-

    (g)all of the material required to be provided by the Bank to you has been provided; and

    (h)following the provision of such material, the Bank has allowed you the period of one day to consider that material.

    GUARANTEES

    1      What is a guarantee?  Why am I being asked to provide the guarantee?

    A promise by you that the BORROWER will keep to all the terms and conditions of the CREDIT CONTRACT.  If that person does not do so, you promise to pay the Bank all the money OWING on the contract (and any reasonable enforcement expenses) as soon as the money is asked for, up to the MAXIMUM AMOUNT stated in the Details page of the guarantee.  If you do not pay, then the Bank can take enforcement action against you which may result in the forced sale of any property owned by you such as your house. 

    You are being asked to provide the guarantee because the BORROWER is unable to give the Bank a good enough security for the CREDIT CONTRACT.

    …

    The Bank will also tell you:

    (i)whether any facility it has given the BORROWER will be cancelled, or if the CREDIT CONTRACT will not be provided, if you do not provide the guarantee.

    The Bank will also give you any other information we have (except our own internal opinions) about the CREDIT CONTRACT (including any facility to be refinanced by the CREDIT CONTRACT) that you reasonably request.

    In addition to making inquiry of the Bank, you should also ask the BORROWER for information about the loan.  Because you know the BORROWER and because, by giving the guarantee you are doing the BORROWER a favour, you should ask the BORROWER:-

    ·about their business affairs generally;

    ·to tell you everything about the loan you have guaranteed; and

    ·whether the loan account is in order.

    If the BORROWER refuses to tell you what you want to know, you should think seriously about whether or not to give the guarantee.

    After you give a guarantee, you should ask the BORROWER for this kind of information at regular intervals until the guarantee is at an end.

    …

    11    If my guarantee says I have to give a mortgage, what does this mean?

    A mortgage means that you give the Bank certain rights over any property you mortgage.  If you default under your guarantee, you can lose that property and you might still owe money to the Bank

    …

    15    What if I do not have the money to pay the Bank?

    If the Bank holds a mortgage from you to support your guarantee, the Bank can sell your mortgaged property to pay the debt.  If the Bank does not hold a mortgage from you, or if any security you have given the Bank is insufficient to pay the debt, the Bank can take you to court and ask the court for a judgment against you for the debt you owe it under the guarantee.

    This could mean that you lose everything you own, including your home.

    The signing page of the guarantees

1. The additional signing page has the following box immediately above the space for the guarantor’s signature in clear print:

   IMPORTANT

BEFORE YOU SIGN

THINGS YOU MUST KNOW

READ THIS GUARANTEE DOCUMENT AND THE GUARANTEED AGREEMENT

Understand that, by signing this guarantee, you may become personally responsible instead of, or as well as, the BORROWER to pay amounts which the BORROWER owes and our reasonable expenses in enforcing this guarantee.

You should also read the information statement:

“WHAT IT MEANS TO BE A GUARANTOR”.

If the BORROWER does not pay you must pay.  This could mean you lose everything you own including your home.

You should obtain independent legal advice and financial advice

You may be able to withdraw from this guarantee or limit your liability.  Ask your legal adviser about this before you sign this guarantee.

Whilst the Bank is obliged to provide you with certain information, you should also make your own enquiries about the credit worthiness, financial position and honesty of the debtor (the debtor is referred to as the BORROWER).

We can change the GUARANTEED AGREEMENT or enter into additional GUARANTEED AGREEMENTS with the BORROWER without reference to you.  This may increase the amount secured by the Guarantee.  However it will not increase the Maximum Amount you are liable to pay us under the Guarantee.  That Maximum Amount can only be increased if you agree to the increase in writing.

The first variation to the guarantee - the purchase of Casual Living

1. In about August 2007, the defendants explored the purchase of another business to complement their acquisition of Truscotts, namely the “Casual Living” business.  It was proposed that such acquisition should occur in the form of a purchase of the assets of Casual Living, which were at that time owned by Damilcok Pty Ltd.[26]  Various communications took place between both of the defendants and the plaintiff concerning this proposal, although Mrs Starrs became the primary contact concerning the financial details of the transaction.

   [26]   T122.

2. On 21 August 2007,[27] Mr Morris sent a letter to Mrs Starrs, as the director of Starrs & Co Pty Ltd,[28] confirming that the bank had approved a variation to the facilities by increasing the overdraft from $2,600,000 to $4,500,000.

   [27]   There is some dispute about the exact date of this letter.  P8, D27, D28.

   [28]   Exhibit P8.

3. The bank facility was accordingly extended.  The extended facility was granted to “STARRS & CO PTY LTD ACN 057 365 090 as trustee for CHRIS STARRS FAMILY TRUST NO 2 trading as TRUSCOTTS”.  The facility was stated to be an overdraft with a limit of $4,500,000 and was to be for the purpose of “temporary increase in working capital requirements required to purchase the assets of Damilock Pty Ltd”.  The security was stated in the security schedule as follows:[29]

   Security for all facilities is as follows (unless otherwise specified):

   [29]   Exhibit D28.

   Status       Details

   ExistingA Guarantee limited to $4,500,000 by Christopher Damien Starrs supported by:

   ExistingA Second Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over Residential Real Property located at 123 Jeffcott St North Adelaide SA 5081.

   ExistingA First Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over Non Residential Real Property located at 3 Dudley St SEMAPHORE SA 5019.

   ExistingA First Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over Residential Real Property located at 32 Northcote Tce Gilberton SA 5081.

   ExistingA First Registered Equitable Mortgage by STARRS & CO PTY LTD ACN 057 365 090 as trustee for CHRIS STARRS FAMILY TRUST NO 2 over the whole of its asset(s) and undertaking(s) including uncalled capital.

   Existing      A Guarantee limited to $4,500,000 by Janine Ruth Starrs supported by:

   ExistingA Second Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over Residential Real Property located at 123 Jeffcott St North Adelaide SA 5081.

   ExistingA First Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over Non Residential Real Property located at 3 Dudley St SEMAPHORE SA 5019.

   ExistingA First Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over Residential Real Property located at 32 Northcote Tce Gilberton SA 5081.

4. On or about 24 August 2007, Causal Living was purchased by Starrs & Co Pty Ltd.

   The initial execution of the first variation documents

5. Little information was provided at trial as to the precise circumstances, including the exact date, of the signing of the original first variation documents by the defendants.  It is agreed by both parties that these documents were initially signed, but were lost by the plaintiff bank at some stage.  Mr Morris’ evidence on this point was as follows:[30]

   My recollection at the time was that we received all the correct documentation and funded the loan because I don’t have authority to fund a loan without approval at the documentary area.  Subsequent there they could - they found that they were missing the document or they had misplaced the document so we had to have them re-issued and acknowledged by yourself when we re-issued them.

   [30]   T156-157.

6. I find that the documents relating to the first variation of the facility were in fact executed by the defendants a short time after 21 August 2007 and that the signatures were regularly witnessed.  While there is no evidence before me as to who witnessed the signing of these original documents, I accept Mr Morris’ evidence that the documents were completed to the satisfaction of the bank which would include satisfaction that the documents were ostensibly properly witnessed.

   The later signing of documents replacing the lost first variation documents

7. I find that the original executed documents relating to the first extension of the facility were, to the mortification of the bank, subsequently lost by the bank.[31]  When this loss was later discovered, the bank requested the defendants to execute fresh documents to the same effect.

   [31]   See: Mr Morris at T156-157; Mr Barlow at T232-233; email from Mr Barlow to Mrs Starrs 4 July 2008 (exhibit D32).  For a case of a similar mortifying bank error, see Commonwealth Bank of Australia v Carotino (2011) 111 SASR 573.

8. I find that Mrs Starrs executed a replacement acceptance document which was then attached to the letter of offer, dated 27 December 2007, which was tendered as exhibit P8.  While the date on the acceptance document is a little hard to read, I find it to be “8.7.08” meaning 8 July 2008.  This accords with the email of Mr Barlow of 4 July 2008 which attached the unsigned document and requested that it be executed.[32]

   [32]   Exhibit D32.

9. I find that the separate Consent and Acknowledgement to Extension of Guarantee had been re-executed on the earlier date of 1 June 2008 by Dr Starrs and Mrs Starrs, both their signatures being witnessed by Mr Morris.

   The second variation to the guarantee

10. Although sometimes referred to as “the second extension”, the second variation actually effected a reduction in the facilities (back from $4,500,000).  The defendants’ total facility limit was reduced from the temporary increase to $4,500,000 back to $3,800,000, this figure now to comprise a “Trade Finance Facility” limit of $3,300,000 plus a “Better-Business Loan” limit of $500,000.

11. The bank facility was stated to be granted to “STARRS & CO PTY LTD ACN 057 365 090 as trustee for CHRIS STARRS FAMILY TRUST NO 2”.  The required documents were accompanied by a letter of offer dated 10 October 2008 addressed to “Starrs & Co Pty Ltd, Truscotts, Adelaide SA 5000” (exhibit P12) signed by a bank employee on behalf of Mr Morris.  The security was stated in the security schedule as follows:

    Security for all facilities is as follows (unless otherwise specified):

    Status       Details

    ExistingA Guarantee limited to $3,800,000 by Janine Ruth Starrs supported by:

    ExistingA Second Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over Residential Real Property located at 123 Jeffcott St North Adelaide SA 5081.

    ExistingA First Registered Equitable Mortgage by STARRS & CO PTY LTD ACN 057 365 090 as trustee for CHRIS STARRS FAMILY TRUST NO 2 over the whole of its asset(s) and undertaking(s) including uncalled capital.

    ExistingA Guarantee limited to $3,800,000 by Christopher Damien Starrs supported by:

    ExistingA Second Registered Mortgage by Janine Ruth Starrs and Christopher Damien Starrs over Residential Real Property located at 123 Jeffcott St North Adelaide SA 5081.

    ExistingA First Registered Mortgage by Christopher Damien Starrs over Residential Real Property located at 32 Northcote Tce Gilberton SA 5081.

12. The acceptance of offer was again executed on behalf of the company by Mrs Starrs alone on 20 October 2008.  The maximum amount of the defendants’ liability under the guarantees was changed to $3,800,000.[33]

    [33]   I note that on 24 January 2008, the guarantee limit was reduced from $4,500,000 to $2,600,000 with Mrs Starrs’ execution of an acceptance document sent to her on 23 January 2008 (exhibit D30).  No significance was attached to this event by either the plaintiff or the defendants.  This appears to have been connected with the sale of the Dudley Street property, which was sold and released from security sometime in 2008.

    The circumstances surrounding the signing of the second variation documents

13. The second variation was accepted by the defendants each executing a further Consent and Acknowledgement to Extension of Guarantee on 17 October 2008.[34]  On this occasion, the execution of these documents was witnessed by Mr John Protheroe.  I will examine some aspects of the signing of the above documents in greater detail below in the context of an examination of Dr Starrs’ understanding of the documents.

    [34]   Exhbits P18 and P19.

    Receipt of documents by Dr Starrs and Mrs Starrs

14. As to the various documents that the defendants signed in the circumstances referred to above, I find that the defendants originally received all of those documents in an unsigned condition either through the post, by delivery by the bank to Northcote Terrace or by collection from the bank.

15. As to the various further documents said by the bank to have accompanied the documents that the defendants actually signed, I note that Mrs Starrs stated in evidence that she did not carefully read documents that she signed, giving the reason that there were so many accompanying documents.  Thus, she asserted in relation to the first letter of approval dated 22 November 2006 that because it was amongst “a big bunch of documents” she did not read it or any of the accompanying documents in detail and regarded such documents as a formality.

16. I find that the defendants each received, either through the post, by delivery by the bank to Northcote Terrace or by collection from the bank, all of the documents asserted by the bank to have been sent in connection with the original offer in November 2006 and that Mrs Starrs retained all such documents amongst her records.  These included the “Usual Terms and Conditions for Commercial Lending Facilities”, the Terms Schedule, the Security Schedule, the Fees and Charges Schedule for Commercial Lending Facilities, an information sheet outlining important features of the offer and the folder of documents required for the giving of a guarantee including the document checklist and instructions for signing a guarantee.

17. The bank witnesses assert that the bank practice was that repeat copies of enclosure documents would have been again enclosed with the later letters to Dr Starrs and Mrs Starrs on the occasions of each of the subsequent variations of the facility.  I note that Mrs Starrs expresses reservations as to whether she did receive a new copy of all such material on each such occasion.

18. I find that if the defendants did not receive repeat copies of all documents on any occasion, that did not in any way affect their ability to consider whether they would sign the subsequent variations.

19. However, as to Dr Starrs alone, there are broader issues in the context of the Garcia defence involving his overall “understanding” of the transaction(s) to which I return below.

    The event of default and sale of the mortgaged properties

20. After several years of profitable trading, Starrs & Co Pty Ltd began to encounter severe financial difficulties.  On 2 July 2009, a notice of default was sent to Starrs & Co Pty Ltd by Retravision (WA) Ltd, pursuant to a charge it had over the assets of Starrs & Co Pty Ltd.[35]  On 11 July 2009, Messrs Munday and Blackwood were appointed as Receivers and Managers of Starrs & Co Pty Ltd.  This was an event of default as defined in clause 10(f) of the “Usual Terms and Conditions for Commercial Lending Facilities” of the plaintiff bank.  On 24 July 2009, Mr Alan Bennett, a Manager in the Credit Management division of the bank, wrote to the defendants advising them that they were in default under the “loan agreements”.  Consequently, the defendants were also in default under the guarantees.

    [35]   Exhibit P60.

21. Following non-payment by the defendants, the bank sought to recover the amount outstanding under the loans by proceeding under the defendants’ guarantees.  On 21 December 2009 the bank sent to the defendants, letters enclosing notices of sale in relation to the Northcote Terrace property and the Jeffcott Street property.[36]  On 13 January 2010, the bank took possession of the Jeffcott Street property, and it was later sold for $1,160,000.  The Northcote Terrace property was sold by the bank on 8 September 2010 for a total of $1,602,610.75.  The proceeds of these sales left a considerable shortfall, which resulted in the current proceedings for the balance of the money outstanding under the guarantees.

    [36]   As noted above, the Dudley Street property had been sold and released from security sometime in 2008.

    PART C:  A BELIEF BY THE DEFENDANTS AS TO A LIMIT OF LIABILITY

22. Both defendants pleaded that they believed that their liability under the original guarantee (and later under the variations) was limited to the realisable value of the securities.  The relevant pleadings in the third defence were:

    3.2The Defendants did not fully or properly read, understand or comprehend the provisions of the Guarantees and the Extensions, which was or should have been apparent to the Plaintiff.

    Particulars

    3.2.1The Plaintiff’s did not properly explain to the Defendants, their obligations under the Guarantees and the Extensions;

    3.2.2The Defendants further refer to and rely upon the fact that neither of them received legal advice about the terms of the Guarantees and the Extensions;

    3.2.3In the alternative to paragraphs 3.2.1 to 3.2.2 above, the Defendants say that they understood their obligations under the Guarantees and the Extensions to be:

    …

    3.2.3.2Limited to the value of the securities provided as set out within the Guarantees and the Extensions, which are referred to within paragraphs 3.2.4.1 to 3.2.4.3 herein.

    3.2.4Further to paragraph 3.2.3.2 above, the Defendants say that they discussed on numerous occasions and confirmed prior to entering into the Guarantees and the Extensions with their relationship manager(s) Mr Gregory Morris (Mr Morris) and/or Mr Simon Barlow (Mr Barlow) that their liabilities under the Guarantees and the Extensions were limited to the values of the securities set out in paragraphs 3.2.4.1 to 3.2.4.3 inclusive herein.

23. The third defence was filed on 23 February 2012.  The final fourth version of the defence contained the same pleadings.

24. It is to be noted that, the defendants’ pleadings do not assert that this is the correct construction of the guarantee.  Rather, the pleadings impliedly accept that the correct construction of the written guarantee was that their liability extended up to the stated maximum amount (originally $3,000,000 and finally $3,800,000) but assert that, due to the conduct of employees of the bank, the defendants formed the (incorrect) understanding that their liability was limited to the realisable value of the securities.

25. However, despite the emphatic claims in paragraph [3.2.4] of the third defence reproduced above, neither Dr Starrs nor Mrs Starrs ever asserted that there was ever any conversation, or written communication, in which any bank officer made any such express representation to either of them.  In fact, both Mr Ross-Smith during his opening on behalf of both defendants and Mrs Starrs in evidence specifically stated that it was not suggested that this had occurred.

26. Indeed, it was common ground at trial that the bank officers did not attempt to orally explain the contents of the guarantee-related documents; it was in fact clear bank policy not to do so but rather to advise only in writing (no doubt in an attempt to minimise the scope of potential later dispute as to what had been said).

27. The position of both defendants at trial was that the discussions with the bank were so concentrated on the topic of securities (and particularly the fact that the value of the securities needed to exceed the limit of the facility) and there was so little oral discussion about the guarantees, that they thought that the guarantees were limited to the realisable value of the securities.  The end result contended for by the defendants was that it would be inequitable to hold them to a different construction of the guarantees in all of the circumstances.

    The position of Dr Starrs

28. I have referred above to the defendants in the plural because at trial Dr Starrs, just as much as Mrs Starrs, was adopting the above position.  This is reflected not only in the pleadings but also in the approach of Dr Starrs to the cross-examination of Mr Morris who he questioned about the proportion of the negotiations which were devoted to discussing the securities thus:[37]

    [37]   T474-475.

    QSo in the particular case of Starrs & Co what proportion of time did you spend discussing the real estate type, hard securities as opposed to the guarantees?

    AIn this instance it was significantly more, a greater time in terms of the hard securities evidenced by the number of emails that specifically were talking about the various properties and their values.  Again, I wouldn’t put a percentage on it but it would be significantly less than the landed securities.

    Q     Would you say it would be 1% at the time?

    A     No, I’d be reluctant to put a percentage on it other than to say -

    Q     But if you had to?

    A     - it would be significantly less -

    Q     But if you had to put a percentage, would it be one?

    AEach of the cases would differ.  In case - and I’m not being vague - hopefully not being vague about that but when we looked at the Casual Living purchase, for instance, down the track there was a lot more time spent on what values we were going to put on stock holdings and those sort of things in regards to the Casual Living and the Retravision transaction.  But at the outset I would say something like 5% of the time - right at the outset in the original Truscott purchase probably 5% of the security time if I was asked to – if I was pressured into making a percentage calculation.

    QSo would you acknowledge that the experience that you had with us in the initial stages of this relationship, taking out the loan etc., we spent many hours talking about the securities, the hard securities and that those discussions totally dominated the transaction that -

    AI wouldn’t necessarily say many hours but the focus - undoubtedly because of the emails - the principle focus was on real estate value because they are the hard recoverable assets - that and the plant and equipment and those sort of things are the hard, recoverable assets that the bank would be - would be looking at to give it the most comfort out of the transaction.

    QSo it would - do you think it would be reasonable for me to describe the situation as one in which the environment of my becoming involved as a guarantor was one in which there was a great deal of discussion about the hard security and very, very little time spent discussing the guarantee?

    A     Yeah, that would be a fair statement.

1. The questioning by Dr Starrs in terms of “us” and “we” appeared to confirm that he was pursuing his pleaded case in suggesting that he had taken part in many hours of talking about the transaction(s), which talk was dominated by discussions about the securities with only a small percentage of it dealing with the topic of the guarantees, and he therefore gained the understanding that the guarantees were limited to the realisable value of the securities.

2. However, when Dr Starrs later gave evidence, he claimed that he had had only minimal discussion about the transaction and/or that he could remember virtually nothing about such matters.  I will come to this later.

   The position of Mrs Starrs

3. Mrs Starrs claimed in evidence that the bank employees, through their focus during the negotiations on the properties to be offered as security and lack of emphasis on the guarantees themselves, led her to believe that liability under the original guarantee and the extensions was limited to the realisable value of the securities.  Thus, Mrs Starrs stated that sometime on 16 November 2006 (after her email of 11:27am to Mr Morris), Mr Morris called her to advise that the funds would be made available to the defendants and she said of this conversation that “there was no mention of guarantees.  There was only mention of mortgages and registering the securities and valuations”.[38]  The following evidence of Mrs Starrs summarises her case:[39]

   HIS HONOUR

   Q(What was) your view of your liability should it happen, contrary to your expectations, the value of the securities given would not be sufficient to satisfy the amount of liabilities subject to your guarantee?

   A     My view was that my guarantee was limited by the securities.

   Q     Are you saying that anyone told you that?

   ANo, I’m saying that due to the frequent emails about the securities, due to the later documents that were signed - maybe I should refer to them now -

   [38]   T554.

   [39]   T575-576.

4. Mrs Starrs then referred to a number of emails amongst which was an email exchange between Mrs Starrs and Mr Morris between 14 and 20 December 2006 (exhibit D8).  Mrs Starrs highlighted the fact that Mr Morris stated, on 14 December 2006, at 11:22am:

   Firstly I need to know what the status is with Dudley St.  Are we still to take this, if so I will need to get the valuation completed on the basis that the lease is not to be signed?  (Christopher asked it to be held up pending sale negotiations)  For me to increase the limit, I will need to formally use this property at the assessed value.

5. Mrs Starrs stated in evidence in relation to this passage:[40]

   A… when we took the loan, Dudley Street was not available to be a registered mortgage immediately because it used to be owned - because it needed to be transferred into Christopher’s name because it used to be owned by a different company that we had instead of Christopher in person, so that delayed the registration of that mortgage and therefore the bank would not give us the money relating to that and only funded us based on the securities provided by Jeffcott Street and Northcote Terrace.  And you’ll see that also ties in with the argument that we were relying on securities being registered before funds would be released.

   [40]   T578.

6. Mrs Starrs also referred to the following emails:

   ·emails (exhibit D7) between Mr Glen Luestner (a Risk Executive of the Bank) and Ms Natilie Hobson (a Relationship Banker with the bank) to similar effect as the above;

   ·an email from Mr Morris to Dr Starrs, of 14 November 2006, at 4:58pm, advising that the plaintiff “would be prepared to assist” to the limit of $3,000,000, with the securities of the Jeffcott Street property, the Northcote Terrace property, and the Dudley Street property “as offered” and subject to certain additional steps being taken (exhibit P36 at page 77);[41] and

   ·an email of Mr Morris to Mrs Starrs, of 6 August 2007, at 2:50pm, which referred to the plaintiff’s proposed additional loan to the defendants for the Casual Living purchase (exhibit D9).  Mrs Starrs stated of this email, “So there was no mention at that time by Mr Morris that this loan was not fully supported by the securities”.[42]

   [41]   T658-659.

   [42]   T591.

7. I note that Mr Ross-Smith in his closing address for Dr Starrs noted that the deeds of guarantee refer to “supporting security” (exhibits P14 and P15) and submitted that this gives the impression that the guarantee is limited to the value of the listed securities.  Mrs Starrs also referred to the fact that the two consents and acknowledgments to extension of guarantee themselves state “the securities given by me as set out in the Facility Agreement will secure all my liabilities to the Bank under my Guarantee”.

   The position of the bank

8. The bank’s position may be stated shortly (but it is no worse for that).  First, that the guarantee itself, on proper construction, contains no such limitation.  Second, both the guarantees and the other bank documents contain statements and warnings that make it clear that liability extends beyond the realisable value of the securities. Third, that no bank officer made any representation suggesting a different position.

   The legal principles relating to the signing of contractual documents

9. The basic principles governing the legal significance and effect of the signing of contractual documents have been settled for many years.  Thus, in 1934 in L'Estrange v F Graucob Ltd, Scrutton LJ stated that:[43]

   [w]hen a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.

   (Emphasis added)

   [43] [1934] 2 KB 394, 403.

10. In more recent times in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd, the High Court enunciated in a unanimous judgment the relevant principles thus:[44]

    [44] (2004) 219 CLR 165, 180-182 (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ).

    [43]… [I]n words that are apposite to the present case, in Wilton v Farnworth[45] Latham CJ said:

    [45] [1948] HCA 20; (1948) 76 CLR 646 at 649.

    In the absence of fraud or some other of the special circumstances of the character mentioned, a man cannot escape the consequences of signing a document by saying, and proving, that he did not understand it.  Unless he was prepared to take the chance of being bound by the terms of the document, whatever they might be, it was for him to protect himself by abstaining from signing the document until he understood it and was satisfied with it.  Any weakening of these principles would make chaos of every-day business transactions.

    …

    [45]It should not be overlooked that to sign a document known and intended to affect legal relations is an act which itself ordinarily conveys a representation to a reasonable reader of the document.  The representation is that the person who signs either has read and approved the contents of the document or is willing to take the chance of being bound by those contents, as Latham CJ put it, whatever they might be.  That representation is even stronger where the signature appears below a perfectly legible written request to read the document before signing it.

    …

    [47]Legal instruments of various kinds take their efficacy from signature or execution.  Such instruments are often signed by people who have not read and understood all their terms, but who are nevertheless committed to those terms by the act of signature or execution.  It is that commitment which enables third parties to assume the legal efficacy of the instrument.  To undermine that assumption would cause serious mischief.

    (Emphasis added)

11. Again in Equuuscorp Pty Ltd v Glengallan Investments, a unanimous bench of the High Court declared that:[46]

    [33]The respondents each having executed a loan agreement, each is bound by it.  Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it.[47]  The parol evidence rule,[48] the limited operation of the defence of non est factum[49] and the development of the equitable remedy of rectification,[50] all proceed from the premise that a party executing a written agreement is bound by it.  Yet fundamental to the respondents’ case that the operative agreements between the parties were wholly oral, and reached earlier than the execution of the written agreements, was the proposition that the written agreements subsequently executed not only may be ignored, they must be.  That is not so.  Having executed the agreement, each respondent is bound by it unless able to rely on a defence of non est factum, or able to have it rectified.  The respondents attempted neither.

    [34]There are reasons why the law adopts this position.  First, it accords with the “general test of objectivity [that] is of pervasive influence in the law of contract”.[51]  The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions.[52]

    [35]Secondly, in the nature of things, oral agreements will sometimes be disputable.  Resolving such disputation is commonly difficult, time-consuming, expensive and problematic.  Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement.  At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case.  Different questions may arise where the execution of the written agreement is contested; but that is not the case here.  In a time of growing international trade with parties in legal systems having the same or even stronger deference to the obligations of written agreements (and frequently communicating in different languages and from the standpoint of different cultures) this is not a time to ignore the rules of the common law upholding obligations undertaken in written agreements.  It is a time to maintain those rules.  They are not unbending.  They allow for exceptions.  But the exceptions must be proved according to established categories.  The obligations of written agreements between parties cannot simply be ignored or brushed aside.

    (Emphasis added)

    [46] (2004) 218 CLR 471, 483 (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ).

    [47]   L'Estrange v Graucob Ltd [1934] 2 KB 394.

    [48]   Hoyt's Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133.

    [49]   Petelin v Cullen [1975] HCA 24; (1975) 132 CLR 355.

    [50]   Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422.

    [51]   Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540, 549 per Gleeson CJ.

    [52]   Gissing v Gissing [1970] UKHL 3; [1971] AC 886, 906 per Lord Diplock; Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441, 502 per Lord Diplock.

    Conclusion as to the defendants’ limit of liability

12. It was never disputed by the defendants that they signed the guarantees and there is no plea of non est factum or any application for rectification.[53]

    [53]   Saunders v Anglia Building Society [1971] AC 1004, 1019 (Lord Reid); Petelin v Cullen (1975) 132 CLR 355, 359-361 (Barwick CJ, McTiernan, Gibbs, Stephen and Mason JJ); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 181-182 [46]-[47] (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ).

13. In the case of Mrs Starrs, she acknowledged that at the relevant time she was aware of the significance of executing a guarantee and its general effect.[54]  It is clear that it is no defence for her now to assert that she did not properly read the guarantees and the extensions, or the explanatory documents associated with them.  The act of signing these instruments gives rise to a binding obligation to adhere to their terms and conditions.

    [54]   T642, 930.

14. I accept the submissions for the bank referred to above.  It is clearly stated on the first page of the deed of guarantee that liability is up to (but not exceeding) the “Maximum Amount”, which was stated to be “$3,000,000.00 plus our enforcement expenses under clause 5 of this guarantee”.  This interpretation is consistent with other provisions of the deed of guarantee, including clause 3:

    Extent of your liability

    3We cannot ask you to pay more than the MAXIMUM AMOUNT.  You should note that we can enter into further CREDIT CONTRACTS with the BORROWER without further reference to you.  Such contacts will be covered by the Guarantee, subject to you being liable to us only for the MAXIMUM AMOUNT.

15. Nowhere in the bank documents is it suggested that the liability is limited to a figure below $3,000,000, namely to a lower realisable value of the securities and it is not possible to read the guarantee as a whole in that way.  Further, there are a number of statements in the documents obviously inconsistent with the defendants’ asserted meaning.  The documents contained numerous clearly flagged warnings about the significance of the execution of the document and the risks associated with a guarantee.  Indeed, immediately above the signing block on the deed of guarantee itself, the box labelled “IMPORTANT” (reproduced above) contains a number of warnings, including “If the BORROWER does not pay you must pay.  This could mean you lose everything you own including your home”.

16. In my view, the term “supporting security” in the guarantee means that the guarantor agrees to be liable for the full amount of the debt, which liability will be “aided” or “assisted” by the value of the securities; the word “supporting” actually recognises rather than negates the outcome that, in the event of default, recourse to the securities may not be sufficient to satisfy the guarantor’s liability. 

17. For the above reasons, I find that there was nothing, either appearing in the bank documents or occurring in discussions between the bank officers and the defendants, that somehow led either of the defendants to believe their liability was limited to the realisable value of the securities.

18. Further, I am far from persuaded that either of the defendants did in fact form the view that their liability was limited to the realisable value of the securities.  However, even if the defendants did form that erroneous view, I find that the bank was in no way responsible for the defendants forming that view and, accordingly, the extent of the defendants’ liability remains as stated in the guarantee in any event.

    PART D:  THE ASSERTED DEFENCE THAT THE GUARANTEES FAILED TO COMPLY WITH THE CODE OF BANKING PRACTICE

19. The guarantees state at the top of the first page that “Relevant provisions of the Code of Banking Practice apply to this guarantee”.  However, the question arises as to which of the provisions are the “relevant provisions” in the particular circumstances of this case?

20. It is very clear that the Code does not apply to all guarantees given to a bank.  At clause 28 of the Code it is stated:

    Guarantees

    28.1This clause 28 applies to every guarantee and indemnity obtained from you (where you are an individual at the time the guarantee and indemnity is taken) for the purpose of securing any financial accommodation or facility provided by us to another individual or a small business (called a “Guarantee”), except as provided in clauses 28.15 and 28.16.[55]

    [55]   Clauses 28.15 and 28.16 apply only to a director guarantor and hence do not apply to Dr Starrs.  They do apply to Mrs Starrs and restrict the applicability of the Code to her.

21. “Small business” is defined in clause 40 to mean:

    small business means a business having:

    (a)less than 100 full time (or equivalent) people if the business is or includes the manufacture of goods; or

    (b)     in any other case, less than 20 full time (or equivalent) people,

    unless the banking service is provided for use in connection with a business that does not meet the elements in (a) or (b) above.

22. The plaintiff submits in its written submissions that the correct interpretation of that clause and its application to the present facts is as follows:

    It is conceded that at the time of the Letter of Offer Exhibit P1 and P2 and the signing of the Guarantees Exhibit P14 and P15 Starrs and Co P/L had no employees (or at best two employees) but “the banking service [as defined in the Code] was provided for use in connection with a business [Truscotts] that [did] not meet the elements in (a) or (b) above”.  As Mrs Starrs said at TX 636.23 there were “about 60, or 70” employees when they first went into the business.  Accordingly, it is submitted the Code did not apply at any time.  Further, the overdraft facility was not provided merely to purchase the business but was to continue to facilitate the operation and conduct of the business.

    (Emphasis in original)

23. The correct interpretation of the above clause in fact presents a somewhat difficult matter of construction.  At first, I was attracted to the argument that clause 28 fastens upon both the state of the guarantor and the state of the debtor as at a particular time.  The first question is whether the guarantor is an “individual” at the time when the guarantee is actually executed.[56]  The second question is whether or not the debtor falls within a class constituted by “individuals” and “small businesses” (where a small business is defined to mean an employer of less than less than 20 employees[57]) at that same time when the guarantee is actually executed.  On this argument, it follows that the words “for the purpose” simply refer to “the purpose of “securing any financial or facility provided by” the bank; while it is true that that sentence continues on to say “another individual or a small business …”, emphasis must be placed on the word provided.  It is the time at which that facility is provided that is determinative and, in the present case, it was provided at a time when the debtor clearly had less than 20 employees, not having at that time yet acquired the Truscotts business.  The argument therefore concludes that at the time when the facility was provided, the debtor, Seniors Care Services Pty Ltd, came within the definition of a “small business” because it then had less than 20 employees.

    [56]   Vide “obtained”; “at the time the guarantee … is taken”.

    [57]   Code of Banking Practice cl 40.

24. However, on further reflection, I now consider that it was this, or a similar argument, to which the concluding words of the definition of “small business” above were specifically directed, namely the words “unless the banking service is provided for use in connection with a business that does not meet the elements in (a) or (b) above”.  I accept the submission of the bank that the meaning of those words must be that the provisions of the Code will not apply to a small business (even though at the time of the provision of the facility it employs less than 20 persons) if the banking service (here the provision of the facility) is provided in connection with a business that does not meet the elements in (a) or (b) of the definition referred to above.  I accept that the authorities have established that the words “in connection with” have a very broad meaning[58] and I have no doubt that the evidence here establishes, and I find, that the facility was provided to Seniors Care Services Pty Ltd in connection with a business (namely the carrying on of the Truscotts business which involved the employment of well over 20 persons).

    [58]   Bank of Western Australia v Abdul [2012] VSC 222, [23] (Croft J) citing Claremont Petroleum NL v Cummings (1992) 110 ALR 239, 280 (Wilcox J), Antonis P Lemos [1985] 1 AC 711, 727 (Lord Branson) and Exford Pines Pty Ltd v Vlado’s Pty Ltd [1992] 2 VR 449, 453 (Tagell J).

25. However, I should add, the bank’s submission leaves a gap which was not addressed by counsel for the bank.  The “purpose” provision of clause 28.1 in fact has two limbs, the first being an “individual” and the second being a “small business”.  However, the “in connection with” exception relied upon by the bank applies only by reference to the definition of “small business” and therefore only applies to the second “small business” limb.  Thus, if it were the case that a company (in this case the debtor, Starrs & Co Pty Ltd) could be interpreted to be an “individual” for the purposes of clause 28.1, that would completely destroy the above argument of the bank.

1. I again emphasise that it is for the guarantor to satisfy the court of all four of the requirements in Garcia.  Since Dr Starrs has singularly failed to satisfy the Court of either of requirements one or two, it is plainly unnecessary to enter upon consideration of the third and fourth requirements in Garcia.

   The extent of the notice required

2. I will refer to only one other matter.  In the present case, counsel for Dr Starrs was at pains to submit that the doctrine in Garcia required notice to the bank of only two matters: the fact of Dr Starrs’ and Mrs Starrs’ marriage and of the fact that Dr Starrs was a volunteer.  He submitted supplementary written submissions to that effect, enclosing a photocopy of a page from Equity & Trusts in Australia[133] with the following passage highlighted:[134]

   The only question of notice that arises under Garcia is whether the creditor knows the guarantor is married to the borrower and is a volunteer.

   (Emphasis added)

   [133] GE Dal Pont, Equity & Trusts in Australia (Thomson Reuters, 5^th ed, 2011) [7.215].

   [134] GE Dal Pont, Equity & Trusts in Australia (Thomson Reuters, 5^th ed, 2011) [7.215].

3. On my reading of Garcia, the only notice to the lender required is notice of the marriage and it is not necessary that the lender have notice of the fact that a guarantor is a volunteer (assuming that she/he is indeed a volunteer).  Thus, the plurality judgment stated:[135]

   [40]We consider that the only question of notice that arises is whether the creditor knew at the time of the taking of the guarantee that the surety was then married to the creditor.  Other questions of notice do not intrude.

   [135] Garcia v National Australia Bank Ltd (1998) 194 CLR 395, 411.

4. The proposition that the creditor needs to know that the guarantor is a volunteer seems to find no support in the authorities other than the passage put forward by Mr Ross-Smith and reproduced above.

5. In Meagher, Gummow & Lehane’s Equity Doctrines & Remedies, the learned authors state in discussing the rule in Yerkey v Jones that:[136]

   [15-090]… All this has been endorsed by the High Court in Garcia v National Australia Bank Ltd (1998) 194 CLR 395; 155 ALR 614; BC9803588; [1998] HCA 48, observing (at [39]-[40]) that the only question of notice that arose was whether the creditor knew of the marriage …

   [136] R Meagher, D Heydon and M Leeming, Meagher, Gummow & Lehane’s Equity Doctrines & Remdies (LexisNexis, 4^th ed, 2002) [15-90].

6. In On Equity, the learned authors quote a passage from Garcia to like effect.[137]

   [137] Judge Peter Young, Clyde Croft and Megan Smith, On Equity (Thomson Reuters, 2009) [5.530] quoting Garcia v National Australia Bank Limited (1998) 194 CLR 395, 411.

7. In the later decision of the New South Wales Court of Appeal in Elkofairi v Permanent Trustee Co Ltd, Beazley JA (with whom Santow JA and Campbell AJA agreed) stated the matter quite definitively:[138]

   [46]In Garcia the majority said that the only notice that was relevant was that the creditor knew the surety was married to the principal debtor at the time of taking the guarantee.  The reason for that is obvious - as the Court stated in the passage to which I have referred above - Yerkey v Jones begins with the premise that a surety is a volunteer.  Notice of the fact of being a volunteer is not, therefore, required in the case of a guarantee.  If the creditor wishes to displace that premise, it bears the onus of doing so.

   (Emphasis added)

   [138] (2002) 11 BPR 20,841.

8. In any event, in fairness to the defendants, I decline to act on what I consider was a mistaken concession by counsel.

9. However, matters are rendered moot by my decision that the plaintiff has clearly proven in the present case that Dr Starrs was not a volunteer, and that in fact that he was far from it.  Further, I find that the bank officers, far from being on notice that Dr Starrs was a volunteer, positively believed on strong and reasonable grounds that he was nothing of the sort.

   PART F:  THE “GREER V KETTLE” DEFENCE

10. The Greer v Kettle[139] defence was raised by both defendants on the first day of trial.  I allowed an amendment to the third defence to this effect and the defence is pleaded as follows in the fourth amended defence (the final version of the defence):

    [139] [1938] AC 156.

    The Liability under the Guarantee Instruments never attached

    8A.1Each of the guarantee instruments on which the Plaintiff relies in these proceedings provides that the Plaintiff had as security for the lending by the Defendant to the Plaintiff, a registered second mortgage over the North Adelaide property.

    8A.2At the time of the giving of the guarantees to the extensions thereof, the Plaintiff at all materials times failed to register its second mortgage over the North Adelaide property.

    8A.3  The Defendants repeat paragraph 7.6.3 of this pleading.

    8A.4In the premises of sub-paragraphs 8A.1 to 8A.3 hereof, liability of the Defendants under the guarantee instruments did not attach and the guarantees (on which the Plaintiff makes its claims) are not binding.

11. The amendment is badly drafted and I will read it as if the following corrections were made:

    ·Paragraph 8A.1 should read “for the lending by the plaintiff to the company initially named Seniors Care Services Pty Ltd and later named Starrs & Co Pty Ltd” rather than “for the lending by the Defendant to the Plaintiff”;

    ·Paragraph 8A.2 should read “the guarantees and the extensions thereof” rather than “the guarantees to the extensions thereof”; and

    ·Paragraph 8A.2 should read “the Plaintiff at all material times” rather than “the Plaintiff at all materials times”.

12. As I understand it, Mr Ross-Smith’s submissions concerning this aspect of the now fourth defence proceed in the following stages.

13. First, each of the guarantee instruments stated that the plaintiff was to have as security for its loans to the company certain stated securities, including a registered second mortgage over the Jeffcott Street property; however, at the times of the execution of the mortgage and the later variations to it, the second mortgage over the Jeffcott Street property remained unregistered by the bank.  Second, the guarantee should be interpreted as providing that the defendants only guaranteed the repayment of the loans if the stated securities were in place and a registered second mortgage over the Jeffcott Street property was not in place.  Third, the guarantees were therefore not binding.

14. For this interesting line of reasoning, the defendants rely upon the decision of the House of Lords in Greer v Kettle.[140]  However, in that case the situation was entirely different to the present.  There, the guarantor executed the guarantee on the express basis that the borrower had given security to the lender in the form of a charge over several specified parcels of shares which in total were valued well in excess of the amount loaned.  It was subsequently found that the parcel of shares which constituted the vast majority of the total value of the shares had never been validly issued and therefore was unavailable as security, with the remaining security being worth far less than the amount guaranteed.  The guarantor argued that the whole basis of his contract of guarantee was that all of the shares were in place as security and therefore that fulfilment of the security recital in the contract of guarantee was to be interpreted as a condition precedent to the liability of the guarantor.  The House of Lords unsurprisingly accepted that submission.  As Lord Roche rhetorically asked arguendo, “Was not Parent Trust saying: ‘We will guarantee the repayment of a loan advanced on a valid charge’?”  Similarly, Lord Killowen stated:[141]

    … the legal rights and liabilities of these parties depend upon the true construction and effect of the agreement of guarantee …

    Once it is realized that the debt which Parent Trust are undertaking to guarantee is a debt described as a debt the repayment of which by the principal debtor is secured by a charge on (amongst other shares) the 275,000 shares in Iron Industries, Ld, the case (apart from the question of estoppel, to which I will refer) becomes in my opinion a simple one. …

    It is not a case, as Bennett J seems to have treated it, of seeking to imply a condition, the implication of which is alleged to be inconsistent with other provisions in the document.  In other words, as Romer LJ said, it is not a case of Parent Trust being released from a contractual engagement.  It is a case of an attempt to impose upon them a liability which they have never undertaken.  The only debt, the repayment of which by the principal debtor they undertook to guarantee, was a debt secured by a charge on the 275,000 shares in Iron Industries, Ld, and a debt so secured never in fact existed.  The language of Knight Bruce LJ in Evans v Bremridge (i) may well be applied to the present litigants.  In that case it was sought to make a surety liable who became a surety on the footing that a co-surety would join in the covenant with him.  The co-surety had not done so, and the surety was held to be under no liability.  As the Lord Justice truly said: “The defendants seek to charge the plaintiff with “a contract, into which he did not enter.”

    [140] [1938] AC 156.

    [141] Greer v Kettle [1938] AC 156, 165.

15. Mr Ross-Smith attempted to rely on this and other cases in which it has been held that the fulfilment of a term specifying the provision of particular security by a party other than the guarantor was to be interpreted as a condition precedent to liability of the guarantor.  For example, he referred to the decision in Chambers v Rankine[142] where a guarantee was held not to attach in circumstances where the security had not been obtained by the lender.  But once again, I make the point that there the security was to come from the borrower, not the guarantor, the contract being interpreted to provide that such provision was a condition precedent to the liability of the guarantor.  Thus, Way CJ stated:[143]

    By it she stated the terms on which the loan was to be made, and she declared that the borrower had upon the execution of the agreement delivered to the lender the said chattels by way of pledge.  Before paying over the £700 it was her duty to have received possession of the chattels as the contract declared she had done.  Instead of that she never obtained actual or constructive delivery of the bulk of the security.

    … [i]n this case the terms of the contract are decisive.  There was a representation in the contract itself that the plaintiff was in actual possession of the pledge to be given.  The agreement states— “The borrower has upon the execution hereof delivered to the lender the said chattels by way of pledge.”  That was a representation by Mrs Chambers, but it was more—it was a condition of the contract, a condition precedent to the defendant’s liability.

    The surety’s liability in this case, as in that, never attached, not because Mrs Chambers released or transferred part of the security, as in Polak v Everett, or Holme v Brunskill, but because the security, which was a condition precedent of the guarantee coming into force, was never taken.  …

    … [i]t seems to me clear beyond doubt that the security which was to be taken as a condition precedent to the guarantee coming into force never was taken, and that no liability under the guarantee ever attached.

    [142] [1910] SALR 73, 79-82 (Way CJ).

    [143] Chambers v Rankine [1910] SALR 73, 79-82.

16. Mr Ross-Smith contended that such conditions precedent necessitated the result that it followed from the failure of the bank to register the second mortgage over the Jeffcott Street property that liability under the guarantees and variations did not attach.

17. I reject these submissions.  It is not, as Mr Ross-Smith appears to suggest, a matter of taking a form of words that have been interpreted by a court in a certain way in a certain set of circumstances and then insisting that a somewhat similar set of words must be interpreted in the same way in quite different circumstances.  Rather, the matter is one of interpretation of the contractual intention of the parties in the light of the particular words used in the particular context in which they appear.[144]

    [144] I have considered not dissimilar matters in Ryan v Urban Construct (SA) Pty Ltd [2012] SASC 128.

18. In cases such as those cited by the defendants, the factual matrix included the two very important facts that, first, the guarantor relied on the stated availability of security provided by a person other than the guarantor when deciding whether or not to grant a guarantee and, second, there was no term in the guarantee militating against the conclusion that the intention of the parties was that it was a condition precedent to liability of the guarantor that the security to be provided by a third party was indeed in place.

19. However, there are two critical differences in the present case that lead to a quite different interpretation of the present contract.

20. First, we have here two identical deeds of guarantee (with Dr Starrs and Mrs Starrs respectively) which state that the creditor (the bank) is entitled to not only the promise to pay by the guarantor but also that such promise be supported by certain stated security.  However, that security does not emanate from a third party but solely from Dr Starrs and Mrs Starrs themselves.

21. Second, there is an express term in the present deed of guarantee (absent from the contracts in the cases referred to by Mr Ross-Smith) which clearly stipulates that absence of registration of securities by the bank will not affect or prevent the liability of the guarantor.  Thus, clause [10.1] provides:

    10.1Our rights and your liabilities under this guarantee are not affected by any act or failure to act by us or by anything else that might otherwise affect our rights or your liabilities under law relating to guarantees, including:

    (a)     the fact that we vary the GUARANTEED AGREEMENT;

    (b)     the fact that we give the BORROWER a concession, for example, more time to pay;

    (c)     the fact that we release, lose the benefit of or do not obtain any SECURITY or other guarantee;

    (d)     the fact that we do not register any SECURITY which could be registered;

    (e)     the fact that we release any PERSON who guarantees the BORROWER’S obligations under a GUARANTEED AGREEMENT;

    (f)    the fact that the obligations of any PERSON who guarantees the BORROWER’S obligations under a GUARANTEED AGREEMENT may not be enforceable;

    (g)     the fact that any PERSON who was intended to guarantee (either in this guarantee or under another guarantee) the BORROWER’S obligations under a GUARANTEED AGREEMENT does not do so or does not do so effectively; or

    (h) the death, mental or physical disability or INSOLVENCY of any PERSON including you or the BORROWER.

    (Emphasis added)

22. I note that in Re Kwan; Ex parte Hastings Deering (Solomon Islands) Ltd[145] Pincus J (again speaking in the context of security given by the principal debtor rather than the guarantor) observed:

    On the evidence the case is one of a kind familiar in commercial life: the directors of a private company were asked to guarantee a company debt to support a substantial security taken over the company’s property, there being no express statement that the efficacy of the guarantee depended upon the creditors troubling to perfect the security.  In such a situation, it is (in general) at least implicit that the creditor will take all reasonable steps to perfect the security.  It would be contrary to the expectation of business people that the creditor, not having perfected the security given by the principal debtor, should be free to have recourse to the guarantors.  In my opinion, here, where the guarantee was given on the basis of an express stipulation that there should be a bill of sale, there is such an implied condition as I have mentioned; the guarantee is therefore discharged for breach of that condition.  It should be added, perhaps superfluously, that what is held here has nothing to do with instances in which the guarantee is so drawn as to exclude the use of such a defence by the guarantor, nor with a case in which the failure to perfect the security was not the fault of the creditor.

    (Emphasis added)

    [145] (1987) 15 FCR 264, 267.

23. The written contention of the bank in the present case was as follows:

    There is no evidence and the inference does not arise from the Guarantee, the Consents to Extension or the various Letters of Offer or any combination thereof that registration of the mortgage was a condition of or a condition precedent to the operation of the Guarantee.  This submission is supported by the whole of clause 10 of the Guarantee and especially clause 10.1(d)(e)(f) and (g).

24. The bank’s submission is both short and unanswerable.  The “primary” defence of both defendants fails.

25. For completeness, I mention that, as stated above, the defendants advanced a specific equitable defence in the alternative to the broader Greer v Kettle defence. The facts relied upon were that an unpaid supplier of goods to Starrs & Co Pty Ltd placed a caveat on the Jeffcott Street property on about 14 July 2009,[146] and it was only after that occurrence that the bank belatedly registered the second mortgage. The bank then purported, without any authorisation by the defendants, to settle the supplier’s claim for a debt of $198,967.12 by a payment of about $100,000 from the proceeds of sale of the defendants’ property in return for the supplier withdrawing the caveat. The bank then claimed that amount it had paid to the supplier as part of an outstanding balance owing by the defendants. During the course of the trial I intimated that if the plaintiff maintained that claim for $100,000 I would likely disallow it and the bank withdrew it. It is unnecessary to say anything more, other than to observe that an exercise of the equitable jurisdiction of the Court in those specific circumstances has no effect upon, and forms no basis for, the different and broader issue of the construction of the guarantee itself as a matter of law. That interpretation remains as I have stated above.

    [146] Exhibit P37.

    PART G:  CONCLUSION

26. There were pleadings of an Amadio defence and breaches of ss 51AA, 51AB and 51AC of the Trade Practices Act 1974 (now ss 20 and 21 of Schedule 2 to the Competition and Consumer Act 2010) but these aspects of the defence were abandoned at trial and no evidence was led that could possibly have established such matters in relation to either defendant.

27. I conclude that all defences of each defendant fail and that the plaintiff has established the joint and several liability of each defendant.  Accordingly, there will be judgment for the plaintiff against each defendant.

28. As referred to above at [22], on 24 October 2012 Mr Howard tendered by consent a revised statement of quantum as exhibit P73 which took into account the abandonment by the bank of a number of items of its claim and established that, subject to the question of liability on the guarantees, as at 24 October the bank was owed the total amount of $2,337,560.44 with interest continuing to accrue at the rate of 15.080 per cent per annum.  The parties agreed that the only other adjustment that was needed to be made was to bring the amount owing for interest up to date as at the time of reservation of judgment.  Accordingly, during his final address Mr Howard by consent supplied the Court with the final agreed quantum of $2,345,176.25 which takes into account the addition of further interest up to 31 October 2012.

    Orders

29. I will hear counsel as to the making of formal orders.