Commonwealth Bank of Australia v Stephens

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT

S CI 2013 05791

COMMONWEALTH BANK OF AUSTRALIA ABN 48 123 123 124	Plaintiff
v
OWEN BRUCE STEPHENS	Defendant

(BY ORIGINAL PROCEEDING)

OWEN BRUCE STEPHENS	Plaintiff by Counterclaim
v
COMMONWEALTH BANK OF AUSTRALIA ABN 48 123 123 124	Defendant by Counterclaim

(BY COUNTERCLAIM)

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JUDGE:	SLOSS J
WHERE HELD:	Melbourne
DATES OF HEARING:	18, 19, 20, 21, 22, 26 and 27 April, 3, 5, 12, 13 and 16 May 2016
DATE OF JUDGMENT:	29 June 2017
CASE MAY BE CITED AS:	Commonwealth Bank of Australia v Stephens
MEDIUM NEUTRAL CITATION:	[2017] VSC 385

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CONTRACT – Unilateral mistake – Equitable right to rescission where other party exploits a ‘serious mistake’ – Whether Bank was aware of customer’s mistaken understanding of terms of fresh loan – Held: Bank was not aware of a ‘serious mistake’ and did not deliberately set out to ensure that customer did not become aware of this mistake – Taylor v Johnson (1983) 151 CLR 422 considered and applied.

TRADE PRACTICES – Misleading or deceptive conduct – Representation alleged to have been made to a party about the terms of an executory contract – Representation must be made with sufficient precision – Conduct to be assessed in the light of all relevant facts and circumstances – Whether Bank made representations about a loan which differed from the terms of that loan – Held: no representation was made giving rise to misleading or deceptive conduct – Australian Securities and Investments Commission Act 2001 (Cth) s 12DA(1) – Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 considered and applied.

TRADE PRACTICES – Statutory unconscionability – Whether statutory unconscionability requires ‘moral obloquy’ as distinct from mere unfairness or unreasonableness – Whether there was a ‘moral taint’ to Bank’s conduct in not explaining terms of fresh loan to customer with sufficient clarity – Held: (1) moral obloquy required; (2) Bank’s conduct not unconscionable – Australian Securities and Investments Commission Act 2001 (Cth) s 12CB(1) – Violet Home Loans Pty Ltd v Schmidt (2013) 44 VR 202; Director of Consumer Affairs (Vic) v Scully (No 3) [2012] VSC 444; [2013] VSCA 292 considered and applied.

EQUITY – Vitiating factors – General law unconscionability – Whether customer with mistaken understanding of terms of fresh loan was under a ‘special disadvantage’ – Requires ‘close consideration of the facts’ – Equitable relief requires both (1) a disabling condition and (2) ‘unconscientious taking advantage’ by the other party – Inequality in bargaining power an important but not decisive factor – Held: (1) there was no special disadvantage; (2) there was no ‘victimisation or exploitation’ - Australian Securities and Investments Commission Act 2001 (Cth) 12CA(1) – Blomley v Ryan (1956) 99 CLR 362; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392 considered and applied.

CONSUMER PROTECTION – Whether a credit contract between Bank and customer was one to which Consumer Credit (Victoria) Code applied – Whether credit contract was ‘carried over instrument’ and subject to National Credit Code – Held: Consumer Credit (Victoria) Code applied and credit contract was carried over instrument – Consumer Credit (Victoria) Act 1995 (Vic); National Consumer Credit Protection Act 2009 (Cth).

CONSUMER PROTECTION – National Credit Code s 76(1) – ‘Unjust transaction’ – Court to have regard to the public interest – Factors to have regard to under s 76(2) – Customer did not seek legal advice before signing loan agreement – Whether Bank discouraged customer from seeking independent legal advice before signing loan agreement – Whether Bank exerted unfair pressure or used unfair tactics or otherwise engendered an unjust transaction – Held: neither of the loan agreements nor their provisions are the product of unfair conduct on the part of the Bank – National Consumer Credit Protection Act 2009 (Cth).

CONTRACT – Restitution – Change of position – Good faith and reliance on receipt of money – Whether restitution unjust because of misrepresentations as to loan amount – David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER (Comm) 193 considered.

EQUITY – Subrogation – Payment out of a prior security by third party – Unconscionability of denying proprietary interest where third party presumably intended paying-out to be for own benefit – Subrogation only available absent sufficient remedy at law or in equity – Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; Aged Care Services Pty Ltd v Kanning Services Pty Ltd (2013) 86 NSWLR 174 considered.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr B Carew	Gadens Lawyers
For the Defendant	Mr S Matters	Wisewould Mahony

TABLE OF CONTENTS

Introduction......................................................................................................................................... 1

Lay Witnesses called to give evidence at the trial........................................................................ 6

Lay evidence called on behalf of the Bank................................................................................ 6
Mr Joseph Ringeri................................................................................................................ 6
Mr Jason Radich................................................................................................................... 7
Mr Mark Deligiorgakis....................................................................................................... 8

Lay evidence called on behalf of Mr Stephens......................................................................... 9
Mr Bruce Stephens............................................................................................................... 9
Ms Patricia (‘Trish’) Henderson....................................................................................... 10
Ms Anna Graham............................................................................................................... 12

Outlines of evidence were filed in advance........................................................................... 13
Joint tender of a substantial body of documentation............................................................ 13
Assessment of the lay witnesses............................................................................................... 13
Persons who were not called..................................................................................................... 14
Mr Stephens’ complaints about the discovery given by the Bank...................................... 16

Chronology of relevant events...................................................................................................... 19

Initial purchase of the 96 Wooralla Drive property............................................................... 19
Investigation of options for 96 Wooralla Drive – proceed with 5 lot subdivision or sell? 20
Meeting at the Manyung Gallery coffee shop on 20 August 2008....................................... 21
Application for loan made by Mr Stephens............................................................................ 23
Loan offer of $300,000 made by the Bank................................................................................ 27
The Bank, via Mr Radich, provides the initial deposit moneys for Marie Court............. 30
Difficulties in following-up Ms MLM prior to settlement................................................... 33
Marie Court settlement unable to proceed because no Bank documents had arrived.... 35
Ms Henderson makes contact with Mr Ringeri...................................................................... 36
Mr Ringeri starts a fresh application for Mr Stephens.......................................................... 38
Mr Ringeri’s communications with Mr Stephens prior to document signing................... 50
Meeting at coffee shop to sign documents on Tuesday, 16 December 2008...................... 52
The Marie Court property settled on 19 December 2008...................................................... 64
Communication with the Bank post-settlement..................................................................... 65
Renovation works continued to be undertaken at 96 Wooralla Drive............................... 70
Mr Stephens authorises the Bank to deal with Ms Henderson............................................ 72
Sale of 2 Marie Court.................................................................................................................. 76
First Notice of Default................................................................................................................ 78
Application made to the Financial Ombudsman Service..................................................... 78
SecondNotice of Default.......................................................................................................... 84
Correspondence with the CEO of the Bank............................................................................ 84
Mr Ringeri told her to stay out of it................................................................................ 85

The Bank’s claim.............................................................................................................................. 86

Mr Stephens’ Defence and Counterclaim................................................................................... 87

Mr Stephens says he acted under a ‘mistaken’ belief............................................................ 87
Mr Stephens contends the Bank engaged in misleading and deceptive conduct............. 87
Mr Stephens contends the Bank engaged in ‘unconscionable conduct’............................. 88
Mr Stephens contends the loan agreements and the mortgage are ‘unjust’ contracts for the purposes of the National Credit Code................................................................................................. 88
Mr Stephens contends that a failure to make restitution would not be unjust................. 89
Mr Stephens contends the Bank is disentitled from asserting a right to subrogation...... 89
Set-off and Counterclaim........................................................................................................... 90

The Bank’s claim in contract.......................................................................................................... 90

Mr Stephens says he acted under a ‘mistaken’ belief............................................................ 96
Conclusion................................................................................................................................. 100

Misleading and Deceptive Conduct........................................................................................... 102

Whether conduct is misleading and deceptive is an objective question of fact.... 103
Oral representations must be proven with precision................................................ 104
Causal link between conduct and persons led into error must be demonstrated 105

The representations relied upon by Mr Stephens................................................................ 105
The alleged ‘oral’ representations.......................................................................................... 109
(a)....... The telephone call from [Ms MLM] to Ms Henderson on about 17 September 2008       109
(b)...... The meeting with Mr Radich at the Mt Eliza branch on or about 25 September 2008     115
(c)....... On or about 25 September 2008 the Bank opened a ‘Streamline’ account for Mr Stephens and allowed him to withdraw $30,000 for payment of the deposit on 2 Marie Court     115
(d)...... Assurances given by Ms MLM in November and December 2008 that the loan had been unconditionally approved for the sum of $2,550,000.00............................... 116

Representations alleged to be ‘implied’ from the conduct of the Bank........................... 119
(a)....... making the Representations pleaded in paragraph 3D(a) and 3D(b).......... 120
(b)...... presenting the documents constituting the First [Loan] Agreement and the Second [Loan] Agreement to Mr Stephens on or about 16 December 2008 for signing forthwith 120
(c)....... failing or omitting to inform Mr Stephens that the documents constituting the First and Second [Loan] Agreement did not provide financial accommodation as represented by the Bank; and........................................................................................................ 122
(d)...... Mr Ringeri, as agent for the Bank, met Mr Stephens in a coffee shop on 16 December 2008 and produced two sets of printed documents for him to sign, without explaining the contents of those documents, nor giving Mr Stephens an opportunity to seek advice regarding them..................................................................................................... 122

Conclusion: The Bank did not engage in conduct that was ‘misleading and deceptive’ 125
Mr Stephens’ reliance upon section 12BB of the ASIC Act................................................. 128
What is the measure of damages?.......................................................................................... 130
Was there a failure on the part of Mr Stephens to take reasonable care?......................... 131

Expert evidence............................................................................................................................... 132

Unconscionable conduct............................................................................................................... 149

Section 12CB: alleged unconscionable conduct in connection with financial services.. 149
Conclusion................................................................................................................................. 158
In the alternative, if section 12CB does not apply, Mr Stephens relies on the ‘unwritten law’ via section 12CA..................................................................................................................... 159
Conclusion................................................................................................................................. 164
Mr Stephens must ‘do equity’................................................................................................. 166

Claim made under the Consumer Credit Law.......................................................................... 167

The old Code was in force when the lending transaction took place............................... 170
The introduction of the new ‘National Credit Code ‘................................................ 172

Did the old Code apply to the provision of credit to Mr Stephens such that there was a ‘carried over instrument’ to which the provisions of the new Code applied?.............................. 175
Characterisation of the loan transaction – was it for ‘personal, domestic or household purposes’?................................................................................................................................ 177
Conclusion: each of the loan agreements and the mortgage is a ‘carried over instrument’ to which the new Code applies.............................................................................. 182

The Court’s power to re-open ‘unjust ‘ transactions............................................................ 185
Relevant circumstances.................................................................................................. 192

Conclusion................................................................................................................................. 198

Alternative claims for Restitution and Subrogation................................................................ 199

Restitution.................................................................................................................................. 199
Observations and conclusions on the claim in restitution................................................. 203
Subrogation................................................................................................................................ 206
Observations and conclusions on the claim in subrogation.............................................. 212

Summary of Conclusions............................................................................................................. 214

The Bank’s claim....................................................................................................................... 214
Mr Stephens’ counterclaim...................................................................................................... 214
Form of Judgment..................................................................................................................... 215

HER HONOUR:

Introduction

In December 2008, the plaintiff, the Commonwealth Bank of Australia (‘the Bank’) advanced to the defendant, Mr Owen Bruce Stephens, the principal sum of $2,100,300 pursuant to two loan agreements. The advance was secured in part by a mortgage registered over Mr Stephens’ property situated at 96 Wooralla Drive, Mount Eliza. Mr Stephens defaulted in making the payments due under the loan agreements, and the Bank now seeks possession of the 96 Wooralla Drive property and to recover the principal sum of $2,100,300, together with interest. The amount of the debt certified by the Bank as due and owing as at 18 April 2016 is $2,495,563.34.[1]
[1]Exhibit P1.

Alternatively, if the Bank does not succeed in its contractual claim, it seeks restitution of the (net) sum of $1,426,950.61 that Mr Stephens has had and received to his benefit, as a result of the Bank advancing the amount of $2,100,830[2] to him and after him making repayments to the Bank of amounts of $102,992.21 and $570,887.18, together with interest. Alternatively, the Bank seeks to be subrogated to the rights of Perpetual Trustee Company Limited (‘Perpetual’) under registered mortgage No. AE909466D (the ‘Perpetual mortgage’) by reason that the Bank paid to Perpetual the sum of $1,365,662.44 in order to discharge the Perpetual mortgage, and in so doing the Bank was presumed, by operation of law, to intend that the Perpetual mortgage would be kept alive for its benefit to secure the payment it made to Perpetual, together with interest and costs.
[2]Pleaded in paragraphs 20 and 21 of the Second Further Amended Statement of Claim dated 19 April 2016 (the ‘Statement of Claim’).

Mr Stephens has filed a defence and counterclaim. In his defence, he admits that he entered into loan agreements with the Bank but says that he did so in the mistaken belief that the financial accommodation to be provided to him by the Bank would be in the total sum of $2,550,000, rather than the sum of $2,100,300 that was actually advanced, and that the interest payable thereon would be capitalised so as to allow him to subdivide the 96 Wooralla Drive property and purchase another property situate at 2 Marie Court, Mount Eliza for the family to live in. Further, he says that the Bank knew or ought reasonably to have known that he was acting under such mistake. Mr Stephens contends that as the Bank advanced only the total sum of $2,100,300, which was less than the total sum of $2,550,000 Mr Stephens says it had approved, he is not bound to perform the loan agreements or the Bank’s mortgage.

Further or alternatively, Mr Stephens alleges that the Bank engaged in misleading and deceptive conduct in contravention of section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (‘the ASIC Act’), by reason of which he has suffered loss and damage. He alleges that the Bank represented to him that it had unconditionally approved a loan and would provide financial accommodation in the total sum of $2,550,000, that the interest on the loan would be capitalised so as to allow him to subdivide the 96 Wooralla Drive property and complete the development before repayment was required, and that the loan documents and mortgage to be entered into would reflect that arrangement.

Acting in reliance upon those representations, Mr Stephens entered into an unconditional agreement to purchase the 2 Marie Court property, and executed the loan documents and mortgage. However, he alleges that the representations made by the Bank were false and/or misleading in that the Bank now says it approved only the provision of financial accommodation totalling $2,100,300, that interest could not be capitalised under the loan documents, and that each of the loan documents so executed by him were consumer credit agreements for the provision of the sums of $1,100,150 and $1,000,150 respectively whereunder interest was payable by monthly instalments. Mr Stephens says that as a result of financial accommodation in the total sum of $2,550,000 not being provided by the Bank, (and implicitly with the interest thereon not being capitalised) he lost the opportunity to develop the 96 Wooralla Drive property and realise its true value, and has suffered a loss of more than $1 million.

Further or alternatively, Mr Stephens alleges that the Court should find that, in the circumstances, the Bank has engaged in unconscionable conduct in contravention of section 12CB, alternatively 12CA, of the ASIC Act, particularly as he was not afforded the opportunity to seek and receive independent legal advice prior to the execution of the loan documents and the Bank’s mortgage, and the Bank knew or ought reasonably to have known that he needed funds urgently to settle the purchase of the 2 Marie Court property.

Further or alternatively, Mr Stephens alleges that the loan documents are credit contracts within the meaning of section 6 of the Consumer Credit Code (Victoria) (the ‘old Code’) applying as if it were section 5 of the National Credit Code (the ‘new Code’[3]), by reason of section 11(1) of the old Code applying as if it were section 13 of the new Code, and that similarly, the mortgage entered into is a mortgage to which the new Code applies. Mr Stephens contends that at the time of entering into the loan documents and the mortgage, they were ‘unjust’ within the meaning of section 76 of the new Code and accordingly, are liable to be set aside by the Court pursuant to section 77(c) of the new Code, alternatively, that he is entitled to be relieved from payment of such amount in excess of an amount that the Court considers to be reasonably payable pursuant to section 77(b) of the new Code.
[3]The new Code appears as Schedule 1 of the National Consumer Credit Protection Act 2009 (Cth).

Generally Mr Stephens admits that he has not paid the sums variously demanded by the Bank but says that a failure to make restitution of the moneys claimed by the Bank would not be unjust in the circumstances; alternatively he submits that he is not liable to make restitution because he has changed his position in good faith and in reliance upon the representations and as a result of the Bank’s contravention of sections 12CB and/or, 12CA and/or 12DA of the ASIC Act. Further, he says that the Bank is disentitled from asserting a right to subrogation by reason of the conduct on the part of the Bank in respect of which he complains. Insofar as he may be found liable to pay any moneys to the Bank, Mr Stephens seeks to set off so much of his damage as is required to extinguish the Bank’s claim.

Mr Stephens also counterclaims for relief along similar lines to that pleaded in his defence, contending that he is not bound to perform the obligations under the loan documents or the mortgage by reason of mistake; further or alternatively, that he has suffered loss and damage by reason of the misleading and deceptive conduct engaged in by the Bank; further or alternatively, that the Bank engaged in unconscionable conduct in contravention of sections 12CB or 12CA of the ASIC Act by reason whereof he has suffered loss and damage; and further or alternatively, that the loan documents and mortgage were ‘unjust’ within the meaning of section 76 of the new Code and accordingly, are liable to be set aside by the Court pursuant to section 77(c) of the new Code, alternatively, he is entitled to be relieved from payment of such amount in excess of an amount that the Court considers to be reasonably payable pursuant to section 77(b) of the new Code.

By way of relief, in his counterclaim Mr Stephens seeks variously:

·damages pursuant to section 12GF of the ASIC Act,
·declarations to the effect that each of the loan documents and the mortgage ‘is void ab initio, wholly null and of no effect’; alternatively orders setting aside each of the loan documents and the mortgage pursuant to section 77(c) of the new Code; alternatively orders declaring each of the loan documents and the mortgage void ab initio, alternatively void pursuant to section 12GM of the ASIC Act;
·an order that the certificate of title for the 96 Wooralla Drive property be amended so as to cancel the entry of the mortgage to the Bank as registered on 3 February 2009 in dealing number AG323120Q, and such further or other orders as may be necessary to rectify the certificate of title so as to reflect the cancellation of the mortgage and its registration;
·further or alternatively, orders pursuant to section 77(b) of the new Code relieving Mr Stephens from the obligation to pay to the Bank such amount in excess of an amount that the Court considers to be reasonably payable in relation to the respective loan documents and the mortgage.;
·interest; and
·costs.

The Bank denies the substantive allegations pleaded by Mr Stephens by way of defence and in his counterclaim.

Against that background, in the event that Mr Stephens’ counterclaim fails, the Bank contends he is liable to deliver up the 96 Wooralla Drive property and pay to it the (net) sum of $1,426,950.61 plus interest up to the date of issue (7 November 2013) in the amount of $476,291.09, and thereafter pursuant to section 58 of the Supreme Court Act 1958 (Vic); alternatively by reference to the subrogated mortgage, to pay to the Bank the sum of $1,365,662.44 plus either compound interest up to the date of issue (7 November 2013) in the amount of $1,906,164.32 or simple interest in the amount of $456,590.69, and thereafter in each case pursuant to section 58 of the Supreme Court Act 1958.

Mr Stephens’ defence and counterclaim give rise to the following issues:

(a) Whether Mr Stephens’ executed the loan documents and mortgage in the mistaken belief that the financial accommodation to be provided by the Bank would be in the total sum of $2,550,000 and that the interest payable thereon would be capitalised so as to allow him to subdivide the 96 Wooralla Drive property and purchase the 2 Marie Court property. If so, did the Bank know or ought it reasonably to have known that he was acting under such mistake?

(b) Whether the Bank made representations to the effect alleged, and in so doing engaged in misleading and deceptive conduct in breach of section 12DA of the ASIC Act? If so, does section 12GF(1B) operate by reason of a failure on the part of Mr Stephens to take ‘reasonable care’ in entering into the agreements in the circumstances? Or whether the Bank made representations as to a future matter for which it had no reasonable grounds in breach of section 12BB?

(c) Whether the Bank acted unconscionably, in breach of sections 12CB or 12CA (within the meaning of the ‘unwritten law’) of the ASIC Act?

(d) Whether by reason of the conduct of the Bank the loan documents and mortgage were ‘unjust’ within the meaning of section 76 of the new Code and accordingly, are liable to be set aside by the Court pursuant to section 77(c) of the new Code? Alternatively, whether in the circumstances, Mr Stephens is entitled to be relieved from payment of such amount in excess of an amount that the Court considers to be reasonably payable pursuant to section 77(b) of the new Code.

(e) What loss or damage, if any, Mr Stephens has suffered by reason of contravening conduct on the part of the Bank? (In this regard I note that Mr Stephens is seeking damages for the loss of opportunity to develop the 96 Wooralla Drive property, an opportunity he says would have come to fruition if the Bank had advanced the sum of $2,550,000.)

Lay Witnesses called to give evidence at the trial
Lay evidence called on behalf of the Bank

The Bank called three witnesses who gave evidence about the events which took place and its lending practices generally, and the indebtedness of Mr Stephens. They were Mr Joseph Ringeri, Mr Jason Radich and Mr Mark Deligiorgakis.

Mr Joseph Ringeri

Mr Joseph Anthony Ringeri is an experienced mobile lending manager who worked in lending roles with the National Australia Bank Limited (‘NAB’) for many years, prior to him commencing employment with the Bank in about 2002. Mr Ringeri first became involved in the lending arrangements for Mr Stephens in the first week of December 2008 when he received a phone call from Ms Trish Henderson. Mr Ringeri knew Ms Henderson from his time at NAB, having met her in about 2002 when he was working there. In his role as a mobile lender, he would meet with clients and potential clients, who were often referred to him by other brokers, and arrange home loans. Ms Henderson had a business at Mornington Peninsula called Ladybug Financial Services and was a source of new business for Mr Ringeri in his mobile lending role. She was one of about eight referrers of business to him,[4] but he did not regard her as a major source of business. Mr Ringeri became involved in Mr Stephens’ transaction after Ms Henderson made a complaint to him about the conduct of the Bank’s mobile lending manager who was handling the matter. Throughout these reasons, I shall refer to that person as ‘Ms MLM’.[5] Mr Ringeri ceased his employment with the Bank in about May 2009 and returned to work with NAB.[6]
[4]Mr Ringeri said that the home loans she referred to him were ‘a mixture of owner-occupied and investments’: Transcript 20/04/16, Ringeri RE-XN, at 359.
[5]The reason for not identifying the Bank officer by name is explained further below.
[6]Transcript 27/04/16, Henderson XIC, at 951.

Mr Jason Radich

Mr Jason Radich joined the Bank on 4 December 1989 and has been working there for the past 26 years. He is currently the branch manager at its Somerville branch. In 2008, he was working as the branch manager at the Mt Eliza branch.

Mr Radich did not have any involvement in any loan approvals for Mr Stephens in 2008 or at any other time. He said that in his role as a branch manager, he would not normally be involved in loan approvals and that they would be handled by a personal lender or a mobile lender.[7] He could not recall having met Mr Stephens or having had any discussions with him in September 2008 concerning the amount the Bank would lend him. He also does not recall having any involvement in Mr Stephens’ acquisition of 2 Marie Court, which was funded by the Bank as part of the loans in 2008, or the later settlement in January 2010 following Mr Stephens’ resale of that property.[8] He also had no recollection of Ms MLM, who was working as a mobile lending manager with the Bank.
[7]Transcript 20/04/16, Radich XIC, at 369.
[8]Transcript 20/04/16, Radich XIC, at 369.

In cross-examination, counsel for the defendant took Mr Radich through the sequence of interactions that each of Mr Stephens and Ms Henderson contended they had with him at the Mt Eliza branch, but for the most part Mr Radich either had no recollection or did not remember. That is not entirely surprising, given the effluxion of time and the limited role he played vis-à-vis Mr Stephens as a customer of the Bank, and counsel for the defendant did not suggest that Mr Radich was other than truthful as a witness.

Mr Mark Deligiorgakis

Mr Mark Deligiorgakis is an employee of the Bank. In his current role, he works as a portfolio manager in the collections area, with loans that have fallen into arrears. Through Mr Deligiorgakis, the Bank tendered a ‘Dobbs Certificate’[9] certifying the amount of moneys secured by Mortgage AG323120Q given by Mr Stephens to the Bank in relation to two Loan Accounts 827 501 903 and 827 502 009 as at 18 April 2016 as being $1,605,723.30 and $889,840.04 respectively.[10]
[9]Loan agreements often contain a clause that is referred to as a ‘Dobbs’ clause’, where the parties agree that the amount of their liability or indebtedness might be fixed by a certificate by one of them, and in some cases not to be able to be challenged: Dobbs v National Bank of Australia Ltd (1953) 53 CLR 643.
[10]Exhibit P3.

Mr Deligiorgakis gave evidence about ‘matter detail reports’ that are created and maintained by the Bank once a loan account falls into arrears. The matter detail reports (in redacted form) that were generated when each of Mr Stephens’ loan accounts fell into arrears were the subject of a joint tender.[11]
[11]Exhibits JT37 and JT38 (joint tender).

Mr Deligiorgakis explained the matter detail report as being a ‘report outlining a snapshot of the current customers’ accounts and details’[12] and said it is a system that is ‘for collections use only.’[13] Once a loan falls into arrears, the system ‘automatically generates a portfolio or summary, and it pops up into a collector.’[14] Bank officers input information into the report by typing and entering the transactional details of phone calls and other conversations. The Bank’s practice, or at least the objective of the training given to the collections officers, is for them to input information into the database as soon as they finish a call with the customer, with the aim of ensuring that the relevant information is captured, usually in an abbreviated or shorthand form, when everything is fresh in their mind and correct.[15] Mr Deligiorgakis was unable to comment about the practices of any of the staff members who recorded information in the matter detail reports for Mr Stephens’ accounts because each of those calls was made to the Bank’s call centre in Melbourne and he works in Sydney.[16]
[12]Transcript 20/04/16, Deligiorgakis XIC, at 377.
[13]Transcript 20/04/16, Deligiorgakis XIC, at 378.
[14]Transcript 20/04/16, Deligiorgakis XIC, at 378.
[15]Transcript 20/04/16, Deligiorgakis XIC, at 380–381.
[16]Transcript 20/04/16, Deligiorgakis XIC, at 386.

Lay evidence called on behalf of Mr Stephens

Mr Owen Bruce (‘Bruce’) Stephens gave evidence himself and called two other witnesses, Ms Patricia (‘Trish’) Henderson and Ms Anna Graham, as to the events which took place.

Mr Bruce Stephens

Mr Stephens has professional qualifications as an electrical engineer, and he is involved in computing and electronics. Nowadays he is wholly self-employed, looking after computer networks and consulting to aviation and other businesses located on the Mornington Peninsula about their computer needs etc. Mr Stephens professes to have little or no experience of the banking or finance sector and says he does not understand banking matters. His domestic partner of some 27 years, Ms Patricia (Trish) Henderson, is currently working in sales and marketing, but she spent several years as a mortgage broker and was working in that capacity at the time the subject transactions occurred. Mr Stephens says he has no knowledge or understanding of Trish’s business.

Mr Stephens has owned at least four properties: one in Spray Street, Rosebud and three in Mt Eliza at 16 Lowe Street (which was later sub-divided into two properties, being nos. 16 and 16A), 96 Wooralla Drive and 2 Marie Court. In the context of purchasing those properties, and in carrying on his business and domestic affairs, Mr Stephens has conducted banking transactions with Westpac Banking Corporation, Perpetual and Bendigo Bank, in addition to those undertaken with the Bank. He acknowledged that by the time of his dealings with the Bank, he had had some experience in dealing with loans and financial matters and was familiar with paying mortgages.[17]
[17]Transcript 22/04/16, Stephens XXN, at 576–577.

At the time he sought the subject loans from the Bank, Mr Stephens was not an experienced developer. Prior to embarking upon his ‘development proposal’ for 96 Wooralla Drive, he had subdivided a property he owned at 16 Lowe Street, Mt Eliza, by splitting it into two blocks, but the 96 Wooralla Drive property was quite a different prospect to the Lowe Street split. He explained that ‘Wooralla was on a much larger scale – it was ‘a full development, development of the land, putting in fences, roads, plumbing, septic tanks and things like that.’[18]
[18]Transcript 22/04/16, Stephens XXN, at 599.

Mr Stephens was not a customer of the Bank at the time he sought the subject finance from the Bank. He conducted his personal banking through Bendigo Bank and had a credit card with Virgin Credit.

From the outset, Mr Stephens had minimal contact with any of the Bank officers involved in the loan transactions the subject of this proceeding. In the early part of the process, Ms Henderson was invariably the contact point or the conduit for information transmitted between Mr Stephens and the Bank, and (as a practical matter) for information transmitted between the Bank and Mr Stephens. Mr Stephens pleads that throughout the subject transactions with the Bank, Ms Henderson was acting as his agent.

Ms Patricia (‘Trish’) Henderson

Ms Patricia Henderson and Mr Stephens are domestic partners and have been in a relationship for more than 27 years. From 2008, when the loan transaction with the Bank was initiated, and throughout, Ms Henderson acted as Mr Stephens’ agent.

Ms Henderson currently works in sales and marketing for an architectural company and other architectural firms and building companies. She has been in that role for about four years. Between about 2003 and 2008, however, she was self-employed as a mortgage broker doing ‘almost exclusively residential’ loans,[19] having done her initial accreditation between about 2000 and 2002 through Sample & Partners and then with Abcorp Financial Services. Whilst working in the mortgage broking role, Ms Henderson said she did accreditations every year which were current and up to date with financial institutions such as Westpac, Interstar, ANZ and Perpetual.[20]
[19]Transcript 27/04/16, Henderson XIC, at 856.
[20]Transcript 27/04/16, Henderson XIC, at 856–7.

At the time when Mr Stephens was seeking development finance from the Bank, Ms Henderson was self-employed as a broker, operating as Ladybug Financial Services, which role she performed for approximately five years between about 2005 and 2010.[21]
[21]Transcript 27/04/16, Henderson XXN, at 958–959.

In 2008, Mr Stephens asked Ms Henderson to have a look and see what options there were for them to undertake a development of 96 Wooralla Drive. At the same time, they were also seeking to understand what smaller residential properties might be coming on to the market, even though they were not in a position to buy at that time.[22]
[22]Transcript 27/04/16, Henderson XXN, at 970.

In June or July 2008, Ms Henderson spoke with a colleague, Ms Anna Graham, and briefed her in very general terms on the proposed five lot subdivision and asked whether there was any development finance available. Ms Graham said that the group she was with did not offer development finance, and suggested that she should speak with Ms MLM, who was a mobile lending manager with the Bank. Ms Graham told Ms Henderson that she would likely know Ms MLM as she had worked with her at Abcorp Financial Services, and she offered to set up a meeting with her. In due course, Ms Graham arranged a meeting to introduce Ms Henderson to Ms MLM at the Manyung Gallery coffee shop in Mt Eliza on 20 August 2008.

Ms Anna Graham

Ms Anna Graham is currently employed by a company called National Mortgage Brokers in Queen Street, Melbourne. She said that National Mortgage Brokers is an aggregator - ‘a middle man between the banks and the mortgage brokers’[23] – and is a wholly owned subsidiary of Aussie Home Loans, which is 80 per cent owned by the Commonwealth Bank. Ms Graham said that in 2008, she and Ms Henderson were ‘business acquaintances’[24] and she did not socialise with her or Mr Stephens.[25]
[23]Transcript 21/04/16, Graham XXN, at 433.
[24]Transcript 21/04/16, Graham XXN, at 442.
[25]Transcript 21/04/16, Graham XXN, at 443.

Ms Graham said she knew that in 2008 Mr Stephens and Ms Henderson ‘were trying to do some finance with’ the 96 Wooralla Drive property. She said that Ms Henderson explained the nature of the transaction to her as being a subdivision, and asked her if she could assist with the finance. Ms Graham said that she said she could not – because they were seeking ‘development finance’ which was outside of the residential code – and suggested that she speak with Ms MLM who was a mobile lending manager at the Bank. The loan agreements that Mr Stephens later entered into with the Bank recorded that commission was payable to the ‘Anna Maria Graham Trust’, but Ms Graham said she assumed that Ms Henderson was the referrer on Mr Stephens’ loan because she was ‘the person that was doing all the talking’[26] and following up with Ms MLM and the Bank.
[26]Transcript 21/04/16, Graham XXN, at 432.

Ms Graham said she did not recall any discussions taking place between her and Ms MLM and Ms Henderson in 2008. She said ‘I heard conversations on the telephone, but I don't recall being - the three of us being together.’[27] She said that she became aware, but was not sure how, that Ms Henderson did contact Ms MLM and that ‘they must have completed an application.’[28] She said that at some point Ms MLM was apparently refusing to speak with Ms Henderson, and so Ms Henderson would be ringing Ms Graham and seeking her assistance, and asking her why Ms MLM was not returning her calls. Ms Graham said that she effectively ‘became sort of the messenger.’[29]
[27]Transcript 21/04/16, Graham XIC, at 404.
[28]Transcript 21/04/16, Graham XIC at 404.
[29]Transcript 21/04/16, Graham XIC, at 404.

Outlines of evidence were filed in advance

In the case of each of the lay witnesses, an outline of the substance of the evidence proposed to be given by each of them was filed by the respective parties in advance of the trial commencing. The lay witnesses gave their evidence viva voce and were cross-examined. Witnesses were not present in Court until they had completed giving their evidence and being cross-examined, save for Mr Stephens, who as a party, exercised his right to remain in Court throughout the proceeding.[30]
[30]However, he was not present in Court during the cross-examination of Ms Graham, who gave her evidence immediately before he was called.

Joint tender of a substantial body of documentation

Three volumes of Court Book were produced for use at the trial. A substantial body of relevant material contained therein was the subject of a joint tender. A small number of other documents, most of which were included in the Court Books, were tendered by one or other party.

Assessment of the lay witnesses

The events in question took place many years ago. The three main witnesses in the proceedings, namely Mr Ringeri (on behalf of the Bank) and Mr Stephens and Ms Henderson, all demonstrated some difficulty in now recalling precisely what happened, and when, or what was said in conversations between them.

For Mr Ringeri, the transaction involving Mr Stephens was one of thousands of loans that were undertaken by him whilst working at the Bank. He was a good witness, in the sense that he listened to the questions, made appropriate concessions and acknowledged when he could not recall something. On many occasions he said he ‘would have’ done something, by reference to his usual practice. But there were other occasions where he clearly did recall that something did (or did not) take place and he made his position clear to the Court. Where his evidence contradicts that of Mr Stephens or Ms Henderson, I generally prefer the evidence given by Mr Ringeri.

Mr Stephens professed to know little about commercial matters. In giving his evidence he conveyed the impression that he had no interest in dealing with the Bank personally and was content to let Ms Henderson handle the whole loan process on his behalf. Because of his lack of direct personal involvement, his recollection of what took place is affected by, or suffers from, the fact that much of what he knows was communicated through the medium of Ms Henderson, rather than by interaction or communication directly with the Bank.

Ms Henderson, while not a party, was nevertheless interested in the transaction in that she acted as the agent for Mr Stephens. Much of the evidence she gave was at odds with Mr Ringeri’s account or contrary to that recorded in contemporaneous notes or correspondence, or the statutory declaration she made in support of an application Mr Stephens made to the Financial Ombudsman Service. When giving evidence, at virtually every opportunity she sought to reinforce the notion that Ms MLM had told her that the loan of $2.55/2.65 million was ‘fully and unconditionally approved’ and Ms Henderson remained of the view that the Bank was committed to advancing that sum notwithstanding that she knew it had been ‘approved’ on the basis of false information, and Mr Ringeri had made it clear to her when he became involved in the matter in early December 2008 that he was going to start afresh and that the Bank would lend Mr Stephens the sum of $2,100,300.

Persons who were not called

The mobile lending manager whom Ms Henderson consulted, on behalf of Mr Stephens, in mid-2008, and dealt with until Ms Henderson made a complaint about her conduct in early December 2008, was not called by either party. I shall refer to the mobile lending manager throughout as ‘Ms MLM’. She no longer works with the Bank. The evidence was that after the complaint was made, Ms MLM became the subject of an internal investigation and her services were terminated by the Bank at some point shortly thereafter. In circumstances where allegations were made in this proceeding that were critical of Ms MLM‘s conduct, but she was not called or given any opportunity to respond to them, I do not propose to identify her by name.

Counsel for Mr Stephens submitted that Ms MLM is in the Bank’s ‘camp’ and is certainly not in Mr Stephens’ ‘camp’, and given the Bank’s failure to call her an inference should be drawn in accordance with the principles in Jones v Dunkel[31] that her evidence would not have assisted the Bank’s case. The Bank disputed this. In effect, counsel for the Bank submitted that in circumstances where the Bank had terminated the employment of Ms MLM, following the making of the complaint, the Bank could hardly be expected to call her to give evidence in support of its case.
[31](1959) 101 CLR 298.

In my view, Ms MLM was not in either party’s ‘camp’ (so to speak). In the circumstances of the termination of her employment by the Bank, it was not reasonable to expect that the Bank would call her. But given that the complaint made by Ms Henderson apparently provoked a phone call from Ms MLM to her in which she stated ‘[w]hat the F have you done to me?’,[32] it was not reasonable to expect that Mr Stephens would call her either.
[32]Transcript 27/04/16, Henderson XIC, at 905.

The conveyancer acting for Mr Stephens, Ms Janice Cocard of Southern Peninsula Conveyancing was not called by him. The chronology of events set out below shows that Ms Cocard played only a peripheral role in the relevant events, and the Bank did not suggest that she should have been called.

There were a number of other Bank officers involved in the relevant events who were not called. Mr Ringeri’s line manager, the credit manager Mr Peter Coulton, and another credit manager, Mr Brian Segrave, were each involved in the fresh assessment and approval of the loans totalling $2,100,300 that were made to Mr Stephens in December 2008. Further, Mr Coulton and a manager named Mr Mark Wilson were apparently involved in the Bank’s investigation of Ms MLM that took place following the complaint. Neither Mr Coulton nor Mr Segrave had any discussions with Mr Stephens, but Mr Ringeri gave evidence that he was told that Mr Coulton ‘[m]ost definitely’ had discussions with Ms Henderson following the making of the complaint.[33] No evidence was given by Ms Henderson about such discussions, and Mr Ringeri’s evidence was not put to her during cross-examination.
[33]Transcript 19/04/16, Ringeri XXN, at 252.

Another Bank officer, Mr Philip Marrinon of lending services, was mentioned on Exhibit D1, which is the printout of internal decision comments recorded on the ComSee approval document concerning loan application 90000033722, being the new application that Ms MLM apparently started for Mr Stephens on 4 December 2008, initially for a loan amount of $2,650,000, but corrected by her later that day to an amount of $2,250,000. Mr Marrinon is recorded as having approved that application at the request of Ms MLM. He was not mentioned by any of the witnesses at trial, and was not called by the Bank.

Mr Stephens’ complaints about the discovery given by the Bank

Counsel for Mr Stephens contended that the discovery given by the Bank of its files was unsatisfactory, and in that context he observed that the Bank did not call any witness, such as Mr Salvatore Dema, the Bank officer who was supervising Ms MLM, whom he contended could have given useful evidence as to the chain of custody of the Bank’s file. He submitted that the ‘incomplete state of the [Bank’s] discovered file(s) became obvious during trial and it is open to the Court to draw adverse inferences based on the failure to call a relevant witness to produce the other documents or explain their absence.’[34]
[34]Defendant’s closing written submissions, at [81], citing Challenger Property Asset Management Pty Ltd v Stonnington City Council (2011) 34 VR 445, at 499–500 [125]–[129].

Counsel for the Bank took issue with the suggestion that there were any inadequacies in the Bank’s affidavit of documents. He produced a letter from the defendant’s solicitors to the Bank’s solicitors dated 26 May 2014 identifying the areas where the discovery appeared not to be complete and noting documents that had not been produced on discovery.[35] The Bank’s solicitors responded by letter dated 18 June 2014, enclosing copies of two Loan Applications and an HLDC Credit Decisioning Request that had been identified, and stated that apart from those documents, their instructions are that the Bank ‘does not have in its possession, custody or power, any further documents as requested in paragraphs 1 to 4 and 6 to 9 of your letter’.[36] As to the defendant’s solicitors request that the Bank give discovery of:
[35]Exhibit P9: Letter from Wisewould Mahony Lawyers to Gadens Lawyers dated 26 May 2014.
[36]Exhibit P10: Letter from Gadens Lawyers to Wisewould Mahony Lawyers dated 18 June 2014.

5.Documents disclosing the reason for suspension and subsequent dismissal of [Ms MLM] on or about 5 December 2008 including all investigations undertaken by the CBA in respect of [Ms MLM’s] conduct regarding Bruce Stephens’ loan application submitted on or about September 2008 and loan applications for her other clients between July 2008 and December 2008,[37]

the Bank’s solicitors responded:

The documents sought in paragraph 5 of your letter … are not part of your client’s case, are not raised on the pleadings, are not relevant to the issues in dispute and will not be discovered by the Bank. Should your client make an application seeking discovery of these documents, the application will be opposed and this letter will be produced to the Court in support of pour application for indemnity costs.[38]

[37]Exhibit P9.

[38]Exhibit P10.

Counsel for the Bank submitted that as no follow-up request was made, the matter rested there and the defendant is now foreclosed from contending that the discovery given by the Bank was in any way incomplete or inadequate. In my view, that is the position.

Counsel for Mr Stephens also contended that the evidence to be given by Ms Henderson would demonstrate that she had given a number of documents to the Bank which have not been produced on discovery. He made a general submission to the effect that the Bank, despite the discovery process and ongoing requests for documents, had not provided all of the documents that were originally given to it. Counsel referenced the original handwritten loan application Mr Stephens made to the Bank, via Ms MLM, for a loan facility of $2.55 million and the handwritten covering sheet enclosed with it, as an example of the type of document that had not been produced. He sought to make something of this in the context of evidence to be led from Ms Graham about a phone conversation that she had with Mr Salvatore Dema of the Bank in early 2009, submitting that it was ‘a critical document to’ supporting Mr Stephens’ case and added that ‘[i]f it has been shredded, then it is detrimental to his case, and so it is relevant in that respect.’[39]
[39]Transcript 21/04/16, at 418 (Mr Matters).

The Bank objected to the Court receiving hearsay evidence from Ms Graham about what Mr Dema had told her during the course of that phone conversation. After hearing argument on the point, however, the Court ruled that the evidence proposed to be given, whilst admittedly hearsay, was conceivably relevant, and at the end of the day it would really be a question of what weight should be attached to it.[40] At that point, it was not apparent what the relevance of the handwritten application was in the scheme of the overall conduct and allegations relied upon.
[40]Transcript 21/04/16, at 422–423 (Revised ruling).

Ms Graham gave evidence that she had not met Mr Dema before that call but knew him to be working as a mobile lending manager with the Commonwealth Bank at that time. She said that she had made a complaint about Ms MLM at an earlier point and Mr Dema was following up. Ms Graham said Mr Dema introduced himself as a manager and they proceeded to have a general conversation about Ms MLM and the state of her files. Ms Graham told him that she ‘had introduced a number of referral sources to [Ms MLM], and they were really angry about what had happened.’[41] She said that some of the referral sources had informed her that they were not being paid for their commissions.
[41]Transcript 21/04/16, Graham XIC, at 426.

Mr Dema said that he had put someone else in Ms MLM’s place to look after these referrers. Ms Graham said she was aware by this point that Ms MLM was no longer working with the Bank because Ms MLM had told her that she was being sacked but was allowed to keep the car until 31 December 2008 when she was being terminated.[42]
[42]Transcript 21/04/16, Graham XIC, at 426–427.

Ms Graham said that in their conversation, which she believes took place in March 2009,[43] Mr Dema described Ms MLM as ‘a nightmare’[44] and said that ‘he’d shredded all of [Ms MLM’s] files that specific day’[45] and that ‘the Stephens file along with all the others were shredded.’[46] She said:

Sal [Dema] had said that he was trying to rectify what had happened and he was putting other mobile lenders in to her referral sources and that her files were so bad that he had to shred everything. He wasn't uploading anything because it was - they were - his words were they were just shocking.[47]

[43]Transcript 21/04/16, Graham XXN, at 431.

[44]Transcript 21/04/16, Graham XIC, at 426.

[45]Transcript 21/04/16, Graham XXN, at 441.

[46]Transcript 21/04/16, Graham XIC, at 428.

[47]Transcript 21/04/16, Graham XIC, at 425.

As noted earlier, Mr Dema was not called to give evidence. It remains unclear what position he held within the Bank vis-à-vis Ms MLM and what role, if any, he performed in relation to document retention matters.

Counsel for the respective parties addressed this matter again in their closing submissions. The position remains that the original handwritten loan application Mr Stephens made to the Bank, via Ms MLM, and the handwritten covering sheet enclosed with it, have not been produced. The evidence given by Ms Graham about the ‘shredding’ of Ms MLM’s files is hearsay, and in my view, has not been shown to be probative of anything. Accordingly, notwithstanding that I ruled the evidence was conceivably relevant, I do not propose to have regard to it or give it any weight.

Chronology of relevant events
Initial purchase of the 96 Wooralla Drive property

Mr Stephens settled on his initial purchase of 96 Wooralla Drive in about February 2007.[48] In order to do so, he entered into a loan agreement with Perpetual dated 7 February 2007 whereby he borrowed the sum of $1,274,000.00, repayable over a 360 month term. The loan agreement provided that the loan would have an ‘interest only’ period of 60 months, during which the principal of the loan would not be reduced, and thereafter for the balance of the period the loan was to be repaid by instalments of both principal and interest. Perpetual advanced the sum of $1,274,000 to Mr Stephens in consideration of him mortgaging all of his estate and interest therein to Perpetual.
[48]Mr Stephens said he believes that when he purchased the property he took out the loan with Perpetual, and the planning permit for the subdivision into 5 lots was in place at that time.

On or about 21 February 2007, Mr Stephens, became registered as the sole proprietor of the 96 Wooralla Drive property.[49] Contemporaneously, Perpetual became registered on the title as the mortgagee of that land.[50]
[49]Being the whole of the land described in Certificate of Title Volume 09186 Folio 149.
[50]CB 1:198.03.

Investigation of options for 96 Wooralla Drive – proceed with 5 lot subdivision or sell?

The 96 Wooralla Drive property occupied approximately 2.5 acres (1 hectare). It was a battle-axe block with a dwelling located at the rear. Mr Stephens said that he and Ms Henderson originally intended that it would be a family home for them and their daughter to live in, with the option to develop it down the track if they wished to do so because it had a planning permit in place allowing for a five lot subdivision. But he said their plans literally changed from day to day – ‘[t]here was a structure in place that allowed that [five lot subdivision] to be done and perhaps if we could sell four of the lots we would keep one property, one raw piece of land for ourselves and build on it for ourselves.’[51]
[51]Transcript 21/04/16, Stephens XIC, at 452.

From the outset, aside from his inexperience as a developer, Mr Stephens was well aware of the practical difficulties he faced in proceeding with any form of subdivision, given his relatively modest salary and self-employed status. He said:

Well, the option to subdivide and so on was always there with the planning permit, but we could never raise finance. My salary at the time was - it varied obviously being self-employed and depending on the types of contracts I had sort of thing - around the 80,000 mark. So the idea of borrowing large amounts of money for subdivision and things like that was never really an option until we came across the idea of a development loan, and this was something that was suggested by Anna [Graham] and Trish [Henderson] and ultimately [Ms MLM].[52]

[52]Transcript 21/04/16, Stephens XIC, at 453.

Ms Henderson said that when they purchased the Wooralla Drive property, it had a permit to allow a five lot subdivision but it was not an endorsed permit. They initially discussed doing a development themselves but did not proceed with anything. By 2008, they had been living at the property for about a year, their daughter was in the final year of school, and the property had a reasonably substantial debt on it, so they decided that it was time to make some decisions and to downsize. They decided to ‘try the market and list the property for sale.’[53] Subsequently, they found a buyer at $2.7 million, introduced by Mitchell Torre Real Estate, but the purchasers kept asking for extensions of the finance clause. This led them to re-explore the option of developing the property themselves and Mr Stephens asked Ms Henderson to have a look and see what the options were.
[53]Transcript 27/04/16, Henderson XIC, at 857.

In early June 2008, Ms Henderson approached the engineering firm of Jamison Craig, who were working on a nearby development, and obtained a preliminary estimate of costs for a development of the five lot subdivision. Jamison Craig estimated the costs of the proposed subdivision as being in the order of $394,656, with a cost per block of $77,931.00.[54]
[54]CB 1: 206–207.

In June or July 2008, Ms Henderson spoke with a colleague in her networking group, Ms Anna Graham, who was then working as a lending manager with Bank West. Ms Henderson briefed her in very general terms on the proposed five lot subdivision and asked whether there was any ‘development finance’ available. Ms Graham said that the group she was with did not offer development finance, and so she suggested that Ms Henderson should speak with Ms MLM, who was a mobile lending manager with the Bank. In due course. Ms Graham arranged a meeting between them to take place at the Manyung Gallery coffee shop in Mt Eliza on 20 August 2008.

Meeting at the Manyung Gallery coffee shop on 20 August 2008

The meeting took place between Ms Graham, Ms Henderson and Ms MLM, although it seems Ms Graham left part way through the meeting. Ms Henderson provided a brief overview of the proposed development for 96 Wooralla Drive, explaining that it was a five lot subdivision, and outlining matters such as the likely costs of the development, the existing mortgage/borrowing, what the likely end values would be and the total borrowing required, the likely end sale of the property and how the loan would be done. Ms Henderson said that they also discussed the amount of the proposed loan Mr Stephens was seeking and the fact that they were looking for another property to live in while the development was underway, but they were not prepared to move on that until they had secured a sale or had the necessary development funding in place. She said:

The amount of the loan that we discussed was 2.5 million and that was broken down into 1.35 for the existing mortgage, a purchase price of approximately 600,000 where we'd set our budget for purchase, legal costs for the settlement of the new property, and Jamison Craig’s subdivision costs, which was about 380,000. Then interest capitalisation which I calculated at about 120,000.[55]

Ms Henderson said that at this meeting she gave Ms MLM a copy of the estimate of the development costs that she had obtained from Jamison Craig, showing that the development cost per block was approximately $78,000.

[55]Transcript 27/04/16, Henderson XIC, at 861.

She said Ms MLM explained to her that the loan would be done as a ‘development loan’, and be based on a ‘gross realisation value’,[56] and that she was accredited to do development loans of up to $3 million and up to five-lot subdivisions.[57] Ms Henderson said that Ms MLM also enquired as to how long the funds would be required and she replied for a period of 12 to 18 months. They also discussed the fact that the interest would be capitalised throughout the term of the loan because Mr Stephens, on his income, could not afford to pay the monthly repayments. Ms Henderson also informed Ms MLM that they had a buyer for the 96 Wooralla Drive property who was seeking a second or third extension of the finance clause and that this was the reason why they were looking to secure funds to do the development themselves. She added that if they could not secure the development funding then they would look at auctioning the property in six to eight weeks’ time.
[56]It appears that by this she meant that repayment of the loan is deferred until the sale of the two divided lots.
[57]Transcript 27/04/16, Henderson XIC, at 859.

As they were leaving the coffee shop, Ms MLM went to her car and gave Ms Henderson a home loan application pack which she retrieved from the boot of her car, and said that she would send through some other loan application forms as well. Ms Henderson said that Ms MLM told her at that meeting that ‘she would initially do a pre-approval, but was confident that she would be able to get the borrowing.’[58]
[58]Transcript 27/04/16, Henderson XIC, at 862.

Application for loan made by Mr Stephens

Ms Henderson said that within a few days Ms MLM had made several phone calls back to her just to clarify items. Ms MLM then came back to her and said ‘[i]n principle, subject to getting everything in the application, the CBA will be able to do this.’[59] She also informed Ms Henderson that once she received the application she would be able to give a ‘full approval for 2.5 million for the full borrowing and enough funds to buy another property.’[60] Ms Henderson said that this was when she said to Mr Stephens ‘[o]kay, we can go ahead and do the full application.’[61]
[59]Transcript 27/04/16, Henderson XIC, at 862.
[60]Transcript 27/04/16, Henderson XIC, at 863.
[61]Transcript 27/04/16, Henderson XIC, at 862.

Mr Stephens said that once they had the idea of developing 96 Wooralla Drive, they knew that the land would be broken up and not be liveable. He was looking around for something smaller for them to live in in the meantime and through contacts at his daughter’s school he found out that the headmistress’s house at 2 Marie Court, Mt Eliza was coming up for sale. They went to see the vendors and in late August or early September 2008 he entered into a contract with them to purchase the property.[62] The agreed price was $605,000 and a deposit of $20,000 was required to be paid by 22 September 2008. Mr Stephens said that at this stage he did not have $20,000 for the deposit but that Ms Henderson spoke with Ms MLM at the Bank and made arrangements for the deposit to be provided by the Bank ‘in advance in order to secure the property.’[63] Initially they paid a deposit of $500 in cash and then later they obtained a bank cheque for the sum of $19,500, which they collected from Mr Radich at the Mt Eliza branch of the Bank on 25 September 2008 and paid to Wilkinsons, the vendors’ estate agents.[64]
[62]CB 1:339–340. The Contract Note, which was accepted by the vendors on 31 August 2008, provided that the offer was subject to the purchaser obtaining finance from ‘any major financial institution’ for an amount of not less than $200,000 by 22 September 2008.
[63]Transcript 21/04/16, Stephens XIC, at 455.
[64]Ex D2, CB 3:1045.

In early September, Ms MLM apparently asked Ms Henderson to provide a list of pre-sales from the area to show what prices land and homes were selling for, and emailed her a ‘low doc home loan application form’ and also a standard home loan application.[65]
[65]Transcript 27/04/16, Henderson XIC, at 866, 867; CB 3:304, 307, 308–321.

Mr Stephens said that sometime around 10 September 2008, after Ms MLM had emailed Ms Henderson, he filled out the loan application form by hand[66] and, with assistance from Ms Henderson, collated the documentation that was to go with it - primarily a copy of his passport and driver’s licence, the pre-sales for the area, Jamison Craig’s breakdown of expenses, and the originals of Mr Stephens’ income tax returns, credit card statements and home loan statements for all properties he owned, and the planning permit. He said:
[66]CB 1:316–319.

. . . I wrote out every component of the loan that was required. It was sealed up in an envelope. The envelope actually had a string attachment to close it. I believe, and I hope, that Trish put all of the other documents with it, all the appropriate development details with it and it was forwarded to [Ms MLM]. That's the last time I have ever seen it.
[MR MATTERS:] When you say you filled out the application, including the loan amount that was required?---That’s correct.
Are you able to tell Her Honour what that amount was?---At the time I believe I filled out 2.5 million or thereabouts. I was very vague at the time when I started trying to remember that actual amount, further down the track with FOS [Financial Ombudsman Service] and things like that. But apparently it was 2.55 million.
When you say ‘apparently it was 2.55’ are you saying the amount you filled out or - - -?---The amount that I filled out and actually applied for was 2.55 million. 2.550000.
Did the application ask you to state what the purpose of the loan was - - -?---If I remember correctly, yes, we put on ‘development loan’ on the top at the front.
You have then given that application to Trish; is that your evidence?---Trish gathered it up and passed it on to [Ms MLM], that’s correct.
After that did you hear anything further through Trish or anyone else as to what was happening with the loan application?---Well, nothing - if we are talking about the deposit stage, nothing between about 1, 2, 3 September when I filled this out and it was sent to [Ms MLM] until it came time to pay the full deposit on 24, 25 September and we had to get confirmation that the loan had been approved.[67]

[67]Transcript 21/04/16, Stephens XIC, at 457–458.

Ms Henderson said that there was a covering note that was submitted along with the loan application which included a breakdown of the costs and the purpose of the loan, being a five lot subdivision to be undertaken over the next 12 to 18 months and the purchase of 2 Marie Court. The covering note is not available,[68] but in giving evidence about it Ms Henderson said:

So mentally it was the refinance, the purchase cost, the legal costs, any additional funds required, the purpose for those funds and in this case the capitalisation of the interest.[69]

[68]Neither the handwritten covering note nor the loan application has been located – Mr Stephens does not have a copy of it and the Bank’s discovery did not locate it.

[69]Transcript 27/04/16, Henderson XIC, at 869.

Ms Henderson said that on or about 10 September 2008 the application was posted from the Mornington branch of the post office to Ms MLM at the Lilydale branch of the Bank from which she operated.[70] Once the handwritten application was submitted to Ms MLM, a ‘Streamline’ account was opened in Mr Stephens’ name at the Lilydale branch of the Bank. The Streamline account was to be the source of the loan repayments and a direct debit form had been completed by Mr Stephens in advance to enable that to take place.
[70]Transcript 27/04/16, Henderson XIC, at 869–870.

Ms Henderson said that within a couple of days of submitting the application, probably on or around 15 or 16 September 2008, Ms MLM rang her and said that the Bank ‘would be able to do the borrowing and that subject to the valuation of Marie Court, that the loans would be fully and unconditionally approved for Mr Stephens.’[71] Ms Henderson said that in the period following this call, she left a number of phone messages for Ms MLM including one informing her that they had put in a contract for the 2 Marie Court property, one mentioning that she had approached a couple of other real estate agents with pre-sales and would send those through to Ms MLM, and another requesting her to confirm that the funds were fully and unconditionally approved, because the 2 Marie Court contract was to become unconditional around about 20 or 21 September. Indeed, Ms Henderson said that because she had heard nothing from Ms MLM, the conveyancer had to seek an extension of time from the vendors of 2 Marie Court with respect to the finance clause.[72]
[71]Transcript 27/04/16, Henderson XIC, at 870.
[72]Transcript 27/04/16, Henderson XIC, at 870.

Ms Henderson also gave evidence that a week or so after she posted Mr Stephens’ completed loan application to Ms MLM, she was chasing up Ms MLM and leaving messages for her, enquiring as to the status of Mr Stephen’s loan application. She said that on about 17 September 2008, while she was at a coffee shop at the shopping centre in Knox with Ms Graham and Mr Ringeri, she received a call from Ms MLM ‘to say that the funds could be fully and unconditionally approved.’[73] She said that it was during this phone conversation that Ms MLM also mentioned that she would provide a ‘buffer of $50,000’ because of the 12 to 18 months it would likely take for the development to be completed. [74]
[73]Transcript 26/04/16, Henderson XIC, at 871.
[74]Transcript 26/04/16, Henderson XIC, at 871.

Ms Graham gave evidence that she recalled a meeting with Ms Henderson and Mr Ringeri in Knox City which she believed took place ‘somewhere between October and December of 2008’,[75] and that Ms MLM called Ms Henderson on her mobile during this meeting. She said that Ms MLM told Ms Henderson ‘[y]our loan’s been approved. Everything’s fine. I’m just waiting – I’m just struggling to print documents, but everything is okay with your loan’.[76] She added that she knew who was speaking to Ms Henderson on the phone because Ms MLM ‘was very, very loud, so even on a mobile phone you always recognised her voice’, and because Ms Henderson was ‘absolutely surprised and shocked’ because Ms MLM had called.[77]
[75]Transcript 21/04/16, Graham XIC, at 407.
[76]Transcript 21/04/16, Graham XIC, at 405.
[77]Transcript 21/04/16, Graham XIC, at 406.

Mr Ringeri, on the other hand, did not recall being at any such coffee shop meeting with Ms Graham and Ms Henderson in mid-September 2008. He said that the only time he recalls having coffee with them was at the Glen Waverley Shopping Centre, The Glen, and he does not recall going to Knox City or Doncaster. Further, he did not recall any phone call between Ms Henderson and Ms MLM taking place during any such meeting nor any discussion afterwards about what transpired.[78]
[78]Transcript 19/04/16, Ringeri XXN, at 247.

Loan offer of $300,000 made by the Bank

By letter dated 19 September 2008, Ms MLM wrote to Mr Stephens’ conveyancer, Ms Janice Cocard of Southern Peninsula Conveyancing, in relation to his purchase of 2 Marie Court to ‘confirm that a loan offer of $300,000.00 has been made by the Commonwealth Bank’. The letter continued:

Our mutual clients [Owen Bruce Stephens] are currently considering the Bank’s offer, including any conditions that need to be satisfied. Please note that before any moneys are advanced, the title to the property and all other aspects connected with the loan must be to the Bank’s satisfaction.
To enable us to prepare our security documents please provide the information detailed on the attachment (if you have not already done so) as soon as possible. Delays in masking the information available may impact on our ability to arrange a timely settlement. Please quote the above reference 20920096 in all correspondence.
The maximum amount the Bank will provide at settlement is $300,000.00 less any applicable fees and charges. Please arrange to collect from your client the balance of the funds required to complete the purchase.
In the meantime, and for your information, we advise:
· Generally, at least four working days notice of intended settlement will be required. …
· The Bank will only pay the loan amount at settlement, therefore, please arrange to collect from your client the equity required to complete the purchase.
The Bank will not be in a position to discuss settlement requirements until all documentation has been completed and signed by our customers. Please contact us on the above telephone numbers for general enquiries and (03) [] for settlement bookings.[79]

[79]CB 1:324–324.01 (emphasis added).

It appears that the letter enclosed the Bank’s Consumer Credit Contract Schedule document (ref: 20920096) dated 19 September 2008, which was signed electronically for and on behalf of the Bank by ‘Owen Eaton’.[80] Such a document was received by Mr Stephens’ conveyancer, and the copy discovered bears an annotation at the top of the first page ‘copy to keep’. The copy of the document in evidence had a blank space at the end for Mr Stephens’ signature. Mr Stephens said that he signed the document but did not make a copy of the signed version.[81] He could not recall the exact date when he signed the application for the $300,000 but said it was somewhere between early September 2008 and the meeting with the branch manager, Mr Radich, on 24 and 25 September 2008.[82] He said the original would have been sent back to the Bank once it was signed. Neither party has discovered a version of the document that was signed by Mr Stephens. In closing submissions, the Bank submitted that it is more likely that Mr Stephens did not sign it.[83]
[80]CB 1:325–330.
[81]Transcript 21/04/16, Stephens XIC, at 462.
[82]Transcript 22/04/16, Stephens XXN, at 622.
[83]See the Bank’s closing written submissions, at [7].

The Consumer Credit Contract Schedule document shows, at Item B, the amount of credit (principal sum) as being $300,000. In examination in chief Mr Stephens was asked whether he was able to explain that? He responded by saying:

---I am not able to explain that. I’m not a banker. I’m not a financier. I have no idea why [Ms MLM] pulled a sum of 300,000 out of the hat for the purposes of this part of the schedule. My original loan application was for 2.55 million. I don't know banking procedure and so I assumed that, okay, this is what she’s done in order to get the deposit over the line and maybe other bits and pieces for costings or something like that. I have no idea why she generated $300,000.[84]

[84]Transcript 21/04/16, Stephens XIC, at 463.

He said that he did not think Ms Henderson understood it either and added ‘[b]ut we had to confirm that before we went fully unconditional [on the purchase of 2 Marie Court], confirm the full amount.’[85] He said the reason they went to the Mt Eliza branch of the Bank to see Mr Radich was ‘we had to ask Jason Radich to confirm it.’[86]
[85]Transcript 21/04/16, Stephens XIC, at 463–464.
[86]Transcript 21/04/16, Stephens XIC, at 464.

Under cross-examination, Mr Stephens said that this contract for the $300,000 was ‘part of [his] original loan application’ and he confirmed he did sign it.[87] Counsel then asked some follow-up questions, to which Mr Stephens responded, as follows:
[87]Transcript 22/04/16, Stephens XXN, at 635.

[MR CAREW:] And you had time to read this [contract for $300,000]? The settlement is some 70-plus days away for Marie Court; you understand that?

---That’s correct, yes.
And did you read the amount on this contract or not?---300,000, yes, I did.
Did you take any interest in the interest rates that were applicable?---Not at that stage because the original loan that I applied for was back to this capitalisation exercise. How [Ms MLM] structured the loan and the loan rates and the $2,340 repayment exercise, that was of little interest to us. I couldn't afford the 2.55 million in total as a traditional home loan. So the capitalisation process was vital.
Did you read this contract or not?---No, we only looked at the 300,000.

You go down to Crown Casino and you throw a fantastic party… spend $2 million and it’s gone, and you don’t have the money to repay when the claim is made. This is the opposite of that. The money goes into an asset and the asset remains there, so there is no change of position.[683]
[680]Transcript 16/05/16, at 1551 (Mr Carew).
[681]Transcript 16/05/16, at 1550 (Mr Carew).
[682]Transcript 16/05/16, at 1551 (Mr Carew).
[683]Transcript 16/05/16, at 1550 (Mr Carew).

Observations and conclusions on the claim in restitution

Although Mr Stephens pleads that the Bank’s restitution claim should not succeed on the basis that it would be ‘unjust’ in the circumstances, this concept was not pressed specifically at trial. Rather, the real focus of his closing submissions was on the second of the pleaded defences, namely that Mr Stephens had changed his position on the faith of an anticipated payment and so should not be held liable. In effect, counsel conflated the two limbs and sought to characterise his change of position defence as a reason why it would not be unjust for him to avoid the restitution claim.

The change of position defence put forward by Mr Stephens is one based ‘on the faith of’ the receipt of the sum of $2.55 million from the Bank, of which only $2,100,300 was actually received. In effect, Mr Stephens contends that on or about 25 September 2008, when he attended at the Mt Eliza branch of the Bank, and was informed that the sum of $2.55 million was fully and unconditionally approved and given an instalment of $30,000 with which to pay (amongst other things) the deposit on 2 Marie Court, he ‘changed his position’. That is, he committed himself to proceeding with the purchase of 2 Marie Court and allowed Ms Henderson to start arranging the development works at 96 Wooralla Drive (by ripping up the driveway and the tennis court lighting etc) and incurring the costs and expense of the development, on the faith of his understanding that the Bank having given approval, the balance of the funds so approved would be forthcoming. In so doing, he anticipated the receipt of the sum of $2.55 million, and changed his position on the faith of its receipt, notwithstanding that the Bank ultimately advanced only the sum of $2,100,300. In the circumstances, he submits that notwithstanding that the balance of the funds was not forthcoming, it would not be unjust in all the circumstances for him to be permitted to retain the sum of $2,100,300 that was advanced.

Mr Stephens’ change of position defence faces a number of difficulties. An important feature of the authorities relied on by the parties is that the recipient in each case reasonably expected to retain the funds that it received (albeit that their expectations were the product of third party deceit). In contrast, in the present case, it cannot be said that Mr Stephens ever expected to retain any funds advanced by the Bank by way of loan without being under an obligation ultimately to re-pay them, with interest. He could not reasonably have expected that he would be able to keep the money for himself. This militates against any argument that it would be ‘inequitable’ in all the circumstances to require Mr Stephens to make restitution.

Secondly, and as acknowledged by counsel for the defendant, Mr Stephens never received the full amount which he says motivated the relevant change of position. In Dextra, the Privy Council upheld the change of position defence in circumstances where the Bank of Jamaica had changed its position in reliance on receiving $US2,990,000 before that sum was actually received. In dealing with the question of change of position, their Lordships observed that the ‘complicating feature is one of timing’, in that the ‘acts of change of position on which the [Bank of Jamaica] would seek to rely as providing a defence to the claim of Dextra occurred earlier in time than the [Bank of Jamaica’s] receipt of the Dextra cheque or its proceeds and in anticipation of such receipt.’[684] Dextra contended that in order for the act of the defendant to amount to a change of position, it must have been performed by the defendant in reliance on the plaintiff’s payment, which cannot be the case if it was performed by him in advance of receipt of the relevant benefit. But in Dextra, in contradistinction to the present case, the Bank of Jamaica did receive ultimately the full amount. In upholding the defence, their Lordships stated:

Here what is in issue is the justice or injustice of enforcing a restitutionary claim in respect of a benefit conferred. In that context, it is difficult to see what relevant distinction can be drawn between (1) a case in which the defendant expends on some extraordinary expenditure all or part of a sum of money which he has received from the plaintiff, and (2) one in which the defendant incurs such expenditure in the expectation that he will receive the sum of money from the plaintiff, which he does in fact receive. Since ex hypothesi the defendant will in fact have received the expected payment, there is no question of the defendant using the defence of change of position to enforce, directly or indirectly, a claim to that money.[685]

[684][2002] 1 All ER (Comm) 193 at 201–202 [27].

[685]Ibid, at 204 [38] (emphasis added).

In Dextra the Privy Council adverted to the issue of whether, if anticipatory reliance were to be permitted in circumstances where the payment did not eventuate, this might undermine the concept of security of receipts. Their Lordships noted the hypothetical argument that:

…whereas change of position on the faith of an actual receipt should be protected because of the importance of upholding the security of receipts, the same is not true of a change of position in reliance on an expected payment, which does not merit protection beyond that conferred by the law of contract (including promissory estoppel).[686]

[686]Ibid, at 204 [37].

However, they continued to reject it as ‘unconvincing’, stating:

…it does not, in their Lordships’ opinion, assist to rationalise the defence of change of position as concerned to protect security of receipts and then to derive from that a limitation on the defence… In any event, since (as previously stated) the context of a restitutionary action requires that the expected payment has in any event been received by the defendant, giving effect to ‘anticipatory reliance’ in that context will indeed operate to protect the security of an actual receipt.[687]

[687]Ibid, at 205 [39] (emphasis added).

While Dextra was cited with apparent approval by members of the High Court in AFSL v Hills Industries Ltd,[688] this was in the context of their Honours explaining the change of position defence in general terms, and not in the context of the Court considering a defence of ‘anticipatory reliance’, no occasion for the Court to do so having arisen. However, Gageler J did go so far as to observe that:

The Privy Council [in Dextra] emphasised that the defence looks to practicalities not technicalities, is not concerned solely with the security of the receipt of payments, and looks to the position of the defendant not to the relative fault of the parties.[689]

[688]AFSL v Hills Industries Ltd (2014) 253 CLR 560 at 580 [22] (per French CJ), 594 fn 200 (per Hayne, Crennan, Kiefel, Bell and Keane JJ), and 620 [145] (per Gageler J.

[689]Ibid at 620 [145]. See also the extra-judicial discussion of Dextra and security of receipt in James Edelman J, ‘Change of Position: A Defence of Unjust Disenrichment’ (2012) 92(3) Boston University Law Review 1009.

Given the views I have reached above, concerning the alleged misleading and deceptive conduct, and Mr Stephens’ failure to make good the alleged representations, were it necessary for me to decide this aspect, Mr Stephens’ change of position defence would fail at the first hurdle. Further, given that the moneys the Bank seeks to recover by way of restitution were moneys advanced to him by way of loan, I am not satisfied that it would be ‘unjust’ or ‘inequitable’ in the circumstances to require Mr Stephens to make restitution to the Bank of the net amount of $1,426,950.61, plus interest.[690]
[690]The Bank tendered (as Exhibit P5.2) an agreed calculation in respect of interest referable to its restitution claim.

Subrogation

If, contrary to the view I have reached, the Bank were not successful in enforcing the agreements it made with Mr Stephens according to their terms, then the Bank seeks to be subrogated to the rights of Perpetual under the Perpetual mortgage. As with the claim in restitution, the Bank’s subrogation claim is made in the alternative to its contractual claim, and given the findings I have made, it is not strictly necessary to deal with it. But lest the matter go further, it is convenient to summarise the arguments that were advanced, and to indicate the views I would have reached were it necessary for me to do so.

It is not in dispute that of the total sum of $2,100,300 advanced by the Bank to Mr Stephens pursuant to the agreements entered into on 16 December 2008, the total sum of $1,365,662.44 was paid to Perpetual at settlement on 19 December 2008,[691] for the discharge of Perpetual’s mortgage.
[691]The Bank pleaded in its Statement of Claim (at [20(g)] and [20(l)]) that the payment was made in two sums, as follows on 19 December 2008:
· First, the sum of $852,082.20 was debited to Mr Stephens’ account no. 827 502 009 (the First Perpetual Payment); and
· Secondly, the sum of $513,580.24 was debited to Mr Stephens’ account no. 827 501 903 (the Second Perpetual Payment).

The Perpetual mortgage,[692] which is contained in dealing no. AE909466D dated 9 February 2007, registered on or about 21 February 2007, includes a Memorandum of Common Provisions AA1011 (‘Perpetual MCP’)[693] that incorporated the following terms:
[692]CB 1:198.05–198.06.
[693]CB 1:198.07–198.15.

(a) The defendant mortgages to Perpetual his rights and interests, present and future, in or relating to the Property as security for him performing his obligations under any secured agreement (clause 1, Perpetual MCP);

(b) The expression ‘money owing’ means all money which, at any time and for any reason, you [relevantly, the defendant] owe us, or will or may owe us, in the future, whether or not all of you owe the money or the amount owing is not able to be calculated at any point in time without set off, counterclaim or reduction (clause 37.1, Perpetual MCP);

(c) The expression ‘secured agreements’ means all loan, guarantee or other agreements which you, either alone or with other person, undertake obligations to us [relevantly, Perpetual] (clause 37.1, Perpetual MCP);

(d) The defendant must comply with his obligations under this mortgage and under the secured agreements (clause 3.1, Perpetual MCP);

(e) You will be in default under this mortgage if: (a) you do not pay any money owing on time or in the way you have agreed to pay it; (c) you are in default under any secured agreement […]; (clause 13.1, Perpetual MCP);

(f) Where you are in default and you do not fix the default as required by a notice or the default cannot be fixed, we may: (a) recover from you all of the money owing; (b) enter and take possession of the property […]; (d) sell or lease the property or any part of it […] (clause 15, Perpetual MCP);

(g) The defendant must pay, or if we have paid them, pay us for all charges and expenses (including legal costs) reasonably incurred by us, any attorney appointed under this mortgage and any receiver in relation to: (i) entering into this Mortgage; (ii) anything done in connection with this mortgage or the money owing, including any variation or administration of it; (iii) exercising our rights under clause 15 or attempting to exercise them (clause 16.1, Perpetual MCP);

The ‘secured agreement’ within the meaning of clause 37.1 of the Perpetual MCP was a loan agreement made on 7 February 2007 between Perpetual and Mr Stephens, by which Perpetual advanced the sum of $1,274,000 to him (the ‘Perpetual loan agreement’).[694] The terms of the Perpetual loan agreement include a term requiring that Mr Stephens shall repay the loan over 361 months and shall for the first 60 months pay interest only at a rate of 9.75 per cent (Loan Schedule, clause 8.1 of the Terms and Conditions).[695]
[694]The Perpetual loan agreement is in writing and comprises the ‘Loan Schedule’ and the ‘Terms and Conditions of Your Loan Agreement’: see Statement of Claim, at [23B].
[695]See Statement of Claim, at [23C].

In the event that the Bank is unable to enforce its agreements with Mr Stephens according to their terms, the Bank seeks to be subrogated to the rights of Perpetual under the Perpetual Mortgage. In essence, in reliance upon the subrogation principle articulated in Butler v Rice,[696] the Bank contends that by reason of the Bank paying to Perpetual the sum of $1,365,662.44 in order to discharge the Perpetual mortgage, the Bank was presumed, by operation of law, to intend that the Perpetual mortgage would be kept alive for its benefit to secure the payment it made to Perpetual, together with interest and costs.[697]
[696][1910] 2 Ch 277.
[697]If the Court finds that the Bank is subrogated to Perpetual’s rights under the Perpetual mortgage, it claims that the Perpetual mortgage secures the payment by the defendant of an amount equal to:
(a)the payment made to Perpetual (i.e., the total sum of $1,365,662.44);
(b)plus interest calculated at a rate of 9.75% from 19 December 2008 until 24 June 2010 (i.e., the date of the first notice) or alternatively 1 August 2012 (i.e., the date of the first notice);
(c)alternatively to para (b), interest calculated at the Bank’s standard variable rate from 19 December 2008 until 24 June 2010 or alternatively 1 August 2012, and
(d)costs.

In Bofinger v Kingsway Group Ltd,[698] the High Court confirmed, for the purposes of Australian law, that the doctrinal basis of equitable subrogation lies in equity. Their Honours observed that the resolution of issues as to subrogation will enliven the ‘application of “the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts.”’[699] Importantly, ‘the relevant principles of equity do not operate at large and in an idiosyncratic fashion’ but rather, their Honours said, adopting a passage from the judgment of Millett LJ in Boscawen v Bajwa:[700]

The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff.[701]

[698](2009) 239 CLR 269 (‘Bofinger’)

[699]Ibid, at 278-279 [1] (Gummow, Hayne, Heydon, Kiefel and Bell JJ), citing Warman International Ltd v Dwyer (1995) 182 CLR 544 at 559.

[700][1996] 1 WLR 328.

[701](2009) 239 CLR 269 at 301 [94].

More recently, the relevant legal principles governing the equitable doctrine of subrogation were considered by the Court of Appeal of New South Wales in Aged Care Services Pty Ltd v Kanning Services Pty Ltd.[702] There, Gleeson JA, with whom Meagher and Leeming JJA agreed, described subrogation in a general sense, as being the ‘process by which one party is substituted for another so that he may enforce that other’s rights against a third party for his own benefit.’[703] His Honour cited with approval the observation of Kearney J in Cochrane v Cochrane[704] that the principle is ‘based on equity’s concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable.’ His Honour noted that one well recognised area of subrogation is where a third party has made payment out of a prior security, and said:

[52]Thus, where a third party has paid off a mortgage, he or she is presumed, unless the contrary appears, to intend that ‘the mortgage shall be kept alive for his own benefit’: see Ghana Commercial Bank v Chandiram [1960] AC 732 at 745; see also Filby v Mortgage Express (No 2) [2004] EWCA Civ 759 at [53]; Butler v Rice [1910] 2 Ch 277; Porter v Latec Finance (Qld) Pty Ltd (1964) 111 CLR 177 at 202 per Windeyer J, who dissented on the facts.
[53]Fourthly, the expression ‘kept alive’ means in this context, that the legal relations between the third party and the debtor are regulated as if the benefit of the security had been assigned to the third party: Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221 at 236F per Lord Hoffmann.[705]

[702](2013) 86 NSWLR 174.

[703]Ibid, at 183 [49], adopting the description from C Mitchell, The Law of Subrogation (1994, Oxford, Clarendon Press) at 3 which was cited with approval in Highland v Exception Holdings Pty Ltd (in liq) [2006] NSWCA 318; (2007) 60 ACSR 223 per Santow JA at [90].

[704](1985) 3 NSWLR 403 at 405.

[705](2013) 86 NSWLR 174, at 183 [52]–[53].

His Honour went on to point out that ‘there is no occasion to order subrogation where there is available to a third party a remedy at law or in equity sufficient to avoid the unconscionable result.’[706] Further, he also agreed with the proposition advanced by Lord Neuberger in Cheltenham & Gloucester plc v Appleyard,[707] (and cited with approval by Santow JA[708] in Highland v Exception Holdings Pty Ltd (in liq)[709]) that:

[41]. . . subrogation cannot be invoked so as to put the lender in a better position than that in which would have been if he had obtained all the rights for which he bargained: see Banque Financiere at 235D and 236G-273B per Lord Hoffmann. This point was also made by Lindley MR in Wrexham at 447.[710]

[706]Ibid, at 184 [58].

[707][2004] EWCA Civ 291, at [32]–[44].

[708]With whom Giles and Hodgson JJA agreed on the question of subrogation.

[709][2006] NSWCA 318; (2007) 60 ACSR 223 at 242 [106].

[710](2013) 86 NSWLR 174 at 185 [59].

Against that background, the Bank submits that it caused the discharge of the Perpetual mortgage and on the instructions of the defendant (and congruent with what Mr Stephens referred to as his ‘original concept’). In these circumstances, equity would presume that the Perpetual mortgage is ‘kept alive’ for the benefit of the third party payer,[711] to regulate the relations between the Bank and Mr Stephens as if the benefit of the Perpetual mortgage had been assigned.[712] If it had been assigned, then the Bank submits that the terms of the Perpetual mortgage would lie in favour of the Bank and enable the Bank to enforce the amount of money that it paid over to Perpetual at the direction or request of Mr Stephens in order to effect the discharge.[713]
[711]Ghana Commerical Bank v Chandiram [1960] AC 732 at 745 per Lord Jenkins.
[712]See, Aged Care Services Pty Ltd v Kanning Services Pty Ltd (2013) 86 NSWLR 174; Western Trust & Saving Ltd v Rock [1993] NPC 89 (CA).
[713]Plaintiff’s closing submissions, at [72].

By way of relief, the Bank sought orders as follows:

I.Further or alternatively a declaration that the [Bank] is subrogated to the rights of Perpetual pursuant to the Perpetual Mortgage in respect of the payment of $1,365,662.44 together with interest and costs;
J.An order that the [Bank] have possession of the [96 Wooralla Drive] land described in Certificate of Title Volume 09186 Folio 149 ...;
K.Alternatively to order paragraph J, an order that [Mr Stephens] execute a mortgage in registrable form in respect of the Wooralla Property to give effect to the declaration set out in paragraph I;
L.Further or alternatively, payment of the sum of $1,365,662.44 (the total of the First and Second Perpetual Payment) together with interest accrued pursuant to the terms and conditions of the Perpetual Mortgage up to 24 June 2010 and interest pursuant to statute thereafter;

M.Costs on a solicitor and client basis and pursuant to the terms of the [Bank’s mortgage] or, alternatively, the terms of the Perpetual Mortgage . . [714]

[714]See Statement of Claim.

By the time of closing submissions, however, counsel for the Bank acknowledged that relief of the kind set out in the orders in paragraphs I and K of its prayer for relief are ‘perhaps more conventional’ than that set out in paragraph J, having regard to the orders made by Hansen J in Australia and New Zealand Banking Group Ltd v Costikidis.[715] Accordingly, in the event that the Bank were successful, counsel envisaged that the Court, following the conventional course, would require the Bank to prepare a form of mortgage for Mr Stephens and the Court to consider and, subject to argument, obtain an order for its execution. That form of mortgage would secure the sum of $1,365,662.44 and such interest as the Court orders to be paid in respect of the subrogation claim, and would refer to those moneys as being immediately due and payable. Thereafter, upon demand being made in the terms of the mortgage, the Bank would then proceed to enforce the mortgage.
[715]Supreme Court of Victoria, 22 December 1994, unreported, Hansen J (S CI 1991 04167). In oral closing submissions, counsel for the Bank stated ‘it seems to me on reflection that Justice Hansen’s orders, with respect, are the safer course’. (Transcript 16/05/16, at 1555).

In response to the Bank’s claim for relief by way of subrogation, Mr Stephens submitted that if the Bank’s relevant agreements and mortgage are set aside by the Court as a result of exploitation of unilateral mistake, misleading or deceptive conduct, unconscionable conduct or on the basis of an unjust transaction, then the principle of subrogation cannot avail the Bank. In essence, counsel for the defendant contended that following the decision of the High Court in Bofinger[716] it is now clear that, in Australia, subrogation is to be viewed as ‘a separate equitable principle’ and not, as the English authorities suggest, one that rests in principles of unjust enrichment. Accordingly, he submitted that ’it is counter-intuitive and offensive to the principles of equity that the [Bank] would be able to invoke equitable principles to recover moneys in circumstances where the [Bank’s] Agreements and Mortgages have been set aside’ on the grounds alleged by Mr Stephens.[717]
[716](2009) 239 CLR 269.
[717]Defendant’s closing written submissions, at [46].

Observations and conclusions on the claim in subrogation

In my view, essentially for the reasons submitted by the Bank, were it necessary for the Court to determine this issue, the Bank would be entitled to be subrogated to the rights of Perpetual under the Perpetual mortgage. In that event, orders in the ‘perhaps more conventional’ form would be made along the lines set out in paragraphs I and K of the Bank’s prayer for relief, requiring the Bank to prepare a form of mortgage to secure the sum of $1,365,662.44, together with such interest as the Court orders be paid in respect of the subrogation claim.

As to interest, the Bank submitted it is appropriate that interest be paid on its rate (which is lower than Perpetual’s rate), compounding as the terms of the Perpetual loan and mortgage allowed, and a calculation in that respect was tendered.[718] During closing submissions, however, counsel for the Bank raised with the Court the question of whether interest referable to the pre-judgment period should be calculated by reference to the commercial rates applicable under the mortgage or the penalty interest rates available under section 58 of the Supreme Court Act 1958 (Vic). He drew to the Court’s attention the recent decision of Daly AsJ in Titles Strata Management Pty Ltd v Nirta.[719] In that case, the facility in question to which the financier wished to subrogate provided that interest was payable at the rate of 72 per cent per annum. In considering the question of the amount of the debt owing, her Honour observed that:

[110]There is no clear guidance from the authorities as to whether a third party payer of an extinguished debt is entitled to the benefit of all of the contractual rights of the original lender. However, while there is some dispute between the English and Australian courts regarding the doctrinal foundation for the principle of subrogation, there is no doubt that it is at heart an equitable remedy, founded upon considerations of conscience. Titles Strata did not refer me to any authorities in support of its contention that by reason of the principle of subrogation it was entitled to assume not only the proprietary rights of STSL, but also the contractual rights of STSL, including its rights to charge an unusually high rate of interest. Understandably, Mrs Nirta made no submissions on the point, save to say that while she acknowledged that it was fair that Titles Strata be repaid its money, it was not fair that she be liable for all of the interest and other costs claimed by Titles Strata. The Registrar was naturally not concerned with this issue, and made no submissions on the point.
[111]Accordingly, I conducted my own research into the matter . . .
[112]Essentially, the courts have adopted two different approaches: the first, more common in English cases, being to award prejudgment interest based upon the interest charged in accordance with the loan agreement giving rise to the discharged principal debt, and the second, more common in Australian cases, but also not unusual in England, where the Court has exercised its own power under the relevant legislation to award prejudgment interest upon the subrogated amount, sometimes at the statutory maximum, or some other rate, selected at the Court’s discretion, and usually by no reference to the basis upon which that award was made.[720]

[718]See Exhibit P5.1: Compound Interest calculated pursuant to the [Bank’s] Standard Variable Rate Home Loan/Investment Home Loan on the sum of $1,365,662.44 in respect of the subrogation claim (compounded on the Perpetual Rest Date being 9^th each month). See, also, Rogers v Resi-Statewide Corporation Ltd [No 2] (1991) 105 ALR 145 at 154.

[719][2015] VSC 187.

[720]Ibid, at [110]–[112].

After reviewing the relevant authorities, none of which were binding, and in the absence of any evidence from Titles Strata regarding what would be an appropriate amount of interest it ought to receive on compensatory grounds, Daly AsJ determined to exercise the powers under section 58 and award interest at the statutory rate from the date that Titles Strata made a demand for payment.[721]
[721]Ibid, at [125].

Counsel for the Bank noted that in the present case, while a claim for penalty interest had been pleaded in the alternative, the Court might nevertheless take the view that it is not appropriate to award penalty interest on a subrogation claim and instead proceed to award interest on the basis of the (lower) commercial rates. Counsel then referred to the decision of the New South Wales Court of Appeal in Heydon v NRMA Ltd and Ors (No 2),[722] where Mason P, with whom Beazley JA and Ipp AJA agreed, adverted to the difference in approach between the award of pre-judgment interest in New South Wales and in Victoria. His Honour said that in New South Wales, ‘the practice is to award restitutionary interest at the rates payable on judgments unless special circumstances exist’[723] whereas in Victoria the ‘situation is quite different’ in that ‘pre-judgment interest rates are set pursuant to the aptly named Penalty Interest Rates Act 1983 (Vic)’.[724]
[722](2001) 53 NSWLR 600.
[723]Ibid, at 609 [32].
[724][2001] NSWCA 445, at [31].

Against that background, the Bank’s claim for interest at the penalty rates was not pressed, and counsel observed that ‘it seems the more just result,’ is ‘the commercial rates we have handed up.’[725]
[725] Transcript 16/05/16, at 1562-1563 (Mr Carew). As noted above. the Bank tendered (as Exhibit P5.1) an agreed calculation in respect of interest referable to its subrogation claim.

Summary of Conclusions
The Bank’s claim

For the reasons set out above, I am satisfied that the Bank has proven the essential elements of its primary case in contract against Mr Stephens. As I have rejected each of the defences Mr Stephens has raised, it follows that the Bank is entitled to judgment in its favour.

The Dobbs Certificate that was tendered by the Bank through Mr Deligiorgakis certified the amount of moneys secured by the Bank’s mortgage in relation to first loan agreement and the second loan agreement as at 18 April 2016 as being $1,605,723.30 and $889,840.04 respectively, and in total $2,495,563.34.[726]
[726]See Exhibit P3.

As the Bank has succeeded on its primary claim, it will be necessary for an updated certificate of debt to be provided in advance of any final orders being made.

Mr Stephens’ counterclaim

Similarly, for the reasons set out above, I am not satisfied that Mr Stephens has made out any of the causes of action pleaded against the Bank. In those circumstances his counterclaim will be dismissed.

Form of Judgment

I will hear from the parties as to the form of the Court’s judgment.

(1)In this Act, except in so far as the context or subject-matter otherwise indicates or requires:
. . .
unjust includes unconscionable, harsh or oppressive, and injustice shall be constructed in a corresponding manner.

[2017] VSC 385

29 June 2017