De Pasquale v ASCF Managed Investments Pty Ltd
[2021] SASC 21
•2 March 2021
SUPREME COURT OF SOUTH AUSTRALIA
(Appeal to a Single Judge)
DE PASQUALE v ASCF MANAGED INVESTMENTS PTY LTD (ACN 106 424 088)
[2021] SASC 21
Judgment of the Honourable Justice Livesey
2 March 2021
REAL PROPERTY - TORRENS TITLE - INDEFEASIBILITY OF TITLE - EXCEPTIONS TO INDEFEASIBILITY
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - HARSH AND UNCONSCIONABLE CONTRACTS AND STATUTORY REMEDIES
EQUITY - GENERAL PRINCIPLES - UNCONSCIONABILITY, UNCONSCIONABLE DEALINGS AND OTHER FORMS OF EQUITABLE FRAUD - SPECIAL DISABILITY
The appellants appealed against an order for possession made by a Master on 19 December 2019 concerning their home at West Beach. The appellants are a married couple approaching retirement with no apparent income. The second appellant suffers from a number of medical conditions. She requires full-time care to undertake the tasks of basic daily life. The first appellant provides this care to the second appellant, rendering him unable to work.
The appellants were induced by a third party to make a series of borrowings using their properties as security. Despite borrowing more than $1.23 million, the appellants did not receive any significant benefit from the borrowings. The first appellant retained only $22,000 and the second appellant retained nothing. Most of the borrowings were transferred to the third party.
The respondent was the lender and mortgagor in relation to the third loan tranche involving the appellant in the amount of $525,000. It was a short-term loan of only three months, ostensibly for the purpose of refinancing the appellants’ other loans. Interest was 1.5 per cent per month. If interest was not paid, the appellants were liable to pay the outstanding interest at the rate of 3 per cent per month, compounding monthly.
The second appellant was the guarantor of this loan. When this loan was made, the solicitors for the lender were issuing notices of default to the appellants for one of the earlier loans. The solicitors acted for the respondent as well as the earlier lender.
The appellants contended that there were triable issues as to whether the respondent acted unconscionably at general law or under statute (or both) when executing the loan agreement and associated mortgage. The appellants claimed that the solicitors’ knowledge of their default was attributable to the respondent. They also argued that the respondent acted unconscionably within the meaning of the Australian Securities and Investments Commission Act 2001 (Cth) by engaging in “asset lending” and the respondent acted unconscionably in equity in seeking to enforce the guarantee against the second appellant, relying on Garcia v National Australia Bank and Yerkey v Jones.
None of these issues were raised before the Master. The appellants’ only contention had been that they were the victims of a fraud perpetrated by a third party. The appellants applied to tender further evidence which had not been put before the Master.
Held per Livesey J, allowing the appeal:
1. The appellants may, in the interests of justice, raise their new contentions on appeal and tender further evidence on appeal.
2. The appellants have raised a number of triable issues:
2.1 Whether the knowledge of the solicitors acting for the earlier lender and the respondent can be attributed to the respondent.
2.2 Whether the respondent acted unconscionably in providing the loan to the appellants where the respondent’s solicitor knew that the appellants were already in default of another loan and could not repay the new loan other than by selling their home.
2.3 Whether the respondent acted unconscionably within the meaning of the Australian Securities and Investments Commission Act 2001 (Cth) by engaging in "asset lending".
2.4 Whether the respondent knew that the appellants had not received independent legal advice when their solicitors, Conatur Legal, acted for all of the borrowers, guarantors and mortgagors in the transaction.
2.5 Whether the respondent acted unconscionably in purporting to enforce the guarantee and security provided by the second respondent, as well as whether the second respondent was a volunteer and did not receive legal advice independently of her husband, pursuant to Garcia v National Australia Bank and Yerkey v Jones.
3. This is a proper case for transfer to the ordinary civil list of the General Division of this Court, to continue on pleadings and discovery in the usual way.
Australian Securities and Investments Commission Act 2001 (Cth) s 12BF, s 12BG, s 12BH, s 12CB; Real Property Act 1886 (SA) s 69; Supreme Court Civil Rules 2006 (SA) r 286; Uniform Civil Rules 2020 (SA) r 232, referred to.
Andrew Garrett Wine Resorts Pty Ltd v National Australia Bank Ltd (2004) 206 ALR 69; Bahr v Nicolay (No 2) (1988) 164 CLR 604; Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 38 WAR 1; El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685; Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20,841; Garcia v National Australia Bank (1998) 194 CLR 395; Lederberger and Scheiner v Mediterranean Olives Financial Pty Ltd (2012) 38 VR 509; Permanent Mortgages Pty Ltd v Pastro [2018] SASC 5; Spector v Ageda [1973] Ch 30; Tonto Home Loans Australia Pty Ltd v Tavares (2011) 15 BPR 29,699; Violet Home Loans v Schmidt (2013) 44 VR 202; Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; Yerkey v Jones (1939) 63 CLR 649, discussed.
Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; Bank of South Australia Ltd v Ferguson (1998) 192 CLR 248; Battye v Shammall (2005) 91 SASR 315; Blackwell v Barroile Pty Ltd (1994) 51 FCR 347; Blomley v Ryan (1956) 99 CLR 362; Ceneavenue Pty Ltd v Martin (2008) 106 SASR 1; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; Commonwealth Bank of Australia v Smith (1991) 42 FCR 390; Davies v Minister for Urban Development and Planning (2011) 109 SASR 518; Dey v Victorian Railways (1949) 78 CLR 62; Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd (1999) 196 CLR 245; G, RE v Department of Correctional Services [2017] SASC 96; Horrobin v Australia and New Zealand Banking Group Ltd (1996) 40 NSWLR 89; Jimann v ANZ [2017] SASC 56; Kleen-Tex (Thailand) Co Ltd v Corporate IM Pty Ltd [2012] SASC 71; McKaskell v Benseman [1989] 3 NSWLR 75; Permanent Mortgages Pty Ltd v Vandenbergh (2010) 41 WAR 353; Prince Jefri v Bolkiah v KPMG [1999] 2 AC 2222; Proude v Visic & Ors (No 4) (2013) 117 SASR 560; Provident Capital Ltd v Papa [2013] NSWCA 36; Rodgers v Moonta Town Corporation (1981) 37 ALR 49; Spencer v Commonwealth (2010) 241 CLR 118; Spina v Conran Associates Pty Ltd [2008] NSWSC 326; Webster v Lampard (1993) 177 CLR 598; Westpac Bank Incorporation v Chadha [2012] SASC 223, considered.
DE PASQUALE v ASCF MANAGED INVESTMENTS PTY LTD (ACN 106 424 088)
[2021] SASC 21
Civil Appeal
LIVESEY J:
Introduction
This is an appeal against an order for possession made by a Master on 19 December 2019 concerning the appellants’ home at West Beach.
The question on this appeal is whether the appellants can show that there is a real question to be tried, that is, an arguable or triable case. Before the Master, they argued only that they were the victims of a fraud, but they could not show how that affected the mortgagee’s right to possession. In this Court, they put quite different arguments. Because this appeared to take the respondent by surprise when the matter was first heard on 27 March 2020, I adjourned the hearing to 3 April 2020, when further evidence and submissions were presented.
For the reasons that follow, I allow the appeal. I find that the appellants have established triable issues and that the matter should be referred into the civil list and proceed in the usual way.
Mortgagee’s Right to Possession
The mortgagee of land under Torrens Title acquires no legal estate and therefore has no immediate or automatic right to possession.[1] Any right to possession must be grounded in contract or under statute.
[1] Figgins Holdings Pty Ltd v SEAA Enterprises Pty Ltd (1999) 196 CLR 245, 260-264.
By s 137 of the Real Property Act 1886 (SA) (Real Property Act), the mortgagee is given a statutory right to possession “upon default in payment of the principal sum, interest, annuity, or rent-charge, secured by any mortgage or encumbrance”.[2] The procedure for the making of an order for possession is found in Part 17 of the Real Property Act and r 204 of the Supreme Court Civil Rules 2006 (SA), now Part 11, r 241.1 of the Uniform Civil Rules 2020 (SA).
[2] That right is not impeached by any cross-claim by the mortgagor: Horrobin v Australia and New Zealand Banking Group Ltd (1996) 40 NSWLR 89, 99-100.
By s 192 of the Real Property Act, a registered mortgagee may seek an order for possession, and “may cause any person in possession of land … to be summoned to appear before the Court to show cause why the person summoned should not give up possession …”. If the person in possession can demonstrate some dispute of substance, the practice of the Court is to direct that the matter proceed on pleadings and refer the summons into the trial list:[3]
The provisions of s 192 and the following sections of the Real Property Act do not, in terms, limit the power of the court to make an ejectment order to cases in which no triable issue has emerged. However, assuming that the court has a discretion to decline to proceed with the determination of disputed questions of fact and law, it is apparent that it would not be right to refuse to make an order for possession if the relevant issues before the court had been fully explored and the evidence revealed that the applicant had a right to possession.
[3] Rodgers v Moonta Town Corporation (1981) 37 ALR 49, 52 (Gibbs CJ); For recent examples, see Westpac Bank Incorporation v Chadha [2012] SASC 223 (Peek J); Jimann v ANZ [2017] SASC 56, [49] (Bampton J); Permanent Mortgages Pty Ltd v Pastro [2018] SASC 5, [3] (Parker J).
The summary procedure is reserved for those cases which are “plain and obvious”.[4] The summary procedure is inappropriate unless “there is no real question to be tried”.[5]
[4] Webster v Lampard (1993) 177 CLR 598.
[5] Fancourt v Mercantile Credits Ltd (1983) 154 CLR 87. The potential issues that arise given the particular words used in r 232 of the Supreme Court Civil Rules 2006 (SA) when determining summary judgment do not arise in this case. Cf Ceneavenue Pty Ltd v Martin (2008) 106 SASR 1, [92] (Debelle J, with whom Duggan and Anderson JJ agreed) with Davies v Minister for Urban Development and Planning (2011) 109 SASR 518, [42] (Bleby J), citing Spencer v Commonwealth (2010) 241 CLR 118, [58]-[60]: “full weight must be given to the expression as a whole”. See also Proude v Visic & Ors (No 4) (2013) 117 SASR 560, [16] (Blue J); Kleen-Tex (Thailand) Co Ltd v Corporate IM Pty Ltd [2012] SASC 71, [19] (White J); G, RE v Department of Correctional Services [2017] SASC 96, [25]-[26] (Judge Roder). See, more recently, Adelaide Brighton Cement Ltd v Hallett Concrete Pty Ltd [2020] SASC 161 (Doyle J).
Accordingly, a matter will not be dealt with in a summary way if there is any “real question of fact or law to be determined”.[6] The appellants argue that there are a number of triable issues and that the matter should proceed through the usual course of pleadings and discovery to trial.
[6] Dey v Victorian Railways (1949) 78 CLR 62; Spencer v Commonwealth (2010) 241 CLR 118.
Factual Background
The appellants, Mr and Mrs De Pasquale, are the registered proprietors and mortgagors of residential property at West Beach (the Property). The respondent, ASCF Managed Investments Pty Ltd (ASCF), is the registered mortgagee of the Property. The value of the Property as at 9 November 2018 was approximately $700,000.00.[7]
[7] Affidavit of Kathryn Lauren Brann sworn on 9 September 2019, [10].
Mrs De Pasquale suffered a neurological trauma in her early childhood which was not identified until she was 48 years of age. Mrs De Pasquale was diagnosed with Cerebral Syringomyelia in 2000. Following her diagnosis, she underwent two spinal surgeries, one of which resulted in the insertion of a Syringopleural Shunt. Mrs De Pasquale’s condition deteriorated to the extent that, approximately eight years ago, she became confined to a wheelchair. Mr De Pasquale has been her full‑time carer ever since. He provides daily assistance with toileting, dressing, feeding and maintaining her personal hygiene.
Mrs De Pasquale has been deaf from “early in her life”. Her deafness and lack of language use or comprehension has “seriously impeded” her capacity and ability to function.[8] Due to Mrs De Pasquale’s medical needs, neither of the appellants is able to work. They do not receive a government pension.
[8] Affidavit of the Second Appellant sworn on 19 March 2020, [5].
The appellants are the sole directors and shareholders of De Pasquale Enterprises (Aust) Pty Ltd and Depent Pty Ltd, the latter of which acts in its corporate capacity and as trustee for the Depent Trust (the De Pasquale Entities).
As at June 2018, the appellants owned four properties – one property at O’Sullivan Beach, one at Parafield Gardens and two at West Beach. Their total assets at this time were estimated to be worth $1.9 million, against total liabilities of $500,000.[9]
[9] Affidavit of the First Defendant sworn on 28 October 2019, [9].
In June 2018, the appellants were introduced to Jonathan Pargan Leffler by one of Mr De Pasquale’s business associates, Robert Thompson. The appellants proceeded to enter a business arrangement with Mr Leffler, Good Life One World Pty Ltd (Good Life) and his business associate Louise Helen Gray (the Leffler Entitites), and they made a series of borrowings. There was no evidence tendered as to the structure or ownership of Good Life. The parties proceeded on the basis that Good Life was Mr Leffler’s company.
The arrangement between the appellants and the Leffler Entities involved Mr Leffler using the appellants’ properties as security to allow him to purchase a number of units at Payneham, on the understanding that when Mr Leffler sold the units, he would use the proceeds to help the appellants develop their properties.[10] Mr De Pasquale hoped that this arrangement would allow him to fund his early retirement.[11]
[10] Affidavit of the First Defendant sworn on 28 October 2019, [11]; Appellants’ Submissions, [25].
[11] Affidavit of the First Defendant sworn on 28 October 2019, [11].
The first of four loan agreements was concluded in July 2018 when First Mortgage Capital Pty Ltd (FMCL) entered into a loan agreement in the amount of $367,402.00 with Good Life as borrower, debtor and mortgagor (the First Loan). Mr Leffler, Ms Gray, the De Pasquale Entities and Mr and Mrs De Pasquale in their personal capacities were the debtors, mortgagors and guarantors of this loan agreement. The First Loan was secured by mortgages over the O’Sullivan Beach and Parafield Gardens properties.
Four months later, on 12 October 2018, the same parties borrowed an additional $145,650.00 from registered pawn broker Mr Frank Borg. Less than a month later, on 2 November 2018, the same parties borrowed a further $200,000.00 from Frank Borg. Of these amounts, only $10,000.00 was retained by the appellants, which they used for the purpose of repaying a portion of the First Loan, which had become overdue.
By 20 November 2018, Summer Lawyers, representing FCML, were sending notices of demand to Mr and Mrs De Pasquale, the De Pasquale Entities and the Leffler Entities due to their collective failure to make the interest repayments due on the First Loan.[12] These notices of demand stated that the appellants’ properties at O’Sullivan Beach and Parafield Gardens – the properties by which the First Loan was secured – were at risk of seizure and sale.[13]
[12] Transcript of Proceedings dated 19 December 2019, 9.
[13] The properties have since been seized: Transcript of Proceedings dated 19 December 2019, 9.
On 20 November 2018, approximately two weeks after the last of the Frank Borg loans was entered into, and after notices of demand were issued in relation to the First Loan, the appellants attended the office of Conatur Legal. There the appellants, for themselves and the De Pasquale Entities, entered into an agreement to borrow $525,000.00 from ASCF (the ASCF Loan or the Loan Agreement), ostensibly for the purpose of refinancing. Mrs De Pasquale was the guarantor of the loan. This loan was not settled until 13 December 2018. It is this loan and its associated security with which these proceedings are primarily concerned.
On 19 December 2018, ASCF engaged Summer Lawyers to prepare the security documents in relation to the ASCF Loan Agreement. Summer Lawyers were retained to ensure compliance with legislative requirements as to the form of security, as well as to attend to execution, stamping and registration. Summer Lawyers’ retainer extended to ensuring that the necessary searches, enquiries and requisitions were made, and addressing the requirements of all other parties to the transaction, including all attendances, correspondence and phone calls.
Summer Lawyers had undertaken the same scope of work in connection with the First Loan for FCML.
As a part of the ASCF Loan, the appellants granted a mortgage in favour of ASCF over the whole of their interest in the Property by way of security for all monies owing by the De Pasquale Entities to ASCF at the date of the mortgage or in the future. The witness to the appellants’ signatures, and the person signing the certification documents, was an employee of Conatur Legal. The mortgage was executed by Summer Lawyers on behalf of ASCF.
Pursuant to the Loan Agreement, the De Pasquale Entities agreed to pay interest monthly, at a very high rate of 1.5 per cent each month. If the De Pasquale Entities failed to pay the interest on the date it was due and payable, the De Pasquale Entities became liable to pay interest on the outstanding interest at the higher rate of 3 per cent, compounding monthly, until the outstanding interest was paid in full. The loan was for a period of only three months.
Pursuant to clause 3.1 of the Loan Agreement, Mr and Mrs De Pasquale agreed to pay, inter alia, the principal amount borrowed, any interest and any costs, fees and expenses incurred (the Secured Money). Clause 18.2 of the Loan Agreement provided that the De Pasquale Entities would be in default if the De Pasquale Entities or the appellants failed to pay any of the Secured Money to ASCF. Clause 18.3 provided that if there was a default by either the De Pasquale Entities or the appellants, the respondent could take possession of the Property. As mentioned, the appellants home was offered as security on a loan of only three months’ duration.
The appellants defaulted on the loan by failing to pay the Secured Money to the respondent in May 2019. In response, the respondent issued a Default Notice pursuant to s 133 of the Real Property Act demanding payment of the arrears owing under the ASCF Loan Agreement. After the appellants failed to comply with this demand, the respondent commenced proceedings to take possession of the appellants’ home.
The appellant’s contentions
On 19 December 2019, a Master ruled in favour of the respondents, making an order for possession of the appellants’ home at West Beach.
As to whether this Court should now find that there is a triable issue, the appellants’ arguments fell into two categories. First, that the granting of the ASCF Loan was unconscionable at general law or under statute (or both), and secondly, that the respondent acted unconscionably in enforcing the guarantee provided by Mrs De Pasquale.
The appellants’ contention that the ASCF Loan was unconscionable was put in two ways. The first was that it was unconscionable for the respondent to loan the money to the appellants in circumstances where they knew that the appellants were already in default of another loan with FCML. The appellants did not identify whether this was a claim of unconscionability at general law or under statute, or both. This argument cannot succeed unless the appellants also establish a triable issue as to whether the respondent knew of the default, or whether Summer Lawyers’ knowledge of the default was attributable to the respondent.
The second way in which the unconscionability claim was put was that the granting of the ASCF Loan was unconscionable within the meaning of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The appellants claimed that the granting of ASCF Loan was unconscionable as it comprised “asset lending”, whereby the appellants were given a loan without providing evidence of income, and the respondent could only recoup the principal by selling the appellants’ home which was offered as security for the loan.
There is a further contention arising under the ASIC Act, namely, that the ASCF Loan Agreement contained “unfair terms” within the meaning of the ASIC Act. The appellants did not point to the specific terms that were said to be unfair. The respondent did not address this issue at all.
As to whether the respondent could be said to be acting unconscionably in enforcing the guarantee given by Mrs De Pasquale (and by calling up the security), the appellants relied on the well-known decisions of the High Court in Garcia v National Australia Bank and Yerkey v Jones.[14]
[14] Garcia v National Australia Bank (1998) 194 CLR 395; Yerkey v Jones (1939) 63 CLR 649.
Common to each of the arguments is the appellants’ allegation that they received no independent legal advice in relation to the transaction. This contention also comprises two aspects. First, that the appellants were not advised independently of the Leffler Entities and secondly, that Mrs De Pasquale was not advised independently of her husband.
New Arguments on Appeal
When the parties first appeared before me on 27 March 2020, the respondent appeared to be taken by surprise by the appellant’s contentions. Accordingly, I granted the parties an adjournment until 3 April 2020 to allow the respondent the opportunity to put on further submissions and evidence.
In determining whether it is in the interests of justice to permit a party to prosecute a new contention on appeal, an important consideration is whether there is any risk of prejudice to the other party.[15] It was not suggested by the respondent that it would suffer any irreparable prejudice as a result of the new contentions, nor was any evidence of prejudice put before the Court.
[15] Battye v Shammall (2005) 91 SASR 315, [10] (Doyle CJ, with whom Duggan J agreed).
My task in this case is to determine whether there are triable issues, absent which the appellants face the loss of their home. Whilst the respondent is ordinarily entitled to the benefit of the earlier determination, that is subject to the identification of triable issues. Any finding regarding the existence of triable issues does not foreclose the parties from litigating those issues in the usual way. In my opinion, this is a case where it is in the interests of justice to permit the appellants to raise new contentions on appeal. Any immediate concern about the change in the appellants’ approach can be reflected in any order for costs.
Further Evidence
The appellants also sought to rely on evidence that was not adduced before the Master. In particular, the appellants sought to rely on the ASCF Loan Application Form and a further affidavit from Mrs De Pasquale that provided more information about her medical condition and capacity.
At the time of the appeal, the Supreme Court Civil Rules 2006 (SA) (the 2006 Rules) applied. Relevantly, r 286 provided:
(1) An appeal is to be by way of rehearing (unless the law under which the appeal is brought provides to the contrary).
(2) Subject to any limitation on its powers arising apart from these Rules, the Court may determine an appeal as the justice of the case requires despite the failure of parties to the appeal to raise relevant grounds of appeal, or to state grounds of appeal appropriately, in the notice of appeal.
(3) Subject to any limitation on its powers arising apart from these Rules, the Court may–
(a) draw inferences of fact from evidence taken at the original hearing and, in its discretion, hear further evidence on a question of fact;
…
The appellants submitted that “the justice of the case” required the admission of the further evidence for four reasons. First, given the nature of the summary hearing, no discovery of documents had occurred. The loan application was not in the possession of the appellants until after the hearing before the Master. Secondly, the appellants submitted that the rules that typically apply to the admission of “fresh evidence” after a trial do not apply where the matter is determined summarily, without any trial. Thirdly, as the loan application document is the respondent’s own document, no issue of prejudice arises. Finally, and as to the new affidavit, the appellants submitted that the issue of Mrs De Pasquale’s capacity was not fully apparent to her solicitors prior to the hearing before the Master.
In Andrew Garrett Wine Resorts, Besanko J set out the factors relevant to whether an appellate court should favourably exercise the discretion to receive further evidence: [16]
I propose to receive the further evidence put forward by the mortgagors. In that event, I will also receive the affidavit of Mr French. I have a discretion to receive further evidence, and in considering the exercise of the discretion, I should have regard to the interests of justice. A relevant factor in the exercise of the discretion will be whether the parties seeking to tender the further evidence could have put the evidence before the court below. Sometimes that will be a highly relevant factor, but in other cases the circumstances will be such that it will not be so significant …
[16] Andrew Garrett Wine Resorts Pty Ltd v National Australia Bank Ltd (2004) 206 ALR 69, [25].
Besanko J held that it will be appropriate to receive further evidence where doing so would allow the “real issues” between the parties to be elucidated and determined:[17]
... I think it is appropriate to receive the further evidence so that the real issues between the parties are identified and determined. In reaching that conclusion, I have had regard to the fact that the master was not required to make what might be called final findings of fact, and the respondent to the appeal has had the opportunity to answer the further evidence put forward by the appellants. I might have exercised my discretion differently if I had formed the view that the further evidence had been held back for strategic reasons, or, possibly, if there had been gross incompetence in failing to put the evidence before the master. In this case there is no evidence of either of these things having occurred.
[17] Andrew Garrett Wine Resorts Pty Ltd v National Australia Bank Ltd (2004) 206 ALR 69, [26].
Particularly pertinent to the disposition of this appeal is Besanko J’s finding that the exercise of discretion may be influenced by whether the respondent has had the opportunity to answer the further evidence put forward by the appellants, as well as whether it may be concluded that the new evidence had not been held back for strategic reasons or was not disclosed at first instance due to “gross incompetence”.
The decision of Parker J in Permanent Mortgages Pty Ltd v Pastro is also instructive on this point.[18] In that case, his Honour held that it was “in the interest of justice” that a further affidavit and exhibits be received because the primary issue on appeal was whether the Master erred in declining to refer the matter to the ordinary civil list, instead of ordering that it remain in the summary possession list. Parker J concluded that, given that the evidence could have been adduced once the matter was put into the general list, it was appropriate to consider the material on appeal:[19]
I consider that in the interest of justice the fourth affidavit and the exhibits to that affidavit, including the additional material referred to in the preceding paragraph, should be received as further evidence in the appeal. I adopt that approach because the primary issue in this appeal is whether the Master erred in declining to refer the matter into the ordinary civil list. In deciding this appeal it is therefore appropriate to take into account evidence that is known to be available and which could be adduced by following the correct practice should the matter be referred to the general list.
[18] Permanent Mortgages Pty Ltd v Pastro [2018] SASC 5.
[19] Permanent Mortgages Pty Ltd v Pastro [2018] SASC 5, [39].
As Besanko J explained in Andrew Garrett Wine Resorts, the question is ultimately whether it is in the interests of justice to admit the evidence.
On the evidence before me, the appellants could not (for whatever reason) put the ASCF Loan Application before the Master. Whilst whether the new affidavit ought to have been put before the Master is less clear, I think that I can take into account the evident shift in strategy: on the earlier case pressed before the Master it seems unlikely, at the least, that the detail of Mrs De Pasquale’s medical condition and capacity were as relevant as they now appear to be.
In the circumstances of this case, it is my view that it is in the interests of justice to admit the further affidavit evidence. There are two reasons. First, I have already held it is in the interests of justice to allow the appellants to agitate what I have termed “the Garcia argument”. The purpose of the affidavit is to provide evidence in support of the Garcia argument. Secondly, it is difficult to envisage how the receipt of the evidence would occasion any injustice to the respondent. After all, this is not a case where I am required to make binding findings of fact. My task is simply to decide whether there are triable issues and whether the matter should be referred to the civil list. Should the appellants be denied the opportunity of putting the evidence before this Court on this appeal, there is at least some risk that “an apparently good claim” may not be considered.[20] Accordingly, in my view, the interests of justice favour of the admission of the further evidence.
[20] Battye v Shammall (2005) 91 SASR 315, [21].
The ASCF Loan Application and the affidavit are admitted into evidence for the purposes of this appeal.
Indefeasibility of Title
Fundamental to the Torrens system is that the title held by a registered proprietor is subject to s 69 of the Real Property Act meaning it is indefeasible and absolute.[21] As registered mortgagee, the respondent prima facie enjoys indefeasibility of title.
[21] See Real Property Act 1886 (SA), s 69.
Subject to the terms of s 69 of the Real Property Act, the effect of registration “is to destroy prior unregistered interests which would have conflicted with, or encumbered, the registered proprietor’s interest”.[22] Accordingly, any party seeking to challenge enforcement of a mortgage, such as the appellants in this case, must establish a relevant exception to indefeasibility. In Bahr v Nicolay (No 2), Mason CJ and Dawson J held that the principle of indefeasibility does not deny the right of a plaintiff to bring a claim in personam against a registered proprietor, arising out of the acts of the registered proprietor: [23]
Neither the two sections nor the principle of indefeasibility precludes a claim to an estate or interest in land against a registered proprietor arising out of the acts of the registered proprietor himself … the recognition and enforcement of such an equity is consistent with the principle of indefeasibility and the protection which it gives to those who deal with the registered proprietor on the faith of the register.
(citations omitted)
[22] Permanent Mortgages Pty Ltd v Vandenbergh (2010) 41 WAR 353, [368] (Murphy JA).
[23] Bahr v Nicolay (No 2) (1988) 164 CLR 604, 613.
In Bank of South Australia Ltd v Ferguson, the High Court, applying Bahr v Nicolay, said of s 69 of the Real Property Act: [24]
The legislation thus recognises the principle, propounded in an established line of cases dealing with Torrens system legislation, that an equity arising from the conduct of a registered proprietor before or after registration may be enforced against that registered proprietor notwithstanding the indefeasibility of registered titles.
(citations omitted)
[24] Bank of South Australia Ltd v Ferguson (1998) 192 CLR 248, [9] (Brennan CJ, Gaudron, McHugh, Gummow and Kirby JJ).
The High Court went on to hold that not all species of fraud which attract equitable remedies will amount to fraud in the requisite statutory sense. Fraud under the Real Property Act embraces less, not more, than the fraud which would ground relief under the general law:[25]
Section 69I operates to qualify the general principle of indefeasibility only if the case answers the statutory description of “fraud”. Not all species of fraud which attract equitable remedies will amount to fraud in the statutory sense. The distinction may be illustrated as follows. In some circumstances, equity subjects the interest of a purchaser of unregistered land to an antecedent interest of which the purchaser has notice. However, in respect of land to which the Act applies, registration of a transfer is not fraudulent in the statutory sense required to qualify the operation of the doctrine of indefeasibility, merely because the transferee knows that registration will defeat an antecedent unregistered interest of which the transferee has notice.
The points of significance for the present litigation are that (i) statutory fraud embraces less, not more, than the species of fraud which, at general law, founds the rescission of a conveyance; and (ii) statutory fraud is not itself directly generative of legal rights and obligations, its role being to qualify the operation of the doctrine of indefeasibility upon what would have been the rights and remedies of the complainant if the land in question were held under unregistered title.
(citations omitted)
[25] Bank of South Australia Ltd v Ferguson (1998) 192 CLR 248, [10]-[11] (Brennan CJ, Gaudron, McHugh, Gummow and Kirby JJ).
In Permanent Mortgages Pty Ltd v Pastro, Parker J explained that unconscionability acts as an in personam exception to indefeasibility of title.[26] That said, title is not to be impugned simply because one party involved in the transaction acted unconscionably. An exception to indefeasibility will not be established unless it is shown that the mortgagor, or the mortgagee’s agent, acted unconscionably in connection with the transaction:[27]
The point of present importance in relation to the fraud exception is that the relevant interest in land must have been registered as a result of a fraudulent transaction engaged in by the person or entity whose title is impugned or their agent. Thus, even if the appellant was able to persuade a Court in properly instituted proceedings that he has been defrauded by Mr Rakic, that could not result in the making of an order setting aside the mortgages granted in favour of PM.
…
If PM was found to have acted unconscionably in entering into the mortgages with the appellant that would operate as an in personam exception to the doctrine of indefeasibility. The question is whether there is an arguable case that PM acted unconscionably. The issue in these proceedings is not whether Mr Rakic acted unconscionably. Any unconscionability on the part of Mr Rakic could not affect the interests of PM unless that company had knowledge, or should have had knowledge, of the unconscionable conduct engaged in by Mr Rakic.
[26] Permanent Mortgages Pty Ltd v Pastro [2018] SASC 5, [89].
[27] Permanent Mortgages Pty Ltd v Pastro [2018] SASC 5, [82], [89]. See also, Spina v Conran Associates Pty Ltd [2008] NSWSC 326, [98] (Austin J).
It is therefore not sufficient for the appellants to establish a triable issue in relation to whether they were defrauded by Mr Leffler and the Leffler Entities. The appellants must establish a triable issue as to whether the respondent or its agent acted unconscionably in connection with the subject transaction. That is, there must arise some scope for a finding of unconscionability that would allow the appellants to set aside, or otherwise call into question, the enforceability of the loan contract and mortgage.
The decision in Violet Home Loans is illustrative.[28] In that case the borrower granted a lender a mortgage over his home as security for a loan facility which he used to invest in what he thought was a series of property developments. He had, however, been defrauded by a third party and most of the money advanced by the lender was lost.[29] The question was who should bear the loss. On the facts of that case, that question was decided in favour of the borrower because the lender acted unconscionably within the meaning of the Trade Practices Act 1974 (Cth) and the ASIC Act. The trial Judge ordered that the loan contract and the mortgage be set aside. The Victorian Court of Appeal dismissed the appeal and refused to disturb the ruling that the loan contract and the mortgage must be set aside.[30]
[28] Violet Home Loans v Schmidt (2013) 44 VR 202.
[29] Violet Home Loans v Schmidt (2013) 44 VR 202, [1].
[30] Violet Home Loans v Schmidt (2013) 44 VR 202, [83].
The appellants on this appeal must demonstrate an arguable case that the respondent, whether personally or through its agent, acted unconscionably when making the loan and taking security for the loan.
The Unconscionability Claims
The appellants’ unconscionability claim falls into two categories: unconscionability in relation to the provision of the loan and unconscionability in relation to the enforcement of the loan. I will address these in turn.
Provision of the Loan
Knowledge of Previous Default
The issue as to the attribution of knowledge arises because the respondent contends that it did not know that the appellants were in default of a previous loan when the ASCF Loan Agreement was concluded. The appellants submitted that Summer Lawyers was the agent of the respondent and, as such, Summer Lawyers’ knowledge was attributable to the respondent. I interpolate here to point out that the purpose of the loan – “refinance” – and the short period of the loan of three months might well have raised at least some basis for a suspicion that there had been a default on earlier finance arrangements. That, however, was not how the issue was addressed in argument.
As to whether Summer Lawyers was the agent of the respondent, the appellants relied on the fact that Summer Lawyers was more than merely the firm that prepared the transaction documents. Summer Lawyers executed the loan documents on the respondent’s behalf. They observed that Summer Lawyers fulfilled the same role for FCML in relation to the First Loan.
The appellants emphasised that Summer Lawyers sent default notices to the De Pasquale Entities and Mr De Pasquale on 30 October 2018, shortly before entry into the ASCF Loan.
The appellants submitted that Summer Lawyers, as the solicitors and agent for FCML issuing the default notices, knew of the appellants’ default and the likelihood of further default. More particularly this, say the appellants, means that Summer Lawyers knew that the ASCF Loan was not serviceable by them, and that the only way it could be repaid would be through the sale of the appellants’ home at West Beach. The appellants say that Summer Lawyers therefore knew that the ASCF Loan would not be repaid within three months, that the interest on the loan would capitalise at the end of the three-month period, the property would then be sold and the respondent and Summer Lawyers would profit from the loan (presumably from fees), at the expense of the appellants.
According to the appellants, Summer Lawyers also knew that the ASCF Loan was entirely for the benefit of Good Life. In support of this contention, the appellants relied on a document entitled “Cheque Directions”, which showed that the entirety of the ASCF Loan was to be deposited into the account of Good Life.[31]
[31] Excluding fees and brokerage.
The respondent distinguished the knowledge Summer Lawyers gained through its retainer with ASCF, and that which was gained through its retainer with FCML in relation to the First Loan. The respondent relied on the principle that the knowledge of an agent is only attributable to the principal where the knowledge is acquired in the course of the agency or where the agent has a duty to disclose. It argued that, as the information about the appellants’ default was obtained in the course of a prior engagement, that information was confidential and they were under no duty to disclose that information to ASCF. As no duty to disclose arose, Summer Lawyers’ knowledge could not, therefore, be attributed to ASCF.
I remind myself that I am not to resolve these contentions, nor determine the underlying point of principle. The issue is whether the appellants’ attribution contention is triable. I commence with Spector v Ageda where Megarry J remarked that:[32]
[a] solicitor must put at his client’s disposal not only his skill but also his knowledge, so far as it is relevant; and if he is unwilling to reveal his knowledge to his client, he should not act for him.
[32] Spector v Ageda [1973] Ch 30, 48.
And in McKaskell v Benseman Jeffries J recognised that, as the relationship between solicitor and client is fiduciary in character, a solicitor is under a duty to reveal all material information relevant to his or her client’s affairs:[33]
Within the solicitor/client relationship the client is regarded as dependent upon the solicitor for a great variety of reasons … A primary obligation of the fiduciary is to reveal all material information that comes into his possession concerned with his client’s affairs.
[33] McKaskell v Benseman [1989] 3 NSWLR 75, 87.
In many cases, one would expect the solicitor at the outset of a new retainer to disclose any issue raising the potential for a conflict between the interests of a former client and the prospective new client. Whether the new client will agree to a retainer where the solicitor will not disclose all that the solicitor knows, particularly if it is material to the new retainer, is a matter to be openly addressed. Of course, in the case of disagreement about matters such as these, the solicitor is obliged to refuse the prospective retainer, as Megarry J made clear in Spector v Ageda.
Without challenging authorities such as these, the respondent relied on the following passage from El Ajou v Dollar Land Holdings plc to support the contention that Summer Lawyers’ knowledge of the appellants’ previous default could not be imputed to the respondent:[34]
I know of no authority for the proposition that in the absence of any duty on the part of the principal to investigate, information which was received by an agent otherwise than as agent can be imputed to the principal simply on the ground that the agent owed to his principal a duty to disclose it.
[34] El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, 703-704 (Lord Hoffmann), cited in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, [127]; Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) 92012) 44 WAR 1, [2207].
However, and as the appellants identified, Lord Hoffmann’s statement in El Ajou assumed that there was no duty to investigate. The appellants submitted that the financial situation of the appellants – approaching retirement age with no source of income – gave rise to a duty to investigate, meaning that Summer Lawyers’ knowledge of the default is attributable to the respondent. The extent to which the statement relied on in El Ajou applies to solicitors, with or without the imposition of a duty to investigate, was not explored in argument.
The appellants relied on Owen J’s remarks in Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) for the proposition that where a solicitor comes into possession of information that has a “real connection” with the subject matter of the transaction, that knowledge is attributable to the solicitor’s principal:[35]
In my view, a solicitor retained in the negotiations for, and the perfection of, a commercial transaction such as this is obliged to pass on to his client any information that comes into her or his possession that has a real connection with the subject matter of the transaction … [a]nd knowledge of that information is therefore to be imputed to the client as the solicitor’s principal.
[35] Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 38 WAR 1, [6365].
The appellants also relied on the following passage from Lederberger and Scheiner v Mediterranean Olives Financial Pty Ltd:[36]
Where, as here, in the course of performing a retainer, a solicitor becomes aware of information which is not confidential and is of potential significance, it is to be expected that the solicitor will draw it to the attention of the client and point out its ramifications.
[36] Lederberger and Scheiner v Mediterranean Olives Financial Pty Ltd (2012) 38 VR 509, [101].
The question of attribution is, in this case, difficult and raises considerations of some subtlety. These include whether Lord Hoffmann’s statements in El Ajou apply to solicitors, as well as whether solicitors are under any duty to investigate or, by contrast, are constrained by confidentiality from revealing what they know even if it is material to the new retainer.[37]
[37] See for, example, Watts and Reynolds, ‘Bowstead and Reynolds on Agency’, 20th ed, Sweet & Maxwell, [8-207]-[8-213], particularly at [8-211]; Dal Pont, ‘Law of Agency’, 2nd ed, Lexis Nexis Butterworths, from [22.49].
On one view of the authorities, a solicitor is obliged to reveal what the solicitor knows, as well as to investigate matters, where these are connected with the new client’s retainer. Any potential difficulty with confidentiality is a matter for the solicitor to address before the new retainer is taken up. Either the former client must agree to waive confidentiality, or the new client must agree that the solicitor need not disclose all that is known about a prior, material transaction. Absent suitable arrangements, it is the solicitor’s obligation to decline the new retainer. Where the solicitor takes up the new retainer without addressing these issues, it is at least arguable that there remains an obligation to reveal knowledge material to the retainer of the new client. Alternatively, it is at least arguable that the solicitor is obliged to investigate issues material to the new retainer, such as whether the borrower and guarantor are already in default and at risk of further default under proposed new loan arrangements. Whatever the correct view, it is clear that these are all matters particularly ill-suited to summary determination. They raise difficult issues of law, which turn on a range of factual questions yet to be addressed.
In my view, there is a triable issue on the question of imputation of knowledge in this case, particularly given the breadth of Megarry J’s ruling in Spector v Ageda and Owen J’s observations in Bell Group (No 9) about the duty of a solicitor to pass on any information in his or her possession that has a “real connection” with the subject matter of the transaction. If the knowledge of Summer Lawyers is ultimately to be attributed to ASCF, that will have important implications for each of the cases now raised by the appellants.
Statutory Unconscionability under the ASIC Act
The appellants contended that the respondent engaged in unconscionable conduct for the purposes of the ASIC Act. The appellants’ claim under the ASIC Act has two limbs: first, that the respondent engaged in unconscionable conduct in contravention of s 12BC, and second, that the ASCF Loan was an “unfair contract” within the meaning of the ASIC Act.
The concept of unconscionability under the ASIC Act is probably broader than it is at general law and in equity.[38] As Allsop P explained in Tonto Home Loans Australia Pty Ltd v Tavares, the ASIC Act should not be “constrained by” the meaning of unconscionability at general law and in equity:[39]
The concept of unconscionable under the Australian Securities and Investments Commission Act 2001 (Cth) is wider than under the general law and the provisions are intended to build on and not be constrained by cases at general law and equity. The range of conduct is wide and can include bullying and thuggish behaviour, undue pressure and unfair tactics, taking advantage of vulnerability or lack of understanding, trickery or misleading conduct. A finding requires an examination of all the circumstances.
[38] See Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1, [87] (Gageler J), [144], [234] (Nettle and Gordon JJ), [268] (Edelman J), cf [48] (Kiefel CJ and Bell J); [118] (Keane J) contra.
[39] Tonto Home Loans Australia Pty Ltd v Tavares (2011) 15 BPR 29,699, [291] (Allsop P, with whom Bathurst CJ and Campbell JA agreed).
The appellants’ further claim that the ASCF Loan constituted an “unfair contract” turned on s 12BF of the ASIC Act:
12BF Unfair terms of consumer contracts and small business contract
(1) A term of a consumer contract or small business contract is void if:
(a) the term is unfair; and
(b) the contract is a standard form contract; and
(c) the contract is:
(i) a financial product; or
(ii) a contract for the supply, or possible supply, of services that are financial services.
(2) The contract continues to bind the parties if it is capable of operating without the unfair term.
(3) A consumer contract is a contract at least one of the parties to which is an individual whose acquisition of what is supplied under the contract is wholly or predominantly an acquisition for personal, domestic or household use or consumption.
(4) A contract is a small business contract if:
(a) at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
(b) either of the following applies:
(i) the upfront price payable under the contract does not exceed $300,000;
(ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.
Section 12BG then goes on to explain the meaning of the term “unfair”:
12BG Meaning of unfair
(1) A term of a contract referred to in subsection 12BF(1) is unfair if:
(a) it would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
(b) it is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
(c) it would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.
(2) In determining whether a term of a contract is unfair under subsection (1), a court may take into account such matters as it thinks relevant, but must take into account the following:
(b) the extent to which the term is transparent;
(c) the contract as a whole.
Section 12BH provides examples of the kinds of contractual terms that may be unfair within the meaning of s 12BG of the ASIC Act. None of the terms of the ASCF Loan Agreement could be regarded as examples of unfair terms within that section. However, the absence of a term within s 12BH is not determinative as to whether or not a term is an unfair term. Section 12BH is expressed as “[w]ithout limiting section 12BG”, and therefore only provides guidance as to the types of terms that may be deemed unfair.
The appellants contend that they meet the definition of “consumers” in s 12BF(3) as the purpose of the ASCF Loan was to refinance earlier liabilities that arose out of the appellants’ plan to invest in property to fund their retirement. This, according to the appellants, meant that the ASCF Loan was a contract “of a kind acquired for household use or consumption”.[40] In support of this contention, the appellants’ relied on the decision of Warren CJ and Cavanough and Ferguson AJJA in Violet Home Loans v Schmidt, where their Honours found that finance for the purpose of investing to fund retirement constitutes finance acquired for a household purpose within the meaning of the ASIC Act:[41]
In our opinion, the financial services provided here were of a kind ordinarily acquired for personal use. It is true that Mr Schmidt declared that the credit to be provided to him was to be applied wholly or predominantly for business or investment purposes. However, that does not show that the kind of financial services acquired by Mr Schmidt were not of a kind “ordinarily” acquired for personal use. Indeed, the declaration assists Violet very little. Investments can be personal.
[40] Appellants’ Written Submissions dated 22 March 2020, [52].
[41] Violet Home Loans v Schmidt [2013] VSCA 56, [75].
In circumstances where the issue whether the ASCF Loan was an “unfair contract” was not developed by either side, I will refrain from ruling on whether it discloses an arguable or triable issue. It is a matter which, if pleaded, will be addressed by the pleadings of the parties.
The appellants’ statutory unconscionability claim is principally that the respondent’s conduct was unconscionable because the ASCF Loan constituted “asset lending”. The appellants submitted that the ASCF Loan was asset lending because the respondent loaned the monies to the appellants without evidence of any capacity to repay the loan.[42] In support of this claim, the appellants’ rely on s 12CB of the ASIC Act which provides:
(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of financial services to a person; or
(b) the acquisition or possible acquisition of financial services from a person;
engage in conduct that is, in all the circumstances, unconscionable.
[42] Appellants’ Written Submissions dated 22 March 2020, [54].
However, a loan agreement will not be unconscionable merely or only because it involves “asset lending”.[43] In addition, conduct is not necessarily unconscionable merely because similar conduct has been found to be unconscionable in the circumstances of another case.[44] That is not to say that previous decisions do not assist a court when determining whether particular conduct is unconscionable. When deciding whether the appellants have established a triable case in relation to the issue of statutory unconscionability, other cases of statutory unconscionability remain of relevance.
[43] Violet Home Loans v Schmidt (2013) 44 VR 202, [59] (Warren CJ, Cavanough and Ferguson AJJA); Provident Capital Ltd v Papa [2013] NSWCA 36.
[44] Violet Home Loans v Schmidt (2013) 44 VR 202, [59] (Warren CJ, Cavanough and Ferguson AJJA).
One example is Elkofairi v Permanent Trustee Co Ltd (Elkofairi). In that case, Beazley JA (with whom Santow JA and Campbell AJA agreed) held that a lender engaged in unconscionable conduct when loaning a large sum of money to a borrower in circumstances where the borrower lacked any material income and the transaction was secured over the borrower’s only asset:[45]
In my opinion, notwithstanding that the respondent did not have knowledge of the appellant's lack of education and her language and domestic difficulties, her lack of income, in the circumstances of this transaction — that is a large borrowing secured over her only asset, in circumstances where the application form failed to disclose any income for either husband or wife — placed her in a special position of disadvantage. Though the full extent of that special position of disadvantage was not known to the respondent, nonetheless the absence of any relevant financial information was sufficient to put the respondent on notice of the appellant's lack of capacity to meet the repayment obligations under the mortgage. That left as the only source of repayment the selling of her only asset, as again the respondent must be taken to have known.
…
In my opinion, therefore, it was unconscientious for the respondent to lend a large sum of money to a person with no income with full knowledge that if the repayments under the loan were not met, it could sell that person's only asset.
[45] Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20,841, [56], [59].
The appellants relied on the finding of unconscionability in Elkofairi in support of their claim because that lender was concerned only “with its ability to recoup any amount outstanding on the loan”, in circumstances where the borrower had no way of repaying the loan, other than by selling the borrower’s home.[46]
[46] Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20,841, [57]. See the Appellants’ Written Submissions dated 22 March 2020, [54].
The appellants also relied on Violet Home Loans. In that case, the lender’s conduct was found to be unconscionable because the lender knew that the borrower was in his mid-sixties, on the brink of retirement and lacking any substantial assets other than his home. It was held that the lender must have had significant doubts as to whether the borrower had the capacity to repay the loan.[47]
[47] Violet Home Loans v Schmidt (2013) 44 VR 202, [32].
The appellants’ case shares some common features with Violet Home Loans. Whilst not determinative, that is relevant to whether a triable issue exists.[48] The appellants had no income and were approaching retirement. They were persuaded by a third party to borrow funds to invest in a property development, hoping to use the profits to fund their retirement. They used their home as security. The appellants submitted that these facts, which they submit were clearly within the knowledge of the respondent, should have raised doubts about the serviceability of the loan and that it was, accordingly, unconscionable for the respondent to proceed with the loan and take the impugned security.
[48] Violet Home Loans v Schmidt (2013) 44 VR 202, [59].
There is a key factual difference with Violet Home Loans. Here the appellants held investment properties that were the subject of other lending which was, at the time of the ASCF Loan, in default. Whether that circumstance is ultimately relevant to the determination of the appellants’ unconscionability case is not a matter I need now determine.
The respondent did not put any submissions against the appellants’ case on statutory unconscionability, apart from relying on the statement in Violet Home Loans that “little is to be gained by a close factual analysis of the myriad of cases that have considered whether particular conduct is unconscionable.”[49]
[49] Violet Home Loans v Schmidt (2013) 44 VR 202, [59].
In my view, the appellants have established a triable issue on the question of statutory unconscionability. That is a case that ostensibly assists both appellants.
Absence of Independent Legal Advice
The appellants argued that there is a triable issue as to whether the respondent acted unconscionably in proceeding with the ASCF Loan in circumstances where it knew that the appellants had not received independent legal advice. They say that because Conatur Legal represented them and the Leffler Entities, Conatur Legal was not independent.
The respondent submitted that, though Conatur Legal advised both the De Pasquales and the Leffler Entities, because different solicitors within the same firm advised each party, there was no conflict of interest and the advice was independent. While the respondent sought to argue that it is possible that law firms can set up appropriate controls to ensure that no conflict of interest occurs, no evidence of such controls was offered to the Court.
It is well accepted that the practice of one solicitor acting for both vendor and purchaser is “undesirable” and ordinarily ought not be permitted:[50]
We pause to say that various courts in a number of jurisdictions have decried the practice of one solicitor acting for both vendor and purchaser … It is an undesirable practice and it ought not to be permitted.
[50] Commonwealth Bank of Australia v Smith (1991) 42 FCR 390, 393 (Davies, Sheppard and Gummow JJ); Blackwell v Barroile Pty Ltd (1994) 51 FCR 347, 359 (Davies and Lee JJ).
Although this is not a case of vendor and purchaser, it is a case where one firm has acted for all borrowers, guarantors and ultimate beneficiaries of the loan, in circumstances where their interests clearly did not align. A solicitor is obliged to provide a client with professional advice and skill, unaffected by the discharge of any duty owed to another party whose interests may conflict with those of the client. That is a longstanding ethical rule which “goes to the core of the solicitor-client relationship”:[51]
We do not agree that the fundamental duty to be observed … namely the obligation to provide a client with professional advice and skill uncompromised by the performance of a like duty to another whose interests conflict with those of the client, was in any way a novel concept in July 1988. It is an ethical rule of long-standing which goes to the core of the solicitor-client relationship, the maintenance and protection of which is a matter of public interest reflected in the doctrine of professional privilege. It is central to the preservation of public confidence in the administration of justice.
[51] Blackwell v Barroile Pty Ltd (1994) 51 FCR 347, 360 (Davies and Lee JJ).
It is not for me to make findings about whether there was an absence of independent legal advice. I must only determine whether the appellants have established a triable issue in relation to that question. I am satisfied that a triable issue arises for the following reasons.
It is at least open to question whether Conatur Legal did or could implement appropriate controls, such as an information barrier, adequate to prevent the exchange of information within the same firm between the solicitor acting for the appellants and the solicitor acting for the Leffler Entities.[52]
[52] Discussed in Prince Jefri Bolkiah v KPMG [1999] 2 AC 222.
There was clearly at least the potential for conflict between the interests of the appellants and the interests of the Leffler Entities. While it was in the interests of the Leffler Entities to borrow further funds guaranteed by the appellants, it is at least open to doubt whether this was in the interests of the appellants. That is because, at the time of the ASCF Loan, the appellants were in default of the FCML Loan, and already at risk of losing their properties at Parafield Gardens and O’Sullivan Beach.
This conflict was not disputed by the respondent.
In those circumstances, and as the appellants contend, it is difficult to see how it was in the appellants’ interest to borrow an additional $525,000, particularly in circumstances where the borrowed funds were immediately to be paid to the Leffler Entities and not retained by the appellants. That predicament is reinforced by the fact that the loan was only for three months and, by that loan, the appellants’ home was put at risk.
On the case of the appellants, it is hard to see how, at this point, it was in their interest to do anything other than “cut their losses”. There is a dearth of evidence as to what legal advice was actually given, as might be expected at this early stage. The respondent knew that the same firm was advising all borrowers and guarantors. In the circumstances, there is at least room to question whether advice from Conatur Legal could be regarded as both independent and in the best interests of the appellants.
Enforcement of the Guarantee
The Garcia Argument
The appellants contend that there is a triable issue as to whether the respondent acted unconscionably in purporting to enforce the guarantee provided by Mrs De Pasquale in circumstances where the principles described in Garcia are enlivened.
The appellants relied on the evidence about Mrs De Pasquale’s impaired health and capacity to support the contention that she was, within the requisite authorities, relevantly in a condition of “vulnerability” towards her husband. In particular, they relied on the evidence of Mrs De Pasquale’s deafness, her confinement to a wheelchair, and her reliance upon Mr De Pasquale to help her undertake all of the basic tasks of daily living.
The appellants submitted that the respondents had notice of Mrs De Pasquale’s vulnerability because there was a photograph of Mrs De Pasquale sitting in a wheelchair within the loan documentation. However, they conceded that seeing the wheelchair would not have put the respondent on notice of Mrs De Pasquale’s deafness and they did not suggest that Mr De Pasquale told anyone about his wife’s disability or impaired capacity.
The respondent argued that it took steps to ensure that Mrs De Pasquale obtained independent legal advice about the transaction, and pointed to the provision of Australian Legal Practitioner’s Certificates from Conatur Legal in connection with the transaction.
It is neither necessary nor appropriate that I make findings about the appellants’ case. Rather, I must only decide whether the appellants have raised an arguable or triable case. In doing so, it is important to bear in mind that discovery is yet to occur and no witnesses have been called or given evidence.
In determining whether a triable issue arises in relation to this case, the starting point is the principle discussed in Garcia and Yerkey v Jones that equity will not presume undue influence in the case of a husband and wife.[53] Importantly, however, the marital relationship “has never been divested completely of what may be called equitable presumptions of invalidating tendency.”[54]
[53] Yerkey v Jones (1939) 63 CLR 649, 675 (Dixon J); Garcia v National Australia Bank (1998) 194 CLR 395, 422 (Kirby J).
[54] Yerkey v Jones (1939) 63 CLR 649, 675 (Dixon J).
In Yerkey v Jones, Dixon J distinguished two kinds of circumstances in which unconscionability may arise between a husband and wife. The first is where “a wife, alive to the nature and effect of the obligation she is undertaking, is procured to become her husband’s surety by the exertion by him upon her of undue influence”.[55] The second category of unconscionability is where the wife “does not understand the effect of the document or the nature of the transaction of suretyship.”[56] His Honour went on to hold that, in relation to the first category of unconscionability, the deleterious effect of the unconscionability cannot be undone by anything other than advice that is wholly independent from the husband. If this does not occur, the transaction is voidable:[57]
Nothing but independent advice or relief from the ascendancy of her husband over her judgment and will would suffice. If the creditor has left it to the husband to obtain his wife’s consent to become surety and no more is done independently of the husband than to ascertain that she understands what she is doing, then, if it turns out that she is in fact acting under the undue influence of her husband, it seems that the transaction will be voidable at her instance as against the creditor.
[55] Yerkey v Jones (1939) 63 CLR 649, 684.
[56] Yerkey v Jones (1939) 63 CLR 649, 684.
[57] Yerkey v Jones (1939) 63 CLR 649, 684.
However, the appellants’ arguments also go to the second category of unconscionability identified by Dixon J, namely, where the wife does not understand the purport and effect of the transaction. In that case, the transaction is liable to be set aside in equity unless the wife receives advice from a stranger to the transaction whom the creditor reasonably believes is “competent, independent and disinterested:”[58]
But, if the wife has been in receipt of the advice of a stranger whom the creditor believes on reasonable grounds to be competent, independent and disinterested, then the circumstances would need to be very exceptional before the creditor could be held bound to any equity which might otherwise arise from the husband’s conduct and his wife’s actual failure to understand the transaction.
[58] Yerkey v Jones (1939) 63 CLR 649, 685-686.
In Garcia, the High Court considered the reasons of Dixon J in Yerkey v Jones:[59]
… in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger.
[59] Garcia v National Australia Bank Limited (1998) 194 CLR 395, [31] (Gaudron, McHugh, Gummow and Hayne JJ).
The High Court went on to explain that it would still be unconscionable for a lender to enforce a guarantee against a wife in circumstances where her husband has not exerted any undue influence where:[60]
· the wife did not understand the purport and effect of the transaction;
·the transaction was voluntary, in the sense that the wife obtained “no gain from the contract”, the performance of which she guaranteed;
·the lender is taken to have understood that the wife may repose trust and confidence in her husband in matters of business, and therefore to have understood that the husband may not have fully and accurately explained the purport and effect of the transaction to his wife; and
·the lender nevertheless failed to take steps to explain the transaction to the wife itself, or to find a stranger to explain it to her.
[60] Garcia v National Australia Bank Limited (1998) 194 CLR 395, [31].
The only question of notice which arises is whether, at the time of the taking of the guarantee, the lender had knowledge that the wife was married to the principal creditor.[61]
[61] Garcia v National Australia Bank Limited (1998) 194 CLR 395, [40].
It is appropriate to return to the affidavit evidence about Mrs De Pasquale’s health and capacity. The appellants relied on this evidence in support of their case that it was unconscionable to enforce the guarantee against Mrs De Pasquale under the Garcia doctrine. The appellants contended that, unlike other cases within this area, such as Commercial Bank of Australia Ltd v Amadio and Blomley v Ryan,[62] the appellants need not show that the wife has some kind of added vulnerability (or, as the courts have termed it, “special disability”) towards her husband. Garcia and Yerkey v Jones are, they say, clear that it is the nature of the relationship between husband and wife which creates the vulnerability, not some additional factor such as physical, mental or linguistic disability or emotional reliance.
[62] Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; Blomley v Ryan (1956) 99 CLR 362.
In light of these arguments, it may be doubted whether the affidavits of Mrs De Pasquale are critical to this unconscionability claim. That is not to say that the evidence serves no purpose. The evidence explains the extent to which Mrs De Pasquale is dependent upon her husband, particularly in light of her deafness and reliance on him for assistance with basic daily living tasks. When the fact of the marital relationship is combined with the photograph of Mrs De Pasquale in a wheelchair which accompanied the loan documentation, it seems to me, at the least arguable that the lender was on notice of the need for Mrs De Pasquale to receive competent and independent legal advice.
Accordingly, there is a further question whether, under Garcia and Yerkey v Jones, it is arguable that Mrs De Pasquale did not receive advice from a “competent, independent and disinterested stranger”.[63] I will return to that after addressing whether Mrs De Pasquale was a volunteer.
The “Volunteer” Argument
[63] Garcia v National Australia Bank Limited (1998) 194 CLR 395, [31].
As a corollary to the Garcia argument, the appellants contended that there was a triable issue as to whether Mrs De Pasquale was a volunteer in relation to the transaction. The appellants submitted that as Mrs De Pasquale was not a borrower, she derived no benefit from the ASCF Loan – the funds were borrowed for the purpose of refinancing sums borrowed by the Leffler Entities, which had not been repaid. Of particular note is the appellants’ claim that, of all the amounts borrowed, only $22,000 was retained by the appellants, and this money was retained by Mr De Pasquale, rather than Mrs De Pasquale.
The respondent contended that, in accordance with Elkofairi, even if Mrs De Pasquale was a volunteer, the appellants were not entitled to seek relief under the principles described in Garcia unless they established that the respondent had notice that Mrs De Pasquale was a volunteer.[64] The respondent submitted that, on the facts of this case, the respondent had neither notice nor knowledge that Mrs De Pasquale was a volunteer.
[64] Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20,841, [49] (Beazley JA with whom Santow JA and Campbell AJA agreed).
In support of this submission, the respondent relied on the fact that Mrs De Pasquale was a director of the De Pasquale Entities, the borrowers, and that this fact appears on all of the documentation. ASCF contended that, in circumstances where Mrs De Pasquale was not only a guarantor, but had actively signed all of the relevant documentation which enabled the borrower to take the money, the respondent could not possibly have had notice that she was a volunteer.
I am mindful that in Elkofairi Beazley JA held that the lender need not have notice that the wife is a volunteer in order for its conduct to be unconscionable:[65]
Notice of the fact of being a volunteer is not, therefore, required in the case of a guarantee. If the creditor wishes to displace that premise, it bears the onus of doing so.
[65] Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20, 841, [56] (Beazley JA, with whom Santow JA and Campbell AJA agreed).
I am prepared to find that the appellants have established a triable issue on the question whether Mrs De Pasquale was, or at least needed to be, a volunteer.
In my view, the appellants have also raised triable questions about the benefit Mrs De Pasquale and the De Pasquale Entities derived from the ASCF Loan given that the purpose of the Loan was to refinance debts incurred for the benefit of the Leffler Entities, and for which the assets of the De Pasquales were offered as security: the “Cheque Directions” document clearly shows that the entirety of the ASCF Loan funds were to be deposited into the account of Good Life,[66] an entity associated with the Lefflers.
Absence of Independent Legal Advice
[66] Excluding amounts used to pay fees and brokerage.
The appellants contend that Mrs De Pasquale did not receive legal advice independently of her husband. The same legal practitioner provided advice to both Mrs De Pasquale and her husband. The effect of this, the appellants submit, is that the respondent acted unconscionably in purporting to enforce the guarantee in light of the principles described in Garcia and Yerkey v Jones.
On the case of the respondent, Mrs De Pasquale received legal advice in relation to the transaction. The respondent points to the provision of the Australian Legal Practitioner’s Certificates as supporting this contention.
The respondent did not dispute that Mrs De Pasquale did not receive legal advice independently of her husband. However, the respondent argued that there was no requirement under Garcia or Yerkey v Jones that a legal practitioner advising a wife must not advise anyone else, as one may assume that a legal practitioner will properly perform his or her duties. The respondent did not provide any authority for this submission.
The Australian Legal Practitioner’s Certificates put before this Court in relation to the guarantee clearly show that the same legal practitioner provided advice to Mr De Pasquale and to Mrs De Pasquale.
As I have said, it is not appropriate for me to make concluded findings. I am, however, prepared to find that the appellants have raised a triable issue in relation to this contention, as well as the Garcia doctrine generally, which goes to the enforceability, at least, of the security against Mrs De Pasquale.
Orders
For these reasons I am satisfied that the appellants have established that there are real questions to be tried and that this matter should be transferred to the ordinary civil list of the General Division of this Court. Accordingly, I make the following orders:
1.The appeal is allowed.
2.The orders made by Judge Bochner on 19 December 2019 are set aside.
3.The proceedings comprising action number SCCIV-19-921 will be transferred to the ordinary civil list and will continue on pleadings.
4.I will hear from the parties on the question of costs.
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