Doggett v Commonwealth Bank of Australia

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2014 0128

STEPHEN DOGGETT	First Appellant
and
KEVIN SULLIVAN	Second Appellant
v
COMMONWEALTH BANK OF AUSTRALIA	Respondent

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JUDGES:	WHELAN and McLEISH JJA and GARDE AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	30 July 2015
DATE OF JUDGMENT:	17 December 2015
MEDIUM NEUTRAL CITATION:	[2015] VSCA 351
JUDGMENT APPEALED FROM:	[2014] VSC 423 (Hargrave J)

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BANKING – Appeal – Incorporation of contractual terms – Whether Code of Banking Practice incorporated into guarantees – Whether Bank owed contractual obligation to exercise care and skill of a diligent and prudent banker in assessing loan application and forming opinion about ability of borrower to repay – Construction of incorporated terms – Inability of borrower to repay loan from business income – Whether contractual obligation extended to assessment of ability of borrower to repay taking into account other potential financial support – Whether breach – Whether breach caused loss and damage – Appeal dismissed.

CONTRACT – Compromise – Settlement of claims – Construction – Whether compromise encompassed then unformulated claim of breach of Code of Banking Practice – Whether compromise vitiated by economic duress – Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112 – Appeal dismissed.

PRACTICE AND PROCEDURE – Application for leave to amend notice of appeal – Application of principles in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 – Whether performance by Bank of term of guarantees a condition precedent to performance by guarantors – Whether breach by Bank of term altered guarantors’ rights in a substantial or prejudicial manner – Whether matters could have been subject of evidence at trial – Application refused.

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APPEARANCES:	Counsel	Solicitors
For the Appellants	Mr M Gronow with Mr C Micallef	No appearance
For the Respondent	Mr N D Hopkins QC with Mr C R Brown	Minter Ellison

WHELAN JA:

I have read in draft the judgment of McLeish JA. I agree with his recitation of the relevant facts and I agree with and adopt his analysis of the application of the Code[1] in this case. I agree with his conclusions that cl 25.1 of the Code was a term of the guarantees, that in both the guarantees and the Dogvan bill facility cl 25.1 required the Bank to exercise the care and skill of a diligent and prudent banker in assessing and forming an opinion about Dogvan’s ability to repay from the resources available to it, that the Bank breached cl 25.1, and that the appellants should not be permitted to raise on appeal arguments not raised below.
[1]The defined terms in the judgment of McLeish JA are also used in this judgment.

I do not agree with his conclusion that the trial judge erred in holding that the appellants had proved that the breach of cl 25.1 caused them loss and damage. In my view, the trial judge was correct in his conclusions both as to causation and as to the loss and damage suffered as a consequence.

For the reasons set out below, McLeish JA and I agree that, in any event, the trial judge was correct in concluding that the compromise letter released the appellants’ claims against the Bank for the breach of cl 25.1 and that the appellants’ agreement to the compromise was not vitiated by duress.

Accordingly, I agree with McLeish JA that the appeal should be dismissed.

Causation — breach of cl 25.1 of the Code

As both the trial judge and McLeish JA demonstrate, Mr Digiglio, the risk executive employed by the Bank who was responsible for the assessment and approval of the appellants’ application on behalf of Dogvan, made a mistake in that assessment. He knew that the appellants would not be working in the business as on-site resident managers and that they would therefore need to employ managers who would live in an apartment rent free and be paid wages.[2] Mr Digiglio gave evidence that his reading of the Valmadre report was that managers’ wages had been taken into account by the authors in their calculations.[3] The trial judge was unable to accept Mr Digiglio’s evidence on this issue.[4] The trial judge held that the seven principal reasons put forward by the appellants (as formulated by the trial judge) for a conclusion that the Bank had breached cl 25.1 had been established. Those reasons were:
[2]Reasons [2014] VSC 423 [52].
[3]Ibid [145].
[4]Ibid [146]–[148].

(1)the Bank knew that Mr Doggett and Mr Sullivan would not be working in Dogvan’s business as on-site resident managers, but would be retaining their jobs in Melbourne;
(2)the Bank knew or ought to have known that Dogvan would employ on-site managers who would live in the managers’ apartment rent-free and would be paid wages;
(3)the Bank knew or ought to have known that the vendors of the management rights business had not been paying managers’ wages;
(4)the Bank knew or ought to have known that the purchase contracts under which Dogvan proposed to buy the management rights business and managers’ apartment were subject to finance;
(5)the Bank knew or ought to have known that the purchase contract for the management rights business was also subject to and conditional upon an accountant nominated by Dogvan verifying that the net operating profit of the business for the twelve month period ended 31 March 2008 was not less than $221,000;
(6)the Bank mistakenly assumed that the accountant’s verification of a slightly lower figure for the full year ($217,751) included allowance for wages to the on-site managers to be employed by Dogvan (without considering the amount of such wages), when the Valmadre report made no such allowance;
(7)if the Bank had identified that the verified minimum net profit omitted any allowance for wages to on-site managers, as a prudent banker exercising diligence, skill and care, it ought to have formed the opinion that Dogvan would not be able to meet its payment obligations to the Bank.[5]

[5]Ibid [135].

The trial judge found that but for the failure to exercise the skill and care required by cl 25.1 the Bank would probably have formed the opinion that Dogvan did not have the ability to repay the loan.[6] The trial judge concluded:[7]

In this case, if the Bank had not breached clause 25.1 of the Code, Dogvan’s loan application would likely have been refused because it did not (by a significant margin in the relevant context) have the ability to repay the loan from its own resources, being the anticipated net cash flow from the management rights business. The defendants should therefore be placed in the same position as if the Bank had satisfied its contractual obligation and, as a result, refused Dogvan’s loan application. Accordingly, the first element of the defendants’ damages claim, being the amount of their indebtedness to the Bank as guarantors of Dogvan’s liabilities, has been established. Subject to the effect of the compromise agreement referred to below, these damages should be set-off against the Bank’s claim under the guarantee and extinguish that claim.

[6]Ibid [156].

[7]Ibid [167].

McLeish JA concludes that the trial judge erred in holding that the appellants had proved that the breach of cl 25.1 caused them loss and damage.

McLeish JA correctly observes that cl 25.1 does not presuppose or require that a bank must form an opinion that a borrower will be able to repay the loan. As he points out, what cl 25.1 requires is care in the formation of an opinion as to whether a borrower will be able to repay the loan. Accordingly, it does not necessarily follow that, if the Bank had complied with cl 25.1, it would not have offered Dogvan the bill facility.

McLeish JA points out that Mr Digiglio’s evidence could not in itself warrant a conclusion that finance would not have been offered by the Bank to Dogvan. Mr Digiglio’s evidence went no higher than stating that if the particular mistake that Mr Digiglio made concerning the management costs had not been made then he would have had to ‘rework’ the whole application. Mr Digiglio’s evidence did not go so far as to say that he would have refused the loan had this mistake not been made.

McLeish JA also points out that, as the Bank could legitimately take into account other sources of funding apart from the cash flow from the management agreement, and as there were other potential sources of funding, it is more difficult to draw the inference that the Bank would have refused to lend money for the acquisition. A further relevant factor in this connection which is referred to by McLeish JA is the level of security offered by the appellants.

McLeish JA concludes that, in these circumstances, the appellants had failed to satisfy the onus which was upon them to establish that if cl 25.1 had not been breached the Dogvan bill facility would not have been advanced.

McLeish JA’s observations upon the effect of cl 25.1, and upon other potential sources of funding and the level of security are valid considerations but, in my view, they should be tempered by the consideration that whatever recourse there might be to other sources of funds (by compulsion under guarantees or subject to the agreement of others) or to security, the capacity of a borrower to service a loan must remain a fundamental consideration. A conclusion that a loan would not have been made to a borrower who had a demonstrated incapacity to meet the required repayments by a significant margin is not one which would be ordinarily in doubt, notwithstanding potential recourse to guarantors, other parties or security.

Before turning to Mr Digiglio’s evidence, there are two additional factual matters which seem to me to be important on this issue.

First, the Bank not only made a mistake in its assessment concerning the management costs but it was also ignorant of a number of other relevant matters.

The Bank was under a misconception that the $150,000 in deposits payable under the contract for the acquisition of the management rights and the contract for the acquisition of unit 1 had been paid, and that accordingly an equivalent sum would be available to Dogvan as working capital.[8] The trial judge considered this to be an important assumption which was caused, or at least materially contributed to, by the failure of the appellants to inform the Bank of the true position.[9]
[8]Ibid [36], [41], [43], [44], [45] and [66].
[9]Ibid [144].

The Bank was also ignorant of other liabilities which the appellants had, notwithstanding the completion by the appellants of statements of assets and liabilities. The Bank was ignorant of a $300,000 obligation to the Bank of Queensland secured over the appellants’ Dromana property.[10] The Bank was ignorant of a $55,000 personal loan which Mr Doggett had from the Bank of Queensland.[11] The Bank was ignorant of a liability the appellants had to complete the purchase of an apartment for $2.5 million in the complex ‘Nirvana by the Sea’.[12]
[10]Ibid [26].
[11]Ibid [27].
[12]Ibid [24] and [25].

The trial judge concluded that there was no acceptable explanation as to why the appellants had not told the Bank about the Nirvana by the Sea contract, the $300,000 mortgage, or the $55,000 personal loan.[13]
[13]Ibid [28].

Secondly, evidence was given as to the Bank’s initial response to the application. That evidence bore upon the significance of the cash flow from the management rights in the assessment process.

The Bank’s relationship manager was Mr Andrew Duncan. His assistant was Ms Elizabeth Geldart. Ms Geldart was the bank officer who prepared the application for Mr Digiglio’s consideration.

The Valmadre report had verified annual profit of $217,751 in circumstances where the contract required verification at the level of $221,000. According to the evidence accepted by the trial judge, Ms Geldart advised Mr Sullivan that the loan application would be refused because of that shortfall. After discussions with Mr Sullivan, Ms Geldart reconsidered the position and prepared an application report referring to the shortfall but nevertheless recommending approval.[14]
[14]Ibid [85]–[86].

The trial judge found that if the Bank had not breached cl 25.1 ‘Dogvan’s loan application’ would likely have been refused because Dogvan did not have the ability to repay the loan from its own resources ‘by a significant margin’. The margin was significant once the management costs error was corrected. It seems, however, that the much lower margin revealed by the misunderstood Valmadre report almost resulted in a negative recommendation from the Bank officer preparing the application for assessment.

It is true that Mr Digiglio’s evidence did not go so far as to say that the Bank would not have financed the acquisition had the management costs error not been made. His evidence went no further than saying the application would have had to be ‘reworked’. It seems to me, however, that, in the light of Ms Geldart’s initial reaction to the identified Valmadre shortfall and the considerably greater shortfall which would have been revealed had the Valmadre report been read correctly, the probability is that the application as submitted would not have been approved.

Further, it seems to me that in considering any hypothetical ‘reworked’ application the possibility that the matters previously undisclosed to the Bank would have been disclosed or discovered must be addressed. In particular, if a ‘reworking’ of the proposal had been undertaken the fact that the deposits had been, or were to be, paid from the loan funds, and that the $150,000 in working capital would not be there, ought to have been revealed.

It may well be that some different ‘reworked’ application would have been made and considered. Given the probability that the application as submitted (‘un-reworked’) would have been refused, unless it can then be concluded that a ‘reworked’ application, imposing relevantly the same obligations on the appellants, would have been approved, then it seems to me that the trial judge’s conclusion is correct. There was no basis upon which a positive finding could have been made that a ‘reworked’ application would have been approved and, in my opinion, the proposition that the loan would still have been made to Dogvan, if it were known to be a borrower without working capital and with a demonstrated incapacity to repay by a significant margin, is improbable.

The conclusion that the Bank’s mistake caused the appellants’ loss may seem odd given that the appellants themselves knew of the true position, not only in relation to the management costs, but in relation to the deposits and the other liabilities as well. It may seem odd that the Bank should be held to have caused a loss to the appellants by approving their application by reason of a mistake as to a matter upon which the appellants themselves knew the truth. But that is a consequence of the agreed incorporation of the Code into the contractual arrangements and of the legal requirement in the event of breach of cl 25.1 that the appellants be put in the position they would have been in had cl 25.1 not been breached.

In summary, my reasons for concluding that the trial judge was correct in relation to causation are these:

1.But for the management costs error, the application which was in fact made would, as a matter of probability, have been rejected. The loan was marginal even on the mistaken analysis and an indication had been given that it would be refused because of the minor shortfall in profit revealed in the misunderstood Valmadre report. Had the mistake concerning management costs not been made, the shortfall would have been much greater. In my view the probability is that that application would have been refused.
2.On the evidence it is not possible to conclude that some different or ‘reworked’ application relevantly imposing the same obligations on the appellants would have been approved. If the misconception in relation to the $150,000 in deposits had been revealed, as it ought to have been, it seems most unlikely any relevantly similar advance would have been made.

Otherwise, on issues of causation and loss and damage I agree with the conclusions of the trial judge for the reasons which he gave.

The compromise letter

In view of my conclusion that the trial judge was correct in his conclusions as to causation and as to loss and damage in relation to the breach of cl 25.1, it is necessary to address the issues raised concerning the compromise letter signed by the appellants dated 6 April 2010.

Two issues are raised on the appeal in relation to the compromise letter. The first is the scope of the letter and whether it does indeed compromise the claim which otherwise succeeded based upon breach of cl 25.1 of the Code. The second is the issue of whether the letter was procured by duress. Before turning to the trial judge’s conclusions on these issues and the submissions made on appeal, it is necessary to review the relevant facts.

The compromise letter — relevant facts

The first matter to be noted arises from the judge’s conclusions on claims made by the appellants which the judge rejected. Both of the appellants believed that the Bank had represented to them that they could ‘support’ the loan which was advanced and that future cash flow was sufficient to service that proposed loan. The trial judge rejected the proposition that the Bank had made these representations but he accepted that the appellants believed that that was the meaning of what the Bank had said and done.[15]
[15]Ibid [75]–[89].

The Dogvan bill facility was advanced pursuant to a letter of offer dated 31 July 2008. The facility was drawn down in full on 15 August 2008. The appellants’ complaints about the Bank’s conduct began prior to the first bill rollover. On 15 September 2008 the relevant bank manager rang to remind the appellants that funds would need to be in the account for the first rollover. Mr Sullivan went in to complain ‘that the loan was too much’ the following day.

On 21 September 2008 the appellants wrote to the Bank. The letter complained of ‘complete mismanagement and incompetence’ by the Bank over the previous four years. A list of complaints was enclosed in the letter. Relevantly in relation to the Dogvan facility the complaints were these:

– Several settlement dated [sic] did not eventuate on the original dates promised, subsequently causing us to pay a $14,000 penalty to the vendor.
– Bank Contracts of Offer were only received by us at the last minute. [Ms Geldart] (Andrew’s assistant) was not confident when [Mr Duncan] was away that we could even get finance.
–    We feel we were not properly funded by CBA with an offer that was more sensible and realistic due to our knowledge of equity in the building.
–    Tim and Andrew came to our house and explained finance but did not properly, nor fully, explain the bill rate.
–    Andrew also explained that his ‘Risk Assessment Team’ told him that we were high risk. We were surprised considering everything we had done to date, had been positive and profitable.
We seriously urge Commonwealth Bank to alter/change our borrowing structure so that the loan is more affordable and logical in the market place, considering that another major bank (National Australia Bank) are able to accommodate for our specialised purchase of Management Rights.
If Commonwealth Bank were unable to complete this task competently, then this was their job to inform us, the client, of their position, and allow us the freedom to seek professional guidance by an experienced person in this field in Queensland.

In their evidence both Mr Doggett and Mr Sullivan said that from the outset they were complaining to the Bank that the loan was ‘unaffordable’. Mr Sullivan described it as ‘hugely unviable’.

The Bank rejected the complaints made but attempted to explore the possibility of varying the arrangements. In response the appellants put forward the following proposal in a letter of 24 September 2008:

To this end, we have put forward for consideration that:
·The 3.5% additional interest rate be waivered.
·The term of the loan be extended from the original 8 years to 20 years.
·Compensation for $14,000.00 fee imposed due to settlement dates not being met by the Bank.
·That the relationship manager role be transferred to the Gold Coast Corporate Banking Office and a person to liaise with here in Melbourne when necessary.
·Separation of apartment loan to reduce interest rate.

Having consideration for the significant losses already incurred by our company due directly to the issues stated previously the reduction on the interest rate would compensate for the monetary losses and also for the unnecessary stress and anxiety which has also taken its toll.

The Bank was not prepared to agree to the proposals put at that stage and, in substance, they were rejected in a letter of 30 September 2008.

The appellants continued to complain and meetings between the appellants and bank officers were held in the latter part of 2008. The substance of the complaints made was that the appellants were unable to service the loans. In the context of these dealings the Bank learnt for the first time of the $300,000 mortgage on the Dromana property.

In late 2008 the appellants sent a hand written letter to the Bank complaining about ‘mistakes of the debt structure’ and also complaining that ‘there was no guidance of explanation for the structure of the debt’. Complaint was also made that ‘the business verification was not correct’. A proposal not dissimilar to the earlier proposal was put. In evidence Mr Doggett explained that the reference to guidance was a reference to ‘the affordability of the loan’.

On 19 February 2010 the appellants sent to the Bank a list of complaints. In evidence Mr Doggett said that the fundamental thrust of the complaints was:

That the loan repayments were not sustainable for the debt.

Relevantly, the written catalogue of complaints included the following:[16]
[16]Emphasis added.

·No (or lack of) support from CBA
…
·We were pressured into a quick settlement when purchasing the business due to the CBA leaving things to the last minute
·No overdraft or capital was offered
…
·We were not fully explained about the 3.5% line fee
…
·We were rushed with the contract
…
·[Ms Geldart] (Andrew Duncan’s assistant) called to advise that the loan was approved over the phone resulting in our Lawyer [removing] the subject to finance clause even though we did not have letter of offer/contract
…
·Andrew Duncan did not consider our repayments when drawing up our contract (how do they come up with the formula for our business repayments?)
…
·Steven asked Andrew approximately 2.5 years at his Ringwood office if he could handle the Queensland deal and his response was yes
…
·We feel that they had very little experience in the field of management rights and should have sent us to Broadbeach CBA
·We feel Box Hill business branch did not offer any resolve for our messy contracts/debts level or the way that it was set up
…
·At the end of the day we feel that the bank did not care about what we were going through

The Bank responded to the complaints made in early 2010 by a letter of 15 March 2010. The letter stated that the complaints made had been previously addressed and would not be addressed again. The observation was made that the business was too highly geared and that assets would need to be sold to reduce the debt, which, according to that letter, the appellants had agreed to do. The letter concluded:

Please understand that unless all units and management rights are sold on or before 31 March 2010, the Bank may proceed with the enforcement of its security.

By an email of 17 March 2010 the appellants advised the Bank that the issue ‘has been escalated to the media … and the Banking Ombudsman’. The email set out the ‘essence’ of what the media and the Ombudsman had been told. This was the following:[17]

*Loosing major finance contracts; *Failing to meet settlement deadlines; *Forgetting to appear at prearranged settlement meetings; *Approvals provided for purchases without contracts; *Verbal approvals for million dollar loans without any paperwork; *Ceased access to finance rendering the company insolvent; *Advised the company employees of insolvency, not the owners; *Bank lost the house titles; *Bank lost the finance files? no history and no record; *Loaning more money after being told we were insolvent ($100k); *Refusing to speak to our business advisors to attempt to resolve; *Included additional fees into contract that were not included in the initial arrangement rendering it impossible for us to repay the loan; *bank did not use formula to assess loan servicing capability; *and many other documented issues.
This action on behalf of the CBA Bank has now resulted in the bank attempting to recover their monies by closing our business.

[17]Emphasis added.

In late March 2010 the Bank internally considered seeking to resolve the dispute with the appellants. An employee within the section of the Bank described as ‘Credit Risk Solutions’, prepared a memorandum which relevantly read as follows:

A complaint has been received from the above customer, which details issues going back for a period of approximately 6 years. The client has aired multiple grievances, most of which are serviced based on which CRS have no basis. There are 2 major issues which seem to be the root cause of this complaint:
1.Clients claim that they received approval for their bill facility over the phone and then removed the subject to finance clause from the sales contract for the management rights. They claim to not have received the letter of offer for some 10 days and when received, claimed to not have known about the 3.5% line fee, which they claim has made the business an unviable proposition;
2.They claim that they wished to be transferred to CFS Gold Coast, as this BU had experience with management rights. They claim they were told by CFS Box Hill that once a TE of $70,000 was repaid, they would be transferred. The TE was repaid, however, they were not transferred and believe that this was caused by CFS Box Hill’s reluctance to let them go.
…

The line fees paid since the inception of the bill facility total $84,320.83. As stated, there is some doubt as to whether the RE has fully explained the line fee issue with the client. Whilst the Bank refutes the client’s allegations, to resolve the current issues, the following is proposed:
·Refund the line fees charged on CBF 136487 which total $84,320.83 and remove the line fee on this facility;
·Extend a temporary overdraft of $50,000 until 30 April 2010 to allow the sale of the units and management rights at the ‘Trickett Gardens’ complex to be completed;
·Should a contract of sale be completed on the above units/business in the indicated timeframe, the CBA will extend the temporary excess expiration to coincide with the settlement of the units/business.

As a result of agreeing to the above, the client will fore go [sic] its right to sue the CBA in relation to the accusations made.

By a letter dated 31 March 2010 the Bank proposed a resolution of the appellants’ complaints. The terms of the letter were the same as those eventually agreed, with the exception of a date. I will not quote the letter at this point for that reason. One of the terms was a temporary overdraft facility until 30 April 2010. That is the date that was altered. It was altered so that the temporary overdraft facility would be extended until 31 May 2010. This alteration was made after telephone conversations between the appellants and a friend of theirs with Mr Michael O’Shea, described as Manager Credit Risk Solutions.

The first conversation occurred on Thursday 1 April 2010. Mr Doggett rang Mr O’Shea. According to an email written by Mr O’Shea at the time, Mr Doggett ‘was quite emotional’. The email continued:

He stated they would not sign the proposal and give away their rights to sue us.

Mr Doggett gave evidence about this conversation. The following interchange in cross-examination occurred:

He records you rang him and you were quite emotional stating that, ‘They would not sign and give away their rights to sue us’? ––– Correct.
That’s what you wanted to keep, wasn’t it, the right to sue? ––– All my rights, generally speaking, yes.
But you wanted to sue, because you wanted to recover these large claims that you’ve articulated to Minter Ellison? ––– Yes.

The large claims which had been ‘articulated’ to Minter Ellison were the claims made in the proceeding. The ‘articulation’ had occurred shortly prior to trial and the total loss and damage claimed had been $10 million.

There was a second conversation on 1 April 2010. This time it was between Mr O’Shea and Mr Sullivan. Mr O’Shea also set out the substance of this conversation in the email which he wrote on the day. The account in the email indicates that Mr Sullivan referred to Mr Doggett’s attitude, but that he was more conciliatory himself and made suggestions about additional security. Mr O’Shea suggested they should consider the proposal over Easter. Mr Sullivan in his evidence said that that was a correct account of the conversation.

The compromise letter itself was dated 6 April 2010. It reads as follows:

We refer to the telephone discussions between Kevin Sullivan, Sam Barbagallo [the Executive Manager of the Credit Risk Solutions Department of the CBA] and Michael O’Shea on 29 March 2010.
Whilst it is acknowledged that the Bank may not have met your service expectations from time to time it refutes any accusation that it provided you with misleading advice or inappropriate facilities that resulted in your ‘Trickett Gardens’ investment becoming unviable. Accordingly, the Bank will defend any legal proceedings that you may decide to initiate.
As discussed, in an endeavour to resolve your grievances and as a gesture of goodwill, subject to the terms and conditions outlined below, the Bank will agree to:
·     Refund $84,320.83 being the line fees charged in respect of Bill Facility No 136487, since the facility was funded in August 2008;
·     Reduce the existing line fee of 3.5% pa to zero% pa, effective immediately;
·     Extend a temporary overdraft of $50,000 until 31 May 2010 to allow the sale of the units and management rights at the ‘Trickett Gardens’ complex to be completed;
·     Extend the term of the temporary overdraft facility, subject to a sale of the ‘Trickett Gardens’ being negotiated on terms and conditions acceptable to the Bank by 31 May 2010. The extended term will coincide with the settlement date of the contract.
Terms and Conditions
·     The temporary overdraft facility will need to be operated within the terms afforded. In particular, interest costs for Bill Facility No 136487 will need to be met. Should funds not be available to meet this commitment, the face value of the facility will be debited to a Bills Matured Accounts titled ‘Dogvan007 Pty Ltd Bills Matured Account’ and will be subject to the Bank’s variable default interest rate, which is currently 14.99% per annum.
·     Should you be unsuccessful in negotiating a sale of the ‘Trickett Garden’ complex, the Bank will provide you with additional time to sell provided that the temporary overdraft facility is repaid in full and there is no other monetary default;
·     The CBA admits no liability and this agreement should not be construed as accepting the validity of any of your accusations against the Bank;
·     The Company and Messrs Doggett and Sullivan agree to take no further action in relation to the claims/accusations that have been alleged;
·     Acceptance of this ‘goodwill payment’ is in full and final satisfaction of any alleged claims.
If you agree to the above mentioned terms and conditions, can you please sign in the indicated area and return a copy to this office.
Should you have any further queries, please have no hesitation in contacting the writer.
Yours sincerely,
[Signed]
Michael O’Shea
Manager, Credit Risk Solutions
Acceptance  Witnessed by
[Signed]  [Signed]  [Signed]
Kevin Sullivan  David Taylor  Steven Doggett
6/4/10  6/4/2010  6/4/10

The letter of 6 April 2010 was written after Mr O’Shea received a phone call from a Ms Rose Taylor who was a friend of the appellants. Ms Taylor told Mr O’Shea that the appellants agreed to the proposal but wanted the temporary overdraft extended to 31 May 2010. That was agreed. The appellants then signed the 6 April letter with the altered date.

Sometime after signing the letter the appellants lodged a dispute with the Financial Ombudsman Service. The Financial Ombudsman Service advised that the Ombudsman would not consider a dispute which had been previously settled or compromised. The Ombudsman took the view that that had occurred when the appellants had accepted the offer of 6 April 2010.

Scope of the compromise letter — trial judge’s analysis

In relation to the scope of the compromise letter, the trial judge referred to the leading authority in the area, which is Grant v John Grant & Sons Pty Ltd (‘Grant v John Grant’).[18] He reviewed the relevant facts and in particular the written complaints of 21 September 2008, 19 February 2010 and 16 March 2010. The trial judge also referred to the evidence given by Mr Doggett and Mr Sullivan to the effect that amongst their complaints was a complaint that the arrangements made were ‘unaffordable’ and ‘unviable’. The trial judge concluded:

Taking the evidence of the defendants’ complaints and allegations as a whole, and notwithstanding the confusion and inconsistency within them, I find that the complaints included the general allegation that the Bank had acted negligently in forming its opinion that Dogvan had the ability to repay the Dogvan bill facility. The written complaints that the bill facility was rendered unaffordable by the 3.5 per cent line fee, that the Bank ‘did not use a formula to assess our loan servicing capability’, and the claim that ‘Andrew Duncan did not consider our repayments when drawing up our contract’, were in substance allegations that the Bank acted negligently when forming its opinion that Dogvan could afford to repay the bill facility on the terms it was provided. The defendants’ oral evidence supports this conclusion. In my opinion, reasonable persons in the position of the parties would have understood the defendants’ ‘claims/accusations’ in that way. On this basis, I conclude that the defendants’ agreement in the compromise letter, that they would ‘take no further action in relation to the claims/accusations that have been alleged’, constituted a release by them of the claim which they have established for breach of clause 25.1 of the Code as a term of their guarantee.[19]

[18](1954) 91 CLR 112.

[19]Reasons [243].

The compromise letter— legal principles

Any analysis of the legal principles in this area must begin with the judgment of Dixon CJ, Fullagar, Kitto and Taylor JJ in Grant v John Grant.

Grant v John Grant concerned a settlement deed between two groups of parties who were members, and persons and entities associated with members, of the one extended family. The settlement was between members or associates of the ‘H C Grant family’ on the one hand and members or associates of the ‘W A Grant family’ on the other. The deed itself recited the existence of disputes between the two branches of the family. The deed made specific provision in relation to various specified debts. The deed concluded with a release in general terms said to be from and to each of the parties to the deed.

It emerged that one of the parties, a company, claimed to be owed monies for work done, money paid, money had and received and money found due on accounts stated from another party. This alleged debt was not referred to in the deed and the plaintiff company itself had been ignorant of its existence at the time of the deed. It was not a matter which had ever been the subject of any dispute between the respective family groups.

The defendant pleaded the deed in answer to the claim. The plaintiff in reply claimed that the deed was no answer to the plaintiff’s claim, relying upon three replications. The first replication denied that the claim had been released on the basis that that was not the effect of the deed because there had never been any dispute between the family groups concerning the debt claimed in the proceeding. The second replication alleged that there never at any material time was any dispute between the plaintiff and the defendant concerning the debt claimed. The third replication was pleaded on equitable grounds. It was contended that the plaintiff had not known of the claim when the deed was executed and did not intend by its execution of the deed to release the defendant. It was also contended that the defendant had known that the money was owed and did not inform the plaintiff of that fact prior to execution of the deed. It was further contended that the plaintiff was not aware the defendant intended that the release should operate in relation to the claim.

The matter came before the Court on a demurrer. The Full Court of the Supreme Court of New South Wales held there should be judgment for the defendant on the first replication and judgment for the plaintiff on the second and third replications.

The majority judgment in the High Court first dealt with the plaintiff’s plea on equitable grounds (the third replication). The majority said that it was no doubt possible for a release to be framed in general terms directed to settling all ‘conceivable’ disputes whether previously disclosed or not. But it said that this was not such an agreement.[20] The majority said that the transaction here ‘appears to be based on a particular consideration of the situation in which the parties stood to one another’.[21]
[20]Grant v John Grant (1954) 91 CLR 112, 129.
[21]Ibid.

As to the equitable principles which apply, the majority said:[22]

[A] releasee must not use the general words of a release as a means of escaping the fulfillment of obligations falling outside the true purpose of the transaction as ascertained from the nature of the instrument and the surrounding circumstances including the state of knowledge of the respective parties concerning the existence, character and extent of the liability in question and the actual intention of the releasor.

[22]Ibid 129–30.

The majority held that if the facts pleaded in the third replication were true then there had been no intention to release this claim. In that respect they observed that the allegation that the defendant knew of the obligation and did not inform the plaintiff of it was relevant but not essential to the application of the relevant equitable principle. Thus, the Full Court had been correct in finding for the plaintiff on the third replication.

As to the first and second replications the majority observed that the issue on both was a question of construction of the deed and in this respect they said:[23]

The question depends primarily on the application of the prima facie canon of construction qualifying the general words of a release by reference to particular matters which recitals show to be the occasion of the instrument. But it is also affected by the general tenor of the deed.

As to the first replication the majority held that the release should be confined to the matters forming the subject of the disputes which the deed recited.[24] As to the second replication the majority held that the detailed character of the deed and the careful adjustments of rights, with specific reference to particular debts and obligations, ‘do not favour the view that a general release was intended going outside the actual area of dispute’.[25]

[23]Ibid 131.

[24]Ibid 131.

[25]Ibid 131–2.

The majority concluded that the demurrer to the first replication should have been overruled, whereas the Full Court had upheld it. The majority held that the demurrer to the second replication, which the Full Court had overruled, should be allowed. This was because the second replication sought to control the general words of the release by reference to disputes which existed between the actual parties, that is between the plaintiff and the defendant, rather than by reference to the express recitals in the deed which were said to control the general words by express references to disputes between the family groups.[26]
[26]Ibid 123 and 132.

Grant v John Grant has been cited and relied upon in innumerable cases since it was decided. The principles articulated have not been altered by subsequent authority.[27] The principles apply whether the settlement is a formal settlement embodied in a deed, as was the case in Grant v John Grant itself, or whether it is a settlement arising through correspondence between the parties.[28] Where the settlement does arise as the culmination of correspondence between the parties it is necessary to review the entire course of that correspondence ‘to identify the commercial purpose and subject matter, that is the disputes and claims, to which the points of agreement … were intended to relate.’[29]
[27]Qantas Airways Ltd v Gubbins (1992) 28 NSWLR 26, 44 and The Owners Corporation of Strata Plan 61390 v Multiplex Corporate Agency Pty Ltd (No 2) [2012] NSWSC 322 [22].
[28]See, eg, Marinchek v Cabport Pty Ltd [2010] NSWCA 334.
[29]Ibid [36].

As Pembroke J observed in The Owners Corporation of Strata Plan 61390 v Multiplex Corporate Agency Pty Ltd (No 2), the principle for which Grant v John Grant stands is sometimes described more widely than is justified.[30] It is not authority for the proposition that a release can only ever apply to matters then known to the parties. It is possible to enter into an arrangement which does settle ‘all conceivable further disputes’.[31] The equitable principles articulated in Grant v John Grant restrain a party from unconscientious reliance on legal rights. Particular circumstances may reveal that it would be unconscientious to allow the general words of a release to be relied upon. Grant v John Grant was such a case. But there will be no room for the application of those equitable principles if it is clear that the parties intended the general words of a release to encompass all conceivable further disputes.
[30][2012] NSWSC 322 [22].
[31]Ibid [30].

Evidence of non-awareness of the existence or likelihood of a particular claim may or may not be significant in the particular circumstances. In the context of banker and customer the mere fact that the customer may be ignorant of particular factual matters relevant to the complaints they make at the time of the settlement is not determinative of the issue. In Westpac Banking Corporation v Billgate Pty Ltd Stevenson J observed, referring to the particular facts of that case:[32]

It may be that Mr and Mrs Jamieson [the customers] were not aware, when they executed the Deed, of particular factual matters relevant to the complaints they make about the Bank’s conduct which have been revealed to them (for example, through disclosure by the Bank) in these proceedings.
But they knew the fundamentals of their complaint, and ignorance of such particular matters cannot, itself, be a basis upon which to read down the general words of the release in the Deed. It is quite obvious to me from the words of the Deed, and the circumstances known to Mr and Mrs Jamieson when they executed the Deed, that, however reluctantly, Mr and Mrs Jamieson, by execution of the Deed, intended to release the Bank from all claims of the kind that they now seek to agitate in these proceedings.
The facts in this case do not remotely resemble those in Grant v John Grant, where the plaintiff company had no knowledge at all of the liability of the defendant that the plaintiff sought to enforce, but which the defendant contended was caught by the general words of a release entered into in an entirely different context.
[32][2013] NSWSC 1304 [626]–[628].

The compromise letter — submissions made

On behalf of the appellants it was submitted that the agreement made 6 April 2010 could not extend to the claim made based upon breach of cl 25.1 of the Code. The appellants were unaware at the relevant time that they had such a claim. The letter by its own terms only compromised claims already made as at 6 April 2010 and no claim under cl 25.1 had been made.

On behalf of the respondent it was submitted that the release extended to all of the ‘matters’ and ‘things’ which were then in controversy. It was not to be confined by reference to a particular legal characterisations of the claims which might be made. It was clear from the evidence given as to the appellants’ response to the first offer by the letter of 31 March 2010 that they knew they were giving up their rights to sue.

The compromise letter — analysis

In my opinion the judge’s conclusion was correct.

Clause 25 required the Bank to exercise the care and skill of a diligent and prudent banker in selecting and applying its credit assessment methods and in forming an opinion about Dogvan’s ability to repay. The Bank failed to exercise that required care and skill because of the error made in relation to the management costs. The error made meant that the Bank failed to identify the fact that Dogvan’s cash flow would be unable to service the loan by a significant margin.

From the outset the appellants complained to the Bank that the loan was ‘unaffordable’ and that the Bank was responsible for putting them in that position. It seems to me that that complaint has to be interpreted as, at the least, necessarily encompassing a complaint to the effect that Dogvan was unable to service the loan from its cash flow and that the Bank had failed to identify and avoid this outcome. The assertion that the Bank was responsible for the ‘unaffordability’ was pervasive from the loan’s inception until the 6 April letter. This claim was made in the context of a belief the appellants held that the Bank had represented to them that the cash flow was sufficient to service the loan. In addition to this pervasive general complaint of unaffordability, the appellants made specific complaints as to a failure to consider the repayments, questioning the ‘formula’ which the Bank had used (written complaint of 19 February 2010), and a failure to use a formula to assess ‘loan servicing capability’ (email of 17 March 2010). These seem to me to be specific claims of a failure by the Bank to undertake a proper cash flow analysis.

Thus, when the compromise letter speaks of ‘any accusation that [the Bank] provided [the appellants] with misleading advice or inappropriate facilities’, of ‘claims/accusations that have been alleged’, and of ‘any alleged claims’, it seems to me that those expressions embraced a complaint about the Bank’s failure to properly assess Dogvan’s capacity to repay. In essence, this is the claim made for breach of cl 25.1. That claim does not fall outside the true ambit of the compromise letter and is not outside the actual area of dispute between the parties at the time the letter was signed. In my opinion it is a dispute to which the compromise letter relates.

In my view, Mr Doggett’s reaction to the 31 March proposal fortifies this conclusion. He appreciated the width of the release and its consequences and was angry about it. Mr Sullivan was aware of this also.

It might be thought that the Bank’s internal memo in late March 2010 identifying the ‘2 major issues’ which are said to be the ‘root cause’ of the complaint is inconsistent with this conclusion. I do not consider that to be so. The relevant passage appears after a sentence which refers to the ‘multiple grievances’ which the appellants had ‘aired’. In any event, one bank officer’s internally expressed opinion as to the ‘root’ causes of the complaints cannot narrow the ambit of the complaints which had in fact been made and to which the compromise letter referred.

Duress — legal principles

The principles which apply when the common law doctrine of economic duress is relied upon were summarised by McLure P in Electricity Generation Corporation t/a Verve Energy v Woodside Energy Ltd.[33] McLure P said:[34]

There are two material facts of the cause of action in economic duress being (1) that illegitimate pressure was applied which (2) induced the victim to enter into the contract (or make a non-contractual payment); the illegitimate pressure does not have to be the sole reason for the victim entering into the contract, it is sufficient if it is one of the reasons: Crescendo Management Pty Ltd v Westpac Banking Corporation(1988) 19 NSWLR 40, 46 (McHugh JA).
If the pressure involves an actual or threatened unlawful act, it is prima facie illegitimate. If the pressure is lawful, it may be illegitimate if there is no reasonable or justifiable connection between the pressure being applied and the demand which that pressure supports: Universe Tankships Inc of Monrovia v International Transport Workers Federation[1983] 1 AC 366, 401 (Lord Scarman); R v Her Majesty's Attorney-General for England and Wales (New Zealand)[2003] UKPC 22 [15]–[20].
An actual or threatened breach of contract is unlawful conduct for the purposes of the economic duress doctrine: Furphy v Nixon(1925) 37 CLR 161; Smith v William Charlick Ltd[1924] HCA 13; (1924) 34 CLR 38; TA Sundell & Sons Pty Ltd v Emm Yannoulatos (Overseas) Pty Ltd[1956] SR (NSW) 323.
[33][2013] WASCA 36.
[34]Ibid [24]–[26].

Duress — trial judge’s analysis and submissions made on appeal

At trial the matters said to constitute duress, and the trial judge’s treatment of them, were as follows:

1. Statements said to have been made by Mr O’Shea on 1 April 2010 to the effect that if the appellants did not agree to the proposal the Bank would call up the facility and exercise its securities. The trial judge did not accept that Mr O’Shea had made those statements but said that in any event he found ‘nothing illegitimate’ about statements to that effect in the circumstances.[35]
[35]Reasons [224]–[225].

2. The severe financial stress which the appellants were under at the time. The trial judge held that this did not make the Bank’s conduct concerning the compromise agreement illegitimate. The Bank was under no obligation to further extend the overdraft.[36]

3. The responsibility which the appellants felt to the resident managers.[37]

[36]Ibid [226].

[37]Ibid [227].

The trial judge concluded that none of the conduct of the Bank which was relied upon was illegitimate.[38] He accepted the Bank’s submission that the agreement made had given the appellants valuable ‘breathing space’ while they endeavored to undertake a sale of the assets.[39] The trial judge held that the defendants’ claim that the compromise letter had been procured by duress failed.[40]
[38]Ibid [228], [230].
[39]Ibid [231].
[40]Ibid [232].

On the appeal, emphasis was placed by the appellants on the fact that the very difficult financial situation in which they had found themselves at the time the compromise agreement was entered into had been caused by the Bank’s breach of cl 25.1. It was submitted that this had created an ‘impossible situation’ for the appellants. It was submitted that the category of circumstances in which the common law doctrine of economic duress would apply are not closed and that the circumstances here are properly to be characterised as circumstances where the Bank’s conduct, given its breach of cl 25.1, was illegitimate.

On behalf of the respondent it was submitted that conduct directed towards a compromise of complaints or claims could not be rendered illegitimate because it could be shown that the complaints were well founded or that the claims would have succeeded.

Duress — analysis

In my opinion the trial judge’s conclusion was correct.

Certainly, the appellants were under considerable commercial pressure. It is true that they had limited choices. Mr Doggett himself was particularly aware of the limited choices which they had, and of the consequences of the choice they were to make. He revealed that awareness in his reaction to the proposal made on 30 March 2010. He knew that if they agreed to the proposal they would be giving up their rights to sue. This made him angry because that was something he did not want to do. Mr Sullivan knew of Mr Doggett’s anger and the reason for it.

The appellants, in effect, had to decide whether to sue the Bank on the claims they had made with the consequence that the Bank would take steps to execute its securities, or take the ‘breathing space’ which was offered in the hope that asset realisations would resolve their problems. A significant inducement to taking the second course was the refund and waiver of the line fees. This was something the appellants had been seeking since 24 September 2008.

The Bank put forward a proposal. In the circumstances, it seems to me that it was not illegitimate for the Bank to do so. The Bank did not threaten to take any illegal course of action. The Bank did not threaten to do anything if the proposal was not accepted other than to defend any proceedings the appellants might institute (letter dated 6 April 2010) and to possibly proceed with the enforcement of its security (letter dated 15 March 2010). The appellants chose to accept the proposal. They did so to obtain the financial and other benefits the proposal offered them and because they perceived that to be the best course for them in the circumstances. I do not consider that the Bank procured the appellants’ agreement by illegitimate means or that its conduct was unconscionable.

The Bank’s conduct cannot become illegitimate merely because it can subsequently be demonstrated that a claim under cl 25.1 would otherwise have succeeded. The essence of all settlements is the resolution of uncertainty. Meritorious claims and unmeritorious claims are compromised. The merits of a compromised claim might be relevant to a duress argument but it cannot be determinative of the issue.

Conclusion

The appeal should be dismissed.

McLEISH JA:

Commencing in about 2004, the appellants Steven Doggett and Kevin Sullivan started buying investment properties on the Gold Coast in Queensland, concentrating in particular on the purchase of apartments in a complex known as ‘Trickett Gardens’. These purchases were largely funded by money borrowed from the respondent, the Commonwealth Bank of Australia (‘the Bank’). By late 2007, the appellants had purchased seven of the 33 apartments in the complex. Their loans had by that time been consolidated into a single portfolio loan facility.

In November 2007, the resident managers of Trickett Gardens, Dino and Wendy Rechichi, advised the appellants of their plans to sell their management rights contract with the body corporate of the complex, along with the managers’ apartment which they owned. The appellants wished to purchase the business and the apartment, based on their shared passion for the Trickett Gardens complex, their desire to protect their existing investments in it, friendships with other apartment owners and other lifestyle reasons.

In anticipation of a purchase price in the order of $1,500,000, the appellants approached the Bank in November 2007 and sought finance for the proposed purchase. In May 2008, they incorporated Dogvan 007 Pty Ltd (‘Dogvan’) and in

June 2008 they signed binding contracts on behalf of Dogvan, for the purchase of the management rights for $1,150,000 and the managers’ apartment for $350,000. Both contracts were subject to finance, and the management rights contract was subject to verification of the financial records of the business. A total deposit of $150,000 was payable upon signing the contracts, although this was not paid at the time.

Dogvan, through the appellants, made a loan application for 100 per cent of the total purchase price and acquisition costs. The Bank approved the loan by formal letter of offer dated 31 July 2008. The loan was to be provided by a bill facility with a limit of $1,630,000. The appellants both executed guarantees of Dogvan’s obligations in respect of the facility, secured by mortgages over the other units they owned in the complex. It was their intention that the bill facility would be funded by the income of the management rights business, with a view to capital appreciation of the business over time.

The Dogvan bill facility was fully drawn down on 15 August 2008. In the meantime, in June 2008, the appellants acting in their personal capacities had bought two further units in the Trickett Gardens complex. Soon after, the global financial crisis struck, adversely affecting occupancy rates and rentals for apartments in the complex.

It transpired that the management rights business was undercapitalised and could not trade profitably, in part because the appellants, unlike the previous owners, did not operate the business in person and therefore needed to employ salaried managers. Dogvan did not have sufficient funds to meet the first bill rollover on 15 September 2008. The Bank provided various assistance and relief, including increasing the limit on the bill facility, increasing the limit on Dogvan’s overdraft, extending the expiry dates of the bill facility and entering repayment plans in relation to temporary overdraft extensions.

After extensive complaints by the appellants about the Bank’s conduct and numerous communications between the parties, on 6 April 2010 the appellants signed a letter compromising their claims against the Bank in return for the Bank making various payments, reducing charges and otherwise ameliorating their financial obligations.

Despite the accommodation thereby afforded to Dogvan and the appellants, the management business never traded profitably. Ultimately, the Bank appointed receivers and managers to Dogvan and receivers of the appellants’ units in Trickett Gardens under powers contained in mortgages securing their portfolio loan facility. After sale of the secured assets, a substantial shortfall of approximately $3,100,000 was alleged to remain outstanding.

Proceedings were issued in 2011. At the commencement of the trial, the amounts owing to the Bank were alleged to be the appellants’ liabilities of:

(a) $2,445,165.48 as guarantors of Dogvan’s liability under the bill facility;

(b) $66,316.87 as guarantors of Dogvan’s liability under a temporary overdraft facility advanced by the Bank to help fund Dogvan to manage the complex;

(c) $84,093.05 as guarantors of Dogvan’s liability under an investment loan facility which had originally formed part of the larger bill facility; and

(d) $507,637.67 for the balance of the portfolio loan facility which had funded their personal purchases of units in the Trickett Gardens complex.

For the purposes of the appeal, it is not necessary to distinguish between the different liabilities of Dogvan of which the appellants were guarantors. It suffices to approach the matter, as the trial judge did, by reference principally to the bill facility.

The issues in the trial primarily concerned various counterclaims made by the appellants, who were self-represented. The judge rejected contentions that the Bank had made representations regarding its assessment of the ability of the appellants and Dogvan to support the bill facility. It had been contended that such representations had been made, that they were misleading and deceptive and that in making them the Bank engaged in unconscionable conduct. Those claims are not pursued in the appeal.

The relevant aspect of the counterclaim for present purposes is an allegation that the Bank owed the appellants a contractual obligation to exercise the care and skill of a diligent and prudent banker in assessing Dogvan’s loan application and forming an opinion about its ability to repay the loan. The obligation is said to arise under cl 25.1 of the Code of Banking Practice published by the Australian Bankers’ Association (‘the Code’).

The trial judge upheld the argument that cl 25.1 gave rise to the obligation for which the appellants contended. He further held that the Bank had breached that obligation in the manner in which it went about evaluating the ability of Dogvan to repay the amounts that would fall due under the bill facility. He concluded that the loss caused by that breach wholly extinguished the Bank’s claims under the guarantees and that its remaining claim under the portfolio loan facility was to be set off in the amount of $80,000, representing additional losses incurred in the management business attributable to the Bank’s breach of cl 25.1.

However, the judge also held that the compromise letter of 6 April 2010 operated wholly to defeat the appellants’ claims pursuant to cl 25.1. In doing so, he rejected an argument by the appellants that their signing of the compromise letter had been vitiated by economic duress. Judgment was therefore entered in favour of the Bank for the full amount of the indebtedness claimed, including interest.

Issues on the appeal

The appellants rely on seven proposed grounds of appeal in their amended notice of appeal, and sought at the hearing to add an eighth ground. In addition, the Bank filed a notice of contention raising grounds in relation to cl 25.1 of the Code and proof of loss and damage in respect of the alleged breach of that provision.

The issues which arise on this appeal are:

(e) whether cl 25.1 of the Code was a term of the appellants’ guarantees;[41]
[41] Notice of contention ground 1.

(f) whether cl 25.1 of the Code (in relation to the Dogvan bill facility, and if it was a term of the guarantees) required the requisite opinion as to Dogvan’s ability to repay to be formed by the Bank by reference to the resources available to Dogvan, or to the combined resources of Dogvan and the appellants;[42]
[42]Notice of contention ground 2.

(g) whether the Bank breached cl 25.1 as properly construed;[43]
[43]Notice of contention ground 3.

(h) whether the appellants had failed to prove that the breach of cl 25.1 as a term of the guarantees had caused them loss and damage;[44]
[44]Notice of contention ground 4.

(i) whether the breach of cl 25.1 caused loss to the appellants beyond the $80,000 found by the trial judge;[45]
[45]Notice of appeal grounds 4 and 5.

(j) whether the appellants were discharged from their obligations as sureties by reason of the Bank’s breach of cl 25.1, pursuant to the principles in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd[46] (which ground was not argued at trial);[47]
[46](1987) 162 CLR 549.
[47]Draft further amended notice of appeal, ground 8.

(k) whether, by reason of the Bank’s breach of cl 25.1, the Bank acted unconscionably in subsequently enforcing its rights against the appellants (which was also not argued at trial);[48]

(l) whether the compromise letter, properly construed, had the effect of releasing the appellants’ claims against the Bank for breach of cl 25.1;[49] and

(m) whether the appellants’ signatures to the compromise letter were procured by duress so as to vitiate their execution of it.[50]

[48]Notice of appeal ground 6.

[49]Notice of appeal grounds 1, 2 and 3.

[50]Notice of appeal ground 7.

For the reasons that follow:

(n) cl 25.1 of the Code was a term of the guarantees;

(o) in respect of both the guarantees and the Dogvan bill facility, cl 25.1 required the Bank to form an opinion as to whether Dogvan had the ability to repay from the resources available to it;

(p) the Bank breached cl 25.1;

(q) the trial judge erred in holding that the appellants had proved that the breach of cl 25.1 caused them loss and damage;

(r) no occasion therefore arises to consider the appellants’ claims of further loss and damage;

(s) the appellants should not be permitted to raise on appeal the claim that the breach of cl 25.1 discharged them from their obligations as sureties;

(t) the appellants should not be permitted to raise on appeal the contention that the Bank acted unconscionably in enforcing its rights against them; and

(u) in any event, the trial judge was correct to conclude that the appellants’ execution of the compromise letter released their claims against the Bank for breach of cl 25.1, and that their agreement to the compromise was not vitiated by duress.

The appeal should therefore be dismissed.

The Code

The Code describes itself in cl 1.1 as a ‘voluntary code of conduct which sets standards of good banking practice for us to follow when dealing with persons who are, or who may become, our individual and small business customers and their guarantors’.

It is not in issue that relevant provisions of the Code, including cl 25.1, were incorporated into the Dogvan bill facility. But the appellants were not parties to that facility. It is therefore necessary to decide whether cl 25.1 was also incorporated into the guarantees.

Each of the guarantees stated that ‘Relevant provisions of the Code of Banking Practice apply to this guarantee’.

Clause 28 of the Code is headed ‘Guarantees’ and relevantly provides as follows:

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

28.2 We may only accept a Guarantee if your liability:
(a)is limited to, or is in respect of, a specific amount plus other liabilities (such as interest and recovery costs) that are described in the Guarantee; or
(b)is limited to the value of a specified security at the time of recovery.

28.3A Guarantee must include a statement to the effect that the relevant provisions of this Code apply to the Guarantee but need not set out those provisions.
28.4We will do the following things before we take a Guarantee from you:
(a)we will give you a prominent notice that:
…
(v)you can request information about the transaction or facility to be guaranteed (‘Facility’) (including any facility with us to be refinanced by the Facility);

(b)… we will tell you:
(i)about any notice of demand made by us on the debtor, and any dishonour on any facility the debtor has (or has had) with us, which has occurred within … 2 years before we tell you this;
(ii)if there has been an excess or overdrawing of $100 or more on any facility the debtor has (or has had) with us which has occurred within 6 months before we tell you this, and … we will give you a list showing the extent of each of those excesses or overdrawings;

…
(d)we will provide you with a copy of:
(i)any related credit contract together with a list of any related security contracts … and we will also give you a copy of any related security contract that you request;
(ii)the final letter of offer provided to the debtor by us together with details of any conditions in an earlier version of that letter of offer that were satisfied before the final letter of offer was issued;
(iii)any related credit report from a credit reporting agency;
…
(v)any financial accounts or statement of financial position given to us by the debtor for the purposes of the Facility within 2 years prior to the day we provide you with this information;
(vi)the latest statement of account relating to the Facility (and any other statement of account for a period during which a notice of demand was made by us, or a dishonour occurred, in relation to which we are required to give you information under clause 28.4(b)(i)); and
(vii)any unsatisfied notice of demand made by us on the debtor in relation to the Facility where the notice was given within 2 years prior to the day we provide you with this information; …

Clause 25 states:

25.1Before we offer or give you a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about your ability to repay it.
25.2With your agreement, we will try to help you overcome your financial difficulties with any credit facility you have with us. We could, for example, work with you to develop a repayment plan. If, at the time, the hardship variation provisions of the Uniform Consumer Credit Code could apply to your circumstances, we will inform you about them.

Clause 39.1 relevantly provides:

39.1 On and after the commencement date:
(a) we will be bound by this Code in respect of:
(i)any banking service that we commence to provide to you; and
(ii)any Guarantee (as described in clause 28) we obtain from you,
except as provided for below;

(b)we will be bound by this Code in respect of any banking service we were providing to you at the commencement date and continue to provide afterwards except for:
(i)clauses 10.2 to 10.5 (Terms and Conditions) (but subject to clause 39.1(d));
(ii)clause 21 (Foreign Exchange Services);
(iii)clauses 24.2 and 24.4 (Statements of Account);
(iv)clause 28.12 (Third Party Mortgages); and
(v)clause 33 (Electronic Communications);

…

Clause 40 of the Code contains definitions. In particular, ‘you’ and ‘your’ are defined to mean:

a person who, at the time the banking service is provided, is an individual or a small business that is our customer (or, where this Code specifically applies to potential customers, a potential customer of ours) and includes, in clauses 28, 33 and 39, any individual from whom we have obtained, or proposed to obtain, a Guarantee.

Incorporation of cl 25.1 of the Code

The trial judge held that cl 25.1 was incorporated into the appellants’ guarantees. He pointed out that cl 1.1 of the Code provides that the Code applies to the Bank’s dealings with persons who become its customers ‘and their guarantors’. Further, he noted that cl 39.1 provides that the Code applies to guarantees as defined in cl 28.1, and that the appellants’ guarantees were guarantees within that definition. The judge further held that none of the exceptions provided for in cl 39.1 operated to exclude the application of the Code. He observed that the appellants’ guarantees included a statement to the effect of cl 28.3 as required by that provision.

The trial judge held that cl 25.1 was ‘a relevant provision’ of the Code for the purposes of guarantees within the meaning of cl 28.1. He did so on the basis that a promise to the customer that the Bank would exercise care, or that it had done so, in the terms set out in cl 25.1 was obviously relevant to a guarantor or proposed guarantor. He held that any guarantor has a material interest in whether the Bank, exercising the care and skill of a diligent and prudent banker, has formed an opinion that the borrower will be able to repay the loan sought.

The judge held that the decision of the New South Wales Court of Appeal in Brighton v Australia and New Zealand Banking Group Ltd[51] supported this reasoning. There it was held that cl 22 of the Code, which imposes a duty of confidentiality, was incorporated as an ‘applicable provision’ of the Code within the meaning of the guarantees in that case.
[51][2011] NSWCA 152 (‘Brighton’).

Having held that cl 25.1 was a ‘relevant’ provision of the Code so that it applied to the guarantees, the trial judge then turned to consider its meaning in that context. He observed that cl 25.1 was not one of the clauses referred to in the definition of ‘you’ and ‘your’ where those terms extended to include a guarantor. He rejected a submission by the Bank that, although cl 25.1 therefore used those expressions to refer to the customer only, the assessment of the customer’s ability to repay included having regard to the assets and income of any guarantors who were proprietors of a corporate small business customer, such as the appellants in respect of Dogvan. He held that cl 25.1 did not extend to consideration of the financial position of such guarantors.

On that basis, the judge construed cl 25.1, operating as a term of the guarantees, as containing a promise to the appellants as guarantors as follows:

25.1Before we offer or give [the customer/Dogvan] a credit facility (or increase an existing credit facility), we will exercise the care and skill of a diligent and prudent banker in selecting and applying our credit assessment methods and in forming our opinion about [the customer’s/Dogvan’s] ability to repay it.

In this Court, the Bank submitted that there was no room to incorporate cl 25.1 into the guarantees because it was not a clause ‘relevant’ to the guarantees. Clause 25.1 is directed specifically to the entity being offered or given the credit facility, not to a guarantor. First, the Bank submitted that the words ‘you’ and ‘your’ were incapable of being used to refer to a person not being offered or given a credit facility, cl 25.1 not being one of the provisions where the words were specifically given an extended meaning. In contrast, the obligation of confidentiality considered in Brighton readily applied directly to a guarantor. Secondly, the Bank submitted that, if cl 25.1 were incorporated into the guarantees, it could not be read, as it submitted the judge had done, as if ‘you’ and ‘your’ in the guarantees referred to Dogvan, which was not a party to the guarantees. Those terms could only refer to the guarantors, in which case cl 25.1 would have no sensible operation. Further, the obligation on the Bank under cl 28.4(d) of the Code to provide the guarantor information relevant to the borrower highlighted the responsibility of the guarantor to make its own assessment of the borrower’s ability to repay.

In order to address the Bank’s submissions regarding the operation of cl 25.1 it is necessary to address the issue in relation to the bill facility and the guarantees separately.

Clause 25.1 and the bill facility

It is convenient to start with the bill facility. As in the guarantees, the terms and conditions of the bill facility stated that ‘relevant provisions’ of the Code apply to the facility. It is not in dispute that this contract incorporated cl 25.1 of the Code in its terms. In that contract, the words ‘you’ and ‘your’ designated Dogvan. There is no basis in that context for giving the words an extended meaning. The Code is drafted in the first and second person, reflecting the exchange between parties with which it is concerned. Clause 40 makes it clear that there are exceptions, where ‘you’ and ‘your’ include a guarantor, but cl 25.1 is not one of them.

The trial judge held that it followed that the opinion to be formed by the Bank for the purposes of cl 25.1 concerned Dogvan’s ability to repay the facility, and not the ability of Dogvan together with its guarantors to do so from their combined resources. He accepted that it was understandable and commercially realistic for the Bank to have regard to the assets and income of the appellants, but that this did not justify extending the meaning of ‘customer’ in cl 25.1. This was clearly a reference to the words ‘you’ and ‘your’ in cl 25.1, read with the reference to ‘our customer’ in the definition in cl 40.

In this Court, the Bank submitted that the construction given by the trial judge to cl 25.1 as incorporated in the bill facility is contrary to the commercial reality of the relationship between the parties. It was contended that the establishment by the appellants of a special purpose company to purchase the management rights business on the finance afforded by the bill facility, which was known to the Bank, made it obvious that the parties contemplated that the Bank would consider the combined resources of Dogvan and the appellants when assessing the loan application.

The judge did not deny that, in discharging its obligations under cl 25.1, the Bank may have regard to the assets and income of the appellants. But the critical inquiry was as to the ability of Dogvan to repay. The trial judge did not need to examine this question further because he held that, in any event, the Bank did give separate consideration to, and formed an opinion about, Dogvan’s ability to repay.

In my opinion, as the trial judge held, it is natural that a bank may take account of the financial position of a guarantor or other third parties as part of its credit assessment of a borrower and in forming its opinion as to the borrower’s ability to repay. A person’s ability to repay a loan may depend in part on the financial resources of a person or persons who ‘stand behind’ that person and upon whom the borrower may call to supply the funds to enable repayment. It is common sense, for example, that the sources of income of the shareholder/directors of a special purpose corporate vehicle will be relevant to the ability of that entity to meet its financial obligations. But that does not mean that the question under cl 25.1 becomes whether the combined resources of the borrower and any guarantors will be sufficient. The definitions of ‘you’ and ‘your’ show that the provision refers unambiguously to an opinion about the borrower’s ability to repay, not that of the guarantor. The guarantee is a distinct obligation which in no way detracts from the primary obligation of the borrower. In the bill facility, therefore, the Bank undertook to exercise the care and skill of a diligent and prudent banker in forming its opinion about Dogvan’s ability to repay. But in doing so, regard could properly be had to the availability to Dogvan, for that purpose, of assistance from other sources.

Clause 25.1 and the guarantees

It is next necessary to decide whether cl 25.1 formed part of the guarantees. As noted, the issue is whether cl 25.1 is ‘relevant’, that being the term used in the guarantees to refer to the provisions of the Code to be incorporated. For the following reasons, in my opinion, cl 25.1 is a ‘relevant provision’ for these purposes.

The process of incorporation of words taken from another instrument into a contract involves two steps or rules. The first step is to construe the incorporating clause to decide on the width of the incorporation.[52] The incorporated words must then be read into the contract to see whether, in that setting, parts of the incorporated wording must nevertheless be rejected as ‘inconsistent’ or ‘insensible’ when read in their new context,[53] or whether they ‘in any way conflict with the expressly agreed terms’.[54]
[52]Tradigrain SA v King Diamond Marine Ltd (The ‘Spiros C’) [2000] 2 All ER (Comm) 542, 564 [78]; Coopers Brewery Ltd v Lion Nathan Australia Pty Ltd (2005) 93 SASR 179, 185 [26] (‘Coopers Brewery’).
[53]Porteus v Watney (1878) 3 QBD 534, 542; The ‘Spiros C’ [2000] 2 All ER (Comm) 542, 564–5 [78]; Coopers Brewery (2005) 93 SASR 179, 186 [27]–[28].
[54]Modern Building Wales Ltd v Limmer & Trinidad Co Ltd [1975] 1 WLR 1281, 1289 (‘Modern Building’); Coopers Brewery (2005) 93 SASR 179, 186 [29].

The question what provisions are ‘relevant’ in this context is therefore first one of construction of the incorporating clause, in the context of the guarantees of which it forms part.

It is true, as Whelan JA points out, that it is possible that, on a ‘reworking’ of the loan application upon discovery of the error in the Valmadre report, the Bank could have identified reasons, contrary to those set out above, for refusing the loan. It may well have discovered that it had not previously understood the true financial position of the appellants (for example, in respect of the non-payment of the deposit). It is also the case that, when it was first discovered that the Valmadre report certified an annual net income only slightly, rather than significantly, less than that stipulated in the contract, an officer of the Bank initially indicated that the loan would be refused. However, in my opinion, reference to these matters serves only to highlight the speculative nature of the appellants’ task in establishing what would have happened had Mr Digiglio properly understood the Valmadre report.

Mr Digiglio was asked, in examination-in-chief, about matters not disclosed by the appellants. His answer reveals the indeterminacy of these considerations:

If the fact was that there was no deposit, the deposit hadn’t been paid by the defendants and they weren’t intending to sell any property, and they hadn’t disclosed and it came to your attention that there were other liabilities to take into account — I’m going to give you three liabilities; a further personal loan of $300,000, a further personal loan of $55,000 and a commitment to purchase an off-the-plan property for $2.5 million. Assume all those matters, could you tell His Honour how it would have impacted on your assessment of the application?---It would require reassessment and taking into account the additional liabilities, but also taking into account any additional income that would have been derived from the investments, but it would definitely require reassessment.

Later, the trial judge asked a question tied also to the Valmadre figures, and Mr Digiglio gave a similar answer:

Is this the case, that if all these hypotheticals are taken into account — and assuming for a moment I’m right, and I’m not suggesting that I am — but if it be the case that the figures don’t include an allowance for manager’s salaries, but nor do they include amounts for the deposit which was assumed to have been paid, or the other commitments which have not been disclosed and so on, you’d have to rework the whole application, wouldn’t you?---I would, yes.

In the end, in my opinion the evidence of Mr Digiglio, given in light of the whole of the financial circumstances of the appellants as he then understood them,[74] and read in context with the other considerations set out above, demonstrates that, even if the Bank had ascertained the appellants’ true financial situation, the evidence still does not establish that it would have refused the loan. But in any event, the prospect that, on revising its assessment to correct for the breach of cl 25.1, the Bank would have ascertained the appellants’ true position, is no more than a possibility.
[74]Mr Digiglio had no recollection of the loan having previously been refused. However, there is no reason to think that any such knowledge would have affected his answers to the substantive questions posed above. Mr Digiglio’s own assessment plainly differed from that of the previous officer.

In circumstances where the onus was on the appellants to establish that, had cl 25.1 not been breached, the Dogvan bill facility would not have been advanced, in my view that onus was not discharged. The evidence shows that a range of factors would have been taken into account and that the Bank was not relying solely on Dogvan’s income from the business to decide whether the loan should be provided. It has not been shown that, if cl 25.1 had been complied with and the Bank had realised that managers would need to be appointed contrary to what was assumed in the Valmadre calculations, it would have declined the loan. I would therefore uphold the Bank’s contention that the appellants have not established that the amount of their indebtedness as guarantors is a loss flowing from the Bank’s breach of cl 25.1.

It follows that I would also uphold the Bank’s contention that the amounts provided by the appellants to Dogvan to assist in the running of the management rights business are also not recoverable. Just as it has not been shown that the loan application would probably have been refused if not for the breach of cl 25.1, it has not been shown that the management rights business would not have been acquired if it had not been for the breach. I would therefore uphold the contention of the Bank that the amount of $80,000 which the judge held ought to be set off against the debt under the portfolio loan facility should not have been allowed.

The appellants’ other arguments as to loss depend on the submission that the trial judge should have found, as a consequence of his other findings, that the appellants would have caused Dogvan to avoid the purchase contracts and not taken out the Dogvan loan. To the extent that these arguments depend upon the finding of the judge that the Dogvan loan would not have been offered, they should be rejected for the reasons already given. Similarly, the other trading losses alleged by the appellants are not made out, for the reasons stated above in respect of the $80,000.

Further, the evidence does not support the submission of the appellants that the breach of cl 25.1 gave rise to the capital losses in respect of the apartments. Reference has already been made to the judge’s finding as to the appellants being unlikely to have been able to pay interest on the portfolio loan facility in the absence of the Dogvan loan. Moreover, the finding that the capital losses were caused by the determination of the appellants to maintain their ownership of units in the Trickett Gardens complex, rather than disposing of those units as the market worsened, has not been seriously challenged by the appellants.

I would therefore reject the argument of the appellants that the judge should have allowed the additional losses claimed by way of trading expenses and capital losses.

It follows from the above conclusions that the arguments as to damage raised in the Bank’s submissions should be accepted and that the grounds of appeal in respect of the judge’s assessment of damages should be dismissed.

The Ankar argument

There remain for consideration the appellants’ arguments relating to the principles in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd,[75] the argument as to unconscionability and the letter of compromise. The first two arguments seek to avoid the appellants’ liability to the Bank, not by way of set-off for breach but either by discharge of those liabilities for breach or by establishing that the liabilities were unenforceable. The third argument challenges the Bank’s successful reliance at trial on the letter of compromise. It is convenient to deal with the arguments in this order.
[75](1987) 162 CLR 549 (‘Ankar’).

In Ankar, pursuant to a guarantee executed between a surety and the owner of certain machinery, the surety had guaranteed the performance of a hirer of the machinery under a contract of hire. The contract of guarantee provided that the owner agreed to notify the surety if the hirer proposed to sell or assign its interest in the machinery or if the hirer was in default under the contract of hire. The owner breached both provisions. The issue before the High Court was whether, in order for the surety to be discharged from liability under the guarantee, it was necessary for it to establish that the provisions breached were essential terms going to the root of the contract, such that the ordinary principles of contract entitled it to elect to treat the contract as being at an end, or whether a ‘special principle’ applied by which it was sufficient to establish a breach of the contract of guarantee which materially prejudiced the interests of the surety.

The joint judgment of Mason ACJ, Wilson, Brennan and Dawson JJ said that the ‘special principle’

is founded not so much on cases dealing with a breach of a term in the suretyship contract, as on cases in which conduct on the part of the creditor materially altered the surety’s obligations. Such an alteration takes place when the creditor agrees to a variation of the principal contract or to an extension of time within which the debtor may comply with that contract. The creditor’s agreement with the debtor thereby alters the nature of the surety’s obligations without the surety’s consent.[76]

[76]Ibid 558.

Under this principle, upon an alteration to the surety's rights as a result of conduct of the creditor being established, the creditor must, in order to hold the surety to its bargain, show that the nature of the alteration was either beneficial to the surety or could not in any circumstances increase the surety’s risk.[77] The principle was a ‘by-product, not so much of the general law of contract, as of the special relationship between creditor and surety arising out of the suretyship contract upon which equity fastened to protect the surety when the creditor’s conduct affected the surety’s liability’.[78] The foundation for the rule was that the creditor could not, by varying the principal contract or extending time, alter the surety’s rights and therefore its interest in the principal contract without consulting it.[79] Consistently with this foundation, ‘the liability of the surety was seen to be strictissimi juris and the suretyship contract was construed strictly in his favour’.[80]
[77]Ibid 559.
[78]Ibid.
[79]Ibid 560.
[80]Ibid.

The joint judgment then turned to the ‘fundamental question’, namely whether that rule of strict construction, derived from the equitable rule protecting the surety against alteration in its liability, was subsumed in the general law of contract. In effect, it was held that it was, because the rule of strict construction applied in law as well as in equity. The judgment concluded:[81]

A doubt as to the status of a provision in a guarantee should therefore be resolved in favour of the surety and so the provision should be interpreted as a condition, or perhaps as an innominate term, instead of a mere warranty. If the surety is to be discharged for breach of a promissory term in the suretyship contract, the justification for the discharge must be that the creditor has failed to comply with a provision that, as a matter of interpretation, requires strict performance as a condition precedent to the surety’s obligation or at least requires substantial performance of the promise such that the surety would not have entered into the contract if it had not been assured that there would not be a breach such as the breach which in fact occurred. If on its true interpretation the term is not intended so to operate, it is not easy to understand why the surety should be discharged by its breach. Of course, in construing the contract the court is entitled to look to the general setting in which the contract has come into existence …

[81]Ibid 561.

The appellants sought leave to amend their notice of appeal to add a ground relying on the decision in Ankar, ultimately in two ways. First, it was submitted that the breach of cl 25.1, in so far as it was a term of the guarantees, satisfied the principle set out above because, as a matter of interpretation, either strict performance of cl 25.1 was a condition precedent to the appellants’ obligations as guarantors or substantial performance was required such that the appellants would not have entered into the guarantees had they not been assured that there would not be a breach such as that which occurred.

Secondly, it was submitted that the equitable rule described in the joint judgment was attracted, in the sense that the breach of cl 25.1, in so far as it was a term of the Dogvan bill facility, had altered the guarantors’ rights in a manner which the Bank could not show was insubstantial or not prejudicial to the appellants.

The Bank rightly pointed out that the facts in Ankar engaged the first, but not the second argument. However, the proposed ground of appeal sought to invoke the ‘principles in Ankar’ and is broad enough to embrace both arguments.

It was accepted by the appellants that neither of these arguments had been advanced at trial. Reference was made to aspects of the pleadings (which had been settled by counsel) but it is plain that the claims were not pleaded either. Nor was relief in the nature of a discharge of the guarantees sought in the counterclaim.[82] However, the appellants submitted that the points should be allowed to be raised on appeal because the issues were ones of law and no prejudice would be suffered by the Bank if the Court were now to decide them.
[82]The appellants pointed to paragraph 3a of the defence and counterclaim, which pleaded that, by reason of the breach of cl 25.1, the portfolio loan facility did not come into force. This goes to a different argument that does not arise on the appeal.

The Bank contended that there were real factual questions which could have been explored at trial had the arguments been raised below. In particular, had the points been taken at trial, this was likely to have led to a closer examination of the terms of the guarantees and the knowledge and understanding of the appellants as to cl 25.1 of the Code. The Bank submitted that there would have been further exploration in the evidence of the conduct of the appellants prior to the approval of the Dogvan loan and during the period between its approval and the execution of the loan and the guarantees. Finally, there were issues about the conduct of the appellants in acting on the breach of cl 25.1. Questions of termination for breach, and waiver by election, were said to arise which would have been the subject of evidence at trial.

The appellants denied that evidence of the subjective intentions of the parties could have been led in relation to the question, to be determined objectively, whether cl 25.1 as a term of the guarantees was to be interpreted as an essential term or precondition so as to attract the right to discharge the guarantees for its breach. They further submitted that, because the trial judge had found that the Dogvan bill facility would not have been agreed to but for the breach of cl 25.1, there was already a finding which meant that cl 25.1 was an essential term as defined in Ankar.

It may be accepted that the question of interpretation is to be decided objectively. However, as the joint judgment in Ankar observed in the final sentence of the passage set out above, in resolving this issue the Court is entitled to look to the general setting in which the guarantees came into existence. In my opinion, the Bank is correct in submitting that, had the point been raised at trial, the alleged essentiality of cl 25.1 was a matter that could have been the subject of evidence. Moreover, even if it were permissible in that circumstance to seek to sustain the argument based on findings made at trial, in this instance the critical finding on which the appellants rely was, for the reasons set out earlier in this judgment, not sustained on the evidence.

There is also considerable force in the Bank’s argument that questions of termination, election and waiver cannot be determined for the first time on appeal. In this regard, the appellants relied on the counterclaim as evidence of their election to terminate. Leaving aside whether the filing of the counterclaim could be treated as constituting an acceptance of the Bank’s alleged repudiation of the guarantees (which question itself might have been the subject of evidence), it is clear that the Bank would have argued that the appellants elected not to assert their rights from the time of the breach up to and beyond the time of Dogvan’s default.

I would therefore refuse the appellants leave to amend the notice of appeal to rely on the first argument sought to be advanced in relation to the decision in Ankar. It follows that it is not necessary to consider a further argument of the Bank that cl 10.1 of the guarantees, which stated that the appellants’ obligations were not affected by any act or failure to act by the Bank, displaced the principle in Ankar in any event.

In relation to the second aspect of the argument, it is less clear that the point could have been the subject of evidence. The Bank does not submit, for example, that it would have explored the question whether there was consultation between the Bank and the appellants in relation to the breach of cl 25.1 as a term of the Dogvan bill facility. Nor did it submit that evidence would have been led directed to the question whether the breach could not in any circumstances have increased the appellants’ risk as guarantors.

Instead, the Bank submitted: first, that the second ‘principle’ in Ankar referred to above operates when the principal contract is varied, not when it is breached; secondly, that when the right to discharge is said to arise following a repudiatory breach of the principal contract, numerous issues of law and fact arise, including whether the breach has been accepted by the principal debtor; and thirdly, as in relation to the first ‘principle’, that cl 10.1 of the guarantees provided that the appellants continued to be liable under the guarantees notwithstanding breach of the principal contract. Clause 10.1 relevantly extended to preserve the appellants’ obligations to the Bank despite anything that might affect its rights or their liabilities ‘under law relating to guarantees’.

As the Bank submitted, none of these issues were the subject of argument at trial, or on the appeal. However, it is plain that the decision in Ankar does not support the submission the appellants seek to advance. It cannot be said that the breach by the Bank of cl 25.1 as a term of the Dogvan bill facility constituted an alteration by the Bank of the nature of the appellants’ obligations as guarantors, without their consent or otherwise. The appellants sought to overcome this difficulty by contending that compliance with cl 25.1 was a condition precedent required to be satisfied at the outset of the contractual relationships including the Dogvan bill facility. However, this submission raises the same problems of interpretation and potential evidence as the first argument.

It follows that, in order to sustain the second argument related to Ankar, extensive issues of fact and law would need to be canvassed, including matters not explored at trial. The ground was not pleaded. Although the appellants represented themselves at the trial, the counterclaim was settled by counsel and the Court was assisted by amicus curiae. For all these reasons, I would also refuse leave to amend to rely on the second aspect of this proposed ground.

In the circumstances, it is again not desirable to say anything further in respect of cl 10.1 of the guarantees.

Unconscionability

The appellants sought to argue on the appeal that the Bank had acted unconscionably in enforcing its securities against the appellants notwithstanding the breach of cl 25.1. The ground of appeal alleges error on the part of the trial judge in finding to the contrary. However, the relevant finding was of a wholly different nature. The judge rejected an argument, no longer pressed, that the Bank had made representations to the appellants as to their ability to support a loan in the vicinity of $1.6 million from the cash flow of the management rights business.[83] It was the making of these representations which had been said to constitute unconscionable conduct (contrary to ss 12CA and 12CB of the Australian Securities and Investments Commission Act 2001 (Cth)).
[83]Reasons [4], [8], [83], [89].

The argument now sought to be advanced was never pleaded and is raised on appeal for the first time. The appellants made no written submissions on the point. It was the subject only of brief oral submissions. The appellants should not be permitted to pursue this ground. Had it been raised at trial, factual questions would have arisen about the circumstances in which the Bank decided to enforce its rights against the appellants, upon which any conclusions as to moral obloquy and unconscionability would have depended. The Bank did not call evidence on these matters and the issues were never explored.

Letter of compromise

The above conclusions mean that leave to amend to add the ground relying on Ankar should be refused, and that the appeal should be dismissed. In the circumstances, it is not strictly necessary to decide whether the compromise letter, which the judge held operated to deny the appellants any relief on the counterclaim, was properly construed as extending to all the claims upon which they were successful at trial. Nor is it necessary to decide whether, if so, the letter was vitiated by illegitimate duress on the part of the Bank.

I have, however, had the benefit of reading the reasons for judgment of Whelan JA in draft form. For the reasons he gives, I would hold that the appellants’ claims under cl 25.1 were released by their execution of the letter of 6 April 2010, and that the release was not vitiated by economic duress.

Conclusion

The appeal should be dismissed.

GARDE AJA:

I have had the considerable benefit of reading, in draft, the reasons of Whelan and McLeish JJA. I agree with their Honours’ conclusions regarding the incorporation of the Code of Banking Practice into the guarantees and bill facility and the subsequent obligations that this placed upon the Bank. I also agree with their Honours and the trial judge below that the compromise letter of April 2010 was untainted by duress and sufficient to release the Bank from any claim alleging a breach of cl 25.1 of the Code. For these reasons, the appeal must be dismissed.

As to the question whether the breach of cl 25.1 caused the appellants loss and damage, I concur with the reasons of Whelan JA. But for the Bank’s misunderstanding of the Valmadre report — this misunderstanding being a breach of cl 25.1 — it is unlikely that the already marginal loan application would have been approved in either its original or a reworked form. As a result, I agree with Whelan JA’s conclusion that the breach is causally related to the losses sustained by the appellants.

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[2015] VSCA 351

17 December 2015