Drummond v National Aust Bank Ltd

[1997] HCATrans 196

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S26 of 1997

B e t w e e n -

MARGARET ELIZABETH DRUMMOND

Applicant

and

NATIONAL AUSTRALIA BANK LIMITED

Respondent

Application for special leave to appeal

DAWSON J
GAUDRON J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON MONDAY, 4 AUGUST 1997, AT 9.51 AM

Copyright in the High Court of Australia

DAWSON J:   Gentlemen, before you begin I think I should announce that my wife holds a modest parcel of shares in the respondent.  If there is no objection, I will continue to sit.

MR J.E. MARSHALL:   If it please the Court, I appear for the applicant in this matter.  (instructed by Shaw McDonald)

MR P.R. GRAHAM, QC:   May it please the Court, I appear with my learned friend, MR T. MUIR, for the respondent.  (instructed by Dibbs Crowther & Osborne)

DAWSON J:   Yes, Mr Marshall.

MR MARSHALL:   Your Honours, this is a case about the application of the New South Wales Contracts Review Act to a standard form contract which contains what is submitted to be a substantively unjust clause.  The contract is a standard form guarantee of the National Australia Bank and the clause, your Honours will have appreciated, is clause 5(g).

GAUDRON J:   It has to be unjust in the circumstances in which the contract was entered into?

MR MARSHALL:   At the time it does for us to succeed.

GAUDRON J:   Yes.  What do you say is the injustice at that time?

MR MARSHALL:   At that time the injustice stems from the circumstances of what was said to Mrs Drummond.  What was said to Mrs Drummond is quoted in our submissions and appears at the top of page 36 of the application book starting on the third line:

“The guarantee is security for the total loan to The Computer Group -

which is the primary borrower -

Your home is supporting that guarantee.  Should the company default on payment, the bank may look to sell the home.”

That is the short statement of what was found was said.  That is all that was said by the Bank.  On the occasion when Mrs Drummond executed the guarantee, the Bank was taking two tangible forms of security.  One was - and, it is submitted, the primary security - the charge given by the company, so it provided a mortgage over the whole of its assets and undertakings which the Bank valued at about $700,000‑odd.  The debt at that stage was $270,000.

On the very same meeting when the company charge was given and all the loan transaction was documented, Mrs Drummond, who was then a director of the company, joined in the execution of the giving of the company charge.  She also provided the other form of tangible security, namely a mortgage over her house.  It was not a jointly owned property; it was solely owned by her.  The mortgage was provided as security for a guarantee which she gave, and it is the guarantee which we say contains the unjust clause.

The decision that she made to mortgage her property to back her personal covenant was made, as his Honour found, because she had made a decision or had reasoned - if I can ask your Honours to turn to page 65 of the application book at line 20, just after the part that is quoted:

Mrs Drummond’s evidence included that she thought the Drummoyne property -

which was her house property -

was not at risk because the TCG business -

that is the company’s business, the subject of the security -

had profits to repay the loans and net assets in excess of the loans ‑ ‑ ‑

GAUDRON J:   That is all at the time that the guarantee was entered into?

MR MARSHALL:   Yes, it is.

GAUDRON J:   You still have to point to injustice as at in the circumstances of that time.

MR MARSHALL:   Yes.

GUMMOW J:   And you have a finding of fact, have you not, at page 99, line 11?

MR MARSHALL:   Yes, and that picks up the finding of fact at pages 65 and 66 from his Honour.  I have to deal with that and I shall, your Honour.  Does your Honour wish me to deal with it now?

GUMMOW J:   Proceed as you will.

MR MARSHALL:   At the time it would be expected that any person providing a guarantee would make the very assessment that Mrs Drummond made.  The assessment is:  should I stand behind the primary debtor.  It is a most natural decision‑making process for what is clearly an astute businesswoman, and she was so found to be.  The decision whether or not to stand behind the company depends upon and was necessarily based upon her view that the Bank would be able to have recourse to the charge which she had given on the same day.

The statement made to her which is recorded at page 36, which I took your Honours to a moment ago, has an element of sequence to it.  It is also set out with the proposition itself.....at page 135 of the applicant’s argument, paragraph 8.  That is the statement which the trial judge found was made to her.  It is submitted that that statement involves a sequential notion.  The Bank would look to the company.  Should the company default, not that the Bank would look to Mrs Drummond’s home, that it may look to Mrs Drummond’s home.

So, in light of what is said to her about the security being taken, should the company default, her knowing that the company was providing a very substantial asset as security, what one would ordinarily expect would be the assessment made by a guarantor, namely to look at what was being put up by the primary debtor, acknowledgment of that and deciding, “Well, my asset won’t be at risk or will be at relatively small risk”.

GAUDRON J:   Does not your client’s problem lie in this:  she resigned as director of the company?  She thereafter left the management of the company to others.  Had she remained as director of the company, she very likely could have taken steps to protect herself.

MR MARSHALL:   That is so.

GAUDRON J:   Yes, but she did not.  Having not remained as director, she left the management of the company in the hands of others knowing that she was the guarantor.

MR MARSHALL:   She did.  She took two steps to deal with that.  One was to enter into an arrangement with those people that they would do certain things in relation to giving of information and carrying on the business in a certain way, which they did not do, so she did take some steps in that regard.

GAUDRON J:   That being so, it seems to me that it is difficult to assert that what was done in circumstances in which your client was the director of the company and able at least to participate in its affairs makes the question of injustice on the part of the Bank somewhat remote.

MR MARSHALL:   Your Honour, what the Bank was unjust in that two years later it relied upon the clause in the guarantee which was - Your Honour, I should come back.  At the time she entered into it, it would have been a simple matter to draw her attention to the ramifications of clause 5(g).

GAUDRON J:   But equally, at the time she entered into it she could, as director, have ensured that nothing was ever done under clause 5(g), could she not?

MR MARSHALL:   No.

GAUDRON J:   Realistically the Bank was not going to release securities or otherwise deal with them unless so requested by the company.  That is realistically the situation, is it not?

MR MARSHALL:   The clause is wide enough for the Bank to do it at the request of the company, not at the request of the company or otherwise.

GAUDRON J:   But as a matter of practicality it would only happen at the request of the company, would it not?

MR MARSHALL:   No, not necessarily.  I submitted in the Court of Appeal the clause was not that wide, but it was found to be that wide that it could do it without any request.  One would think as a matter of practicality that it would not happen without notification to the person whose security the Bank would primarily rely upon.  What the Bank did two years later was, without telling her, had her property revalued, presumably from external means or from information provided by her ex‑husband.  It then made a decision whether or not it would release the primary security in making ‑ ‑ ‑

GAUDRON J:   He was not her ex-husband at that time, was he?

MR MARSHALL:   I cannot tell your Honour when he became her ex‑husband.  They were certainly estranged and not living together.

GAUDRON J:   That does not appear from the documents, does it?

MR MARSHALL:   That they were not living together does appear from the documents.  I cannot tell your Honour the date of the divorce.

DAWSON J:   But the point is - and I think it is the point that is being made to you by Justice Gaudron - that looking at the clause at the time that the mortgage was entered into, you could not say that it was unjust.  It was a common clause contained in documents of this kind.  It was changed circumstances on the part of your client that brought about the situation of which she complains.

MR MARSHALL:   But, your Honour, even if she had remained a director, she was one of three directors and later on ‑ ‑ ‑

DAWSON J:   There are all sorts of things that one can speculate about, but the fact is that at the time the contract was entered into, you could not say that the clause was an unjust one.

MR MARSHALL:   It is submitted that it was because of its peculiar and wide‑reaching effect which would not be ordinarily appreciated.

DAWSON J:   But it is a clause that is found in thousands of these instruments.  That does not necessarily mean that it is not unjust.

MR MARSHALL:   But that is at the essence of our submission.  The fact that it is in so many is why it has the potential to be unjust, because it is not necessarily an expected clause.

DAWSON J:   But that is not enough for your purposes, having regard to the way in which the case was argued, that there is potentiality of injustice.  The clause has to be able to be shown to be unjust at the time of the contract.

MR MARSHALL:   Yes, your Honour.  Your Honour is expressing a view which is at variance with a view expressed by the Chief Justice of South Australia in a decision which is referred to in these papers, and it is also a view which I would submit to your Honours, that it is simply unfair for a Bank, without negotiating a clause like that, at a time when the Bank manager makes a statement to the intending guarantor that, should the company default, then the Bank may look to you, in those circumstances not to draw to the intending guarantor’s attention this clause which she gave evidence she did not know about, she was not cross‑examined on that.  She said she was not aware of the effect and she was not cross‑examined on that either.  So that in that situation to secure a clause which would entitle the Bank to discard the primary security without receiving anything in return, which is what the Bank did, is unjust.

GUMMOW J:   What about this finding of fact?

MR MARSHALL:   The finding of fact, your Honour, is a finding which commences at page 65.

GUMMOW J:   I was wondering about the one at 99.

MR MARSHALL:   Quite, your Honour, but the one at 99 is the Court of Appeal picking up the finding which is - 99 line 15 is what your Honour has in mind?

GUMMOW J:   Starting at line 11.

MR MARSHALL:   Yes.  Can I tell your Honour that is the finding that comes from pages 65 and 66.  If I could take your Honour to those pages.  The finding is one that she would have gone ahead in any event in effect.  The finding comes from page 66 towards the top.  The particular part of it starts at line 12:

In my view the proper conclusion is that in October 1986 Mrs Drummond was content to undertake a personal liability.....and to give security.....regardless of the status or priority of Wosenda’s charge:  if the positive conclusion is inappropriate -

and it is submitted that it is inappropriate - his Honour put it in the alternative that he was not satisfied that she would not have done so.  If I can take your Honours back to the sixth line down, it is referred to as an “absence of evidence”, and in the Court of Appeal’s dealing with the same matter at page 99 starting at line 14, the sentence:

His view was that there was no evidence that she would not have signed the deed of guarantee.

This finding was not based upon - I was not at the trial, but I have gone through the materials in the appeal books in the Court of Appeal - it was not based upon the impression of the witness because she was never cross‑examined on her understanding of clause 5(g).  There was no cross‑examination ‑ ‑ ‑

GUMMOW J:   But look at line 2 on page 66.  That is the foundation of it all.

MR MARSHALL:   Line 2 of page 66:

It was for Mrs Drummond to provide evidence ‑ ‑ ‑

GUMMOW J:   Yes.

MR MARSHALL:   And we say there was, and his Honour overlooked it.  If I can take your Honours back to page 65 starting at line 15, and can I hand up to your Honours what is the correct transcription of the paragraph which his Honour, I will submit, misquoted.  What I have done here, your Honours, is to put three passages which are not in the application book.  It is the middle one that I am directing your Honours’ attention to at the moment.  That paragraph was from Mrs Drummond’s affidavit of 15 May.  It is photocopied from page 80 of the Court of Appeal book which does not appear here.  What is different between what Mrs Drummond said and what the trial judge set out, is the last sentence is omitted.

GUMMOW J:   Paragraph 21 is looking at the later time, is it not?

MR MARSHALL:   No, it is the middle of paragraph 12, “At the time I executed”, that is the source of what appears in inverted commas at page 66 line 16 and onwards.  What his Honour does not set out is the last sentence of that which Mrs Drummond was not cross‑examined ‑ ‑ ‑

DAWSON J:   But he quotes that passage on the basis that she was not aware.  “It is also material to ask what Mrs Drummond would have done had she become or been made aware of that which” ‑ ‑ ‑

MR MARSHALL:   Yes, but then the next part, starting at line 20:

Mrs Drummond’s evidence included that she thought the Drummoyne property was not at risk because the TCG business had profits to repay the loans and net assets -

Then his Honour says:

but that was not linked with her position had she been told what she was not told.

So we would say that the failure to make the link that the trial judge - the failure of the trial judge to appreciate the implicit link is why his Honour thought there was no evidence that she had adduced.  It was for her to adduce the evidence and she did.  She explained her circumstances at the time, that had she been aware - first of all, she was not aware of the clause.  She had no explanation.  She was not cross-examined on either.  She explained her reasoning process was that the company had sufficient assets and that there was a mortgage over the company’s assets and she explained that that was the crucial reason why she was prepared to go ahead.

His Honour does not appreciate the link that the giving of the guarantee was based upon that reasoning process.  It is there and his Honour says, “but that was not linked with her position”.  It is odd, in my submission, that his Honour did not see that the statement that she went ahead because of her assessment of the value of the company’s security, coupled with her statement of what she was not told and what she did not appreciate, that the link was not drawn by his Honour.  Had his Honour drawn that link then there was the evidence.  It was for her to give the evidence and she did give it.  The only reason that his Honour did not appreciate it, in my submission, is that his Honour did not appreciate the link that was between the two.

Your Honour, it is that part of the finding which I have to be able to persuade your Honours, otherwise the proposition that your Honour put to me is fatal to the application.  We appreciate that.  But it is that his Honour based it upon no evidence and coupled it with an inference from a letter that she wrote later on.  The inference drawn from the letter goes the other way.  What Mrs Drummond did was appreciate when she read the guarantee there was a clause she was not happy with.  She wrote and complained about it.  It was the most innocuous clause in the guarantee, clause 15.  It has no substantive effect whatsoever.  His Honour drew an inference from that that she must have appreciated the substance of all of the other clauses but in our submission the inference should go the other way. 

So that in the circumstances, there is a clause which can lead to an unjust result.  It did in this case because the Bank gave up the primary security, which was more than adequate to repay the debt, and threw the debt burden back on her home at a time when it realised she was not prepared to provide further security.

GAUDRON J:   That is not the finding, is it, because his Honour the trial judge refers to a note some months later and said there was no evidence that they knew at the time.

MR MARSHALL:   He does say that, yes.  But the evidence is - and that is why it has been included in the application book - the evidence is in the Bank’s internal document.

GAUDRON J:   Yes, but it is a later date.

MR MARSHALL:   No, it predates that.  What his Honour did not appreciate was the significance of what was in the internal document of the Bank, and the document is in the application book page 114.  It is the document of 15 December which predates the decision to release the charge which was in January 1989.  It is cryptic and this is the reason why it was not clear, but ‑ ‑ ‑

GAUDRON J:   Was it relied on below?  First of all, you had better take us to the document.

MR MARSHALL:   If your Honour sees under the heading “Securities”, about line 12 on the right, there is a printed heading “Securities” and then there is a circled number, No 1 ‑ ‑ ‑

GAUDRON J:   I cannot see “Securities” on the right.  Yes, I do, about a third of the way down the page.

MR MARSHALL:   That is so, your Honour.  On the right it lists, first of all, the existing security, “No 1 G’tee & Indem.  $270,000  3gn”.  Three guarantors.  “P/S” partly secured “by 2nd R/M” registered mortgage, and the deed has a Bank value, whatever it is, the number set out.  So that is the existing security.  What is proposed at this time when the Bank rejected the application for further loan was - and it is in item 2, because that is along the line - it is in the same line as the new business, the guarantee that was being offered, “G’tee & Indem $300,000”.  Two guarantors “2 gn U/S”, unsecured. 

So the Bank appreciated, and it is clear from this document, that what was being offered was an unsecured further guarantee by only two of the guarantors ‑ ‑ ‑

GAUDRON J:   But it does not indicate - that is not the same as the finding which the trial judge made - and I am not sure of the page - that some months later the Bank was aware that your client was not prepared to give any further guarantee.

MR MARSHALL:   It is not the same, but the document must record the same fact, because the directors in this document, 114, do not include Mrs Drummond.

GUMMOW J:   About page 39.

MR MARSHALL:   Yes, that is the finding.  But the finding ignores what is inescapable from the document which predates it, the decision.  The finding is that some months afterwards - and that is based upon an internal document in August 1989 ‑ ‑ ‑

GUMMOW J:   Did you appear at the trial?

MR MARSHALL:   No, I did not.

GUMMOW J:   See, we do not know whether this document was expounded in the course of addresses or in the course of evidence.

MR MARSHALL:   We know that his Honour ‑ ‑ ‑

GUMMOW J:   A lot of documents get produced in commercial cases and they sit there.

MR MARSHALL:   His Honour asked the question ‑ ‑ ‑

GUMMOW J:    ‑ ‑ ‑what happens, they just sit there.  They contain all sorts of nuggets but no one pulls them out.

GAUDRON J:   It is very doubtful that that is a nugget in relation to the Contract Review ActI point.  It might have been a nugget for some other argument.

DAWSON J:   I see that the red light is shining, Mr Marshall.

MR MARSHALL:   That is all I can really put to your Honours.

DAWSON J:   The Court need not trouble you, Mr Graham.

This case was argued below upon the basis that the applicant was required to show that the relevant clause of the guarantee was unjust at the time the applicant entered into the guarantee.  Upon that basis, there is insufficient reason to doubt the correctness of the decision of the Court of Appeal to warrant the grant of special leave to appeal.  Special leave is accordingly refused.

MR GRAHAM:   We would ask for an order for costs, if your Honour pleases.

DAWSON J:   Can you say anything about that, Mr Marshall?

MR MARSHALL:   No, your Honour.

DAWSON J:   Special leave is accordingly refused with costs.

AT 10.14 AM THE MATTER WAS CONCLUDED