Equuscorp Pty Ltd v Worts
[2000] VSC 179
•10 May 2000
SUPREME COURT OF VICTORIA
COMMON LAW DIVISION
No. 7628 of 1994
| EQUUSCORP PTY. LTD. | Plaintiff |
| v | |
| ALAN REGINALD WORTS and ROBERT SYDNEY WORTS | Defendants |
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JUDGE: | HEDIGAN, J. | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 26-28 April, 1 May 2000 | |
DATE OF JUDGMENT: | 10 May 2000 | |
CASE MAY BE CITED AS: | Equus Corp. Pty. Ltd. v. Worts | |
MEDIUM NEUTRAL CITATION: | [2000] VSC 179 | |
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Guarantee and indemnity – Whether guarantor imposed limit on extent of liability – Guarantee and indemnity – Whether second defendant entitled to rely on special relationship of disadvantage – Equitable principles – No disadvantage – guarantor fully understanding effect of guarantee after detailed explanation.
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APPEARANCES: | Counsel | Solicitors |
For the Plaintiff | Mr. J. Simpson | Wilmoth Field & Warne |
| For the Defendant | Mr. N. Young | N.A. Young & Co. |
EQUUSCORP PTY. LTD.
v.
ALAN REGINALD WORTS and ROBERT SYDNEY WORTS
HIS HONOUR:
The background
This proceeding No. 7628 of 1994 (and an associated proceeding No. 7825 of 1996, which I have already tried and decided as an undefended proceeding) both arise out of the acquisition by a company A. Worts & Associates Pty. Ltd. (hereinafter called "Alan Worts' company") with the financial aid of the plaintiff (then called Equus Financial Services Ltd. and hereinafter called "Equus") in 1989 of two vehicles, namely a BMW 735 and a SAAB under the terms and conditions associated with a so-called Prestige Vehicle Plan offered by Equus. Alan Worts' company was one of the corporate vehicles of Mr. Alan Worts, in those days a high-flying investment adviser, fated to crash ignominiously in the year 1990 and ultimately being sentenced to serve a substantial term of imprisonment for misappropriation. In January 1989, however, the approaching economic cataclysms of 1990 and the years beyond were visible only to a relatively small number of business investors and advisers. Mr. Alan Worts was not one of them. In 1989 Alan Worts' company acquired these two expensive European vehicles. The SAAB was purchased for the use of Astrid Worts, Alan Worts' wife. Both Alan Worts and Astrid Worts were guarantors with security of Alan Worts' company liability to Equus with respect to the SAAB motor car. It will not be necessary for me, in the course of these reasons, to deal with the events relating to the SAAB, save as they are connected with the features of the financial arrangements made with respect to the company's acquisition of the BMW. It might be shortly stated that A. Worts & Associates Pty. Ltd. collapsed and was de-registered in 1993. No proceedings had been taken against it in respect of the vehicles to that point in time and thereafter none could be. This led to the commencement of the present proceeding in the year 1994, the details of which I shall shortly address, and a proceeding against the guarantors of the performance by the Alan Worts' company of its obligations in respect of the purchase of the SAAB motor car.
The defendants to the SAAB proceeding were Alan Worts and Astrid Worts. Neither of them appeared when that action was called on for hearing and in that undefended proceeding, having heard evidence and considered documents, I indicated that the judgment for the plaintiff Equus against Alan Worts and Astrid Worts would be entered with costs.
The proceeding arising out of the acquisition of the BMW, the present proceeding, was not commenced until 1994 and, since Alan Worts' company had been de-registered and was in any event worthless, the proceeding was brought against Alan Worts and his brother Robert Sydney Worts (hereinafter called "Syd" to distinguish him from Alan Worts hereinafter called "Alan"), as guarantors, with security of the obligations of A. Worts & Associates Pty. Ltd. with respect to the acquisition of the BMW. Alan Worts did not appear in court as a defendant in this proceeding and neither plaintiff nor the defendant Syd Worts called him as a witness.
The family business of the Worts family, that is of the father of Alan and Syd, was H. Worts & Sons Pty. Ltd. at Colac. Mr. Worts senior died at some time in the 1980s. The business was conducted from 175 Bromfield Street, Colac and the evidence showed that at some point of time both Alan, who was the elder by two years, and Syd worked in that business but, ultimately in a business sense, they went their separate ways, primarily because of differences between their respective wives. Alan became a highly successful investment adviser in the '80s whilst Syd became the distributor for Mobil Oil Australia for the Western District, through H. Worts & Sons Pty. Ltd. which supplied all the service stations in Western Victoria. The managing director of Equus was Mr. Nicola Russo who had met Alan and Astrid Worts in the early 1980s when Mr. Russo was State Manager for Citicorp, a substantial worldwide financial institution with operations in Victoria. At that time Alan Worts had not branched out to be an investment adviser in his own right but was an investment adviser for Australian Fixed Trusts. This was the commencement of their business connection and when Alan Worts became involved in investment and advice Citicorp helped to finance some of his investment companies. There was some development of social friendship as well as the business connection between Mr. Russo and Alan Worts so that it could be fairly said they were friends as well as business associates. When Mr. Russo left Citicorp, he went to work for Associated Midland, a financial institution owned 50% by the then State Bank of Victoria and 50% by the Midland Bank in the United Kingdom. Whilst he was there, Associated Midland commenced dealings with Syd Worts so that Nicola Russo became familiar with his business operations as well as those of Alan Worts. The evidence of Mr. Russo was that Syd had complex commercial structures with many borrowings from banks and other financial institutions. According to Mr. Russo, from time to time when called upon to do so, he did an analysis of Syd's affairs and arranged for the advance of millions of dollars to enable Syd to consolidate his substantial financial affairs with the one lender. He also referred to Syd's involvement with other interests and other companies including a substantial (although apparently ultimately unsuccessful) venture into inland crayfish farming. By the mid-1980s Mr. Russo had established his own company Equus which became a substantial provider of commercial finance. According to Mr. Russo, Syd Worts was an astute commercial operator and had survived during a difficult period in a difficult industry. He was said to be "well on top of" his creditor relationships and it was also said that Alan, the elder brother, had greatly admired Syd's commercial knowledge and skills.
Around about the start of 1989 Alan Worts, who already had the BMW, approached Mr. Russo to re-finance it and this was done by embarking upon the Prestige Vehicle Plan. Precisely the same steps were taken, in principle, with the SAAB. This involved the provision by Alan Worts of sufficient information and then the entry by the company into various agreements. These entailed a deed of mortgage (in fact a chattel mortgage) and the execution by Alan Worts' company of a Schedule as part of the Prestige Vehicle Plan. What was involved was the payment out by Equus of the debt to Citicorp Australia Ltd. ($152,760) and the assumption by the mortgagor of the obligation to pay 46 payments of approximately $2,500 and a final payment (the so-called balloon payment) of $132,361. As Mr. Russo explained it, the Prestige Vehicle Plan was really virtually an interest-only loan, tied to the motor vehicle, thus making the monthly payments tax deductible if the vehicle was used for business (as it was) with the final payment being about 80% of the purchase price. As he explained it, this was both good for him and good for the mortgagor but exposed the mortgagee to high risk. This was met by the giving by Worts of a guarantee and indemnity to the mortgagee of the mortgagor's performance of his obligations by what appears to have been an all accounts mortgage, moneys being repayable on demand upon default. Equus also took a charge over the vehicle (registered at the Road Traffic Authority). A charge was also given over Worts' property at 248 Latrobe Terrace in Geelong, protected by unregistered mortgage and caveat. The deed was varied in May 1990 at Worts' request so as to substitute 43 Deans Marsh Road (another Alan Worts' property) for the Geelong property. This was to accommodate Alan Worts' need for money at that time, to which I will later refer.
The proceeding
A Notice to Admit was served on both Alan Worts and Sydney Worts. I will refer to the effect of this document on the proceeding against Alan Worts when I turn at a later stage to consider that proceeding, which has not been defended. It should be stated that this proceeding, commenced against both Alan and Syd Worts, was founded upon the execution by them of the commercial documentation, to some of which I have already referred and in the case of Mr. Syd Worts' execution by him of specific documents. I refer to proof of the execution of the deed of mortgage of 13 November 1989 (Exhibit B), to the deed of variation dated 17 May 1990 (Exhibit G), proof of execution of the deed of guarantee and indemnity of 9 August 1980 (Exhibit H) and a deed of variation of 9 August 1990 (Exhibit D).
When the proceeding was originally commenced against these defendants, seeking to rely upon the various surety documents, they were both acted for by a solicitor, Mr. Neil Young. At a later stage Mr. Young ceased to act for Alan Worts but this was not until 1999 or thereabouts. Mr. Young continued to act as a solicitor for Mr. Syd Worts and appeared for him on the hearing of this proceeding. It is not necessary for me to refer to the detail of the Notice to Admit which I am satisfied was served on Mr. Syd Worts through his solicitor. No notice of dispute was ever given with respect to the matters of fact set out in the Notice to Admit. The reality is that none of them, save one, were in dispute and ultimately there was filed on behalf of the second defendant a notice of dispute as to the amount claimed to be due in respect of the BMW transaction, namely $287,115.52 as at 26 April 2000. There are other admissions called for and not disputed which I now deal with and dispose of. Namely, that interest is continuing to accrue at $63.46 per day and that the price obtained on the sale of the BMW was a fair and reasonable price. The service of the notice of demand on Sydney Worts on 15 July 1993 has been similarly established. From that point of time, Equus' demand made on Sydney Worts as guarantor and indemnifier in view of the default by the mortgagor A. Worts & Associates Pty. Ltd. under the deed of loan of 13 January 1989 was $138,624.57. It should be said that when the proceedings were commenced against both Worts in 1994, a "holding defence" was filed which did not raise any specific defences, including no equitable defences. In 1997, when there were some amendments sought to be effected, and were effected, to the plaintiffs' statement of claim, this led to a more elaborate defence which essentially raises many of the matters here argued for.
The evidence
Mr. Russo's evidence addressed the detail of the steps taken, and the events which ultimately occurred. It should be said that it appears that many of the original documents can no longer be found, it being not disputed that they were lost when the solicitor then acting on behalf of Equus ceased to practice (he going to the Victorian Bar) so that in the changeover to fresh solicitors the originals were never obtained. Nothing turns on this as Mr. Young, for Mr. Syd Worts, raised no objection to the use of copies of the multitude of documents which it became necessary to refer to. Mr. Russo (who had kept good records of various conversations had) gave evidence that Alan Worts, on 10 January 1990, approached Equus for the right to substitute, for the back-up security to the deed of guarantee and indemnity (Geelong) his property at Deans Marsh Road, Lorne for the Latrobe Terrace property at Geelong. He apparently wanted to do this to raise money for other ventures, that is, to sell the property at Latrobe Terrace. It is not necessary to know much more than that about that request as Russo was prepared to accommodate his request in that respect. He informed me that he did not require valuations of the various properties, in effect because his relationship with Alan Worts was such that he expected the properties to be of sufficient value to meet the shortfall if the vehicle had to be sold. At that time there was no indication of any financial difficulty being experienced by Alan Worts who had not long before completed a statement of assets and liabilities which was satisfactory. Russo had indicated to Alan Worts that it would be satisfactory, that he was happy to arrange for a caveat to be placed on the Lorne property instead of the Geelong property. However, he had not promptly followed this up.
On 17 May 1990 Alan Worts approached him, looking for funds to acquire an extra 5% in a company Micro-Computer Solutions which was jointly owned (save for 5%) by Worts and one John Marks. Marks had 50% of the company (for which he had paid $750,000 to Alan Worts) and Alan had 45%. He wanted to borrow $10,000 to acquire the remaining 5% from an employee, so that he and Marks would be equal shareholders. Russo was prepared to advance him $10,000 to buy those shares (apparently with a lien over them) as there was then nothing appearing to impact upon his continuing to make the payments in respect of the motor vehicles. He made that advance. However, on that night he received a telephone call from Alan Worts, from a police station, when he informed him he had been arrested apparently in connection with misappropriation of moneys. He said that he had been under investigation by the NCSC although police had never been mentioned, in connection with "black money" invested with him by various investors. There was no suggestion by Alan Worts that there was any theft involved. Russo apparently informed Syd Worts of Alan's arrest and arranged to put up the Colac property at 175 Bromfield Street which was for the present purpose to be regarded as jointly owned by Alan and Syd.
It does not appear to be in dispute between the parties that it is certain that Alan wanted to substitute the jointly-owned Colac property for his Lorne property, the funds from the sale of which he needed to make some restitution to those persons it was claimed he had defrauded, to improve his prospects of not going to gaol, and also to fund his defence. It is to be recalled that his problems concerning that had come to a head on 17 May by the end of which day both Syd Worts and Russo knew of his problem. Mr. Russo was prepared to agree to the security substitute but point-blank refused to assist unless there was real estate security. Mr. Russo said that Alan, explaining why he wanted the money, said that he had spoken to Syd and Syd would be a guarantor. Thus, although Alan had said he wanted Nick to withdraw the caveat and the charge over the Lorne property to get money for the two purposes to which I have referred, Nick Russo had said he would not release the security which was there to protect Equus. Alan stated he had spoken to Syd, Syd would guarantee it and they would provide other property as security as well. According to Russo, knowing Syd's strong financial position, he followed up on Alan's request to phone Syd. He did so on the same day. The substance of that conversation was that they spoke about Alan's troubles generally. He told Syd of Alan's commitments to him and took Syd through those commitments to Equus, explaining the three accounts (one was the computer share advance, $10,0000). He took him through the two car accounts, telling what the balance of each was, and what the payments were that Alan was making. He told Syd that Alan had told him, Russo, that Syd would personally guarantee any shortfall on the sale of the cars. Syd said he would guarantee it. He said that the property (the Colac property) was worth in excess of $100,000. There was an encumbrance by reason of the necessity to put the property up as a bond for Alan's bail, but since Alan was bound to turn up, it was not in effect a problem. Russo said that although he was surprised the Colac property was only worth $90,000-$100,000, nevertheless he was prepared to accept it as security because he thought it was likely to be sufficient to cover the shortfall that might exist once the cars were sold, if they had to be sold. He also regarded Syd's offer of unlimited guarantee as being worthwhile, because he believed him to be very wealthy. The substance of these conversations were recorded by Mr. Russo in a memorandum of 20 July (Exhibit M). I should say at this point that Syd did not agree that this conversation ever took place. He first said he had no memory of the conversation but it became clear enough later on that he was denying that it had ever taken place. According to Russo, the next step was to send to Syd a standard application form which Equus ordinarily wanted guarantors to complete. It was, he said, stock procedure to get details from someone providing a guarantee. There was a little delay in getting onto it but the document was sent on 7 August to Syd which led to a response being faxed on 8 August 1990 from Syd Worts to Equus. This document is of sufficient importance to set out in substance, it being sent to Nick Russo at Equus:
"Letter of personal guarantee from R.S.J. Worts to Equus Financial Services Limited.
I received your fax today, but please note I am not applying for a loan, just giving a guarantee that if in the advent Alan does not pay out the monies owing on his BMW/SAAB you can have in kind the proceeds from the sale of Crown Allotments 1 & 3 Section 16 Parish of Colac to a value equal to the principal plus interest.
The current valuation as per attached is 90,000 dollars and is free of any encumbrance other than the Clerk Of Courts in Geelong hold the title as a paid security for 50,000 dollars that Alan will appear in court to answer to the charges as laid on 18th May, 1990.
Crown Allotment 2 is held under possessory title, and is with the titles office to be consolidated.
In the unlikely advent that Alan did not appear at court, I would pay the bail personally, thus releasing the property as security to the courts.
If the cars are ultimately sold and the shortfall exceeds your entitlements to the said property I further give my personal guarantee that I will make good any deficiency."
This document was signed by Syd in the presence of a witness and there was annexed to it a valuation of June 1990 by a Colac valuer of the property at $90,000. There was ultimately considerable debate between the parties as to the effects of this document. I will return to that aspect at a later stage.
There is then in the evidence disagreement as to what happened next. According to Mr. Russo, an Equus employee, one Oden, sent a deed of variation, and also a guarantee and indemnity for signature to Syd. This had to be addressed quickly because Lorne was due to settle on 10 August. Syd claims that he had a conversation with Russo (on 9 or 10 August) in which Russo agreed to limit the width of the guarantee which, according to Syd, was wider than it should have been and in respect of which he specifically told Russo that the money limit on the guarantee over and above the property was $35,000. He claimed Nick said fine, we'll fix all that up. Russo strongly denied this conversation, contending that it would be absurd for him to have accepted such a limitation and that he had not, and furthermore that had not had any conversation on those days with Syd at all. When Syd received the documents to which I have referred, he received seven pages of faxed documents. He executed two pages where provision for execution was made. He faxed those pages back to Equus and retained the other pages. He claimed in evidence that he did this, that is, he did not send back all the pages, because they had not been amended up in the way it had been suggested they would in his conversation with Russo. On the basis of the return of the executed parts, Russo did not seek to maintain the caveat over the Lorne property which was thereby enabled to be sold. What happened to the proceeds was not made clear but one assumes it was spent for the purposes that had been identified. Thereafter, according to Russo, efforts were made over long periods of time to have Syd execute the return the "hard-copy" (that is, not in fax form) documents which were sent to him. However nothing ever happened in that respect until November 1990.
According to Russo, on 9 November, having been endeavouring to get hold of the whole of the executed document from Syd, he finally spoke to him. Syd said that his solicitor had said not to sign the documents because they opened up all sorts of liabilities for any later loans made to Alan by Equus. Russo said words to the effect that that was nonsense, that it was always concerned only the cars and he would put it in writing that the guarantee was limited to the BMW and the SAAB. He made a file note of this conversation (see Exhibit O) and on 13 November faxed to Syd Worts a memo confirming that the guarantee was confined to the shortfall with respect to the two cars. Notwithstanding that, he did not get the executed document back until 10 December. Syd Worts' evidence was that later in the year, when things did not seem to be getting any better for Alan, he told Alan to go and see Madgwicks, solicitors, a man named Laurie, who had acted in a matter in which Syd had been engaged and by whom he was impressed. Thus very technically, he was claiming that what he was told was not coming from his solicitor but Alan's solicitor. Notwithstanding that aspect, his evidence to me was that Alan had told him that his solicitors Madgwicks had said that Syd should not sign the guarantee and indemnity and associated documents as it exposed him to other liabilities beyond the two vehicles. This virtually corroborates Russo. He claimed that once he got the assurance from Nick Russo, he then re-executed the documents, that is, he signed on a different document but to the original effect. It should be said that the document appeared to indicate that in about August 1990, Alan Worts' company was probably one payment in arrears but by December, when the documents were returned fully executed, the payments were about five months in arrears. It is hard to believe that this was not known to Syd Worts who was so well aware of Alan's perilous position that he was steering him towards the solicitors Madgwicks.
The pleadings and the defence
The plaintiff amended its statement of claim in April 1997. The defence at that time was a defence on behalf of both defendants. Nearly all of the allegations in the statement of claim as to the documents were admitted. The deed of variation of 9th August was admitted by both defendants to have been executed and the demands were admitted. By May 1997 Alan had different solicitors but N.A. Young & Co remained solicitors for Syd. Many defences were raised but at the end of the day few were persisted with before me. An allegation that Alan Worts was the agent of Equus and acting on behalf of Equus in the defence was abandoned on the second day of the hearing. Paragraph 20 of Syd Worts' defence appears to allege that a conversation concerning a limitation of the guarantee to an amount of $35,000 took place between Alan Worts and Syd Worts, it not there being pleaded that any conversation took place between Russo and Syd Worts to that effect. Thus, confining oneself to the statement of claim and noting the abandonment of agency, discussions between the Worts brothers could not bind the plaintiff. Moreover, the second defendant failed to call Alan Worts, although the evidence revealed that he knew where he lived.
Paragraph 25 of the second defendant's defence appears to form part of an allegation of unconscientious or unconscionable conduct founded upon Amadio-Garcia principles, claimed to arise and apply in this case. Paragraph 25 of the defence alleges that because of the relationship between Alan and Syd, Syd relied upon and trusted Alan and also relied upon Russo to advise him of all relevant matters. The defence is very discursive in form but essentially, I treat it as raising the matters that were the ones argued before me. These were as follows. First, that the second defendant was in a position of special disadvantage as a consequence of him placing trust and confidence in his brother Alan so that when his brother Alan sought Syd's consent to providing a guarantee backed by real estate security founded on the Colac storage yard as security to replace the Lorne property which was desired to be sold, the duty and obligation fell on the plaintiff to explain to the second defendant all of the matters relating to the transaction that would be reasonable for him to have known in order to decide whether or not he would give a guarantee. These included the state of the accounts, the debts in relation to motor vehicles and the nature of the obligation being assumed by Syd as to the relevant matters in relation to the cars. Second, the submission was that there had been a failure on the part of the plaintiff to advise the second defendant to obtain independent legal advice and/or not to enter into the agreement until such time as he had obtained it. Third, although there seems to me to be considerable doubt whether or not the defence does raise the argument which in my judgment became the principal argument, namely that the limit of the guarantee was $25,000, $30,000 or $35,000, this point was advanced, without objection, by Mr. Young.
The plaintiff's case was essentially founded upon the documents themselves, coupled with the denial that any arrangement was made outside the purview of the documents so as to affect the obligations that arose. Equus denied that there was any special disadvantage or any such situation or relationship as to attract equitable principles to set aside the legal obligations. It was contended that the issue of the guarantees was not first raised by Equus, that all relevant details were explained to the guarantor Syd Worts who was an experienced businessman familiar with guarantees and who was prepared to enter into an unlimited arrangement in order to aid his brother, a decision which he made and the implications of which were explained to him.
The findings
I now proceed to indicate the facts as I find them to be, and the consequences of the application of proper legal principles to the facts as I find them. I am satisfied that Mr. Russo of Equus had, over a number of years prior to these events, been involved with both Alan and Syd Worts in arranging finance for them, with Mr. Alan Worts whilst Mr. Russo was at Citibank and with Mr. Syd Worts while he was Associated Midland. With respect to these connections, there was little identification of the size of the transactions save that consolidation of Mr. Syd Worts' complex of companies, interest and debt into one creditor involved millions of dollars. I accept Mr Russo's evidence. I am also satisfied that with respect to both men, perhaps particularly Alan Worts, some level of friendship developed beyond an amiable commercial acquaintance. I am also satisfied that although Mr. Russo, particularly once he established his own business, Equus, was prepared to accept their statements of Alan and Syd e.g. as to property values, he was not prepared to risk large sums of capital without proper security including charges over personal and real property and all customary documentation. However, he was by no means difficult to get money out of on appropriate conditions, as the evidence in this case indicates.
I am mindful that with respect to both of the principal witnesses, they were giving evidence ten years after the events which they addressed. For the most part, Mr. Russo has had the support of memos and notes of conversations made at or about the times of the critical events occurring. Both plaintiff and second defendant have a considerable amount of money at stake in these proceedings. I make allowances for that, as well as the elapsing of time in my evaluation of the perspectives in the year 2000 of events occurring in 1989 and 1990.
Mr. Russo described Alan Worts, in effect, as an incurable optimist who always thought things would turn out his way when everyone understood the facts. Others may have seen him as an over-confident risk-taker. In my judgment, Mr. Russo was by no means seduced by Alan Worts' self-confidence and kept a close eye on the match between the moneys advanced and security. These events are a commonplace of business. Business friendships generate business but businessmen customarily protect themselves with appropriately drawn documents and rely upon their rights. I am mindful also that a backward look at the late '80s is often accompanied by the self-reassuring memory that one's judgment of the realities was superior to that of those around one.
The conversations of 17th May and 20th May 1990
The first critical date raised by the evidence is 17 May 1990. However, no conflict about that arises because the conversations to which Mr. Russo deposed all took place between him and Alan Worts. No objection was raised to this evidence. The first was the conversation concerning the advance required to buy the floating 5% in Micro-Computer Solutions and the request that the caveat and security might be put on the property at Lorne instead of the Geelong property. I accept Mr. Russo's evidence that neither of these matters presented any problem or difficulty to him. He agreed to them. The second aspect was the conversation on the night Alan Worts was charged, the first time indication to Russo that Alan had previously been under an NCSC investigation. I also accept this evidence. It would seem to me that it is likely that Syd Worts knew of that investigation before Russo did, it being mentioned by Alan Worts as a factor inhibiting him obtaining the price he wanted for the sale of his house.
The second important date is 20 July 1990. Mr. Russo's evidence of the conversations on that day, first with Mr. Alan Worts and then with Mr. Syd Worts, is aided by a detailed file note. I accept Mr. Russo's evidence about this. There is no reason at all to query the accurate recording of events which, having regard to all of the other evidence, appear to me to be perfectly feasible. I have already referred to the fact that Mr. Syd Worts originally said he had no memory of the conversation. This later became a positive rejection of it. However I do not accept his evidence about that. I note that the file note states that Alan Worts had said he had decided to keep both vehicles and would bring the account up to date. This is consistent with the evidence that Russo gave before me, in re-examination, that at the time of the conversation he had with Syd on 20 July Alan had absolutely not said that he could not make another payment. All this is consistent with Russo's evidence that he refused point blank to withdraw the caveat on the Lorne property, because there was a substantial shortfall between the value of the vehicles and the possible pay-out figures. It was prompted by Alan Worts' statement to provide the storage yard in Colac jointly owned with Syd, and to contact Syd about the guarantee that led to Russo calling Syd. Indeed, the terms of the file note, written more than three weeks prior to the documentation in August, were to this effect, concerning Mr. Syd Worts:
"He agreed to sign personal guarantees and give us a caveat interest and unregistered mortgage over the property he owned with his brother Alan Worts. He claims the property had been valued at over $100,000. He said he would fax to me a copy of the valuation."
Mr. Russo prudently noted that they would await details of the security property and the valuation, and then proceed in effect with due care. Thus I conclude that as early as 20 July Syd Worts had agreed to give a guarantee backed by the Colac property. An important issue is whether or not what was encompassed by the phrase in the note "Discussed the situation with him". Mr. Russo gave evidence to me that Syd never suggested that this call to him was a surprise, and that he thought that Alan and Syd had discussed the matter before he called Syd. He said that Syd well understood what he was getting into, and that he explained the two car accounts, what he was guaranteeing, what was owed at that time and the state of the accounts he was being asked to guarantee. He told Syd that the accounts were in default, only about one payment. He said he told Syd how much was owed and how much was in default. In his evidence before me, he said that he told Syd Worts on 20 July the details about the possible prices that might be gained on the possible sale of the BMW. The Equus only had it with it to see if they could get a better price if Alan decided to sell the cars but, since he had decided not to, it was no longer a relevant matter. What did matter was the guarantee and indemnity and the security. Mr. Russo also stated that he told Syd to get legal advice not because he thought he needed it, but because he always did say that at that time. He did not recall Syd's response to the suggestion. I note that it was suggested in cross-examination, then attempted to be addressed in the evidence of Mr. Syd Worts, that some conversation took place between Alan Worts and Syd Worts, Syd apparently believing that Mr. Russo was in some way involved at the other end of the conversation with Alan Worts. However, he conceded he had no knowledge of whether Mr. Russo was there and there was no basis articulated for that belief. I reject the second defendant's denial of the conversation and accept Mr. Russo's evidence.
I should say that in many respects I found Mr. Syd Worts to be an unacceptable witness. There was little of what he said to me that I would accept without reservation, particularly as so much of what he said ran counter to the documents generated at the time. I note in particular that he rarely answered a question briefly but launched into long self-exculpatory explanations in which he appeared as hero, the man of his word. By no means do I reject all his evidence because much of it is not disagreed with by Mr. Russo. However, he indicated enough from time to time that he was here to fight because the claim had blown out to $300,000. My finding of fact in this respect is a critical one because it impacts substantially upon one of the arguments advanced, that the plaintiff was in breach of its duty to fully explain, because of the vulnerable position in which Mr. Syd Worts was due to his trust and confidence in his brother and, for that matter, Mr. Russo. I will address that aspect separately but at the present time make the observation that I have no doubt that a reasonable and adequate explanation of the matters in relation to the car accounts and the debt owed by the company to enable him to give appropriate consideration to the matter was given to him by Mr. Russo.
No cross-examination was directed to Mr. Russo to suggest that what he claimed he told Mr. Syd Worts about the accounts was not set out in the memorandum, so as to throw doubt upon his evidence that he did give that information. Moreover, it appears to me from Mr. Syd Worts' evidence that his statement that he did not know that the SAAB was financed was false and certainly false on the basis of Russo's evidence. Moreover Syd knew about the NCSC investigation in February or March 1990. He knew that Alan had sold two of his premises, namely Latrobe Terrace and the property in Hayfield Court. However he thought Alan was moving to Melbourne to advance himself by developing his Micro-Computer business. One indication of the cavalier approach of Mr. Syd Worts to his evidence was when he was being questioned by his own lawyer as to the date upon which he discovered that Alan was in the Geelong lock-up. Mr. Syd Worts said he thought it was March/April 1990. He was told by Mr. Young that it was the 17th May to which he said "I will run along with that, it sounds good to me."
The August 1990 events
Mr. Syd Worts claimed in his evidence he had first discovered the proposal that he should assist by substituting Colac for Lorne two or three days before Lorne being settled which was the 10th August. I do not accept this evidence. Alan Worts had sought the withdrawal of the Lorne caveat and the substitution of the jointly-owned storage yard in Colac in conversation with Russo no later than 20th July in which he asked Russo to call Syd. It would be extraordinary if he did not tell Syd of these matters until two to three days prior to the due settlement. It was obviously he wished to set up this change and he did so. Accordingly I reject Syd Worts' evidence that Alan only asked permission to substitute Colac for Lorne as late as he claimed. I note that in his own evidence (T170) Syd said that Alan had told him that it was in connection with the cars. True, he said that Alan claimed a worst scenario disaster of a shortfall of about $30,000. I regard that as unlikely but in the upshot Syd never bothered to call. He claimed that what was faxed to him on 7 August looked like a loan agreement. A man as experienced in business as Syd Worts must have been well aware that it was not a loan agreement. What it was, however, was a request for him to supply in writing information about his affairs which he did not wish to supply. Eventually what he did supply was the letter of 8 August offering a guarantee in unmistakable terms, that if the shortfall after the sale of the cars was such that the sale of the Colac property was insufficient, he would pick up the outstanding amount. Mr. Young argued that the failure to make any reference to the claimed limit was explained by the fact that that amount would have to be deemed to be within his promise to make his share of the Colac property available. This, however, was not based on anything said to him by Russo. The letter is not difficult to construe. It was an unequivocal statement that his property would be available to meet the shortfall. If there was not enough from the real estate, he would meet it from sources other than the property. The absolute omission of any reference in the letter to the sum of $25,000 to $35,000 is the clearest indication it was not the subject of any agreement between Equus and the proposed guarantor, the second defendant. I find that it was not. The commonplace in the evidence of varying the alleged limit $25,000, $30,000 or $35,000, all used interchangeably, is a clear pointer to the fact that a specific figure was not mentioned as a limit.
The final paragraph of Mr. Worts' letter of 8 August has already been set out. The phrase "I further give my personal guarantee" etc., must mean "in addition to the sale of the Colac security". In his evidence before me, Mr. Worts sought to explain away the signing of the execution pages of the guarantee and indemnity of the schedule only on the basis that he thought that it covered more than the obligation arising out of the two cars, and that the agreement had not been adjusted to make that clear. However, I conclude that he had no discussion with Russo at all between 20 July and the execution of these documents. Ultimately, it appeared to me from the evidence of the second defendant, that he accepted that the only point he was really relying upon was that a limit of $25,000-$30,000 on shortfall had been agreed. I note that the letter he wrote on 8 August specifically identified the liability that was being addressed as being the liabilities in respect of the brother's company in respect of the BMW and the SAAB. The suggestion in his later claim that the liability was too wide is, in my judgment, clearly trumped up.
The events subsequent to August 10th 1990
Having sent back the executed pages and Equus having let the Lorne sale go ahead, Syd Worts simply sat back and declined to send off the extra pages that had been sent to him. He himself later claimed that he re-executed because he had given his word by the signing of the execution pages on 9 August. He later claimed when Russo finally ran him to earth in November that he was not satisfied that the obligation was confined to the cars. Russo derided that as nonsense but had no difficulty in writing a memo to make it clear that the obligation was limited to Alan Worts and his company's indebtedness in respect of the vehicles and not in respect to any other advances. Thus Syd's bluff was called. Moreover, on his own evidence he re-executed the binding documents in November 1990, none of which set any limit on his guarantee and indemnity, after receiving legal advice that he should not execute the document for fear that it did pick up some later obligations. He knew, of course, from the outset, having regard to the terms of his own letter, and from the November memorandum from Russo, that there was no wider liability for which he signed. In my view, his re-execution disposes of virtually every argument in this case, the argument founded on the ill-defined limit, the argument founded him having had no sufficient explanation, the argument of the fax to him, the argument founded upon not having had any legal advice and having been unaware of the matters which he was entitled to know. The re-executed document bore the same date of 9 August although it was redone in November. He said in effect that he did it because he was a man of his word by which, I take it, he meant that he realized at all times that he was bound by the previous document.
The second defendant's knowledge
I do not overlook that the second defendant was a person well familiar with guarantees. He said so in his evidence and that he had been involved in continuous activities for a long time at a high business level. I believe that he was evasive about his business interests in giving his evidence to me but I do not regard that as being of any particular significance. He had given a substantial guarantee to Westpac Bank in connection with his fish farm venture and had had, in connection with that, legal advice from the New South Wales Investment Corporation about guarantees. This was in about 1987 to 1988. He and his partner had sold 10% of that business for $1m. He knew well that banks as lending institutions, commonly required guarantees backed up by real estate or other security. I have no doubt that he absolutely well understood what the state of the debt with respect to the vehicles was and could be, that Russo had explained all that to him and, as I would venture, it was also probably explained to him by his brother. There does not appear to be any explanation of him returning only the execution pages of the relevant pages on 9 August other than an attempt to seduce Russo into believing that he had unqualifiedly accepted the terms in the document. He could at any stage have himself typed and faxed queries or explanations to Russo, whom he well knew, if he was in doubt of any feature of the transaction. He never offered any explanation why he executed the documents, if they were contrary to the agreement that he had made with Mr. Nicola Russo. He agreed that he could have raised an objection in November 1990 that the memo sent to him on 13 November still had made no reference to the alleged $30,000-$35,000 limit. He was silent about that and silent because it was never true. In my view to return his execution pages on 9 August was a serious attempt to mislead Equus and it did because it lifted the caveat on the Lorne property. It also appears that he may have been prepared to give the guarantee because he anticipated to get, if necessary, his brother Alan's share of his 80-year-old mother's house expected to be left to them both on her passing.
The Amadio-Garcia defence
Mr. Young raised in argument that a presumption of trust and confidence arose from the second defendant's sibling relationship with his brother Alan so to create an equity of a kind recognized by the High Court of Australia in Yerkey v. Jones (1939) 63 C.L.R. 649; The Commercial Bank of Australia v. Amadio (1983) 151 C.L.R. 447 and, more recently Garcia v. National Australia Bank Ltd. (1999) 194 C.L.R. 395.
I have no inclination to retread the well-trodden path of statements of principle from those cases, not always reconcilable as to the mode of expression but undoubtedly so in the exposition of fundamental principle. Yerkey v. Jones and Garcia were, of course, cases involving a husband and wife and, furthermore, to come to Garcia, that was a case in which the transaction was, as here, voluntary, in the sense that the guaranteeing party did not profit from the performance of the contract which was guaranteed. But the re-statement of principle by the majority in Garcia emphasized the unconscionability (unconscientiousness, to use Deane, J.' phrase in Amadio) in seeking to enforce the guarantee against the wife when she did not understand the purport and effect of the transaction when the creditor is to be taken to have understood that the wife might repose trust and confidence in her husband in matters of business). In such circumstances the creditor will be taken to have understood that the husband may not have fully and accurately explained the purport and effect of the transaction to the wife, or completely failed to do so. The perception of the factual matrix in Garcia (and for that matter Amadio) points up the fallacy involved in the suggestion that those cases apply so as to govern this case. One of the first, and significant, differences is that in those cases it had been left to the person in whom the trust and confidence was reposed, and entitled to be reposed, to explain to the surety giver the relevant facts. This is not such a case. In this case the lender spoke directly to the guarantor and, as I have found, explained the conditions and state of the management of the debt of the principal debtor to the creditor, and its then state, itself. Whilst there may be cases in which this direct dialogue may not materially change the application of the putative equitable conscience, here the fact is that the guarantor was told everything.
Moreover, one cannot overlook the evidence concerning Syd Worts' business acumen. The second defendant was neither Amadio nor Yerkey. He was a very experienced businessman, knew about guarantees, had them explained in the past and entered into them in the past. He had, as I have found, a detailed conversation with the mortgagee (with whom he had a long and well-developed commercial connection) concerning the state of the principal's indebtedness and the risks. At least as a commencing point, it would strike one as a palpable absurdity to suggest that this was a case which attracted the intervention of equity to prevent imposition.
Counsel for the plaintiff, Mr. Simpson, strongly attacked the proposition that a presumption of trust and confidence might arise from the relationship between Alan and Syd so as to create an equity of the recognized kind. He submitted that that argument was founded on a false premise which collapsed under the weight of the evidence. He argued that at no time did Sydney place any reliance, let alone trust and confidence in and upon Alan at the time of entering into the guarantee and indemnity and the deed of variation on 9 August or, even worse upon re-execution of the hardcopy documents in November 1990. He drew attention to the facts emerging from Syd's own evidence, namely that he was last in partnership with Alan some 35 years before. He deliberately did not discuss business with him. He spoke to him once every two or three months if that. His connections with Alan were so slight he only learned about his difficulties and the possible sale of the Lorne property very late (although I have not accepted that evidence). He was told by Alan not to re-execute the hard copy documents but said that he had already made an agreement. He then re-executed the hard copy documents even though Alan rang to say he should not and, on the contrary, he said he placed his faith on Nick Russo. It seemed to me that Mr. Simpson also put a submission that a sibling relationship of this kind without cohabitation could not fall into the categories that the court decisions had favoured, although he appeared ultimately to concede that if the requisite elements of trust and confidence were demonstrated by evidence, such a relationship would have to be admitted under the rubric to which I have referred.
Without endeavouring to say any more than is necessary for a judge at first instance with respect to the application of legal principle, this is a hopeless case to suggest that the guarantor fell within the range of equitable protection established by the cases to which I have referred. Some emphasis was also placed by the plaintiff on the second defendant's failure, without explanation, to call Alan Worts as a witness, as one he might reasonably be expected to call, thus permitting me to infer that his evidence would not have advanced Syd's defence of these proceedings. This was said to be in two respects. One, in deciding whether to accept the evidence of Syd that he had a conversation with Alan by which he expressly limited his liability under the guarantee for a maximum amount of $30,000; (b) in deciding whether to infer facts open to the Court upon the evidence given in relation to contested matters with respect to which Alan, not called as a witness, could have spoken: see O'Donnell v. Reichard [1975] V.R. 916. I do not lend much weight to this and moreover, having regard to the views I have formed, I have no necessity to resort to inferences that the application of that principle might permit. In addition, although the evidence did not specifically address it, Mr. Young's submission to me was that the relationship between the brothers had in effect deteriorated. As was often the situation before me, some of the evidence came from the Bar table instead of the witness box.
I have not ignored Mr. Young's submissions to the effect that the full debt on the car had not been disclosed nor the special features of the Prestige Plan and that the simple fact that there was substitution of, not creation of, a security as being potent on this issue. In my view, however, the facts are insuperably against the second defendant's case.
I have not referred to the evidence of Mary Fugaro, called for the plaintiff which established by way of a Certificate of 20 April 2000, pursuant to s.55B of the Evidence Act 1958, the following matters: (1) the advance made on 13 January 1989 through the Worts' company was $153,338.49; (2) the payments made by the borrowing mortgagor to the plaintiff during the term of the chattel mortgage (13 January 1989 to 13 December 1992) resulted in a debt of $120,423.59 as at 13 December 1992, with interest accruing thereon, at the higher rate of 19.9% per annum, that is at $65,66 per day; (3) neither the mortgagee company nor either defendant guarantor has made any payments since service on them of the notices of demand; (4) the total indebtedness as 26 April 2000 is $297,037.17 plus interest at $65.66 per day. It is to be borne in mind that in this case there was a guarantee and indemnity. Consequential losses are recoverable.
This has been, in many respects a melancholy and wretched case. A brother assisting another brother by guarantee with property as security, only to find that disaster supervenes so as to leave him exposed beyond all reasonable expectation. The case dragged on for years, a delay not explained, never brought into a list for close management, and with neither side pressing hard for trial. Finally, the iron hand of 19.9% interest, a frightening rate that reminds of the inglorious economic commonplaces of an undisciplined era, thankfully departed, at least for the time being. The Court has no pleasure in declaring the necessity to make the orders which I will shortly specify.
The case against the first defendant Alan Worts, although undefended by him, was heard as part of this proceeding. The case against him has been amply established by a combination of relevant matters. Firstly, the admissions made by way of defence; second, the consequences that flow from the Notice to Admit deemed to be served upon on the first defendant by the filing of it in the Supreme Court Registry on 6 April 2000, in accordance with the mode of service ordered by paragraph 4 of the order of Master Kings of 4 October 1999 and in accordance with Rule 20.05(3) of the Rules. I refer to the affidavit of Jay Aaron Hyett. The facts were specified in paragraphs 1 to 15 and the documents referred to in paragraphs 16 to 17 of the Notice to Admit are, as a consequence of the Rules and service of it, deemed to be admitted for the purpose of this proceeding. No notice of dispute as to any of the facts ought to be admitted has ever been filed or sought to be relied on. I also note the affidavit of Andrew Dean Harris, a solicitor employed by Lewis Hutchinson, former solicitors for the first defendant, and which was given in the companion proceeding No. 7825 of 1996 (the SAAB claim), a proceeding which was ordered to be heard with this proceeding and which I did hear immediately before commencing with the present proceeding. In particular I refer to the exhibits to that affidavit marked D and E and tendered in evidence.
Accordingly there should be judgment for the plaintiff against each defendant, namely Alan Reginald Worts and Robert Sydney Worts in this proceeding in the sum of $298,022.07 to the 10th day of May 2000.
I note that in the written submissions on behalf of the plaintiff a claim for indemnity costs was made. A similar claim was made and granted by me with respect to the SAAB proceeding but I will hear the representative of the second defendant on the issue of costs, if he wishes to be heard.
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