First Mortgage Managed Investments Ltd v Basil James Pittman - [2012] NSWSC 1332

Supreme Court

New South Wales

Amendment notes

Medium Neutral Citation: First Mortgage Managed Investments Ltd v Basil James Pittman [2012] NSWSC 1332
Hearing dates: 04/07/2011 - 08/07/2011
Decision date: 01 November 2012
Before: Garling J
Decision:
1. I order that the parties confer with a view to reaching agreement as to the orders which ought be made to give effect to these reasons;
2. In the event that the parties are unable to agree, then each party is to file a set of short minutes of order for all of the orders sought, including any order as to costs, together with an outline of submissions in support of those proffered orders on or before 4pm, 22 November 2012;
3. Any submissions in response are to be filed and served by 4pm 29 November 2012;
4. Adjourn the proceedings for hearing on the short minutes to 9.30am 6 December 2012.

Catchwords: REAL PROPERTY - defendants properties used as security for substantial loan - loan used by second cross-defendant - defendant's lacked education, life experience and commercial sophistication - inadequate independent legal advice - solicitor also acted for second cross-defendant - defendants pressured by second cross-defendant - plaintiff did not adhere to prudential lending guidelines - whether contract under Contracts Review Act 1980 or unconscionable - contract unjust - whether mortgage ought be set aside - consideration of benefit to defendants
Legislation Cited: Contracts Review Act 1980
Trade Practices Act 1974 (Cth)
Fair Trading Act 1987
Cases Cited: Antonovic v Volker (1986) 7 NSWLR 151
Baltic Shipping Co Limited v Dillon (1991) 22 NSWLR 1
Bank of Western Australia v Tannous [2010] NSWSC 1319
Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256
Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447
Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413
Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482
Fast Fix Loans Pty Ltd v Samardzic [2011] NSWSC 19
Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; (2008) 77 NSWLR 205
Nguyen v Taylor (1992) 22 NSWLR 48
Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41
Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153
Spina v Permanent Custodians Ltd [2009] NSWCA 206
St George Bank Ltd v Trimarchi [2004] NSWCA 120
Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; (1995) 184 CLR 102
West v AGC (Advances) Ltd (1986) 5 NSWLR 610
Texts Cited: ---
Category: Principal judgment
Parties: First Mortgage Managed Investments Ltd (P)
Basil James Pittman (D1)
Rex Neil Webster (D2)
Margot Locke (2nd XD)
Representation: Counsel:
Mr M Young (P)
Mr J Lazarus (D1 & D2)
No appearance (2nd XD)
Solicitors:
Bransgrove Lawyers (P)
Brock Partner Lawyers (D1 & D2)
Self Represented (2nd XD)

File Number(s): SC 2008/288217

Judgment

The Plaintiff, First Mortgage Managed Investments Ltd, sues Basil James Pittman and Rex Neil Webster for possession of three properties, and as well, a monetary judgment in the exercise of its claimed entitlement under a number of mortgage securities over adjoining properties on the Bells Line of Road at Kurrajong Heights and upon the basis of a loan agreement.

Mr Pittman and Mr Webster oppose the relief sought on a variety of grounds and claim, by an Amended First Cross-Claim, that the Court ought to grant relief to them under the Contracts Review Act 1980, Trade Practices Act 1974 (Cth), Fair Trading Act 1987 and in accordance with equitable principles.

THE PARTIES

First Mortgage Managed Investments Ltd

First Mortgage Managed Investments Ltd ("FMMI") is the manager of an investment scheme which obtains funds from the public and lends them on the security of first mortgage. The loans are invariably for a relatively short term, here a period of two years, and are interest only loans.

FMMI has a series of requirements that must be fulfilled before monies are advanced and loans are completed. Those requirements are to be found in a document which was before the Court called "A Prudential Lending Manual". Mr Michael Boyce, a solicitor of the Supreme Court of Queensland and of the Supreme Court of New South Wales, was the Executive Director and Compliance Officer of FMMI. He was the key person noted on the Australian Financial Services Licence held by FMMI. His role as Executive Director and Compliance Officer involves the checking of, and advising further in respect of, credit and valuation analysis, the documentation of the loan facility and the settlement of the loan, acting in his capacity as a solicitor. It was he who approved the loan in question.

Mr David Wilson was at all material times the Director and Lending Manager of FMMI. He had the day-to-day conduct of the file involving the loan in question. He was responsible for preparing much of the internal documentation, or else causing it to be prepared.

It is necessary to identify the fact that there are two entities involved on the plaintiff's side of the proceedings although, the parties did not suggest that I needed to differentiate between either of the two organisations. FMMI, which is the plaintiff, is an unlisted public company established in 1999 and which, as I said above, specialises in offering first mortgage investments to investors. It holds an Australian Financial Services Licence. It raises monies from investors and then makes those monies available to be loaned to borrowers.

The second corporate entity is First Mortgage Investments Pty Limited ("FMI") which is the mortgage manager to FMMI. It is responsible for the efficient management of the mortgages held by FMMI. The evidence suggested that the duties and responsibilities of FMI were:

(a) Assessment of loan applications and issuing letters of offer;

(b) Attending to credit analysis and valuation requirements for each loan;

(d) Issuing as necessary all default proceedings to obtain recovery of outstanding monies.

The boundary between these two corporations was, in practice, not entirely clear.

I will refer compendiously to the organisations as "First Mortgage" unless there is a need to differentiate between them.

Basil James Pittman

The first defendant, Basil James Pittman, was born in 1938 and has lived all of his life on a property on the Bells Line of Road at Kurrajong Heights. He is now 74 years old.

He left school at the age of 16 and went to work locally as a gardener, flower and vegetable grower. He also worked in an apple orchard and as a builder's labourer. He subsequently became an orchardist. In 1964, he inherited one of the properties the subject of these proceedings upon the death of his mother's mother. It was subject to a life interest in favour of his mother who died on 31 January 1994. In 1965, he purchased another lot of land on the Bells Line of Road. In 1972 or 1973, together with his half brother, Rex Neil Webster, he jointly purchased another property on the Bells Line of Road which adjoined the property which he had inherited.

He and his half brother, Mr Webster, have lived in the house on the inherited property for all of their life. They shared the house with their mother prior to her death.

He and his brother share a room. The house has no running water. Water is available from a standing tank. They use a wood fire for their cooking needs. Although the house has an electrically operated stove and microwave, both of these are in poor condition and are not used. Photographs of the house demonstrate that it is rudimentary in its design, layout and construction. It is poorly maintained. It is adequately described as simple, plain and barely adequate accommodation.

With the exception of a few hundred dollars in share dividends from NRMA (now Insurance Australia Group Ltd), Mr Pittman's income has been and continues to be from the sale of fresh fruit produce grown on part of his land being Lot 8. He has, and has had, at all material times relevant to this case, no other source of income. He has no superannuation. In evidence, he estimated that the combined income of Mr Webster and himself is about $30,000 gross per year. His income tax returns suggest that his income is in fact a lower figure than that.

Mr Pittman's commercial experience has been almost non-existent. In about 1977, he obtained the loan of some money to construct three dams on his properties from an agency of the New South Wales Government. He had purchased a tractor and piece of orchard equipment by hire purchase in 1977. Although he obtained approval for a loan from the Commonwealth Bank of Australia to enable him to purchase the block of land which he jointly acquired with his brother in 1972 or 1973, he ultimately did not call upon that loan and paid cash for the land.

He has had no borrowings prior to the events in question and the evidence does not suggest he had ever taken out a mortgage or had any commercial dealings whatsoever except for those rudimentary ones which would ordinarily arise from his occupation as an orchardist. Like his brother, he had no understanding of the complexities and risks of property development, nor of the complexities of the financing and funding of such projects.

In giving evidence, I formed the clear impression that he was an honest and truthful witness. It is clear that his evidence was on some occasions inaccurate. I accept the submissions of counsel for First Mortgage that he had "... an imperfect recollection of relevant events". Nevertheless, I am inclined to, on the whole, accept his evidence.

Rex Neil Webster

The second defendant, Rex Neil Webster was born in 1943 and accordingly is now 69 years old.

He too left school at the age of 16. Although he sat for his Intermediate Examination, he failed all of his subjects and was a poor student. After leaving school, he worked as a labourer for about four years on a local orchard. He then commenced to work for the New South Wales Government in the Department of Main Roads (and it successor agencies) as a ganger. A ganger is a person who is involved in building or repairing roads. It is another name for a labourer. He held that employment for over 30 years. He is presently employed, and has been since 2003 by a company that buys and sells fresh produce. He works part-time as a labourer doing odd jobs.

In his evidence, he described his current living arrangements as according with the description which I have given above. He notes that he has never married and then gives this description of his own capacity:

"I don't tend to read very much. The only things I normally read are the Daily Telegraph, (the fishing section, the weather and perhaps the front page sometimes) and some fishing magazines. I do not read books. I would not be able to sit down long enough to read one."

The only land that Mr Webster owns is the lot which he jointly owns with Mr Pittman. He borrowed some money from the Commonwealth Bank in order to fund that purchase. With that exception, he had never purchased any property. Prior to the relevant events in question, he had never seen a solicitor and had made only a few major purchases in his life, which essentially involved motor vehicles, a tractor and a fishing boat. He paid cash for each of these.

The only shares that he has ever owned were, like his brother, IAG shares, which he obtained on the demutualisation of the NRMA.

It is fair to say Mr Webster is an entirely unsophisticated and simple man who, at the time in question, had no commercial knowledge or sense at all and had had no real experience in matters of significant borrowings, mortgage transactions, securities and the like.

He certainly had no experience in the funding for, nor the undertaking of property development. He had no knowledge of any of the risks associated with such projects.

Mr Webster was, in my assessment, an honest witness. He had little real memory of the events. Some of his evidence was clearly a reconstruction, and it was occasionally difficult to be entirely certain which parts of his evidence were original recollections, and which parts reconstruction. As well, from time to time, in cross-examination, I had a real sense that he did not understand the question and its purport, although he proceeded to give an answer, often making concessions against his interest. Whilst, I accept the objective and contemporaneous accounts, particularly from documents, where these differ from his recollections, I generally accept his evidence.

Other relevant individuals

It is convenient at this stage of the judgment, in introducing the parties to identify two other individuals whose conduct will form part of the narrative of the events. The first of these is Ms Margot Locke. Ms Locke was joined to the proceedings as the second cross-defendant. She filed a defence, but when the proceedings were called on for hearing she did not appear. I was informed by counsel that she had previously been represented when the matter was before the Court on earlier occasions, but that the Court had been informed that she did not intend to appear at the final hearing and that she would "...submit to any order of the Court". I have proceeded with this judgment upon the basis that as she has not appeared, any evidence that she has filed has not been read, and that the evidence about Ms Locke comes before the Court from a variety of other sources.

Ms Locke was apparently known by a number of other names, but it is sufficient for the purposes of this judgment to maintain the reference to her as Ms Locke.

Ms Locke came into the lives of Mr Pittman and Mr Webster in a significant way in about 1990. At that time, she rented the property adjoining the property where Mr Pittman, Mr Webster and their mother lived on the Bells Line of Road. During the time she was living on the property, she gave birth to a son. Apparently Ms Locke had a difficult experience in raising her son. This led her to become friendly with Mr Pittman and Mr Webster's mother, Ena Fairlie Webster. As a consequence, Ms Locke was a regular visitor to the house where Mrs Webster lived.

During the very severe bushfires of late December 1993 and early January 1994, Mr Pittman, as a member of the local rural fire brigade, undertook operations involving Ms Locke's property. He came to know her somewhat better during that time of crisis.

Ms Locke used to visit Mrs Webster regularly. She would stay for a meal about once a week. After Mrs Webster's death in January 1994, Ms Locke continued to visit regularly and share a meal with Mr Pittman and Mr Webster. They were obviously friendly.

It appears from the evidence that Ms Locke was an apparently sophisticated, charming and somewhat beguiling woman. She engaged in land development. She operated her business affairs through a number of companies or trusts including Forest Group Pty Ltd, Skyfarm Pty Ltd, Skyfarm Holdings Pty Ltd and Total Property Developments Pty Ltd. The evidence suggests that she used a number of names to describe herself in her various business activities including Christina Locke, Margaret O'Dell, Christina O'Dell, Isobel O'Dell. As well, there appear to be a number of other bodies which could have been companies or trusts, the evidence was unclear, through which she conducted business. They included: Ribbon Master, M & M Holdings, M & J Family Trust, Remony Farm, Pecks Farm Pty Ltd and Pecks Family Trust. The evidence discloses that Ms Locke was undertaking developments of one sort or another at Valley Heights in the Blue Mountains, Springwood in the Blue Mountains, Silverdale and also near Camden in the area of the Razorback range. There may have been others.

Ms Locke, according to the evidence of Mr Webster, which on this matter I accept, was also capable of exploitation of others who were less sophisticated than she. Having inveigled herself into the lives of Mr Pittman and Mr Webster by providing limited companionship, and some very limited assistance with domestic chores after their mother's death, some chores around the orchard and providing some signs advertising their produce for sale by the side of the road, she prevailed upon Mr Webster to undertake labouring tasks for her upon the promise that she would pay for his work. She did not ever do so. As well, she persuaded Mr Webster to advance her some money by obtaining a Citibank Visa Gold Card which was used to pay various of her expenses. Despite her promises and assurances, Mr Webster was never reimbursed for these expenses.

As the evidence shows, Ms Locke was a woman who was prepared to lie and deceive in order to obtain money and valuable benefits to be used for her own interests at the expense of others.

She was pushy and forceful, was persistent and demanding and, it would appear from the evidence, driven by her single purpose of enriching herself through land developments. She was manipulative, greedy and an exploiter of the vulnerable.

Her conduct in the circumstances was thoroughly discreditable. Mr Pittman and Mr Webster were no match for Ms Locke.

Emma O'Callaghan

Ms O'Callaghan was a witness in the proceedings. In January 2003 she started work as a paralegal with the firm Christopher M. Edwards. In January 2004, she commenced practice as a solicitor of the Supreme Court of New South Wales on a full-time basis. She worked from that time onwards for the firm which carried on practice in Richmond. Her position as a solicitor specialised in conveyancing and associated transactions. Her functions and responsibilities included the full carriage and responsibility for the completion of conveyancing transactions including sale and purchase of residential property, refinancing of commercial property, drafting and registration of commercial leases, negotiation and the drafting of commercial agreements. She regularly explained mortgage and finance documents to clients and was also involved in the checking of finance approvals.

Christopher M Edwards had acted for Ms Locke from about 2004 onwards. Ms O'Callaghan dealt with Ms Locke personally in relation to a conveyance in late 2004. Between late 2004 and October 2006 she was instructed by Ms Locke in relation to a number of matters, predominantly conveyancing matters involving refinancing and sales of property either by Ms Locke or her associated companies. A conveyancing paralegal, Ms Martin also undertook work for Ms Locke under the supervision of Ms O'Callaghan or the principal of the firm, Mr Edwards.

The documentary evidence of communications between Ms O'Callaghan and Ms Locke in 2006, satisfy me that Ms O'Callaghan was familiar with Ms Locke and was able to deal with her, on relatively informal terms because of that familiarity. She was in all respects, Mr Locke's solicitor.

Ms O'Callaghan provided advice to Mr Pittman and Mr Webster with respect to their entry into the loan agreement with First Mortgage and the execution of the security documents relating to that loan agreement. She was also involved as a solicitor in giving them advice with respect to a refinance transaction which occurred in 2008. Hers was the only legal advice which Mr Pittman and Mr Webster had access to, or received, with respect to the First Mortgage transaction.

As a witness, Ms O'Callaghan had little independent recollection of her meetings with Mr Pittman and Mr Webster. My clear impression was that she was largely reliant upon her general practice. As later analysis shows, her evidence was often inaccurate. It is necessary to approach the acceptance of her evidence with care and caution. That is not because she was a dishonest witness. On the contrary, she was manifestly honest and made concessions against her interests, but she was not a wholly reliable witness.

The Land

The Bells Line of Road runs generally in an east-west direction across the Blue Mountains from North Richmond to Bell. In the area of Kurrajong Heights to Bilpin, the land use is predominantly rural, generally consisting of small lots, which are used for principally horticultural purposes, such as orchards, with some vegetable and flower growing areas. Roadside fruit and vegetable stalls are commonplace.

Properties along the Bells Line of Road are bordered to the north by the Wollemi National Park and to the south by the Blue Mountains National Park.

The land is predominantly owned by residents of long standing, mixed with city dwellers who retreat to the area for peace and quiet and bush solitude.

The properties taken by First Mortgage as security for the loan were on three separate titles. It is unnecessary in this judgment to give the full title details. It is the policy of the Court not to do so. I will refer to the land as Lot 8, Lot 9 and Lot 23 respectively. The Lots were adjoining and had only a few buildings on them including the old home in which Mr Pittman and Mr Webster lived, which was located on Lot 8.

Lot 8, known as the house block, was about 58 acres, or 23.66 hectares. It had a number of dams and an orchard on the property. There were two sheds. The house was described by First Mortgage's appointed valuer as built about 1900, of weatherboard and corrugated iron, which was in extremely poor condition. I have earlier described the conditions inside the house in terms of services and facilities. So poor was the house that the appointed valuer assessed it as having no value at all.

Lot 9, known as the middle block, was about 53 acres or 21.58 hectares. It had no agricultural improvements such as a shed or an orchard. It had a very poor quality, old, two bedroom cottage on it. The appointed valuer described it as being "in extremely poor condition".

Lot 23, known as the bottom block, was the land owned by both Mr Pittman and Mr Webster jointly. It consisted of about 63 acres or 25.55 hectares. It had two dams on it but had no buildings at all.

It can be observed that all three secured properties were rural, relatively small holdings and without any significant infrastructure investment. The houses were in very poor condition. There was no sophisticated horticultural or agricultural enterprise being undertaken on the land. This picture, drawn from the appointed valuer's reports, was one available to First Mortgage, if the report had been read.

First Mortgage transaction

The transaction involving First Mortgage, which it is sought to set aside, occurred in December 2006. There was a subsequent variation in February 2008.

Before coming to a description of all of the issues, and a further consideration of the facts which arise, it is convenient to set out the events of December 2006, the terms of the mortgages and the circumstances in which they came to be signed.

Ms Locke and First Mortgage had dealings prior to those involving Mr Pittman and Mr Webster. In those dealings, Ms Locke instructed Ms O'Callaghan to act for her.

So far as appears from a letter dated 2 November 2006 from Christopher M Edwards to Ms Locke, the previous dealings had at least these features:

(1) the amount of the loan was more than enough to pay out the previous lender the sum of $2.46M;

(2) the loan was secured over four separate properties in the Bilpin and Kurrajong Heights area;

(3) the outgoing lender was entirely different from the outgoing lender in the transaction involving Mr Pittman and Mr Webster; and

(4) Ms Locke's solicitor, Ms O'Callaghan or her assistant Ms Martin had been dealing with First Mortgage. Thus, by 27 October 2006, when the loan was settled, First Mortgage knew that the firm Christopher Edwards was Ms Locke's solicitor.

The particular context for the December 2006 transaction commences in November 2006. Ms Locke approached First Mortgage because she wished to arrange the refinancing of an existing facility which can be conveniently called the "Flamanda facility".

On 1 November 2006, which was within a few days of the settlement of the previous $2.46M loan, Ms Locke sent a proposal for a further loan by email to Mr David Wilson at First Mortgage. She described it as "loan refinance of Lots 8, 9 and 10... - Bells Ln Rd, Kurrajong Heights, NSW. Owned in our private names, not a company". Further details were provided. The terms of this and further emails between Ms Locke and First Mortgage show a degree of familiarity with each other, which must have been engendered, at least in part, from the October transaction.

Mr Wilson responded by asking whether she wanted First Mortgage to issue an offer to her. She responded affirmatively. There was further correspondence between Ms Locke and Mr Wilson about the whereabouts of an offer. On Friday 3 November 2006, Mr Wilson sent an email to Ms Locke in the following terms:

"These lots, PR Data, shows them in different names, but of course that is not always correct. Please confirm that they are all in the name of Skyfarm."

Ms Locke responded in the following terms:

"Hi David, you are correct, the names will be Basil James Pittman and Rex Neil Webster. These two people are the borrowers."

On the next business day, Monday 6 November 2006, First Mortgage issued a Letter of Offer. It was addressed to Mr Pittman and Mr Webster, and it, relevantly, included the following:

"RE: FIRST MORTGAGE MANAGED INVESTMENT LIMITED PROPOSED ADVANCE TO YOU

We refer to the recent submission received by us from First Mortgage Investments and wish to advise that our Company is able to make an advance to you, the principal terms and conditions of which are as follows:

This offer is conditional upon receipt of part of an establishment/application/management Fee in the sum of $1,100.00 in favour of First Mortgage Investments Pty Ltd.

In addition you will be required to pay a valuation fee, a quote for which we will obtain upon receipt of ALL signed documents together with your cheque for the establishment/application/management fee.

We cannot process your loan until we receive BOTH the establishment/application/management fee and valuation fees.

Principal

$2,030,000.00

Interest Rate

15.95% reducing to 10.75% for prompt payment.

Method of Payment

Interest only monthly in arrears which will provide for the appropriate amount to be debited to the Borrower's Account THREE (3) DAYS PRIOR TO THE DUE DATE and shall be made to the credit of First Mortgage Managed Investments Limited - Internet Account

Term of Loan

Twelve (12) months from date of advancing of monies

Proposed Mortgagor

BASIL JAMES PITTMAN
REX NEIL WEBSTER

Proposed Borrower

BASIL JAMES PITTMAN
REX NEIL WEBSTER

Guarantors (if applicable)

Director and/or Shareholders of Mortgagor (if Company)

Method of Payment

By Bank Periodical Payment

Minimum Valuation

1/ $1,200,000.00
2/ $ 750,000.00
3/ $ 950,000.00

Security
(a) First Registered Mortgage over property situate at

1/ Lot 8 Bells Line of Road, Kurrajong Heights
2/ Lot 9 Bells Line of Road, Kurrajong Heights
3/ Lot 10 Bells Line of Road, Kurrajong Heights

(b) Loan Agreement between the Borrower/s and First Mortgage Managed Investments Limited (the Lender)

(c) First Deed of Assignment of Rentals in respect of all leased mortgaged premises.

It is to be observed that First Mortgage made this offer without any application from Mr Pittman and Mr Webster, and without any knowledge of who they were, nor what their capacity to service the loan was. All that was required was that the land meets the minimum specified value. The offer was made solely upon the basis of First Mortgage's dealings with Ms Locke, and any information which she had provided them about the amount necessary to be borrowed, the term of the loan and the purpose of the loan. First Mortgage knew nothing of Mr Pittman and Mr Webster, but were content to offer to lend them a multi-million dollar sum.

Having regard to the evidence up to this point in time, with respect to the First Mortgage loan and the previous loan transaction in October 2006, I would be prepared to find that by this time, First Mortgage knew of Ms Locke, had had previous dealings with her, were aware of, at least, one other of her business entities: "... in the name of Skyfarm", and had a sufficient understanding of her various business ventures for which the loan was being sought, as well as her overall financial position.

At the end of the letter, there is provision for acceptance of the Letter of Offer which was to be signed by Mr Pittman and Mr Webster. It is in the following terms:

I/We BASIL JAMES PITTMAN and REX NEIL WEBSTER HEREBY ACCEPT the principal terms and conditions set out herein and advise that the Title Reference to the above property is .................................................. and our Solicitors who will be attending to our interests in this transaction are ..........................

DATED this day of 2006.

..............................................................

Signature

BASIL JAMES PITTMAN

..............................................................

Signature

REX NEIL WEBSTER

The Letter of Offer was accompanied by two declarations under the Consumer Credit Code, and a number of other documents.

It appears that the two declarations under the Consumer Credit Code were each signed by Mr Pittman and Mr Webster on 10 November 2006, before a Justice of the Peace, Mr Kelvin Tsui. Mr Tsui was the proprietor of Rabbit Photographics in Richmond.

According to his evidence, the signature appearing as the witness to these documents is his. Understandably, he has no specific recollection of the occasions when he witnessed these signatures. However, he does say:

"In each case ... I would not have signed as witness of the document without having the signatory or signatories on the documents that I was required to witness."

Mr Tsui does not, in his evidence, suggest that prior to signing any documents, he requires the production to him of any documents of identification for the individuals who are signing the documents. He does not suggest that it is any part of his function to check that the person who is purportedly signing a document in a particular name, is in fact that person.

Mr Tsui knew Ms Locke well, and used to see her once or twice a week. He says that he had witnessed a number of documents for Ms Locke over the years. He says that he did not recall the names of Mr Pittman and Mr Webster although, in 2010, when shown a photocopy of a driver's licence of Mr Pittman and Mr Webster, he said that he believed that he had met them before and that he did remember their faces. However, he was unable to describe the circumstances in which he had met them.

The signatures of Mr Pittman and Mr Webster accepting the offer were not required to be witnessed. The signed documents were sent to First Mortgage by Ms Locke.

Included in the signed documents were a Statement of Personal Particulars, and an Asset and Liability Statement. These provided details with respect to Mr Pittman and Mr Webster. They were completed by Ms Locke. They were undoubtedly signed by Mr Pittman and Mr Webster. However, having regard to the incorrect particulars recorded, I think it likely that the documents were signed before they were fully completed, because I think that had the particulars, which I will shortly identify, been included at the time the documents were signed, it is likely that Mr Pittman and Mr Webster would have noticed these discrepancies. This would have given rise to one or more queries and a conversation with Ms Locke. There is no evidence that this occurred. In those circumstances, I am satisfied that the Statement of Personal Particulars was incomplete at the time it was signed.

The Statement of Personal Particulars, which was completed by Ms Locke, is false in a number of respects. They are:

(a) that Mr Pittman's net weekly salary/wage was recorded as $5,000. Mr Pittman's annual income at about that time was in the order of $15,000. He had never earned $5,000 a week, or anything like that;

(b) Mr Webster's weekly salary was recorded as $4,000, which was false because his annual income was, like Mr Pittman's, about $15,000;

(c) the nearest relative who was not living with them was recorded as Ms Margaret Anne Locke, who was said to be their niece. Ms Locke was not a relative of theirs, nor was she their niece;

(d) their solicitor and accountant was recorded as Christopher Edwards/Leanne Martin of the firm Christopher Edwards at Richmond. Mr Pittman and Mr Webster had never met Mr Edwards or Ms Martin and had never retained them to act for them (although that occurred about a month later).

The Asset and Liability Statement was also submitted with these documents by Ms Locke to First Mortgage. It is signed by Mr Pittman and Mr Webster, although it is not completed in their handwriting. I am satisfied that they signed the document before the relevant details were inserted. I am satisfied that Ms Locke completed these details.

The Asset and Liability Statement records that between them, Mr Pittman and Mr Webster had $18,000 deposited in the bank, and had $18,000 cash on hand. It records their ownership of the land. It records their ownership of three motor vehicles, a modest amount for furniture, and farm equipment of $50,000.

This document, which provided information to First Mortgage about Mr Webster and Mr Pittman, stood in stark contrast to the Statement of Personal Particulars. On the one hand, the Statement of Personal Particulars presented a picture of two elderly gentlemen who had lived all of their lives on the land in question and who were said to be earning on a net basis, a little under $470,000 pa. Yet, the Asset and Liability Statement suggests that they own only a very modest amount of furniture and farming equipment of indeterminate age, three motor vehicles, one of which was 35 years old, and they only had a total of $36,000 in cash and savings.

Since they had no liabilities, according to the Asset and Liability Statement, including any obligation to make any payment on existing loans, there was a clear discrepancy in this information. If documents were read, with a view to a rational financial assessment by First Mortgage, and obtaining any understanding of who the borrowers were, and their capacity to repay the loan, such a discrepancy ought to have raised in the mind of First Mortgage real doubts about the accuracy of the information and the probity and prudence of making the loan.

There was a later amendment to the front page of the Letter of Offer. It appears that on 14 November 2006, Ms Locke sent a letter to First Mortgage by facsimile, which said:

"Please find as follows the amended front page of the loan offer accepting the interest rate of 10.75 % and a penalty rate of 15.95% of the loan to B J Pittman and R N Webster."

Mr Pittman and Mr Webster both deny that the signatures on the accompanying document written against the interest rate are theirs.

I am not satisfied that they signed those signatures. The signatures do not look like, to me, the signatures at the bottom of the document. In particular, the letter 'B' in Mr Pittman's first name and the letters 'BST' in Mr Webster's name are sufficiently different from the admitted signatures of Mr Pittman and Mr Webster for me to doubt their authenticity. I accept the denial of Mr Pittman and Mr Webster that they placed their signatures on that document. I am satisfied that Ms Locke signed their names on this document.

On 1 December 2006, First Mortgage sent a letter to Christopher Edwards, Solicitor, relating to the proposed advance to Mr Pittman and Mr Webster, and the security documents. That letter enclosed the mortgages, the Loan Agreement, a Bill of Sale, a Deed of Assignment of Rentals, and a number of other declarations. The letter provided instructions to Christopher Edwards as to the requirements of First Mortgage with respect to the execution of the documents. First Mortgage required the return of the following documents:

"The above documents duly executed by all parties denoted thereon and in respect of ALL SECURITY DOCUMENTS same MUST be witnessed by the Solicitor who executes the Solicitors Certificate."

At the time this letter was sent, Mr Pittman and Mr Webster had not instructed Christopher Edwards (or Emma O'Callaghan) to act as their solicitors. Ms Locke had dealt with the solicitors, whom she had retained on her behalf for some years. Other than in a telephone call which occurred on 1 December 2006, First Mortgage had not checked with Mr Pittman or Mr Webster directly, that Christopher Edwards was acting for them.

There is a dispute in the evidence which it is appropriate to note here about whether there was, at about this time, a telephone conversation between Mr Wilson on behalf of First Mortgage and each of Mr Pittman and Mr Webster. Both Mr Pittman and Mr Webster deny that there was any telephone call. The telephone records suggest otherwise. Mr Wilson has made what appears to be a contemporaneous note, and gives an account in his affidavit of the conversation which he says is based on the note.

In light of my later findings about the nature of the dealings between Ms Locke, and Mr Pittman and Mr Webster, I do not accept Mr Wilson's evidence about the content of this conversation. In particular, I do not accept that Mr Webster nominated Christopher Edwards as his solicitor, as the note suggests. On the contrary, I am persuaded that the email between Ms Locke, and Ms O'Callaghan dated 6 December 2006 which gives a contrary account of the nomination of Christopher Edwards, is the accurate version. This account is consistent with the fact that Mr Pittman and Mr Webster did not know, and had never dealt with Ms O'Callaghan, or anyone at Christopher Edwards, but both Ms Locke and Mr Wilson had.

Ms Locke had forewarned Ms O'Callaghan that the documents would be arriving. At about 1pm on Friday 1 December 2006, which was the date the documents were sent by First Mortgage, Ms Locke sent an email to Ms O'Callaghan in the following terms:

"Hi Emma,

First Investment Mortgages will be sending through loan docs for Basil Pittman and Neil Webster, that may reach you on Monday. If they do, we would like to see you for an hour on Tuesday morning at say 10-11am or, or if you receive them on Tuesday, then either late Tuesday afternoon or Wednesday morning at 10-11am.

The loan sum will be used to pay out the existing mortgagee and fund the final works of the subdivision at Razorback.

The loan drawdown is to be $650,250 to Flamanda Pty Ltd, some rates to June 07, balance to Forest Group Pty Ltd.

Let me know when this turns up."

The terms of this email suggest that there was a comfortable pre-existing relationship between Ms Locke and Ms O'Callaghan. They also suggest that Ms O'Callaghan had a reasonable degree of familiarity with Ms Locke's property dealings. The terms of the email, although written by Ms Locke, also suggests that Ms O'Callaghan was familiar with other business entities and enterprises of Ms Locke.

Equally, the terms of this and any previous emails did not suggest, either to First Mortgage or to Ms O'Callaghan, that either or both of Mr Pittman and Mr Webster had any legal, or equitable, interest in any of Ms Locke's property projects. They were not identified as joint venturers, nor having any financial share at all. Their role, and their apparent willingness to offer all of their land, including their home, as security for Ms Locke's property ventures was unexplained, and unexplored.

It is convenient to note here that, I am satisfied that the fact was that, at no time, did either of Mr Pittman or Mr Webster have any financial interest in the property development projects. They were not joint venturers with Ms Locke. They were not given any financial reward from the projects. They had no role to play in the projects (except when Mr Webster did a limited amount of unpaid labouring work on a subdivision in the Blue Mountains area, unpaid and for a short period). They had never been to the Razorback area, and knew nothing at all about the nature and size of the projects, their financial viability, the financial risks involved, the extent of borrowings for the project and the anticipated returns. They knew nothing of Ms Locke's own financial position, nor her capacity to service the loans.

A little after that time, but still on 1 December 2006, Mr Wilson of First Mortgage sent an email to Ms Locke, the subject of which was "Perpetual tenancy". He said:

"don't forget to get this off the title please."

As a consequence of this email, on Sunday 3 December 2006, Ms Locke sent an email to Ms O'Callaghan and her colleague Leanne Martin in the following terms:

"Hi Emma and Leanne,

There is a interest registered on the title of Lot 8, one of the items in the Second Schedule that relates to a life interest, to Daisy Pittman. Daisy is deceased and some thirty years ago. This needs to be removed from the title and urgently. Can you arrange this, i.e. speak to them at the Land Titles Office. It is an oversight by them as when it was transferred to Basil Pittman after her death, it should of been automatically removed.

They are helpful at the LTO about this.

I have dropped in a certificate."

On Wednesday 6 December 2006, Mr Pittman and Mr Webster attended at the offices of Christopher Edwards, where they were seen by Ms O'Callaghan. I will return to the detail of this conference in due course, but it was during this conference that all of the relevant transactional documents were signed.

The Loan Transaction

In addition to the terms and conditions set out in the mortgage documents, it is appropriate to record the details of the loan transactions.

The three lots of land which were being taken as security by First Mortgage were each valued for First Mortgage, in the following amounts, as at November 2006:

Market Sale

Forced Sale

Lot 8

$1,030,000

$910,000

Lot 9

$ 790,000

$700,000

Lot 23

$ 970,000

$850,000

Total

$2,790,000

$2,460,000

These valuations were prepared on a "cleared, fenced and watered basis". That was because of the instructions which the valuer received. The valuer noted that buildings on the various lots were in poor or very poor condition and added little to the value of the properties.

As well, the valuer noted that "... the residential property market is past its peak in this area. Recent increases in interest rates may affect property values and selling periods in this area".

The principal of the loan was said at one time to be $2,030,000. The interest rate was 15.95 per cent, which was reduced to 10.75 per cent if interest was paid on time. Some of the documents signed by Mr Pittman and Mr Webster also describe the principal sum borrowed as $1.9 million. I am satisfied that ultimately, the sum borrowed was the lower amount of $1.9 million.

The Disbursement Statement dated 18 December 2006, which was prepared by First Mortgage, noted that disbursements, made from the drawdown of $1.9 million, amounted to:

(a)

First Mortgage for fees and performance

$52,685

(b)

First Mortgage for 1 year's interest in advance

$204,250

(c)

Payments to or on behalf of Flamanda Pty Ltd (the outgoing lender)

$1,172,563

(d)

Rates and miscellaneous expenses

$2,262

$1,431,760

The balance of the loan monies was disbursed to one of Ms Locke's companies, named Total Property Developments Pty Ltd. The sum paid to Total Property Developments Pty Ltd was $468,240.

The evidence satisfies me that none of the loan monies were paid to Mr Pittman or Mr Webster. The amount paid for rates was for their benefit because it relieved them of their obligation to pay the rates themselves.

The term of the loan was 2 years. Interest for the first year was prepaid. The monthly interest that would need to be paid in second year of the loan from December 2007, was, if the payment was made on time, $17,021. It can be observed that one month's interest payment exceeded the annual income of either of Mr Pittman and Mr Webster.

In summary, the advance by First Mortgage to Mr Pittman and Mr Webster had the following essential features:

(a) The loan sum was about 72% of the valuation obtained by First Mortgage on a market basis. The rate was about 80% on a forced sale basis.

(b) Those valuations recognised and revealed that the market for the sale of the security properties was past its peak and was likely to be slow.

(c) The interest payments were unaffordable for Mr Pittman and Mr Webster, whose total annual income could not have paid two month's interest payments.

(d) Neither Mr Pittman, nor Mr Webster, had, apart from the secured land, any other assets which could have been used to pay the loan.

6 November 2006 - Conference with Ms O'Callaghan

The mortgage and other documents which were required to be signed by Mr Pittman and Mr Webster were sent directly by First Mortgage to Christopher Edwards. They arrived on the afternoon of 5 November 2006.

The documents were first produced to Mr Pittman and Mr Webster at the conference which occurred the following morning at about 10am.

It is clear that the firm Christopher Edwards had previously acted for Ms Locke and for some period of time. Ms O'Callaghan deposed to the fact that Ms Locke had been a client of the firm since late 2004 and that between that time and October 2006, she had been instructed by Ms Locke in relation to a number of matters which were predominantly conveyancing matters, including refinancing and selling of property owned by Ms Locke or her associated companies. Ms Leanne Martin, a conveyancing paralegal, also assisted in looking after Ms Locke.

Ms O'Callaghan says that during her dealings with Ms Locke, she was never aware of the extent of her developments or the detailed financial arrangements place regarding those developments. I have no reason to doubt that evidence, although it is equally clear, as I have earlier said, that she had a degree of familiarity with Mr Locke's business entities and her affairs generally.

It was Ms O'Callaghan's understanding on the morning of 6 December 2006 prior to that meeting, that neither of Mr Pittman or Mr Webster were going to derive any financial, monetary or other benefit from the loan, which was being made by First Mortgage.

It appears that the meeting took somewhere between half an hour (according to Mr Pittman and Mr Webster) and about an hour (according to Ms O'Callaghan). There is no contemporaneous note of the precise length of the meeting.

As the covering letter from First Mortgage records, there were nineteen separate sets of documents required to be either signed by, given to, or acted upon by Mr Pittman and Mr Webster, or Ms O'Callaghan.

Ms O'Callaghan described the way in which she went about the conference in her evidence. Having carefully read her affidavit and listened to her evidence, I am persuaded that she has little, if any, accurate recollection of what happened in this conference, but honestly believes that she followed her usual procedure in explaining documents to Mr Pittman and Mr Webster, and providing the documents to them to be signed. Her evidence is, I am satisfied, largely a reconstruction. I do not regard it as generally accurate.

Ms O'Callaghan agreed that it was not possible in the space of time allocated for this conference, for Mr Pittman and Mr Webster to have read the entirety of the loan agreement. It follows from that answer, which I accept, that it was not possible for them to have read in their entirety all of the other documents which were forwarded by First Mortgage to Ms O'Callaghan. This conclusion is fortified by the fact that neither Mr Pittman nor Mr Webster were good readers. Mr Webster's evidence about his reading ability suggests that he was simply not capable of reading these documents, even if given an extended period of time.

The conclusion is also fortified by the fact that the Memorandum of Mortgage which was filed in the Land Titles Office, the terms of which were incorporated into each of the three impugned mortgages, was not available to Ms O'Callaghan. She did not know, for the purposes of this transaction, what those conditions were, none was a copy provided to Mr Pittman and Mr Webster. No explanation was, or could have been given to them about its contents.

Even if Mr Pittman and Mr Webster were accomplished readers, having regard to the volume and content of the material with which they were being confronted for the first time in that conference, it would not have been possible for them to have read, let alone absorbed, the content of those documents. Much less would it have been possible for them to get any real understanding of the documents, from reading them, having regard to their limited capacity for reading and their limited intellectual capacity for understanding the content of these rather complex documents.

The only information given to Mr Pittman and Mr Webster was that provided by Ms O'Callaghan, in the context of what they had been informed of, by Ms Locke, before they went to the meeting.

It is also relevant to note that, so far as can be determined from the documents which were tendered, the bundle of documents which Ms O'Callaghan had before her at the conference, consisted of over one hundred pages and so far as can be determined, Mr Webster and Mr Pittman were required to sign their names on the various documents on over thirty occasions each. Ms O'Callaghan had to witness their signatures, formally by signing her name, on over thirty-five occasions. In addition, during the course of the conference, it was necessary for Ms O'Callaghan to, when completing the identity checking process, obtain documents of identity from Mr Webster and Mr Pittman, have those documents photocopied, certify the copy as being an accurate copy of their identity documents, and return those identity documents to them.

Additionally, as is obvious from a number of the documents, Ms O'Callaghan had to complete various parts of the documents which were otherwise blank. Ms O'Callaghan also had to undertake a number of searches for the purpose of dealing with the encumbrance of a life estate on the title.

Ms O'Callaghan did not prepare a separate diary note of all that occurred during this conference. She did not prepare any diary note recording the terms of any advice which she gave. However, during the conference, she completed, and observed, Mr Pittman and Mr Webster place their signatures on a pro forma document, which had been sent to her by First Mortgage, which was entitled "Acknowledgment of legal advice by proposed borrower". In cross-examination, Ms O'Callaghan initially accepted that this document was intended to, and did, record advice that she gave to Mr Pittman and Mr Webster. However, as the complete cross-examination demonstrated, the document recorded advice which could not have applied to this transaction, and which would could not have been, and, as Ms O'Callaghan ultimately accepted, was not given by Ms O'Callaghan to Mr Pittman and Mr Webster. It would be unreliable to accept this document as any form of a contemporaneous file note.

Paragraph 3 of the "Acknowledgment" is in the following terms:

"3. The advice given to me by my solicitor included that:-

(a) by signing the loan documents I will be liable for regular payments of interest and repayment of the amount of the loan at the due date;

(b) if I fail to make any payment on time, the lender can charge a higher rate of interest, and the lender's costs of rectifying that failure;

(c) if I fail to comply with any of the terms and conditions of the loan documents including the obligation to pay principal and interest,

the lender can sue me personally; and

the lender may take possession of my property; and

after notice, sell my property to recover the amount owing together with interest and other costs including solicitor's costs, the costs of selling the property and the costs of maintaining the property; and

if the proceeds of the sale of my property are insufficient to satisfy the debt to the lender, the lender can sue me for the deficit, and

(d) the additional obligations, rights and remedies set out in the loan documents if the Consumer Credit Code applies;

(e) that I am/we are satisfied that our obligations to you will not adversely impact on our ability to meet all my/our other financial obligations (including living expenses) as and when they fall due;

(f) that I/we confirm that I/we can comfortably afford all repayments resulting from this loan without incurring substantial financial hardship;

(g) by making a Statutory Declaration verifying the giving of the advice I am making a statement having the force of an Oath which can be relied upon by the lender."

In her affidavit, Ms O'Callaghan deposes to the fact that she gave the advice set out in that paragraph, paragraph 3, of the document. But she could not have and I do not accept that she did. In subparagraph (a), the advice purports to be that there would be regular payments of interest. Mr Pittman and Mr Webster were not making any payments of interest, let alone regular ones, at all. The loan did not require regular payments of interest for the first twelve months, because that interest was pre-paid.

Subparagraph (e), namely that the borrowers informed Ms O'Callaghan that they were satisfied that their obligations under the proposed borrowing would not adversely impact their ability to meet all of their financial obligations, including living expenses, could not possibly have been, and was not, said by Mr Pittman and Mr Webster to Ms O'Callaghan.

Subparagraph (f), which refers to assurances given by Mr Pittman and Mr Webster to Ms O'Callaghan could not have been said during the conference. The fact was that neither Mr Pittman nor Mr Webster could not "comfortably afford all repayments". They did not know what the amounts of the repayments were and they did not give any such assurance to Ms O'Callaghan.

Ms O'Callaghan in cross-examination agreed that whilst she may have read out these paragraphs to Mr Webster and Mr Pittman, she did not draw their attention to the fact that they could not possibly have given those undertakings or declarations to the lender. She agreed it was incumbent on her to draw that fact to their attention, and that she did not do so. In light of these concessions, properly made, I do not accept Ms O'Callaghan's evidence in chief that she in fact read all of these matters out to Mr Pittman and Mr Webster. In those circumstances, I cannot be satisfied that she gave the legal advice set out in this Acknowledgement. On the contrary, I accept Mr Pittman and Mr Webster's evidence that little or no advice about the transaction was given to them by Ms O'Callaghan.

The significant change in the evidence, between Ms O'Callaghan's affidavit and the answers that she gave in cross-examination in respect of this document, and other events during the conference, lead me to the view that the conversations set out by Ms O'Callaghan between paragraphs 35 and 65 of her principal affidavit are likely to be unreliable and I do not accept her evidence about them. There are a number of reasons for this.

First, it is unlikely that the reason said to have been given by Mr Pittman and Mr Webster to Ms O'Callaghan for not seeing Mr Mitchell, a previous solicitor, was that they did not want to go to Katoomba to sign documents. They had in fact done so on many occasions. The reason they were seeing Ms O'Callaghan was that Ms Locke had made arrangements with First Mortgage to send the documents to Ms O'Callaghan. There was never a suggestion that Mr Pittman and Mr Webster would see anybody other than Ms O'Callaghan with respect to these documents. The allegedly proffered reason did not reflect the fact, and there was no reason for, nor was it suggested to either of Mr Pittman or Mr Webster, that they lied to Ms O'Callaghan about this apparently inconsequential fact.

Secondly, Ms O'Callaghan, in her affidavit in paragraph 36, says that she was handed a copy of the loan documents either by Ms Locke immediately before the meeting, or Mr Pittman and Mr Webster at the meeting. Clearly, as the emails and correspondence show, and as Ms O'Callaghan ultimately accepted in cross-examination, this was not correct and that her firm had the documents prior to the conference and it was she who produced them to Mr Pittman and Mr Webster. There is no evidence to suggest that Ms Locke was ever in possession of the documents prior to that conference.

Thirdly, in paragraph 38 of her principal affidavit, she purports to recall a conversation with Mr Pittman and Mr Webster to the following effect:

"EOC: Have you seen these documents before?

Pittman: Yes. Margot showed them to us.

EOC: Have you had a chance to read through them?

Pittman: Yes. We flicked through them."

This conversation could not possibly have happened. It does not reflect the fact of the documents being in the possession of Ms O'Callaghan's firm. It does not reflect the fact, as Ms O'Callaghan ultimately agreed in cross-examination, that it was she who produced the documents and showed them to Mr Webster and Mr Pittman for the first time. Nor is it likely that Mr Pittman would ever have said that he flicked through the documents having regard to his limited reading capacity.

Fourthly, in paragraph 39 of her principal affidavit, Ms O'Callaghan records a statement by either Mr Pittman or Mr Webster in response to her question:

"EOC: That's a lot of money, what is it for?

Pittman/

Webster: Margot needs it to complete the subdivision at

Razorback.

EOC: So Margot is using all of this money for the subdivision?

Pittman: Yeh, that's right ..."

As is manifestly apparent from the disbursement statement dated 6 December 2006, prepared by First Mortgage and signed by Mr Pittman and Mr Webster in Ms O'Callaghan's presence, not all of the money was going to Ms Locke to complete the subdivision at Razorback. On the contrary, the disbursement statement on its face demonstrates that other borrowings are being repaid, and purportedly the balance of funds were being paid to Mr Pittman and Mr Webster. Although this is not what ultimately happened, the document then available was inconsistent with the verbal account, but on her evidence, Ms O'Callaghan did not identify the discrepancy, nor seek any explanation for that significant discrepancy.

Fifthly, Ms O'Callaghan knew that one of the requirements of First Mortgage was that at settlement, they be provided with a discharge of the Flamanda mortgage. Unless Ms O'Callaghan knew that the Flamanda mortgage related to the Razorback subdivision, she could not without question or comment have accepted this remark as accurate. She does not recall any such question or comment.

Sixthly, in paragraph 45 of her principal affidavit, Ms O'Callaghan deposes to a conversation to the following effect, having obtained a copy of the title searches of the real property during the conference:

"EOC: There is a life estate to Daisy Anne Pittman and Ena Fairlie. What's that all about?

Pittman: Daisy was our grandmother. Ena was our mother. We are half brothers. She had a life estate. She died some time ago. The land is ours now.

EOC: That needs to come off title in order for the new mortgage to be registered. ..."

The terms of Ms O'Callaghan's affidavit in paragraph 43, describe the lead up to this conversation. She records her observations:

"On the search of folio 8/..., I noticed a dealing, G143185. I conducted a search of dealing G143185 ... I noticed that the dealing related to a life interest involving Daisy Ann Pittman and Ena Fairlie".

These two paragraphs suggest that Ms O'Callaghan found out for the first time, having obtained the title searches, about the existence of the life estate. However, as the emails demonstrate, Ms O'Callaghan was on notice of the dealing and the life interest before the meeting with Mr Pittman and Mr Webster. On 3 December 2006, Ms Locke had sent her an email noting the interest on the title, the fact that it was a life interest to Daisy Pittman, who was deceased and had been for some time. Ms Locke also notified Ms O'Callaghan of the requirement that the dealing be removed from the title.

Further, on the afternoon of Tuesday 5 December 2006, at about 2.45pm, Ms O'Callaghan sent an email to Ms Locke which included the words "have ordered the search also to remove Daisy from the title". As well, in an email sent at a little after 8.30am on 6 December 2006 by Ms Locke to Ms O'Callaghan, Ms Locke said:

"In relation to the Life Interest on the title of Lot 8 DP..., the name is Daisy Anne Pittman."

The dealing G143185 is entitled "Application to be registered under the Real Property Act (s 94) as Proprietor by Transmission". It records the fact that Daisy Anne Pittman, a widow of Kurrajong Heights, claims to be entitled "for an estate (in fee simple)" with respect to land held by the late Clement Pittman, also of Kurrajong Heights. The application notes that:

"I declare that no other person is within my knowledge entitled to any estate or interest in the said land, except as follows:

Ena Fairlie has the right to reside in the homestead erected on the land and the use of the flower garden around the house during her life as set out in the deceased's will ..."

As a consequence of this Application, on 6 December 1954, Daisy Anne Pittman was registered as the proprietor of the land. In substance, what this dealing recorded, was a life estate in favour of Ena Fairlie over a limited part of the land, namely the house and its immediate curtilage, the registered proprietor of which was Daisy Anne Pittman.

In those circumstances it is highly unlikely for a solicitor reading that dealing, as Ms O'Callaghan says she did, to have said to Mr Pittman and Mr Webster, words to the effect, with respect to Daisy Pittman, that "[t]here is a life estate here to Daisy Anne Pittman" as she deposes in her affidavit. The dealing did no such thing. Nor does the dealing which is an Application for Registration by Transmission, sit comfortably with the description used, namely, "... the dealing related to a life interest ...", used by Ms O'Callaghan in so far as it relates to Daisy Pittman who was not getting a life estate at all - on the contrary, she was taken the whole of the land as the new registered proprietor. For these two reasons, I do not accept the accuracy of Ms Callaghan's evidence of the particular conversation.

In light of all of the foregoing, I do not accept the accuracy of Ms O'Callaghan's evidence as to the nature and content of the conversations which she had with Mr Pittman and Mr Webster on 6 December 2006, and as she has deposed in her affidavit. As I have earlier said, much of the affidavit is a reconstruction.

As a consequence, I generally accept the evidence of Mr Pittman and Mr Webster as to what took place during this meeting.

Of interest, is that Ms O'Callaghan does depose to the fact that the first documents signed by Mr Pittman and Mr Webster were the loan documents, followed by them signing the mortgage documents. Ms O'Callaghan then says she would have turned to the statutory declarations pursuant to the Consumer Credit Code, and, after explanation, they were then entered into by Mr Pittman and Mr Webster.

The terms of the Consumer Credit Code declaration contains this phrase:

"3. I/we declare that this declaration was executed prior to me/us entering into the Mortgage and associated documents."

And an Acknowledgement, also signed during the conference on 6 December and addressed to First Mortgage, contains this statement:

"I/we Basil James Pittman and Rex Neil Webster confirm that the two (2) Statutory Declarations pursuant to the Consumer Credit Code were executed by me/us PRIOR to executing any other security documents between ourselves and FIRST MORTGAGE MANAGED INVESTMENTS LIMITED...."

If the sequence of events deposed to by Ms O'Callaghan is correct, then these documents were in truth signed in her presence by Mr Pittman and Mr Webster in circumstances where the declarations were manifestly untrue. It is unlikely that Ms O'Callaghan would have permitted Mr Pittman and Mr Webster to have signed false declarations.

I do not accept the evidence of Ms O'Callaghan of the sequence of the signing of the documents. I think it more likely than not that, having regard to the contents of the declarations, they would have been executed before signing the loan and the mortgage.

Lastly, a further reason to regard Ms O'Callaghan's affidavit evidence as inaccurate, is that in paragraph 66 she asserts that Mr Pittman and Mr Webster took a copy of the documents they had signed with them when they left the offices of Christopher Edwards. In cross-examination she accepted that she had no clear recollection of Mr Pittman and Mr Webster leaving with copies of the documents, and that it was possible that Ms Locke took with her copies of the documents and not Mr Pittman and Mr Webster.

I think it more likely than not, in light of Mr Pittman and Mr Webster's evidence on this point, which I accept, that they did not take any documents away from the officers of Christopher Edwards and that all documents were provided directly to Ms Locke.

In the result, there is little of Ms O'Callaghan's evidence which I can accept in preference to that of Mr Pittman and Mr Webster as to the substance of the advice which was or was not given.

The essence of Ms O'Callaghan's account in her affidavit is that she gave comprehensive, appropriate and independent advice. Mr Pittman and Mr Webster denied receiving any legal advice at all, nor any financial advice.

Ultimately, in cross-examination, Ms O'Callaghan agreed that she had failed to give advice, which a prudent solicitor would have given to Mr Pittman and Mr Webster, on the following matters, namely:

(a) the absence of any written agreement, or documentation recording any obligations or arrangements between them and Ms Locke;

(b) the absence of any form of security being given to them by Ms Locke to protect their interests; and

(c) most particularly, that there was no benefit at all in entering into the transaction, and that it was contrary to their interests to enter into it.

Ms O'Callaghan was asked these questions with respect to the conference of 6 December 2006, and she gave these answers:

"Q. Now, the failure by you to give the various legal advices, that you accepted from me a prudent solicitor would have given in this case, had the consequence that Mr Pittman and Mr Webster entered into this transaction, correct?

A. Yes.

Q. And it also had the consequence that a very substantial benefit was conferred on Ms Locke and/or her companies?

A. Yes.

Q. And your failure to give that advice advanced her interests, correct?

A. Yes, correct.

Q. And disadvantaged the interests of your clients, Mr Pittman and Mr Webster?

A. Yes."

Ms O'Callaghan also agreed with cross-examining counsel that any legal advice which she gave to Mr Pittman and Mr Webster was not independent of Ms Locke, because of the pre-existing relationship between the firm Christopher Edwards and Ms Locke. No doubt, also the interests of Ms Locke in this particular transaction meant that the advice was not independent.

She also agreed that the result of her failure to give such advice as she ought, was that in the transaction Ms Locke's interests were preferred to the interests of Mr Pittman and Mr Webster. She said that this was unintentional.

Mr Pittman and Mr Webster both gave evidence about the conference. Mr Pittman and Mr Webster first learned that the conference was to happen on the evening before, 5 December 2006, when Ms Locke came to their house to share a pizza. All they knew was what Ms Locke told them when she said to Mr Pittman and Mr Webster:

"I need you to sign some documents tomorrow for the transfer of the loan to FMI. Meet me in Richmond at 9.30 tomorrow morning."

At that stage, Mr Pittman and Mr Webster were not given any detail as to whom they were going to see, nor what the documents were that they had to sign. They were not provided with a copy of the documents. They were not provided with any detail of the financial investments of Ms Locke or the use to which the monies being raised was to be put. They were not told that a much larger sum was being borrowed than was necessary to "transfer the loan" to First Mortgage.

On the next morning, Mr Pittman and Mr Webster met Ms Locke at a café in Richmond where they had a cup of coffee and something to eat. They went from there to the offices of Christopher Edwards. They met with Ms O'Callaghan. In the course of that conference, they were provided, for the first time, with the documents.

It is Mr Webster's recollection that Ms Locke was present throughout the conference. Ms O'Callaghan denies that Ms Locke was present. I accept the evidence of Mr Webster on this issue. I am satisfied that she was there to ensure that the documents were all signed so that the transaction would proceed. She also was there to take away and keep, for her records, the copies of the documents. She was also there to deal with any queries raised by either Mr Pittman and Mr Webster.

Loan and Mortgage transaction

The loan and mortgage transaction of November 2006 had the following features:

(a) the loan agreement was in a standard form produced by First Mortgage;

(b) Mr Pittman and Mr Webster were named as borrowers;

(d) the interest rate was 15.95 per cent which was reduced to 10.75 per cent if instalments were paid on time, and if there was no default in the repayment of the loan;

(e) the entire loan was due to be repaid two years after the loan was drawn down;

(f) the security provided included the three first registered Mortgages over the property of Mr Pittman and Mr Webster; a Bill of Sale over all of their plant and equipment, chattels and machinery in and about the mortgaged properties; a Deed of Assignment of rentals in respect of one of the mortgage properties and according to clause 17.1 of the Loan Agreement, as further security, the borrowers by the execution of the Loan Agreement charged "all freehold and leasehold interest in any land or any part of any land, which the Borrower is the registered proprietor or lessee or which the Borrower may acquire".

(g) the mortgages secured the Deed of Loan. Each form of mortgage called up Memorandum No.7514585Y, filed with the Department of Lands;

(h) each mortgage was collateral to and interdependent with the Loan Agreement and the mortgages given over the other parcels of land.

The terms of the loan actually being made included the pre-payment of interest for a period of 12 months. This meant that some of the provisions about timely payment, and default, were inapplicable until the second year of the loan.

The Loan Agreement appeared to be one carrying a fixed repayment sum and a fixed rate of interest. However, clause 6 of the Loan Agreement dealt with increased costs and required the borrower to compensate the lender on demand if the lender determined that a "directive" directly or indirectly increased the lender's costs of providing the loan, reduced any amount received or receivable by the lender or the lender's effective return in connection with the loan, or reduced the lender's return on capital allocated to the loan, or its overall return on capital.

In short, the borrower agreed to underwrite the lender's return on capital to ensure that the lender received the return on capital fixed by the terms of the Loan Agreement.

The "directive" was defined in clause 21 of the Loan Agreement to mean:

"a law, an official directive, or request having the force of law, and an official directive, request, guideline or policy with which financiers carrying on business similar to the lender generally comply."

It can be observed that the definition of a directive is very broad indeed. It incorporates industry guidelines or policy with which lenders generally, but not mandatorily comply. In short, the borrower was underwriting the financial return to the lender. This was not a feature drawn to the attention of Mr Pittman and Mr Webster.

The mortgages which were entered into were in a familiar form. They were all monies mortgages which were secured only over the land of Mr Pittman and Mr Webster. They did not refer to, nor were they interdependent upon any mortgage of any land owned by Ms Locke or one of her associated entities.

The defendants' state of mind in December 2006

The defendants, Mr Pittman and Mr Webster, gave evidence about what they knew and understood and the state of their minds generally in December 2006, at the time when the various mortgages and other related documents were signed.

The context in which to understand their evidence, and make findings that are relevant, is that of their general learning and education, or lack of it, their lack of commercial understanding and limited capacity to read, let alone understand, documents. Reference has been made to these personal features earlier in this judgment.

Additionally, the clear context was, regardless of what the documents themselves said, that the loan was being sought by Ms Locke for the purposes of her property development activities, in particular the subdivision taking place at Razorback, and it was Ms Locke, or one of her companies, which was to receive the entirety of the proceeds of the loan, in excess of the component for refinancing the existing borrowings. Mr Webster and Mr Pittman were not to, and did not, receive any sum of money at all from First Mortgage.

An issue in the proceedings was whether, and if so to what extent, Mr Pittman and Mr Webster obtained a benefit from the loan and mortgage. It will be necessary to consider that in more detail and make findings about it in the context of what relief, if any, is to be granted to Mr Pittman and Mr Webster. First Mortgage however did not suggest that any benefit which it contended Mr Pittman and Mr Webster received, was constituted by the receipt into their personal accounts of any of the funds raised by the loan made in December 2006 by First Mortgage.

As is by now apparent, there is a conflict in much of the evidence between Ms O'Callaghan and Mr Pittman and Mr Webster as to what was said during the meeting, as to whether Ms Locke was present, and the nature and the extent of the explanation given about, and the understanding of Mr Pittman and Mr Webster about, the documents which they signed.

I have already pointed out that I do not accept Ms O'Callaghan's evidence given in chief in a number of respects. Similarly, I do not accept all of the evidence of Mr Pittman and Mr Webster. However, much of it was given, I thought, honestly and I did not detect any intentional attempt by Mr Pittman or Mr Webster to embellish or exaggerate their evidence. Their recollections of course, are far from perfect. As well, their evidence may suffer, in explanations which they give, from their general lack of commercial sophistication and understanding of some of the concepts involved in the transaction.

In cross-examination both of them, I thought, made admissions against their interests. Those admissions have to be examined carefully because of the potential for a misunderstanding by the witnesses of the time at which they had particular knowledge, or the time at which they had a particular understanding, because it is quite clear that by the time they came to give evidence, they had a far greater knowledge of what had transpired.

As I have said, on the morning prior to going to the meeting with Ms O'Callaghan, having been informed the afternoon before that it would be necessary for them to attend at the solicitors, Ms Locke, Mr Pittman and Mr Webster met at a café before seeing Ms O'Callaghan.

Mr Pittman said in his affidavit of 15 February 2011, at paragraph 25, that during the meeting in the café, Ms Locke had said to he and Mr Webster something to this effect:

"If there is any problem, my subdivision property will be sold first and only then, would the bank then need to take your properties. There is nothing to worry about, because that will never happen and, in any case, my properties will cover any amount needed to pay the bank."

Both Mr Pittman and Mr Webster gave evidence, which I accept, that their understanding was that Ms Locke was responsible for repaying the money, that they were not the borrowers, that Ms Locke's property was secured to support the loan and that, at best, they were providing a security which was not the first security to be called upon by the bank, and further the security was being provided in circumstances where it was most unlikely to be called upon.

Both Mr Pittman and Mr Webster, who gave evidence to this effect in their affidavits, which I accept, did not understood that they were the only borrowers on the First Mortgage loan, they did not understand that they had the obligations on the First Mortgage loan to which I have earlier referred. They did not know that Ms Locke was not a party to the loan, nor that she was not liable to First Mortgage with respect to the particular loan. They did not understand that Ms Locke had no legal obligations to do any of the things which she promised them she would do.

It is clear that neither of them understood that they were the borrowers. They each had an understanding that their property was being used as security, in effect of last resort, but their understanding was a long way from that which an average person would understand about all of the ramifications and conditions of this particular loan transaction and the mortgages which were to secure the loan. They did not have the benefit of appropriate advice to assist in their understanding.

Mr Pittman thought that, with respect to the First Mortgage loan, Ms Locke would be arranging for the payout of it and that, in a worst case circumstance, if Ms Locke did not abide by her commitment to pay out the loan, he understood that First Mortgage could take his land. But the context for this understanding was, based upon such reassurance and blandishments which Ms Locke had given them, that he believed that there was no realistic prospect of the security being called upon, and that Ms Locke would be responsible for and was capable of, attending to all of the obligations to First Mortgage. Mr Pittman had no concept, or belief, that there was any real risk that his property may be taken by First Mortgage.

Mr Webster specifically rejected the proposition that his understanding in December 2006 was that First Mortgage could sell his land without first resorting to Ms Locke's land. Mr Webster understood that the land was being mortgaged to First Mortgage, but not that Ms Locke had no legal obligations with respect to the loan and mortgage. On the contrary, he understood that Ms Locke was legally obliged to repay the funds in full. He did not comprehend that he was a borrower.

Neither Mr Pittman nor Mr Webster read through the documents. Time was not sufficient, and their education was inadequate, as were their reading skills. They were given no understanding of the nature and effect of these documents, nor the substance of the transactions prior to signing the various documents.

They did not know of the interest rate on the loan, and both denied that Ms O'Callaghan had explained to them the rate of interest. I accept their denials particularly having regard to the fact that interest was being prepaid, that is, deducted by First Mortgage from the capital sum of the loan, and they were not to get any of the monies from the loan. There was no good reason why they needed to know the interest rate on the loan, unless and until the loan expired without repayment of the principal, or else it fell otherwise into default. It is for that reason that I do not think that Ms O'Callaghan explained what the interest rate was, and I do not accept her evidence to that effect.

Both Mr Webster and Mr Pittman knew sufficient of the concept of a mortgage and a security that if a loan was ultimately in default, a lender "...could take possession of [the] property and sell the property to recover the amount owing ...". But that understanding was, in the context of this loan, and the information which they had, seen by them as theoretical only, or entirely hypothetical and not, in reality, remotely likely to happen. Based on what they had been told this was not an unreasonable view for each of them to hold.

Of importance to these conclusions about the state of mind of Mr Pittman and Mr Webster, was the fact that Ms Locke was present throughout the only discussions about the loan and mortgage. Her presence would have inhibited Mr Pittman and Mr Webster from freely asking questions of Ms O'Callaghan, and would also, I am satisfied, providing ongoing comfort and reassurance to them of the extent of her involvement.

(f) whilst legal advice which was independent of First Mortgage was obtained, that advice was:

(i) wholly inadequate in content;

(ii) not independent of the true financial beneficiary of the loan, Ms Locke, which was known to First Mortgage;

(iii) was not provided in circumstance which were conducive to its proper appreciation;

(iv) could not have been provided, and was not provided, in a way which met First Mortgage's minimum requirements.

The advice was not adequate because it did not explain the provisions of the loan transaction, nor the mortgages and their legal and practical effect. Neither Mr Pittman nor Mr Webster, according to contemporaneous evidence, had a clear understanding that they were the borrowers, and that Ms Locke was not legally bound to make any repayments, nor that their land could be sold by First Mortgage without first resorting to all of Ms Locke's assets.

As is also obvious, and a factor entitled to significant weight, in the circumstances which exist here, the properties which are subject to the mortgage constitute the home and orchard of Mr Pittman and Mr Webster. It is their sole source of residence and income.

The commercial setting, purpose and effect of the contract

The purpose of the contract was to fund Ms Locke's property development endeavours. The effect of the contract was to make Mr Pittman and Mr Webster the underwriters of those endeavours to the extent of the sum of money borrowed. The setting, or the circumstances in which the contract was made, did not suggest that there was any good reason why Mr Pittman and Mr Webster would underwrite Ms Locke's property development activities to the extent which they did. Nor was there any compelling reason why they would do so. Although there were suggestions in the evidence that they were to receive some benefit, I am not satisfied that that was so. Nothing was proved in the evidence which provided any firm basis for such a conclusion.

The understanding of Mr Pittman and Mr Webster, that Ms Locke was the person responsible for the repayment of the debt and the interest was not matched by the legal effect of the loan agreement, nor the legal consequences contained in the mortgages, upon which First Mortgage intended to rely. First Mortgage recognised that it was both foreseeable, and probable, that they would need to rely on their full legal rights contained in the agreement and mortgage, namely, selling Mr Pittman and Mr Webster's land.

There are additional features which make the loan agreements unjust. These features include:

(a) the financial structure of the loan. First Mortgage well knew that Mr Pittman and Mr Webster could not repay the loan except by the sale of the secured property (or else through the voluntary, and unenforceable, payment, by Ms Locke, of the proceeds of sale of the property developments being undertaken by her. Given that the only certain method of repayment of the loan was by the sale of the properties owned by Mr Pittman and Mr Webster, the effect of such loan and its terms upon such sale was to completely deprive Mr Pittman and Mr Webster of all of their assets. This was because the loan to value ratio was about 70 per cent, but if there was to be a forced sale, by which expression I take it to be that the mortgagee required a sale to be made without regard to the state of the market from time to time, then the loan to ratio value was close to 80%. The consequence of was that, with an interest rate for timely payment of interest at a little under 11 per cent, and a higher rate at 16 per cent, the entire equity in the properties of Mr Pittman and Mr Webster would be removed by the accumulation of a minimum of about one year's interest after default, and a maximum of two year's worth of interest after default.

(b) There was a difficulty with the latter proposition, to which I have earlier referred, namely the payment by Ms Locke of the proceeds of sale of her subdivision, which was the alternative said by First Mortgage to be the "primary exit strategy", which was that Mr Pittman and Mr Webster did not know anything about the financial position of Ms Locke, the extent of her developments, her other borrowings and what properties, if any, she owned which had equity in them and which were or were not secured. As well, as First Mortgage knew there was no legal obligation upon Ms Locke to make any repayments of the loan at all. First Mortgage also had no specific detail of, and chose not make any enquiries about, the nature and extent of the subdivision and the financial position of Ms Locke.

(c) the failure by First Mortgage to comply with various provisions of the lending manual to which I have earlier made reference, which is of some, but limited weight in the circumstances; and

(d) neither Mr Pittman nor Mr Webster received any direct financial benefit from the loan. They were not to receive any part of the funds to spend for their own purposes, nor did they in fact receive, nor were they intended to receive, any benefit at any later point in time. They were in a position analogous to a third party guarantor.

Unconscionability

The defendants rely upon unconscionability either as a consequence of the statutes to which reference has been made earlier, or as a consequence of the general law.

In Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 at [4], Mason J said:

"It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct. As Fullagar J said in Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 at p 405: 'the circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity in body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other..."

And at [6]:

"It is not to be thought that relief will only be granted in a particular situation as mentioned by their Honours. It is made plain enough, especially by Fullagar J, that the situations mentioned are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applied whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstances is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know the existence of that condition or circumstance and of its effect on the innocent party."

The defendants rely upon these principles as being called up in the factual circumstances of this case. It is clear that the Contracts Review Act provides for a broader base for the finding of unjustness.

Since, as I have explained, I am satisfied that the contract is unjust as that term is used in the Contracts Review Act, there is no further profit to be gained by determining whether or not it was also unconscionable. This approach is consistent with authority: Spina at [28] per Young JA.

The position under the other statutes is no different.

Relief

First Mortgage submits that even if the Court were persuaded that the contract was unjust, relief would not necessarily follow, and if it did, the Court would need to take into account all benefits which Mr Pittman and Mr Webster received from the loan from First Mortgage.

First Mortgage submitted that any relief which the Court would grant, assuming it were minded to grant relief, would not involve setting aside the mortgage, the loan agreement and 2008 Deed of Variation, but rather the Court would vary those documents to reduce the amount owing to a sum of $1,172,713.04 which equal to the sum which was applied to discharge the Flamanda loan, plus interest on that amount from the date of drawdown. First Mortgage submits that this sum was a direct benefit to Mr Pittman and Mr Webster because it discharged an existing liability and removed an encumbrance which existed over their land.

As well, First Mortgage submits that the sum of $200,000 received by Mr Pittman and Mr Webster by way of a settlement reached with the legal firm Christopher Edwards, which was a third cross-defendant in the proceedings, in accordance with a Deed of Settlement, is a direct benefit which must be taken into account.

Finally, First Mortgage submits, and Mr Pittman and Mr Webster agree, that a direct benefit was received in the sum of $4,349.20 which was paid for council rates directly from the First Mortgage loan funds.

First Mortgage also submitted that such rights as Mr Pittman and Mr Webster claimed, in their cross-claim against Ms Locke, were a benefit, although First Mortgage conceded that there was no evidence as to the value of those rights.

Putting it in a summary fashion, First Mortgage submitted that the appropriate relief, in a practical sense, which the Court ought grant, assuming it was otherwise persuaded to grant relief, would be confined to setting aside the mortgage over Lot 8, which was the parcel of land upon which the house in which Mr Pittman and Mr Webster resided, and the orchard stood, and capping the debt due to the plaintiff as the net amount yielded by the sale of Lots 9 and 23.

Mr Pittman and Mr Webster, on the other hand, submit that the Court would grant the relief sought in its totality and would not restrict the relief by reference to the sum paid by First Mortgage to discharge the Flamanda loan. They submit that nothing that they received in any real or substantive sense constituted a benefit, including the discharge of the Flamanda loan. They submit that, in summary, each of the previous financial transactions was unjust in the circumstances, and was capable of being set aside under the Contracts Review Act.

It is necessary to examine the relevant legal principles upon the issue of the identification of, and the nature of a benefit to which the Court ought have regard.

Legal principles

The grant of relief, where a court finds a contract to have been unjust, is conditioned initially, by the terms of the Contracts Review Act, which provides that a court may take any of the actions listed in s 7(1)(a)-(d):

"... if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result ..."

Davies J in Bank of Western Australia v Tannous [2010] NSWSC 1319 at [33], said of the consequences of section 7:

"33. One of the considerations in the exercise of that discretion involves a consideration of any benefit that the borrowers obtained as a result of the unjust contract. That is why, in the ordinary case, the discharge of a pre-existing mortgage by the payment of part or all of the proceeds of the loan agreement held to be unjust, would result in an order that ultimately required repayment of that sum to the new lender."

However, as his Honour went on to make plain, this result does not necessarily, much less automatically, follow. At [34] - [35], he said:

"34. If it can be shown that the pre-existing liability was itself unenforceable, or unjust in whole or in part, the discretionary order made in respect of the unjust contract sued upon would take account of that unenforceability or unjustness ...

35. No doubt the borrowers in such a case will lead evidence suggesting reasons that the pre-existing mortgage/loan agreement was unenforceable or unjust, and that the discharge of that arrangement by the incoming lender was not a benefit to the borrowers for that reason. One can envisage also that the incoming borrower [sic] may need to counter that evidence, by calling evidence from the outgoing mortgagee/lender to answer the claim of unenforceability or unjustness ..."

I understand the last sentence in [35] to refer not to an incoming borrower adducing evidence, but rather the incoming lender doing so.

In Elkofairi, Santow JA considered the question of benefit from a transaction which was otherwise liable to be set aside. His Honour said at [98]:

"When a transaction is set aside for unconscionability or fraud, such order may be conditional on the repayment of any unwarranted benefit. The remedy to redress the effect of unconscionability should do no more than the minimum necessary to do so. The Court thereby seeks to achieve "practical justice"."

His Honour noted the use of the expression "unwarranted benefit" in both the High Court of Australia and the Full Court of the Federal Court of Australia to describe the concept to which he was referring.

The phrase "unwarranted benefit" is a short hand expression which describes the concept that having regard to what occurred in the impugned transaction and having regard to the position which courts of equity historically adopted in seeking to achieve what is practically just, the party who or which obtains relief against a transaction or obligation must do equity. As the High Court of Australia said unanimously in Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; (1995) 184 CLR 102, at [28]:

"Thus, unconscionability works in two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party obtaining an unwarranted benefit at the expense of the other."

This approach was followed in Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482.

The Court of Appeal considered a similar case in St George Bank Ltd v Trimarchi [2004] NSWCA 120. The trial Judge, Dunford J, had found that the funds advanced by St George had been used to pay out an earlier mortgage from National Mutual. The National Mutual funds had been used to pay out a Westpac Mortgage. Dunford J held that the National Mutual mortgage was an unjust contract that would have been liable to have been set aside.

Mason P, in the Court of Appeal, noted at [20] that the mortgages granted to Westpac were third party mortgages in which there was no direct financial benefit to the mortgagors. He held that the fact that the St George mortgage had discharged an earlier mortgage from National Mutual was not conclusive against a grant of relief: see [24].

At [25], the President said:

"The Act requires separate attention to be given to the transaction being sought to be enforced and the "justness" of that contract. Simply because the money advanced by St George went to discharge the earlier mortgage transaction involving National Mutual did not mean that relief had to be withheld, a fortiori where the respondents were effectively guarantors of their son's primary obligation, to the knowledge of the appellant through Mr Briggs; where the earlier transaction was tainted as regards the respondents; and where one element of the unjustness of the present transaction was the absence of independent legal advice as to the respondents' rights to challenge the National Mutual loan or financial advice as to the consequence of committing to the St George Bank transaction..."

Accordingly, it is necessary to examine, in light of the submissions by First Mortgage, whether the Flamanda loan, which was being repaid, was an unwarranted benefit. Mr Pittman and Mr Webster submit that it was not a benefit because the Flamanda loan was itself an unjust loan and was liable to be set aside.

As is apparent from an earlier discussion in this judgment, this question, namely whether the Flamanda loan was an unjust loan, cannot be considered in isolation from the earlier mortgage transactions.

It needs also to be kept in mind, with respect to the earlier mortgage transactions, that even though Mr Pittman and Mr Webster are shown as borrowers, there is no suggestion that in any of the earlier mortgages, they received any monies directly from the loan funds to be used for their own purposes. Rather, it is clear from an examination of the substance of each of those transactions that the monies were to be used by Ms Locke in or one or other of her property developments, in none of which Mr Pittman and Mr Webster had any legal interest, or any right to the profits, or a part of them.

In reality, and in substance, the properties of Mr Pittman and Mr Webster were being used as security for Ms Locke's property development activities. They were in an identical position, as a matter of substance, to that of a third party mortgagor. That is, a third party, with no interest in the relevant business, and who does not receive any funds, but who proffers a security to support borrowings by another.

The comments of Mason P with respect to the position of a third party mortgagor, as seen in Trimarchi, are applicable to the position of Mr Pittman and Mr Webster in each of the various transactions.

As Santow JA points out persuasively in Elkofairi at [90]ff, the terms of loans and guarantees often blur the distinction between borrows and sureties so that both became principal debtors, or co-debtors. In the context of the particular transaction there relevant, his Honour said at [96]:

"The relevance of this analysis....is to support the proposition that, when resorting...to the wider doctrine of unconscionability, here in granting relief to the wife...the fact that the transaction is in the strict sense not one of guarantee need not provide an insuperable obstacle to relief...Each circumstance must be taken into account in looking at all of the circumstances, to see if indeed it would be unconscionable for the lender to enforce the rights against the wife."

In truth and in substance here, the position of Mr Pittman and Mr Webster in respect of all transactions involving First Mortgage, the Flamanda loans and the Forrest Knoll/Obelisk Securities loans, is more akin to third party mortgagors, namely individuals proffering their land as security for a loan to a different individual or entity for use in a project in which the mortgagors have no interest, and no ability to control.

Features of earlier loans

I have concluded that the earlier loans were also unjust. I have reached that conclusion for these reasons:

(a) Mr Pittman and Mr Webster had the same personal features to which I have earlier drawn attention;

(b) they received no direct financial benefit from the loans. They had no legal or other right to claim in the proceeds of any of the property subdivisions of Ms Locke. They were in substance third party mortgagors;

(d) they had no real or substantial knowledge of Ms Locke's property dealings in the financial sense, and hence were unable to make, even with expert accounting or financial advice, any real assessment of the risks involved in proffering their land as a security (or else being the borrowers);

(e) they received no independent legal advice which explained in any clear way what the true effect of the transaction was;

(f) by reason of the lack of warning given by Ms Locke of the need to attend at solicitor's offices, the limited information they were given about what was going to happen, often the volume of material with which they were confronted and had to deal with, the fact that they did not know who the solicitors were, let alone choose them, and Ms Locke's presence in the room, they were not able to exercise any real independence in considering the terms of the loan, including whether or not to enter into it;

(g) the amount of the sums of money borrowed, the absence of any demonstrated ability to repay the sums from anything other than the sale of their properties, the fact that the properties were their sole residence and earning source, and in many cases, the very high interest rates being charged, all combined to mean that such equity as they did have, would evaporate very quickly.

These were on any view, mortgages which were not financially manageable by Mr Pittman and Mr Webster, they could only ever escape the liabilities which they took on, by the sale of the properties, and only then, if the properties were sold promptly and if the real estate market was sufficiently viable for the sales to occur at a proper price. In short, the realistic alternatives if the loans were not "rolled over" which events depended entirely on Ms Locke's activities and efforts, was that the secured properties were to be sold.

These features of themselves are sufficient to warrant a finding that each of the earlier loans was unjust.

I am comforted in that finding by the failure by First Mortgage in the course of its case, notwithstanding the evidence given by Mr Pittman and Mr Webster about how the signing of these mortgages came about, and notwithstanding the terms of the mortgages, to call any of the earlier witnesses to the mortgages, including the solicitors who were said to have given independent advice to Mr Pittman and Mr Webster. Nor did they call Ms Locke, who could have given evidence about the circumstances in which each of these loans were made.

In those circumstances, I make the finding of unjustness based upon an acceptance of the evidence of Mr Pittman and Mr Webster, which is largely uncontradicted, and the objective facts observable from the terms of the mortgage.

In summary, I conclude that since the earlier mortgages were in substance third party mortgages, and they had the features to which I have drawn attention, that they were unjust within the meaning of the Contracts Review Act and accordingly, the fact that the First Mortgage moneys went to repay, at least in part, the Flamanda loan which itself replaced earlier loans, was not an unwarranted benefit to the defendants, Mr Pittman and Mr Webster, because each of those loans was unjust, and because of that conclusion, I am satisfied that the entry into those earlier loans did not constitute a financial benefit to Mr Pittman and Mr Webster. It follows that the discharge of the loans, by incoming lenders, ultimately, First Mortgage, did not amount to any benefit to Mr Pittman and Mr Webster of a kind which necessitates any consideration in the terms of the relief which is to be granted.

Was the settlement a benefit?

Mr Pittman and Mr Webster on 11 April 2011, entered into a Deed of Settlement and Release with Christopher Edwards, who a cross-defendant in the proceedings, and also with Ms O'Callaghan. The purpose of the Deed was to settle the proceedings brought by way of a cross-claim by Mr Pittman and Mr Webster against Christopher Edwards.

The recitals to the Deed adequately capture a summary of the cross-claim. The recitals said:

"F. [Mr Pittman and Mr Webster] each allege that [Christopher Edwards] acted in breach of contract with [them] in breach of fiduciary duty, and/or in breach of [Christopher Edwards] duty of care owed to each of [Mr Pittman and Mr Webster] and knowingly participated in the breaches of fiduciary duty by [Ms Locke] ..."

The Deed was recited that, Mr Pittman and Mr Webster

"... agreed to accept $200,000 inclusive of all claims, interest and costs in full and final settlement of the proceedings against [Christopher Edwards]."

It further recites that Mr Pittman and Mr Webster would agree

"... to a verdict in favour of [Christopher Edwards] with no order as to costs ..."

As the pleadings show, Mr Pittman and Mr Webster claimed compensatory damages, plus interest and costs, for the causes of action based on tort and also in contract. The settlement sum is a single indivisible amount which is unallocated between compensatory damages, interests and costs. It is non-specific as to which cause of action it relates to, or if more than one cause of action, which one or more causes of action it relates to.

I would infer, with some confidence, having regard to the matters with which this judgment has dealt, that the settlement represented a compromise between the maximum amount that Mr Pittman and Mr Webster thought could be recovered in the action, and the risk that they may not succeed in proving any liability in Christopher Edwards, or else, if they did, but failed against First Mortgage, of having no, or else only a small, claim for damages.

The concept of financial benefit is one which usually derives from a determination of whether, and if so to what extent, the lender's funds were paid to the borrowers who are seeking relief on a Contract Review Act claim, or alternatively, if no monies were paid to them, whether the payment resulted in a financial benefit other than a direct payment to the borrowers.

Here, the receipt of $200,000 represents damages, interest and costs in respect of a claim based on cause of action in tort, for breach of contract or breach of fiduciary duty which arose, not from the making of the loan and the payment of monies by First Mortgage, and the disbursement of the loan monies, but rather from the antecedent conduct by a person, Christopher Edwards, or his employee Ms O'Callaghan, which conduct was not dependent upon the funds being made available by First Mortgage.

Whilst it is correct that without the offer of the loan from First Mortgage, Mr Pittman and Mr Webster would not have come into contact with Christopher Edwards, and the claim for damages was one which, assuming it proceeded to a contested hearing, fell for assessment in a way which depended upon the outcome of the proceedings between First Mortgage and Mr Pittman and Mr Webster, it is nevertheless hard to see that the settlement represents a financial benefit, let alone one which derives from the loan.

There are a number of arguments which favour the view that the settlement does not amount to a benefit. First, a significant part of the sum would represent a reimbursement of the legal costs incurred by Mr Pittman and Mr Webster in pursuing Christopher Edwards as part of these proceedings.

Second, even if Mr Pittman and Mr Webster were wholly or substantially successful in their defence of First Mortgage's claim, or in the pursuit of their cross-claim against First Mortgage, it remained open to them to claim by way of damages from Christopher Edwards, a sum equal to the amount of legal costs on an indemnity basis, which were unrecovered from First Mortgage, but which were nevertheless incurred, because the proceedings were defended or the cross-claim brought by Mr Pittman and Mr Webster acting reasonably and in mitigation of the damages claim against Christopher Edwards. This component of costs is likely to be not insubstantial.

Third, even if the whole of the payment is later to be notionally allocated in damages and interest, that does not necessarily equate to a financial benefit. Rather, it merely represents the monetary value, or perhaps a part of the monetary value, of the chose in action which is constituted by the claim in tort, breach of contract or breach of fiduciary duty. There is no element of a benefit or bonus in that comparison.

Fourth, no authority was cited by counsel for First Mortgage which enunciated any legal principle for the conclusion which First Mortgage urged on the Court, nor was any authority cited by way of a factual example of where a similar finding had been made by a court.

There are a number of arguments, which, on the facts of this case, favour a conclusion that the funds paid over, or at least part of them, represent a benefit to Mr Pittman and Mr Webster which ought to be paid to First Mortgage.

First, because it is likely that the whole sum will not be accounted for, by legal costs, even on an indemnity basis, and if Mr Pittman and Mr Webster are to be released of their obligations to First Mortgage under the loan transactions, then at the end of the day, Mr Pittman and Mr Webster having been placed in the position of having no obligation to First Mortgage, their land free from any encumbrance, all of their legal costs paid in full, would then have a sum of money which would be a complete bonus or financial advantage from the transactions.

Second, the equitable principle of practical justice means that because Mr Pittman and Mr Webster ought to "do equity" to obtain what in substance equates to equitable relief, then retaining a "profit" or "bonus" would not be an example of doing equity, and the "profit" or "bonus" ought be accounted for to First Mortgage by Mr Pittman and Mr Webster.

Third, the separate claims against First Mortgage and Christopher Edwards, whilst distinct claims or causes of action were sufficiently close or interconnected that the monies paid by Christopher Edwards should be regarded as an integral part of the claim made against First Mortgage.

In the result, I favour the view that as the task which the Court is embarking upon is an attempt to achieve practical justice, and if the relief granted against First Mortgage restores Mr Pittman and Mr Webster to the position they were in before the loan transactions were entered into, then any excess of the sum after the proper deduction for legal costs and expenses should be paid to First Mortgage.

I conclude that that part of the $200,000 remaining after a proper deduction for legal costs, received by way of a settlement of Mr Pittman and Mr Webster's claim against Christopher Edwards, is a financial benefit to which the Court ought have regard in fashioning the relief which is to be granted.

Relief - conclusion

In all of the circumstances, to do justice between the parties, I am satisfied that Mr Pittman and Mr Webster should be relieved of their obligations under the 2006 Loan Agreement and the 2008 Variation with First Mortgage, and should have consequential relief with respect to the registered mortgages.

I have come to that view, having regard to the fact that I have found the Loan Agreement and the Deed of Variation to be unjust. It follows that the consequential dealings by way of mortgage are also unjust, and relief needs to be granted which deals with these encumbrances.

As a consequence of this unjust contract, Mr Pittman and Mr Webster were exposed to the consequences of the default on the loan (and the 2008 variation), but this is not something which they understood, nor were they equipped by education, life experience or independent advice in the circumstances then prevailing, to be able to understand the nature and essence of the obligations arising from the loan.

On the other hand, as First Mortgage well knew, this was in fact, and in substance, a loan to Ms Locke (or perhaps one of her associated corporate entities) for the purpose of providing funding for her property development activities which, of their nature, were likely to carry a significant degree of risk. First Mortgage knew that the only possible source for the repayment of the loan, other than by selling the secured properties, was from the proceeds of sale and realisation of the subdivided parcels. It knew that there was no legal obligation on Ms Locke to make any payments to it, nor to Mr Pittman and Mr Webster so as to enable them to make the payment of interest and the repayment of the capital of the loan.

It considered that the absence of these legal obligations presented a risk to it, which was a very significant one in my judgment, and it knew that the only recourse would be to sell the secured properties thereby depriving Mr Pittman and Mr Webster of their only home and their principal source of income from farming and orchard keeping activities. It decided it would do nothing to address, let alone ameliorate, this risk.

In substance, First Mortgage took the chance that the loan which was to be used for property development would be repaid from the proceeds of that property development. In so acting, it made no enquiries, except perhaps of Ms Locke, and then only in the most cursory way, to establish the prospect of any likelihood that the subdivision would provide a sufficient financial return. It was, at least, cavalier in its attitude, perhaps even reckless, as to the repayment of the loan other than from the sale of the secured property.

There is nothing unjust in my opinion in First Mortgage bearing the full financial consequences of the risk which it took. After all, the reason why they are now proceeding against Mr Pittman and Mr Webster and the secured properties, is to recover the financial consequences of that risk.

It is appropriate that Counsel formulate for the Court the orders, which are suggested ought to be made. The orders which the Court makes will need to provide for a judgment in favour of Mr Pittman and Mr Webster on First Mortgage's claim against them, appropriate relief with respect to the setting aside of the Loan Agreement and the Deed of Variation, and the mortgages, subject to a payment by Mr Pittman and Mr Webster of $4,349.20 by way of reimbursement for council rates, and accounting to First Mortgage by Mr Pittman and Mr Webster for the excess of the settlement funds, calculated after proper deduction for all of the costs which they incurred in conducting the proceedings against Christopher Edwards and the unrecoverable indemnity costs component, if any, of these proceedings.

As well, counsel for Mr Pittman and Mr Webster will need to consider what orders, if any, are required, in light of the findings, to dispose of the cross claim against Ms Locke.

Costs

In the ordinary course, since Mr Pittman and Mr Webster have been successful, First Mortgage would be obliged to pay their costs. However, if agreement cannot be reached between the parties on this issue, I will allow the parties an opportunity to make submissions.

Orders

I make the following orders:

1. I order that the parties confer with a view to reaching agreement as to the orders which ought be made to give effect to these reasons;

2. In the event that the parties are unable to agree, then each party is to file a set of short minutes of order for all of the orders sought, including any order as to costs, together with an outline of submissions in support of those proffered orders on or before 4pm, 22 November 2012;

3. Any submissions in response are to be filed and served by 4pm 29 November 2012;

4. Adjourn the proceedings for hearing on the short minutes to 9.30am 6 December 2012.

**********

Amendments

18 December 2012 - Removed [36] and following paragraphs renumbered. Minor amendment renumbered [347], [386] and [440]

Decision last updated: 18 December 2012

Medium Neutral Citation:	First Mortgage Managed Investments Ltd v Basil James Pittman [2012] NSWSC 1332
Hearing dates:	04/07/2011 - 08/07/2011
Decision date:	01 November 2012
Before:	Garling J
Decision:	1. I order that the parties confer with a view to reaching agreement as to the orders which ought be made to give effect to these reasons; 2. In the event that the parties are unable to agree, then each party is to file a set of short minutes of order for all of the orders sought, including any order as to costs, together with an outline of submissions in support of those proffered orders on or before 4pm, 22 November 2012; 3. Any submissions in response are to be filed and served by 4pm 29 November 2012; 4. Adjourn the proceedings for hearing on the short minutes to 9.30am 6 December 2012.
Catchwords:	REAL PROPERTY - defendants properties used as security for substantial loan - loan used by second cross-defendant - defendant's lacked education, life experience and commercial sophistication - inadequate independent legal advice - solicitor also acted for second cross-defendant - defendants pressured by second cross-defendant - plaintiff did not adhere to prudential lending guidelines - whether contract under Contracts Review Act 1980 or unconscionable - contract unjust - whether mortgage ought be set aside - consideration of benefit to defendants
Legislation Cited:	Contracts Review Act 1980 Trade Practices Act 1974 (Cth) Fair Trading Act 1987
Cases Cited:	Antonovic v Volker (1986) 7 NSWLR 151 Baltic Shipping Co Limited v Dillon (1991) 22 NSWLR 1 Bank of Western Australia v Tannous [2010] NSWSC 1319 Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482 Fast Fix Loans Pty Ltd v Samardzic [2011] NSWSC 19 Kowalczuk v Accom Finance Pty Ltd [2008] NSWCA 343; (2008) 77 NSWLR 205 Nguyen v Taylor (1992) 22 NSWLR 48 Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 Spina v Permanent Custodians Ltd [2009] NSWCA 206 St George Bank Ltd v Trimarchi [2004] NSWCA 120 Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; (1995) 184 CLR 102 West v AGC (Advances) Ltd (1986) 5 NSWLR 610
Texts Cited:	---
Category:	Principal judgment
Parties:	First Mortgage Managed Investments Ltd (P) Basil James Pittman (D1) Rex Neil Webster (D2) Margot Locke (2nd XD)
Representation:	Counsel: Mr M Young (P) Mr J Lazarus (D1 & D2) No appearance (2nd XD) Solicitors: Bransgrove Lawyers (P) Brock Partner Lawyers (D1 & D2) Self Represented (2nd XD)
File Number(s):	SC 2008/288217

Principal	$2,030,000.00
Interest Rate	15.95% reducing to 10.75% for prompt payment.
Method of Payment	Interest only monthly in arrears which will provide for the appropriate amount to be debited to the Borrower's Account THREE (3) DAYS PRIOR TO THE DUE DATE and shall be made to the credit of First Mortgage Managed Investments Limited - Internet Account
Term of Loan	Twelve (12) months from date of advancing of monies
Proposed Mortgagor	BASIL JAMES PITTMAN REX NEIL WEBSTER
Proposed Borrower	BASIL JAMES PITTMAN REX NEIL WEBSTER
Guarantors (if applicable)	Director and/or Shareholders of Mortgagor (if Company)
Method of Payment	By Bank Periodical Payment
Minimum Valuation	1/ $1,200,000.00 2/ $ 750,000.00 3/ $ 950,000.00
Security (a) First Registered Mortgage over property situate at		1/ Lot 8 Bells Line of Road, Kurrajong Heights 2/ Lot 9 Bells Line of Road, Kurrajong Heights 3/ Lot 10 Bells Line of Road, Kurrajong Heights
(b) Loan Agreement between the Borrower/s and First Mortgage Managed Investments Limited (the Lender)
(c) First Deed of Assignment of Rentals in respect of all leased mortgaged premises.

Market Sale	Forced Sale
Lot 8	$1,030,000	$910,000
Lot 9	$ 790,000	$700,000
Lot 23	$ 970,000	$850,000
Total	$2,790,000	$2,460,000

(a)	First Mortgage for fees and performance	$52,685
(b)	First Mortgage for 1 year's interest in advance	$204,250
(c)	Payments to or on behalf of Flamanda Pty Ltd (the outgoing lender)	$1,172,563
(d)	Rates and miscellaneous expenses	$2,262
$1,431,760