Gower, M.L v Esanda Ltd

[1985] FCA 567

Re: MARK LEVESON - GOWER
And: ESANDA LIMITED
No. WAG 40 of 1985
Trade Practices

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WEST AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Forster J.

CATCHWORDS

Trade Practices - misleading and deceptive conduct - applicant entering contract for loan and mortgage with respondent as guarantee to secure loan from respondent to another - memorandum of mortgage and contract for loan allegedly executed by applicant substantially in blank form - whether documents completed by respondent to reflect terms of repayment and rate of interest different to terms previously agreed between applicant and respondent.

Trade Practices Act, ss. 52, 87(1) (a)

HEARING

ADELAIDE
#DATE 15:11:1985

ORDER

The memorandum of mortgage and memorandum of contract for loan entered into between the applicant and the respondent and dated 31 August 1982 be declared void ab initio.

The respondent pay the applicant's costs of proceedings to be taxed.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

The applicant entered into a contract for loan and a mortgage with the respondent over farming land owned by him at Coorow in Western Australia by way of guarantee in order to secure the repayment to the respondent by one Watts of a loan of $25,000. He claims that he signed the memorandum of mortgage and the contract for loan substantially in blank having been assured by an employee of the respondent that the memorandum of mortgage and the memorandum of contract for loan would be completed so as to reflect the arrangements previously made for a loan to Watts repayable over a period of five years by annual instalments of $5,000 with reducing interest at a rate not exceeding 23%. He says that later the memorandum of mortgage and the contract were completed by the respondent so as to guarantee a loan to Watts of $25,000 repayable in six months at a rate of interest of 25%. This mortgage was registered as a second mortgage on his land. The applicant says that to complete the memorandum of mortgage and the contract for loan so as to reflect an agreement quite different from the agreement entered into amounted to misleading or deceptive conduct engaged in by the respondent in trade or commerce within the meaning of s.52 of the Trade Practices Act ("the Act").

The applicant seeks an order pursuant to s.87(1) (a) of the Act declaring the mortgage and the contract for loan to have been void ab initio and also for damages. The statement of claim asks in the alternative that the mortgage and the contract for loan be set aside as being an unconscionable dealing on the part of the respondent. The respondent denies that any incomplete documents were signed by the applicant and says that although there were initial discussions about a loan of $25,000 repayable over five years at 23.5% this advance was never made and new and completed documents were executed by the applicant and Watts with respect to a loan of $25,000 repayable in six months at 25%.

The dispute between the parties is in a relatively narrow compass. If, as the applicant says, documents were executed substantially in blank and were later completed by the respondent to reflect a bargain quite different from that which the applicant had agreed to then, in my view, misleading and deceptive conduct by the respondent is established and the applicant is entitled to relief. If, on the other hand, the documents were complete when signed by the applicant and he knew of their provisions or at least had a reasonable opportunity to ascertain them, then no misleading or deceptive conduct is made out and the applicant must fail. All this was conceded by counsel for the respondent in the course of his final address.

In 1981 or 1982 the applicant bought a farm property at Coorow, approximately 150 miles north-east of Perth. He was 24 years old at the time and had lived and worked on farms all his life. He decided to try working in the city for a few years before settling down on the farm he had bought. He obtained a job as a land salesman with a company described in the evidence as Rural & Metro Realty Pty Ltd with offices in Midland on the edge of Perth between the centre of Perth and the foothills. Midland is a centre for the rural area between Perth and the foothills. It was necessary for the applicant to find a tenant to whom to lease the farm at Coorow until he wanted to work it himself. He wished to have a tenant whom he knew and upon whom he felt he could rely. He had known Gregory Hu Watts since they were both very young and he heard that Watts was looking for a farm to lease. The applicant sought Watts out and together they inspected the property and after discussions Watts agreed to lease it. No formal lease was ever entered into and the terms of the leasing arrangement were vague. The agreement probably was for a lease of one year at a basic rental of $7,000 with provision for additional rent if Watts' crop was successful. If the first year lease worked out well the parties anticipated that the tenancy would continue for about five years. Watts had one problem and that was that although he was owed money with respect to some contracting work he had done he lacked money to put in a crop on the farm and for superphosphate and other necessary goods and services in connection with the first crop.

The applicant's employer had a business relationship with the respondent whose offices in Midland were only a block away. Rural & Metro Realty frequently suggested the respondent to its clients as a source of finance. This business relationship was one which the respondent was concerned to foster and an arrangement was made, probably by Gibson, the finance officer of Rural & Metro for Watts to call at the respondent's Midland office. The applicant accompanied Watts to the office where they saw one Bailey, the "Esanda officer" in Midland. Bailey took preliminary details from Watts. Watts saw or spoke to Bailey once or twice more giving further particulars. The only security which Watts could offer was a second mortgage over the matrimonial home which he owned as joint tenant with his wife. In one of the subsequent discussions Bailey informed Watts that this security would be insufficient. Watts informed the applicant of this and the applicant offered to give to the respondent a mortgage over the farm property by way of guarantee. The arrangement come to eventually between Watts and the respondent was that the respondent would advance $25,000 repayable over five years with interest at 23.5%. $5,000 of the principal sum was to be repaid each year together with the interest outstanding which would reduce each year as the principal was reduced.

The documents seen by the respondent as necessary to be signed by Watts, Mrs Watts and the applicant were prepared at the security section of the head office of the respondent in Perth and forwarded with an internal memorandum dated 8 June 1982 to the respondent's office at Midland. At some time in mid-June Mr and Mrs Watts and the applicant went to the respondent's Midland office in order to sign the documents which were a second mortgage over the Watts' property, a second mortgage over the farm property, forms of declaration as to prior encumbrances with respect to both properties, memoranda of contract for loan, a loan disbursement form and a letter to the first mortgagee with respect to each property. Bailey denies that these documents were ever signed but I am satisfied that they were. Having heard and seen the applicant, Watts and Mrs Watts giving evidence of the signing I prefer their evidence to that of Bailey in this matter. In addition, the copy of the internal memorandum which accompanied the documents from Esanda Securities to Esanda Midland shows that the documents were sent and it includes a request for return of the documents presumably for stamping and registration and for $596 costs. The duplicate of this internal memorandum which should have accompanied the executed documents back to head office contains a note that the applicants "require that the legal costs be taken out of the advance". This note was made by Bailey and the information probably ascertained when the documents were signed as I find that they were.

Matters proceeded in the ordinary way until the respondent's head office sought to make arrangements for the production of the certificate of title to the Watts' property to enable registration of a second mortgage to the respondent. The manager of the branch of the ANZ Bank which held the first mortgage and the certificate of title spoke to Mrs Watts about the matter and for the first time she realised that she had signed a second mortgage over the matrimonial home. At the time the marriage of the Watts was breaking up and they were no longer living together despite Watts assertion to the contrary. I find that Watts had deceived his wife into believing that she had to sign some documents with respect to his loan because she was a joint owner of some of his farming machinery. However this may be Mrs Watts told the bank manager that she did not wish to give a second mortgage over the former matrimonial home and did not wish him to produce the certificate of title to enable registration. Although no doubt the respondent could have compelled production of the duplicate certificate of title to enable registration of the second mortgage, having been told that Mrs Watts did not wish to go on with the transaction, the respondent declined to do so and the transaction went off.

Watts by this time had sown his crop and was committed to a good deal of expense. He saw Bailey and negotiations for another loan were put in train. Eventually the respondent through its manager, commercial and property development finance, wrote to Watts on 5 August 1982 offering him a loan of $25,000 for a term of six months expiring on 28 February 1983 with interest of 25%. Security for the loan was to be the applicant's guarantee second mortgage and a lien over Watts' crop. Watts signed his acknowledgment of this offer and was at all times fully aware of the terms. A similar letter was not sent to the applicant and his evidence was that he was never made aware of the shortened term or the increased rate of interest. He said that Watts never informed him of the changed term and rate of interest and Watts confirmed this and said that he deliberately deceived the applicant because he doubted that the applicant would continue his part in the transaction if he knew the new terms.

A Mr Ryan was at relevant times a field services manager employed by the respondent having responsibility for the Midland area amongst others. He said that he believed that the first approach to the respondent for finance for Watts came from the applicant to him, but his evidence lacked certainty on this and other topics and he also said that it might have been Gibson. The applicant said that he never had any dealings with Ryan with respect to this whole transaction and indeed he only remembers speaking to him once at a social gathering at the respondent's Perth office. Ryan on the other hand said that apart from the initial contact he spoke to the applicant on a number of occasions during the various negotiations which took place with respect to the loan to Watts. Having seen and heard both I prefer the evidence of the applicant to that of Ryan where there is a conflict between them. The applicant gave his evidence in a straightforward forthright way and Ryan on the other hand seemed nervous when giving evidence and frequently moistened his lips with his tongue when testifying. I think that Ryan is either untruthful in the matter of his contact with the applicant or is mistaken. No doubt he was and is a very busy man having to deal with many transactions and it would hardly be surprising if his memory is defective with respect to one among many. On one or two occasions his evidence was that he told either Gibson or the applicant about some particular matter. I think it most probable that the discussions were with Gibson whom he had known for some time both at Rural & Metro Realty and away from work. Ryan undoubtedly assisted Bailey in the matter and prepared a good deal of the information contained in exhibits 8 and 9, applications to the respondent's head office for approval to advance funds. I find that such information in those exhibits as emanated from the applicant was ascertained by Ryan from Gibson. Gibson was not called by either side and if he were available either side could have called him. Since he was Ryan's friend he might have been more readily available to the respondent.

As to the new arrangements for the loan being repaid in a shorter term and at a higher rate of interest even Ryan cannot be certain that he discussed this with the applicant but said that it was his usual practice to discuss such things with guarantors. I find that in this case he did not do so.

Watts made an arrangement with Bailey to go to Midland from the farm in order to sign the new documents for the loan. He was very busy on the farm and arranged to go to the Midland office of the respondent on the same day as he had to go to Perth from the farm to collect some superphosphate in his truck. Watts arranged for the applicant to attend with him at the respondent's Midland office. When Watts and the applicant arrived at the office they both say that they were told by Bailey that all the documents were not complete and that they would have to be sent back to head office for completion and Watts and the applicant would have to call back on another day. Both documents were substantially duplicated or printed but the rate of interest and the terms of repayment had to be added in typewriting on the memorandum of contract for loan and a schedule to the memorandum of mortgage containing similar information also had to be added in typewriting. Watts was angry at being told this because being busy at the farm he did not wish to take another day away from it in order to travel once more to Midland. The applicant and Watts both say that Bailey then suggested that they should both sign the memorandum of mortgage, the memorandum of contract for loan and the crop lien in their incomplete form and that the forms could be completed over their signatures. Bailey denies this and says that no documents were ever signed partially completed but that the memorandum of contract for loan and the memorandum of mortgage both contained all necessary additional typewriting. There is some confusion between Watts and the applicant as to how much was filled in on the forms but both are quite clear that the term of the loan and the rate of interest were not included.

I am in no doubt that Bailey was untruthful or mistaken as to the signing of the first set of documents and I think that he is once more untruthful or mistaken about incomplete documents being signed by the applicant and Watts. The memorandum of contract for loan and the memorandum of mortgage both contained terms which are entirely inconsistent with the arrangement come to with Watts that the loan would be repaid in six months out of the proceeds of the crop which was then growing. Each document provides in fact for six monthly repayments during the term of the loan with interest calculated at a flat rate of 25%. Watts and the applicant both say that they glanced at the documents and Bailey confirms this but says that he gave no verbal explanation of them. Had Watts and the applicant given the documents even a casual reading and had they been in their final form both must have seen that six repayment instalments were called for which was not only quite contrary to the arrangements as Bailey admits but quite impossible for Watts to meet because he would have no money to make the payments until he received payment for the crop in January or February. The crop lien which was entirely in typewriting except for the signatures and the attestation required for a bill of sale contained no direct reference to the terms of the loan or the rate of interest but merely referred to "a mortgage of even date". Bailey says that he did not discuss the terms of the documents with either the applicant or Watts at the time the documents were signed. Had the documents been in their final form at the time of signing I would have expected Bailey to realise, immediately he saw them, that they were not in accordance with the arrangements made in that they called for six repayment instalments. The fact that he did not do so lends confirmation to the proposition that the documents were incomplete when Bailey last saw them at the time of the signing.

Watts of course knew all the time that the loan was for only six months at an increased rate of interest but I find that the applicant thought that the loan was still for five years at 23.5% and that the memorandum of contract for loan and the memorandum of mortgage would be completed accordingly.

The documents were executed on about 20 August but were dated at head office 31 August. Bailey had no difficulty in completing attestation clauses with respect to the signatures of the applicant and Watts on the crop lien which recited that he was present at Midland on a blank date, saw the applicant and Watts execute the deed and that he thereupon signed his name as attesting witness to each of their signatures. The date 31 August 1982 was added later at head office. These attestations clauses as completed were of course false and Bailey does not attempt to deny this. It may be of course that the documents came back to Midland from head office shortly before this date but there is no evidence of this.

In October or early November 1982 Watts called to see the applicant at the latter's home at Thornlie and later they went to the Thornlie Tavern for a drink. Amongst some general conversation the applicant said to Watts words to the effect of "I am glad that's all over, how did it go?", referring to the transaction with the respondent. Watts said "they have made it a one year loan". This last statement was of course untrue because as Watts well knew the loan was for only six months. Watts says that the applicant was shocked to be told that the loan was for only a year as he was under the impression that it was a five year loan. Watts told the applicant that the respondent had agreed to re-negotiate the loan to a five year loan at the end of the term of the current loan. This too was untrue but the applicant believed it.

Watts' crop substantially failed and he only received enough money to pay the respondent the interest on the loan and $1,500 in reduction of principal. He went to see Bailey at Midland and explained the position to him. Bailey arranged for Watts to see Parker the manager, commercial and property finance, at the respondent's head office. Discussions took place and as a result the respondent wrote to Watts on 1 February 1983 approving an extension of the loan to 8 February 1984. The letter pointed out that the documents for the extension/variation of the mortgage would need to be prepared and that "all other terms and conditions of the loan are to remain unchanged". Both Watts and the applicant signed an endorsement on the duplicate of this letter saying that the terms and conditions of it were accepted. It should be noticed that the letter does not mention the rate of interest of 25%. The applicant was still under the impression that the rate of interest was 23.5%. Watts obtained the applicant's signature to the endorsement on the duplicate letter and overcame the applicant's reluctance to sign by saying that the terms had to be accepted otherwise the respondent could and would sell the farm.

At some time in about mid-March 1983 the documents to effect the extension of the loan were sent by the respondent to Watts who passed them on the the applicant. When the applicant saw that the interest rate was 25% his misgivings about the whole transaction and in particular the respondent's part in it which had been simmering since his conversation with Watts in October boiled over and he refused to sign the documents and has never done so. He consulted solicitors who wrote to the respondent on 24 June 1983 complaining of what had happened and seeking a discharge of the mortgage to the respondent. The letter contained some inaccuracies but the allegation is firmly made that when the documents were signed "there was on them no indication that is would merely be for a period of six months". Complaints were also made about the increase in the interest rate. After the applicant declined to sign the extension documents the respondent has taken no step to enforce its security, despite being invited to do so, beyond issuing a notice of demand on 17 May 1984. Finally, in order to get the matter dealt with the applicant commenced these proceedings on 12 April 1985.

The respondent called evidence from loan officers, security officers and from the manager and the acting manager of commercial and property finance, in fact all of its officers who had any hand in the transaction between the respondent and the applicant and Watts. No relevant officer could remember incomplete documents being sent to Midland office in August and all said that the applicant's system and practice precluded such a thing happening. I have no reason to doubt the accuracy of their evidence as to the respondent's general practice in such matters but none of the officers concerned had any independent recollection of this particular transaction. It is noteworthy that no internal memorandum forwarding the documents whether complete or incomplete to Midland for execution has been discovered. However this may be I am satisfied that on this occasion for reasons not yet explained incomplete documents were sent to Midland from head office. The reason may have been that they were sent urgently to Midland in order to meet the time of the appointment made by Watts and that at head office securities department, for some reason; there was insufficient time to complete them. It may be also that the irregularity of sending incomplete documents accounts for the absence of an internal memorandum accompanying them. Whatever the reason I am satisfied on the balance of probabilities that the applicant signed the memorandum of contract for loan and the memorandum of mortgage when the details of repayment of the loan including the term and the interest rate were not included therein and on the understanding that they would be completed to reflect the same arrangements as were included in the documents signed earlier by the applicant, Watts and Mrs Watts. I find that Watts deliberately concealed the true nature of the transaction from the applicant and that for whatever reason Bailey did not inform him of the altered arrangements I believe the applicant and find that Ryan did not inform him either.

The applicant never agreed to the altered terms of the loan to Watts. The documents were completed to reflect an agreement quite different to the one which had been made. In these circumstances the applicant is entitled to an order that the memorandum of contract for loan and the memorandum of mortgage were void ab initio and I so order. I also order that the respondent pay the applicant's costs of these proceedings to be taxed. The question of damages was neither mentioned in evidence nor argued before me and I therefore make no order in this respect.