Grubic & Ors v Commonwealth Bank of Australia

[1993] HCATrans 333

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A22 of 1993

B e t w e e n -

JOSKO GRUBIC, RENATE GRUBIC and

PETER MICHAEL WALTER GRUBIC

Applicants

and

COMMMONWEALTH BANK OF AUSTRALIA

Respondent

Application for special leave

to appeal

MASON CJ
BRENNAN J

TOOHEY J

Grubic 1 28/10/93

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON THURSDAY, 28 OCTOBER 1993, AT 12.13 PM

Copyright in the High Court of Australia

MR T.A. GRAY, QC:  May it please the Court, I appear with my

learned friend, MR R.W. EVANS, for the applicants.

(instructed by Thomsons)

MR D.M.J. BENNETT, OC:  May it please the Court, I appear

with my learned friend, MR J.E. LUNN, for the

respondent. (instructed by N.P. Anderson)

MASON CJ:	Mr Gray.
MR GRAY:	If the Court pleases, the transaction giving rise

to the point in this application involved what has

been described as a commercial bill rollover

facility. In respect of such an entity, there has

been debate as to its correct legal

characterization.

The position in the United Kingdom is clear

and that is that such a facility involves a

separate and new advance each time the rollover

occurs.

The High Court, in the case of Morris, divided

2:2 on that issue; Justice Murphy, the other member

of the Court, not expressing an opinion.

Your Honour the Chief Justice and Justice Aickin followed the English line of authority in

concluding that there was a separate advance at the

time of each rollover. Justices Stephen and Wilson
taking the view that there was a continuing advance

and a liability under the facility ..... itself.

TOOHEY J:	Mr Gray, are we to understand that some of the matters raised by the draft notice of appeal going
to representations, reliance upon representations,
fiduciary relationship and the like are not
pressed?

MR GRAY:  No. They are pressed in two respects, if the

Court pleases. It is suggested that a second

special leave point relates to the question as to

whether there was a fiduciary relationship between

the parties in the case at bar and that the

intermediate court applied too narrow a test. The

intermediate court limited itself to a
consideration as to whether there would be a

fiduciary relationship coming out of the giving of

financial advice to Grubic. His case was that

there were other circumstances that created the

necessary degree of trust and confidence to give

rise to the fiduciary relationship and that the

Full Court, by posing the test as it did, excluded

a consideration of the relevant factors.

The third point is a very short point and it

is that when the courts below came to consider the

Grubic 2 28/10/93

Trade Practices claim for relief which turned on

section 87 of the Trade Practices Act, the court

essentially equated the approach to that section

with the common law and, in particular, required

the making out of reliance. Whereas, the case that

was put was put in two ways: first, that in so far

as the representation, as found, had been made, it

did in fact induce, and my clients lost on the

facts on that issue. But, secondly, my clients put

the case in a different way, that is, that the

representation being made, in fact it was not

honoured in the event and, as a matter of simple

causation, loss ensued. So that inducement played

no part in that second aspect.

BRENNAN J:  No doubt it did not because it seems to be

lacking otherwise. If you have a representation

that is made and the representation is not honoured

because the representation is a promise, where do

you get the causation?

MR GRAY:  If the Court pleases, the circumstance was this:

that the representation as found was that if the

principal debtor defaulted, the Bank would move

promptly in regard to that default. The court also

found that that statement was made to quell an

anxiety in Grubic at the time. The court then

found that Mr Grubic - for other reasons, he had

some other advice - did not in fact rely materially

on that statement.

On the applicants' case and as found by the

trial judge, default occurred at the time of the

second rollover in December 1986.	The Bank did not
move immediately on that default.	It did not move
until August the following year.

So, the applicants' case is it was misleading

and deceptive, on the one hand, to say this, "That

we will move immediately on default", and then when

the default occurred in December, not to do so. As

a matter of simple causation, the case as put was

that had the Bank moved in December '86 and not

August '87, steps could have been taken to minimize

the exposure of the guarantor, Mr Grubic.

TOOHEY J: That is really tied up, in a sense, with the

first point on which you began, is it not, as to

whether, indeed, there was a default at that time?

MR GRAY:  It does. The trial judge found a default in

December and a further default in March and a

further default in June '87. The Appeal Court,

having identified that the authority in this Court

of Devries that it would not interfere with the

trial judge's findings, did come to interfere with

that finding and that was a necessary consequence,

Grubic 28/10/93

as Your Honour Justice Toohey has pointed out, of

the Full Court's approach to the characterization

of the commercial bill facility.	So, the two
intertwine.

In the context of the fiduciary relation: if

there be, in fact, a fiduciary relationship between

the parties, one has a circumstance of a promise

being made to Grubic that the Bank would act in a

certain way, it in fact preferred the position of

its other client in the transaction, the other

party to the transaction, and indulged its default

and, in fact, advanced further moneys, the expenses

to other rollovers to occur, leaving the guarantor

without protection and it said in that circumstance

and because of that conflict that if there be a

default in December and not acted on until August

the following year, that there was a clear breach

of a fiduciary relationship. So, they are the

three special leave points which we wish to

agitate.

The point about the reversal of the trial

judge on the fact of the point of time of default

is not a special leave point in the sense of it

being an important point of law. We do say that

having said that the trial judge should not be
reversed on these matters, to do so causes an
unfairness in the general sense of the

administration of justice, but it is not a point of

law, per se.

If the Court pleases, Justice Debelle, who

gave the principal judgment in the intermediate

court - if I might turn first to the question of

the characterization of the commercial bill

facility - made it plain that that was very

important to the question of a priority of the

mortgages. That appears in two passages in the

application book. At page 126, on the final page

of the reasons, Justice Debelle said, at line 8: For these reasons I do not think that, by

accepting a fresh bill on each rollover, the

Bank was making a further advance which fell

within the rule in Hopkinson v Rolt.

And His Honour, at page 119, line 8, expressed

himself in the same way:

The question to be determined, therefore,

is whether each rollover constituted a further

advance and so fell within the rule in

Hopkinson v Rolt.

MASON CJ:  How was the security expressed in the mortgage?

What did the mortgage secure?

Grubic	28/10/93
MR GRAY:	The first mortgage to the Bank was an all-moneys

security. The second mortgage to the Grubics had

two aspects to it. It secured a sum of $55,000

that Grubic had left outstanding to allow the land

transfer to take place and it also indemnified the

Grubics in respect of the guarantee.

I have a copy of that exhibit and that second

mortgage to make available to the Court if the

Court wishes to see it. But it had the twin aspect

to it: it is not a second mortgage limited to

$55,000. It goes to provide to the mortgagees and

a security indemnifying them in the event of a

liability to bank.

TOOHEY J:  I am not sure that I understand that.

Indemnified them, what, in respect of their liability as guarantors under the Tabourne

mortgage?

MR GRAY:	Yes.
TOOHEY J:	To what extent?

MR GRAY:  To the amount of any claim. So that if that

second mortgage has in fact been elevated and given

priority, it will essentially completely relieve

the Grubics of any liability to the Bank. So, the

issue is a very real and major one so far as the

litigation is concerned. It is an unusual

mortgage. I am happy to provide a copy to the

Court if the Court would like to see that.

TOOHEY J:  Does that aspect of the indemnity come through in

the judgments?

MR GRAY:  It does not but I can assure the Court that it was

argued specifically and was the subject of a

written submission. But the Court will not find in

either - I think I am right in saying - the trial

decision a reference to the other aspect of the	judge's decision or in the intermediate court's
mortgage.

TOOHEY J:  No. I must confess, on my reading, it seemed to

me that the court was focusing on the question

whether the security, that is, the security of the

second mortgage, was jeoparized in any way by what

had happened at each rollover.

MR GRAY:  Yes. If the Court pleases, the court did not take

up the submission we put in regard to the second

aspect of that second mortgage which we said had

very significant consequences as far as the Bank's

claim was concerned.

Grubic	28/10/93
BRENNAN J:	I see this mortgage was subject to the

memorandum of mortgage in favour of the

Commonwealth Bank. It is expressed to be so.

MR GRAY:  Yes.

If the Court pleases, we say that is so in regard to advances made prior to the time of the

second mortgage.

BRENNAN J:  It depends on the terms of the mortgage to the

Commonwealth Bank, does it not?

MR GRAY: That is an all-moneys mortgage.

BRENNAN J:	Why is this not subject to that?
MR GRAY:	In our respectful submission, if the Court

pleases, the rule in Hopkinson v Rolt makes the
second mortgage subject to the first mortgage of

course, and every advance as to the time of the

second mortgage but not after that.

BRENNAN J: But does that rule have anything to say when the

securities given are expressed in terms which make

one subject to the entirety of the security given

by the other?

MR GRAY:  That is going to be a question of construction of

the documents. And, no, the cases do not go

directly to that point.

BRENNAN J:  How can you avoid the operation of this

mortgage?

MR GRAY:  In our respectful submission, the principle in

Hopkinson v Rolt was designed to protect a second

mortgagee. If the Bank wished to protect itself,

it would do so either by not making a further

advance or, alternatively, by having a deed of

priority.	The judgments in Hopkinson v Rolt itself
refer to the first mortgagee protecting itself by a
deed of priority.	In this case there was no deed

of priority, and one simply has, we say, the

documents standing and the question of priority is

determined according to law. In our respectful
submission, that is the correct approach. It comes

back to a question as to whether, under the

commercial bill facility, at the time of the

rollover, there was a new advance.

If one looks at it from the point of view of the guarantor, at the time when the default

occurred in December 1986, what happened was that

the Tabourne interests could not perform. The Bank

proceeded to accept a further bill and the Bank

proceeded to, in effect, advance the necessary expenses to allow that to occur which totalled about $30,000, and then the Bank proceeded to debit

Grubic 6 28/10/93

that to an overdraft of Tabourne. So, from the

guarantor's point of view, rather than having the

Bank moving immediately on default, what had

occurred was that there was an extension of the

liability to the Bank.

BRENNAN J:  The mortgage to Grubic operates as a charge,

does it not, under the Torrens system?

MR GRAY:	Yes.
BRENNAN J:	And it is a charge upon the land according to

its terms, and so it is a charge upon the land

subject to an all-moneys mortgage given to the

Commonwealth Bank. How is there room for this

equitable rule to be applied?

MR GRAY: In our respectful submission, the all-moneys

mortgage is referring to whatever had been advanced

to that date.

BRENNAN J:  It would be a very peculiar mortgage if it was

so expressed.

MR GRAY: In our respectful submission, that is the

consequence, Hopkinson v Rolt being a rule designed

to protect the second mortgagee. The first

mortgagee is always able to protect itself by

simply having a deed of priority and that is, of

course, commonly done. That is the usual way in

which the first mortgagee would protect itself. It

would say, "We will simply not proceed with this

unless we have the deed", knowing of there being a

second mortgage.

MASON CJ:  Is not the rule in Hopkinson v Rolt predicated on

the first mortgagee not being obliged to make any

further advances?

MR GRAY:  We would say not, if the Court pleases. We would

say that in that circumstance the rule in Hopkinson

v Rolt and the authority refers to the first

mortgagee being able to protect itself by a deed of

priority or, for example, a letter of

acknowledgement.

MASON CJ: But if you look at the passage from the judgment

of Lord Chelmsford, which is set out on line 5 of

page 120 of the application book, it commences:

"And, as the first mortgagee is not bound to

make the stipulated further advances - - -"

MR GRAY:  That was so in that particular case but they did

make the point in Hopkinson v Rolt that the way in

which the first mortgage - - -

Grubic 28/10/93

MASON CJ: But it really would be a most inequitable rule, would it not, if it prevented the first mortgagee from taking security which would be effective in

relation to future advances made when he was bound

to make future advances?

MR GRAY:  If the Court pleases, we would say that the way in

which that is dealt with is that the first

mortgagee, at that time, requires a deed of

priority, recognizing there being this rule that

would otherwise cede priority to the second

mortgage. So, we say when it comes to the question

of commercial certainty the law is quite clear,

that if the first mortgagee is making a further

advance with no second mortgage, he has ceded

priority unless he has protected himself by a deed

of priority.

Now, if that be the rule, it is not an unfair rule and the Bank is able to protect itself and it

allows for certainty. If one leaves it the other
way, there is an area of confusion and lack of
certainty. It is not a question of, with respect,

unfairness. It is a question of commercial

relations and certainty.

TOOHEY J:  What do you mean by "further advance", Mr Gray?

Do you mean an advance additional to the advance

originally made?

MR GRAY:  In this case, there were two further advances, we

say.

TOOHEY J:  I know, yes, you say that. I am just trying to

identify what is meant by "further advance"? I

mean, the original advance was $645,000 less cost

of discounting.

MR GRAY:  Yes. When the second bill was accepted, in a

sense a replacement amount came forward. In

addition, the Bank also advanced the necessaries

or the expenses to allow that to happen and debited

the account of Tabourne.

TOOHEY J:  Why should not what you describe as a "further

advance" simply be seen as an extension of the

moneys already advanced?

MR GRAY:  That is the point on which the High Court is

divided in K.J. Morris and on which the English

authorities say that the liability arises not out

of the facility agreement but out of the bills and

so it is a separate and distinct liability arising

out of the new bill as it comes along. So, it is,

in fact, properly characterized as a separate and

distinct liability arising under a different

document and, as such, represents, in terms of

Grubic 28/10/93

mortgage law, a fresh advance. Then, quite

separately, there was the advance of $30,000 or so

to meet the expenses of that. Mr Tabourne could

not put that up. So that from the guarantor's point of view, the second mortgagee's point of

view, he says, absent deed of priority, he is

entitled to priority according to law.

It is not, with respect, a question of

fairness. The Bank well knows about the rule in

Hopkinson v Rolt, and the second mortgagee is

perhaps deemed to know, and that is where they

conduct their business.

That is the first special leave point and we

say that it does directly arise and fairly raise

the determination of a point that was thought to

have been an important point in the Morris case and

has been left unresolved since that time.

Could I turn to the second of the special

leave points, and that is in regard to a fiduciary

relationship. I come at that just reciting the

finding of the trial judge and the concurrent

finding of the Full Court that there had been a

representation. The representation was that the

Bank would move promptly on default with the

principal debtor.

Now, the Morris decision and the question of the true analysis of the commercial bill facility does bear on that question of default. So, on the

finding of fact the trial judge made, the default

during December, being reversed by the Full Court,

it was primarily reversed because Justice Debelle

favoured the view of Justices Stephen and Wilson in

the case of Morris.

TOOHEY J: But is it right to say that in Morris the

document reflecting the transaction between the

parties was the bill itself?

MR GRAY:  No. There was a facility agreement and then there

were rollover bills.

TOOHEY J: But was there a mortgage?

MR GRAY:  No, that that case arose in - it says of a

liquidation, and the issue being discussed was

whether creditors in the liquidation who were

seeking to claim after default had occurred were to

be affected or not. The creditors in the Morris

case were in the equivalent position of the second

mortgagee in the case at bar. But the essential

reasoning of Justice Aickin was to the effect that

the liability arose not out of the facility

Grubic 9 28/10/93

agreement but out of and from each bill as it was

rolled over.

Now, if that be the correct analysis, and we

contend that it is, the Full Court's basis for

finding there was no default falls away and the

trial judge's finding would stand.

The point in regard to fiduciary relationship

then develops. The reasoning of the intermediate

court commences at application book 95 and

continues through to page 102, and as the Court
would have noted, the only matter being focused on
by the Court was whether financial advice had been

given by the Bank to Mr Grubic sufficient to give

rise to a fiduciary relationship. That point was

certainly addressed but also addressed was the fact

that the making of the representation in the

circumstances of the Bank having two clients gave

rise, in itself, to a fiduciary relationship.

In particular, we seek to bring ourselves within the test laid down in the Hospital Products

case. We have sought to articulate that in the

outline of argument in the following terms, and it

is this, that the undertaking was given to quell

anxiety in Grubic that saying what the Bank did was an act, in the interests of Grubic, in the exercise of a power or discretion of the Bank, and that the

exercise of the Bank's discretion would affect

Grubic, at least in a practical way, and that the relationship thus created gave the Bank a special opportunity to exercise its power or discretion to

the detriment of Grubic who, accordingly, was

vulnerable to abuse by the Bank.

Now, in that formulation, which is in

paragraph 14 of our precis, we say we have applied

directly the test in Hospital Products. We would

add to that, on the fullness of an appeal, the

longstanding relationship of Grubic to the Bank,

and of the areas in which there was evidence that

the Bank had given advice of a general nature to

Mr Grubic about financial matters and then,

further, there is this particular aspect of it, and

we would build our case out of all those

circumstances. The intermediate court of appeal

did not consider this particular matter, although

it did refer to the Hospital Products test.

We say that the matter is best tested by

looking at the conflict the Bank was in. It had,

on the one hand, a rollover facility to the

Tabourne interests but, on the other hand, had a

guarantee arrangement to Grubic. It told Grubic

that it would move promptly on default; to Tabourne

it indulged Tabourne. So, it was in a position

Grubic 10 28/10/93

where, if it was to honour its commitment to Grubic

it was going to be taking an immediate hard line to

Tabourne. It could not take a relaxed attitude

towards Tabourne and indulge Tabourne in the way
that it did without breaching its commitment to

Grubic. We say, in those circumstances, coupled

with the other circumstances that have been spoken

of, a fiduciary relationship arose.

If that was so, when it came to December 1986

and there was a default, the Bank was obliged to

move immediately on that default. The trial judge

did not consider the fiduciary relationship issue
because he found there was no reliance but, of

course, reliance is not part of that particular

defence or cause of action. So, the trial judge

did not consider it at all and the intermediate
court, in considering it, did not give full vent to

the appropriate test. So, we say in those

circumstances a special leave point does fairly

arise.

Could I then turn to the third of the points

which is the question of the Trade Practices Act

and section 87.	I have already touched on this
with the Court.	But in the Wardley decision, this

Court, when dealing with section 82, made the point
that the way that section was worded, the use of

the word "by" really indicated simply a cause and

effect. It was a question of whether loss or harm

had been occasioned by conduct.

Section 87 is similarly worded and would

invite, if the Court pleases, an appropriate

construction. That being so, the case that is put

is that had the Bank acted as it said it would, it

was at least likely - to pick up the wording of

section 87 - that Grubic would have suffered less

loss and damage.

Now, if the Court pleases, there are no

findings as to what would have happened, because

the court simply foreclosed on that issue. But

there was an argument as to falling value in regard

to real estate; there are arguments as to the

prospects of recovery had there been prompt action.

Justice Lockhart in a single justice decision

in Janssen-Cilag has taken the point on the

construction of sections 82 or 87, that the concept

of reliance does not form part of that statutory

cause of action or right to relief. It may, in

appropriate circumstances, be a necessary factual
matter but not always. If the Court pleases, we

put the matter this way, that where a case can be

made out of loss or damage flowing directly from

the representor having failed to do what he said he

Grubic 11 28/10/93

would do, absent the need for reliance or

inducement, for example, the prospects of recovery

being greater the more immediate the action against
the principal debtor, then there is effectively an

action under the Trade Practices Act and pursuant

to section 87.

They are the points that we seek to agitate

for special leave, if the Court pleases.

MASON CJ: Yes, thank you, Mr Gray. The Court need not

trouble you, Mr Bennett.

The applicants seek to challenge the judgment

of the Full Court of the Supreme Court of South

Australia on the ground that the Full Court was in

error in failing to apply the principle in

Hopkinson v. Rolt (1861) 9 H.L.C. 514 [11 E.R. 829]

so as to subordinate subsequent rollovers of the

bill facility to the applicants' second mortgage.

That mortgage was expressed to be subject to the

Bank's first mortgage and that, in our view, is an

answer to the applicants' submission.

In the view of the Court, there is no

substance in the other two grounds which the

applicants sought to raise. The application for

special leave to appeal is therefore refused.

MR BENNETT:	I ask for costs, if the Court pleases.
MASON CJ:	You do not oppose that, Mr Gray?
MR GRAY:	No, Your Honour.
MASON CJ:	The application is refused with costs.
AT 12.45 PM THE MATTER WAS ADJOURNED SINE DIE

Grubic 12 28/10/93