Kennard, C.C. v AGC (Advances) Ltd

Re: CHRISTOPHER CAMPBELL KENNARD AND MARGARET BETH KENNARD
And: A.G.C. (ADVANCES) LIMITED and SYDNEY FRANCIS DEMPSTER AND KRYSTYNA EMILIA
DEMPSTER
Re: A.G.C. (ADVANCES) LIMITED (Cross Claimant)
And: CHRISTOPHER CAMPBELL KENNARD AND MARGARET BETH KENNARD (Cross
Respondents)
No. QLD G67 of 1986
Trade Practices - Guarantee - Mistake

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Pincus J.

CATCHWORDS

Trade Practices - misleading statements as to effect of mortgage - whether as to future - remedy - variation ordered. Guarantee - substance not form - document creating primary liability - obligation to disabuse guarantor of misapprehension as to effect of document. Mistake - unilateral - what must be shown to justify rectification. Trade Practices Act, s.52

HEARING

BRISBANE

#DATE 12:11:1986

JUDGE1

This is a claim under s.52 of the Trade Practices Act with alternative claims under the general law. The evidence and issues are mentioned in some detail below, but it is convenient to begin with a brief account of the matter.

The applicants and their friends the Dempsters executed a second mortgage at the end of 1985, making them all liable for a sum in excess of $1 million, which would otherwise have been due by the Dempsters only. The mortgage was one of a number of securities given to the respondent, a well-known finance company, in the course of the Dempsters consolidating their debts. Even on the respondent's evidence, the applicants' having made themselves liable on the personal covenant seems clearly to have been, at best, a mistake; it was not really intended that they should do so. The more substantial question in the case is whether, as the respondent says, it was intended that the applicants should put their interest in the relevant property at risk by way of security for the money owing by the Dempsters, or whether, as the applicants say, they were to retain their half-interest in the property, whatever was done under the mortgage.
As to the former point, the personal covenant, the applicants must certainly succeed; as to the latter point, there is more room for argument, but in the end I have come to the conclusion that the applicants' case should be accepted; it appears that they were led to think they had to lend their names to the transaction, but would retain their equity of redemption against the first mortgagee, in full.
In these reasons I refer to the first respondent simply as "the respondent", and the second respondents as "the Dempsters". Although they were joined by order of the Court, plainly having an interest in the outcome of the proceedings, no relief is sought by or against the Dempsters.
The statement of claim alleges that in December 1985 one Roy Stagg, the "Branch manager - property finance" at the Rockhampton branch of the respondent, made misleading statements about a security which the respondent proposed to take in respect of money due by the Dempsters. The pleading alleges that Stagg made the statements in question to one Bryant, the applicants' accountant, and also to the Dempsters; it alleges that Bryant and the Dempsters passed the information on to the applicants. It is also alleged that the statements made by Stagg were fraudulent.
The applicants' pleaded case is that Stagg said that if the applicants executed the security in question it would not charge their interest in the land which was to be the subject of the security, nor make the applicants liable to the respondent. The pleading goes on to say that in fact the mortgage did charge the applicants' interest in the land and make them liable to the respondent.
The pleading also claims rectification, saying that it was the common intention of the parties that the mortgage have the effect, or rather lack of effect, which Stagg attributed to it. Further, a case of unilateral mistake is pleaded.
The defence puts the substantial allegations in the statement of claim in issue. There is also a cross-claim for moneys said to be due under the mortgage; I find that the amount due as at 7 November 1986 was $420,294.25.

Factual Questions
It is common ground that in early December 1985 the Dempsters, who owed substantial sums to the respondent and others, were contemplating consolidating their debts. When this came to the knowledge of Stagg, he proposed that the respondent should be considered for the role of financier. Dempster, a builder, owned a substantial amount of real property and that was put forward by and on behalf of the Dempsters as sufficient to support the refinancing operation. However, Stagg formed the opinion that it was not, and asked that security be provided, in addition, in respect of a property in East Street, Rockhampton. The transaction was to involve an advance of a further $320,000 to the Dempsters.
The East Street land was, and still is, owned by the Dempsters as joint tenants inter se and the Kennards as joint tenants inter se, the two groups holding as tenants in common in equal shares; there is a first mortgage, in favour of National Westminster Finance Limited. The applicants had no interest in the proposed refinancing transaction; that is, they owed no money to the respondent and it was not proposed that they borrow any. They were, however, friends and business associates of the Dempsters.
Various accounts have been given of the way in which the matter was put to the applicants and of those the most reliable, in my view, is that of the male applicant. He gave evidence that the accountant, Mr. Bryant, raised the matter with him first, explaining that the respondent desired further security. Bryant asked whether the applicants would give a "third party mortgage" which, it was said, would allow the Dempsters to use their equity in East Street to get the loan, "and that it would not affect our equity in the property in any way whatsoever". Then there was a further discussion with Bryant when the mortgage was ready for signing and the male applicant rang Bryant asking whether the documents were "all right to sign". Bryant said he would check with Stagg "to make sure there is nothing in them that would affect your equity in the property", and later claimed to have done so, telling the male applicants that all the applicants were doing was "giving A.G.C. access to the Dempsters' equity in the property".
Bryant gave evidence to the effect that the information he provided to the male applicant was obtained from Stagg. Neither Bryant nor Stagg was a satisfactory witness, but I am satisfied that Bryant had conversations with Stagg of the kind he reported to the male applicant.
Stagg's explanation of the course of events was, in substance, that he did not have any relevant conversations with Bryant, but told the Dempsters that under the mortgage they (i.e. the Dempsters) would be liable for the repayments to be made. Mrs. Dempster's account differed significantly from that of the applicants, but I accept her evidence that she, being concerned about involving the applicants in the matter, asked Stagg about it and was told that the applicants would not be affected by executing the proposed mortgage; she passed that information on to the male applicant. The female applicant appeared to me to remember nothing of the whole matter, but I accept her husband's evidence that the transaction was explained to her in accordance with the erroneous account of it emanating from Stagg.
So far from not affecting the applicants' interest, the mortgage which was in fact executed made them fully liable for all the Dempsters' obligations to the respondent. It contained no provision protecting their equity in the East Street property.
Ordinarily, in my view, the Court should be slow to give relief on the basis of evidence asserting that those who have executed a document plainly having a certain effect did not appreciate what it said. Here, the applicants' case is that they did not think the document they signed, prominently entitled "Bill of Mortgage" at the top of the first page, took effect as a mortgage by them. They acted imprudently in executing the document without taking proper steps to ascertain its true effect, other than by asking their accountant who, of course, also acted imprudently in giving them assurances about the matter which he derived from the mortgagee.
However, in this case a number of circumstances combine to confirm my view that it is right to act on the evidence outlined above.
Firstly, there is the fact that Stagg, who handled the matter on behalf of the respondent, gave evidence that the respondent did not make its advance on the security of personal convenants by the applicants, and that he told the Dempsters that it was they who were responsible for the repayments - implying, in the context in which the statement was said to have been made, that the applicants were not so responsible. In fact, as I have said, the document does not differentiate between the liability of the applicants and that of the Dempsters; all of them are liable for all sums due and to become due by the Dempsters to the respondent. It is true that at one place in his evidence Stagg suggested that he said to the Dempsters that the mortgage made all the parties liable for the total debt, but in my opinion that evidence was untrue. Nor do I accept that he merely said that it was the Dempsters who were responsible for the repayments under the mortgage, but if he had said that it would of course have been misleading.
Next, the applicants' case derives strong support from the respondent's document, exhibit 23. This is a submission by Stagg to his superiors, setting out the securities available for the then proposed advance to the Dempsters of $320,000 and making a recommendation that it not be made; Stagg suggested that $301,200 only be advanced. The submission includes a discussion of each of the properties put up as security, and a detailed analysis of the financial position of the Dempsters themselves, no doubt because they were to be personally liable. It makes no mention of the applicants assuming any personal liability, nor of their financial position; since the applicants were known to be people of some substance, their undertaking responsibility for the Dempsters' debts would have been an important advantage.
Other documents which came into existence before the dispute arose are also consistent with the view that the respondent did not regard the applicants as truly co-mortgagors with the Dempsters. The mortgagee's requisitions on title were answered by the Dempsters only, a form of authority providing for the disposition of the funds advanced was signed by them only, an acknowledgment of "particulars of proposed loan" in accordance with the Queensland Moneylenders Act 1916-1979 was signed by them only, and the costs including stamp duties were billed by the respondent to them only.
Further support for the view that the respondent did not regard the applicants as true mortgagors is provided by events after execution of the mortgage. The Dempsters were apparently soon in financial trouble, and a solicitor, Mr. Bressington, contacted Stagg to discuss the possibility of the respondent's not charging penal interest. The purpose of the approach was connected with a proposal that the Dempsters make an arrangement with their creditors; that ultimately occurred. Bressington had no connection with the parties' entering into the original transaction, was an impressive witness, and seemed to me to be the only truly disinterested person called. His conversation with Stagg occurred on 14 February 186 and was recorded in a diary note. It included a statement by Bressington to Stagg that there was a "charging clause in the mortgage over the East Street properties". Stagg told Bressington that he was not concerned about it, and that it would not affect the Kennards. He also told Bressington that he was happy with half of East Street, which was an odd thing to say if the respondent regarded itself as having a mortgage over the whole of the property.
Apart from this conversation with Bressington, whose evidence I accept, there was a further conversation between him and Stagg which it is unnecessary to set out.
Notices of default were given under the bill of mortgage, as required by the Queensland Property Law Act 1974, on 17 March 1986. Again consistently with the view I have mentioned, they were given only to the Dempsters and to their company Syd Dempster Homes Pty. Ltd. which was a guarantor. No notices of default were given to the applicants until 24 June 1986, after these proceedings were begun, and after Beaumont J. had at the instance of the applicants granted an interim injunction restraining exercise of the respondent's powers under the mortgage. Thus, although I have taken into account the demeanour of the witnesses, particularly that of Stagg, in forming my conclusion, I am reinforced by the documentary support for the applicants' case and by the evidence from a strong independent witness, Bressington.
Much criticism was, of course, directed to the applicants for their failure either to peruse or comprehend the effect of the document they were signing. In my opinion that criticism loses some force if one examines the document. The form of bill of mortgage prescribed by the Real Property Act 1861 (Form F) is, abbreviated, as follows:

"I, A.B., being registered as proprietor of an estate . . . subject, however, to such encumbrances, liens, and interests as are notified by memoranda endorsed hereon, in that piece of land (describing it). In consideration of a sum of $ this day lent to me by E.F. ... do hereby covenant with the said E.F. that I will pay to him the said E.F. the above sum . . ."

The form of mortgage executed by the applicants and the Dempsters splits this statutory form, which is really one sentence, into two, by inserting between the description of the land and the mortgagors' covenant a number of other clauses, in such a way as to make the structure of the document difficult to follow. Further, the mortgage contains a great deal of verbiage which is inapplicable to the circumstances of the case and might, with advantage, have been deleted; but even had it been, I think few laymen would undertake the task of analysing such a complicated-looking document to ascertain its true effect.

In summary, I find that Stagg, on behalf of the respondent, misrepresented the effect of the mortgage on the applicants' position, with the result that they formed the erroneous view that execution of the mortgage would not affect their equity in the East Street property, nor make them personally liable to the respondent.

Legal Considerations
It was argued by Mr. Andrews, junior counsel for the respondent, that the applicants could not succeed because statements attributed to Stagg, or some at least of them, were made before the documents were prepared, and were therefore only actionable as promises. In my view the contention cannot succeed because Stagg's statements as to what the document, when prepared, would achieve, were reaffirmed by him when it was ready for signature. Even if that had not been so, the very presentation of the mortgage for signature, as being that previously spoken of, would have conveyed to the applicant the impression that it was such a document as had been foreshadowed. As pointed out above, even Stagg admits that he gave an explanation of the effect of the mortgage to the Dempsters after it had been prepared.
It was argued that the respondent's conduct in procuring the execution of the mortgage by the applicant had to be judged in accordance with the rules applicable to guarantees. In Permanent Trustee Co. of N.S.W. Ltd. v. Hinks (1934) 34 SR(NSW) 130, Jordan C.J. discussed whether there was, in particular circumstances, a guarantee within the meaning of a moratorium statute, and said at p.138:

"I think that the essential thing is that according to the substance of the agreement it should be one by which (in the case of a loan) a loan is being made to A which B, who is not, according to the agreement, receiving the loan, but is joining merely to assume an obligation, agrees to pay. If this is the nature of the transaction, I am of the opinion that the contract is one of guarantee as between the creditor and B, and that it is immaterial whether in form B binds himself jointly and severally with A to pay the amount of the advance or agrees to do so upon A's default. This goes to the form and not to the substance."

Here, it is clear that the advance was to the Dempsters and if the applicants were to become liable they would have been "joining merely to assume an obligation". That is, despite the form of the mortgage, were it allowed to take effect according to its terms, it would be treated as in the nature of a guarantee by the applicants.

The law is particularly careful to ensure that prospective guarantors are not in any way misled; the obligation goes to the extent of positively requiring disclosure "where there are some unusual features in the particular case relating to the particular account which is to be guaranteed": Goodwin v. National Bank of Australasia Ltd. (1968) 117 CLR 173 at 175 Further, if the creditor should reasonably have known that the proposed surety was acting under a misconception, the guarantee is unenforceable if he did not dispel it: O'Donovan and Phillips, "The Modern Contract of Guarantee" p.121.
Here, apart from the positively misleading statements made by Stagg, the respondent has, in my view, no right to enforce the personal covenant. All that the respondent asked for was access to the East Street property by way of further security. It did not require that the applicants undertake personal liability even for the further sum to be advanced to the Dempsters, let alone for all that had been advanced in the past on other securities. It would, of course, have been simple enough to have included a clause in the mortgage preventing proceedings on the personal covenant against the applicants. It is my opinion that, in the circumstances, the respondent was under an obligation, if it wished to enforce the transaction against the applicants, positively to draw their attention to the fact that (contrary to any reasonable expectation) the request that they lend their names to a mortgage to enable access to the East Street property as further security had led to the preperation of a document putting at risk not only their interest in the East Street property, but all their assets.
I feel obliged to add that as it is clear even from Stagg's version of the matter and the respondent's internal document discussed above (exhibit 23) that there was no true intention on anyone's part that the applicants be made personally liable for all the Dempsters' past, present and future obligations; it is suprising that a reputable organisation such as the respondent should have taken the course of suing the applicants on the personal covenant, a course which, if successful, would utterly ruin them.
It is my view, then, that the applicants are entitled to succeed on the basis of the misleading statements made by Stagg and referred to above, and also under the general law as to guarantees. The only other basis of liability which should be dealt with, and that briefly, is rectification. The pleading alleges fraud and Mr. Muir, for the applicants, strongly urged that I should find that, in the circumstances, Stagg's conduct was fraudulent, at least in the sense that he was reckless as to whether the statements he made as to the effect of the document were true or not. I do not find it necessary to make a finding on that allegation; but because I am unsure precisely what was Stagg's state of mind or that of the respondent, I cannot conclude that this was a case of common mistake. However, mistake on the part of the applicants there undoubtedly was. In Taylor v. Johnson (1983) 151 CLR 422, a majority of the High Court commented at p. 432 that:

"In the United States and Canada, the rule that relief from contractual obligations on the ground of unilateral mistake will be granted where enforcement of the contract would be unconscionable is well established. . . . It has been said that the rule applies when one party knows that the other party is, or might well be, mistaken . . . The same result ensues when one party causes the other party's mistake . . . And it matters not that the mistake is, or may be, due to negligence or want of care on the part of the party who is mistaken when the other party has not materially changed his position and third party rights are not in question . . ."

The Court did not say whether it agreed with the statements which have been quoted; it applied a narrower proposition to the resolution of the problem before it. The general principle is that "the conduct of the defendant must be such as to make it inequitable that he should be allowed to object to the rectification of the document" (per Buckley L.J. in Thomas Bates and Son Ltd. v. Wyndham's (Lingerie) Ltd. (1981) 1 WLR 505 at p.515, but what is sufficient to constitute such conduct appears not to be settled. Here, in my opinion, the facts fall comfortably within the general principle, for the respondent had reason to know and should have known that the applicants were under a misapprehension as to the nature of the document they were being asked to sign, the document being one which, if it took effect according to its terms, would involve a grossly improvident assumption of obligation on the part of the applicants in favour of the respondent. It is my view, then, the applicants are entitled to relief, if necessary, by way of rectification also.

What is not quite so clear is the appropriate order to be made. I am left in no doubt that the applicants executed the mortgage on the basis that their equity in the property would be preserved, but that could have been achieved by permitting the respondent full rights as second mortgagee, on the basis that it account to the applicants for half the net proceeds of any sum derived by it from the property in exercise of such rights; alternatively, the general intention of the parties may have been complied with by restricting the respondent to a mortgage over the Dempsters' interest only.
It might be thought that the proper order would be one setting aside the mortgage altogether, or rectifying it so as to make it apply to the Dempsters' interest only. In my view, however, there is little justification for diminishing the respondent's rights any further than necessary to achieve what should have been provided in the first place. I take into account that a mortgage of the Dempsters' interest alone would be an awkward security from the point of view of practical realisation. I therefore propose to order that Bill of Mortgage No. C513523 be varied by addition of the following clause:

"Notwithstanding anything herein contained:

(i) the mortgagee shall bring no suit nor take any other step to enforce any personal liability of Christopher Campbell Kennard and/or Margaret Beth Kennard hereunder but may take any other step available to it as mortgagee hereunder;

(ii) any sum accruing to the mortgagee in consequence of a sale of the mortgaged property shall (after deduction of any reasonable expenses of sale) be held by it as to one-half for Christopher Campbell Kennard and Margaret Beth Kennard and paid to them on demand."

I shall hear anything counsel have to say as to the form of the order and invite them to consider whether the variation can and should be embodied in a memorandum registered under s.79 of the Property Law Act 1974.

[1986] FCA 519

12 NOVEMBER 1986