National Australia Bank Limited v Wehbeh
[2014] VSC 431
•9 September 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2011 01817
| NATIONAL AUSTRALIA BANK LIMITED (ABN 12004044937) | Plaintiff |
| v | |
| SAMI WEHBEH | First Defendant |
| and | |
| VERA WEHBEH | Second Defendant |
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JUDGE: | MACAULAY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 21 May 2014 |
DATE OF JUDGMENT: | 9 September 2014 |
CASE MAY BE CITED AS: | National Australia Bank Limited v Wehbeh & Anor |
MEDIUM NEUTRAL CITATION: | [2014] VSC 431 |
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MORTGAGES AND SECURITIES - husband and wife – wife both mortgagor under home loan and guarantor of business loan to husband’s company – default under home loan and business loan - bank seeking possession of land under mortgage and judgment for debt due under guarantee - Transfer of Land Act 1958 s 78 – mortgage and guarantee prima facie enforceable - defences – whether wife under special disability - whether unconscientious for bank to rely on default under home loan to enforce mortgage – whether undue influence of husband in procuring guarantee from wife – whether wife was a volunteer in transaction - whether bank had knowledge of any undue influence – independent legal advice provided - Yerkey v Jones (1939) 63 CLR 649 - Garcia v National Australia Bank (1998) 194 CLR 395 - Blomley v Ryan (1956) 99 CLR 362 - Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 - Bridgewater v Leahy (1998) 194 CLR 457.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C Archibald | Minter Ellison |
| For the Second Defendant | Mrs V Wehbeh (in person) |
HIS HONOUR:
Introduction and summary
The plaintiff, National Australia Bank Limited (NAB), as first registered mortgagee, seeks to recover possession of land at 5 Fernyhill Court, Greenvale, Victoria (Greenvale land). Vera Wehbeh, the second defendant, and her husband, Sami, the first defendant, from whom she is now separated, are the registered proprietors of the land. Apparently, Mr Wehbeh is a bankrupt. The NAB obtained summary judgment against him on 1 March 2012. Only Mrs Wehbeh defended the bank’s claim. She represented herself at the trial of the proceeding.
The mortgage under which the NAB seeks possession of the land was registered on title on 19 May 2008. It secures the repayment of a home loan. But it also secures the performance of the obligations of Mr and Mrs Wehbeh under a guarantee they gave to the NAB on 17 July 2008 in respect of a business loan made to a company. In addition to seeking possession of the land, the NAB also seeks judgment against Mrs Wehbeh for the debt alleged to be due under that guarantee.
Mrs Wehbeh admitted some but not all of the elements of the NAB’s claim. Nevertheless, as will appear, the evidence establishes that the bank has made out its entitlement to possession of the land and judgment on the debt under the guarantee subject only to the determination of the two positive defences advanced by Mrs Wehbeh. Those two positive defences, pleaded by lawyers acting for Mrs Wehbeh at the time that her amended defence was filed, appear to raise the following contentions:
(a) First, it would be unconscionable to permit the NAB to rely upon any default under the home loan as default under the mortgage because the bank unconscientiously procured the loan agreement from Mrs Wehbeh by exploiting her “special disability” (unconscientious dealing defence);[1] and
(b)Secondly, the NAB should not be permitted to enforce the guarantee because it knew it was procured from Mrs Wehbeh in favour of a business of her husband in which she had no interest, knew that she would or may repose trust and confidence in her husband who may not accurately explain the effect of the loan and, in fact, she did not understand that the obligation she incurred under the guarantee was secured by the mortgage over the land (undue influence defence).[2]
[1]Para’s 3A‑3C and 15 of the second defendant’s Amended Defence to Second Further Amended Statement of Claim (‘Defence’).
[2]Para 25A of the Defence.
Ultimately, the real questions for decision in this case involve the determination of Mrs Wehbeh’s two positive defences.
For reasons given below, I am not satisfied that Mrs Wehbeh has established all of the necessary elements to give rise to the two defences she has advanced, the onus being upon her to do so. It follows that the NAB is entitled to the relief it seeks. I will order that it recover possession of the land and I will give judgment in its favour for the sum due under the guarantee.
Before turning to a consideration of Mrs Wehbeh’s defences, however, I will first explain how the evidence establishes the NAB’s prima facie entitlement to possession of the land and judgment on the guaranteed debt.
Proofs required of the NAB
If there was a default in payment of the money due on the home loan the NAB was entitled to enforce the mortgage including, for example, by taking possession of the land. The mortgage provisions only required the service of a notice of demand to the extent the loan or mortgage were governed by the National Credit Code (NCC).[3] There is no dispute that both the home loan and the mortgage were governed by the NCC. So, under s 88 of the NCC, after a default and before bringing any proceeding for possession, a lender in the position of the NAB is required to serve on the borrowers and mortgagors a notice complying with the section, allowing at least 30 days to remedy the default.
[3]Exhibit 31, clause 16.1
If it served such a notice, and the default was not remedied, the NAB was entitled to bring proceedings for possession of the security property pursuant to s 78 of the Transfer of Land Act 1958 (TLA).
Section 78(1)(b) of the TLA states that:
The mortgagee or annuitant upon default in payment of the principal sum or interest or annuity or any part thereof respectively at the due time may bring an action of ejectment to recover the land, either before or after entering into receipt of the rents and profits and either before or after any sale of the land as aforesaid.
Other than proof of service of any notice required by the NCC, a mortgagee seeking to exercise the power given to it by s 78(1) of the TLA is required to establish:
·the execution of the mortgage;
·the advance to the mortgagor;
·default under the mortgage; and
·that the mortgagor is in possession of the mortgage property.[4]
[4]Commonwealth Bank of Australia v Jackson (1992) V Conv R 54-447 cited with approval by Beach J in Wren Close Nominees Pty Ltd v McCulloch [2002] VSC 138.
Turning then to the guarantee, in order to establish its entitlement to judgment for the amount of debt claimed, the NAB was required to prove:[5]
·the execution of the guarantee;
·the default of the borrower under the guaranteed transaction;
·a demand by the NAB to Mrs Wehbeh to pay;
·failure by Mrs Wehbeh to pay on demand; and
·the sum due under the guarantee.
[5]Exhibit 45 (guarantee), in particular clause 6.2.
Although the home loan and mortgage were entered first in time, it is convenient to begin with the circumstances of Mrs Wehbeh giving the NAB the guarantee as they explain the context in which the home loan and mortgage transactions were entered.
Background
Guarantee transaction
By 2008, the income for the Wehbeh family had for a long time been derived from a family business which traded under two names: Casa Della Pasta and Pik-a-Pasta. Three companies were involved in the operation of the business. One was Casa Della Pizza Group Pty Ltd registered in April 1999. Mrs Wehbeh had been a director of that company for eighteen months between December 1999 and June 2001. After June 2001, Mr Wehbeh was the continuing director and sole shareholder. A second company was Casa Della Pizza Franchising Pty Ltd registered in June 1999 of which Mr Wehbeh was sole director and shareholder. The third company, 888 Investments Pty Ltd, was registered in September 2002. Its directors and shareholders were Mr Wehbeh and a Mr Issa Chris Tannous, a business partner of Mr Wehbeh.
Mrs Wehbeh described Casa Della Pasta and Pik-a-Pasta as the ‘family business’.[6]
[6]Transcript 75, 78.
By late 2007 the business had five outlets: two were owned and conducted by the business and the other three were franchised. The franchised outlets provided royalty income to the business. One of the franchised outlets was located at a shopping centre in Box Hill. Mr Wehbeh and Mr Tannous, the two directors of 888 Investments, wished to purchase the Box Hill franchise and re-fit it as a Pik-a-Pasta business to operate themselves. To that end, in October 2007, 888 Investments applied to the NAB for a business loan of $220 000 to finance the fit out. The loan that was later granted was termed an equipment loan. To make its application, 888 Investments used the services of a mortgage and finance broker, Capital Trust (Blackburn office).
It was in conjunction with that application for business finance that Mr and Mrs Wehbeh made the associated application to the NAB to re-finance their mortgage over the Greenvale land. By doing so, the Greenvale land could become one of the securities for the business loan. I will return to that transaction below.
Among other things, the NAB required personal guarantees from Mr and Mrs Wehbeh and Mr Tannous, presumably to ensure that the mortgage taken over the Greenvale land (and another taken over Mr Tannous’ property) secured the business loan via their guarantees.
On 9 April 2008 the NAB sent to each of Mr and Mrs Wehbeh, separately, a letter concerning the proposed guarantee together with a copy of the guarantee loan documents. The letter informed them that the NAB had approved funding supported by the guarantee and requested that they each read the documents carefully before signing the guarantee. The enclosed guarantee loan documents included:
·The equipment loan contract.
·A Duties Act declaration.
·The guarantee (including a solicitor’s certificate).
·Guarantee information statement.
·Guarantor acknowledgement form.
On 16 April 2008 Mrs Wehbeh attended the office of Mr Tony Raso, solicitor, to execute the guarantee in his presence. I will return to what occurred at this meeting later, but Mrs Wehbeh signed the guarantee on that day.[7]
[7]Exhibit 1 [52]; exhibit 45.
There were a number of conditions precedent which needed to be satisfied before the equipment loan was advanced. One of them was confirmation that the equipment to be purchased under the loan had been purchased and fitted into the new shop. Those conditions had been satisfied by 10 July 2008. On that day, Ms Suman Lal of the NAB sent a letter to 888 Investments confirming that the NAB had approved the credit request with respect to the equipment loan. Also on that same day, Mr Wehbeh and Mr Tannous executed the equipment loan for and on behalf of 888 Investments. On the following day, 17 July 2008, Mr and Mrs Wehbeh executed the equipment loan as joint and several guarantors pursuant to the guarantee they had each signed on 16 April 2008.[8]
[8]Exhibit 1 [68]; exhibit 39.
On 18 July 2008, the equipment loan was drawn down and $220 000 was credited to 888 Investments’ business cheque account. [9]
[9]Exhibit 62, 392; exhibit 63, 556.
Home loan and mortgage transactions
In November 1997, Mr and Mrs Wehbeh became joint registered proprietors of the Greenvale land and they built their home upon it. Initially, they borrowed money from the NAB to purchase the land and secured repayment of the loan by giving the NAB a mortgage over the land. In March 2001, Mr and Mrs Wehbeh re-financed the NAB mortgage loan by taking a mortgage loan from the Commonwealth Bank of Australia. Later, in August 2004, they re-financed the Commonwealth Bank loan by taking a loan from Perpetual Trustees Victoria Limited, also secured by a mortgage given to that lender.
Finally, in the context of the application to the NAB for business finance as described above, Mr and Mrs Wehbeh also sought to refinance the mortgage to Perpetual Trustees. This gave rise to the relevant home loan and mortgage the subject of the NAB’s possession claim in this proceeding.
On behalf of Mr and Mrs Wehbeh, Capital Trust applied for the loan from the NAB to re-finance the Perpetual mortgage. The balance of the Perpetual mortgage in early 2008 was approximately $535 000. In the presence of Mr Kevin Payne of Capital Trust, Mr and Mrs Wehbeh executed a Facility Agreement with the NAB (home loan agreement)[10] on 13 April 2008. Under that agreement the NAB agreed to grant a facility up to $535 000 under its variable rate home loan NAB choice package. It was a term of the home loan agreement that the NAB would take a registered mortgage over the Greenvale land as security.
[10]Exhibit 41.
On the same date, 13 April 2008, Mr and Mrs Wehbeh executed a mortgage in favour of the NAB as security for the home loan,[11] again witnessed by Mr Payne. Other documents necessary to effect the transaction, such as a loan draw down authority, insurance undertaking, direct debit request and an acknowledgement and consent to the payment of commission, were also signed by Mr and Mrs Wehbeh on or shortly before the date of the loan.[12]
[11]Exhibit 42.
[12]Exhibit 1 [12].
On 9 May 2008, settlement of the discharge of the Perpetual mortgage took place at which NAB paid to Perpetual Trustees the amount of $540 387.04. In exchange, the NAB received the discharge of the Perpetual mortgage and the original certificate of title over the land. The settlement amount paid to Perpetual Trustees was in part drawn down from the home loan advanced by the NAB ($519 805.83) and, as to the rest, drawn from funds supplied by Mr Tannous.[13]
[13]Exhibit 1 [60]-[61].
In her evidence at trial, Mrs Wehbeh admitted that she signed the relevant loan and mortgage documents[14] and that the NAB advanced the monies to pay out the Perpetual loan and discharge its mortgage.[15]
[14]Transcript 88
[15]Transcript 93.
The NAB mortgage was registered at the Victorian Land Titles Office on 19 May 2008 as a first ranking registered mortgage over the Greenvale land.
Default and demands for payment
By her pleadings, Mrs Wehbeh put in issue whether she and her husband had defaulted on the home loan, and whether 888 Investments had defaulted on the equipment loan. Further, she raised an issue concerning the efficacy of the notices of default allegedly served upon Mrs Wehbeh in respect of each loan.
Those issues disappeared at trial, first because, when served with a notice to admit[16] (while still represented by solicitors) Mrs Wehbeh did not dispute service of each of the notices listed below. Secondly, at trial Mrs Wehbeh accepted that no payments had been made on the home loan since her husband had left her in mid-2010[17] and she further accepted that she had received the relevant notices of demand.[18] Thirdly, the NAB tendered accounts for both the home loan[19] and the equipment loan.[20] Those accounts showed that no payments were received on the home loan after July 2010, and that repayments on the equipment loan were consistently dishonoured from about the same time.
[16]Exhibit 78.
[17]Transcript 97.
[18]Transcript 60.
[19]Exhibit 59
[20]Exhibit 62; Exhibit 63.
Further, the evidence of Ms Lal independently satisfies me that the bank served the requisite notices of demand upon Mrs Wehbeh, namely:
·On 26 August 2010, a default notice pursuant to s 88 of the NCC in respect of the arrears of payments then due under the home loan contract, demanding payment within 30 days of service of the notice.[21]
·On 30 September 2010, a further demand calling up payment of the whole home loan ($494 667.31).[22]
·On 8 October 2010, a demand addressed to 888 Investments notifying it of default in payments under the equipment loan and making demand for payment within 14 days.[23]
·On 9 March 2011, a second notice of demand to 888 Investments demanding payment of the total amount then owing under the equipment loan of $132 340.24 within 14 days.[24]
·Also on 9 March 2011, a demand posted to Mrs Wehbeh demanding payment from her within 14 days of the whole amount of the equipment loan ($132 340.24).
·On 28 March 2011, a demand pursuant to s 76 of the TLA sent by post addressed to each of Mr Wehbeh and Mrs Wehbeh (in separate envelopes) to their Greenvale property demanding immediate payment of the total owing under the home loan, $511 110.14.[25]
·On 24 April 2012, after Mrs Wehbeh had denied by her amended defence that the NAB had served the demand dated 26 August 2010 in respect of the home loan, a further default notice pursuant to s 88 of the NCC by prepaid post to each of Mr and Mrs Wehbeh. The second NCC notice demanded payment of the default amount under the home loan then being $92 366.70, within 30 days of service of the notice.[26]
[21]Exhibit 1 [75]; exhibit 65
[22]Exhibit 1 [78]; exhibit 66
[23] Exhibit 1 [83]; exhibit 68.
[24]Exhibit 1 [87]; exhibit 69.
[25]Exhibit 1 [100]; exhibit 75.
[26]Exhibit 1 [104]; exhibit 76.
Proof of indebtedness
As it was permitted to do under the terms of the loan agreements and the mortgage, the NAB proved the amounts due and payable by certificates given by Aiden Hsu, manager at the NAB, each dated 21 May 2014, as follows:
·Under the home loan, $621 981.71.[27]
·Under the guarantee, $56 651.71.[28]
·Under the mortgage, $674 864.92.[29]
[27]Exhibit 2, pursuant to clause 31 of the home loan agreement (exhibit 34).
[28]Exhibit 3, pursuant to clause 22.1 of the guarantee (exhibit 45).
[29]Exhibit 4, pursuant to clause 24.1 of the memorandum of common provisions of the mortgage (exhibit 31).
Mrs Wehbeh admitted in evidence that each loan remained in default.
NAB’s entitlement to possession and to judgment on the debt
As outlined above, the NAB has proven the execution of the mortgage, the advance and the default. The NAB’s notice served on Mr and Mrs Wehbeh on 26 August 2010 complied with the NCC and allowed the required period for remedy of the default. The default was not remedied. It is not in dispute that Mrs Wehbeh remains in possession of the Greenvale land. So, it follows that the NAB has established its right to possession of that land.
The evidence establishes Mrs Wehbeh’s execution of the guarantee and the execution by 888 Investments of the equipment loan, being the guaranteed obligation. It also establishes that the NAB made the required demand of 888 Investments and, after it continued in default, that it demanded that Mrs Wehbeh pay the outstanding amount pursuant to her guarantee. There is no dispute that she has not done so.
In those circumstances, the bank has also established its entitlement to judgment on the outstanding balance of the equipment loan.
What remains is to consider the two positive defences alleged by Mrs Wehbeh.
Defences
In response to the NAB’s allegation that Mrs Wehbeh entered the home loan agreement, Mrs Wehbeh pleaded as follows:
3AFurther the plaintiff knew or reasonably should have known that the second defendant was under a special disability in dealing with the plaintiff by reason of the following facts and circumstances:
(a)the second defendant lacked experience in commercial transactions and familiarity with loan agreements;
(b)the plaintiff failed to ensure that the second defendant received proper independent advice as to the terms, nature and effect of the loan agreement;
(c)the second defendant was emotionally dependent upon her husband and relied upon him for advice;
(d)the loan was arranged by the first defendant; and
(e)the second defendant had no capacity to pay the plaintiff the loan payments or the loan amount.
3BAt the time the plaintiff procured or accepted the second defendant’s execution to the loan agreement it well knew or ought to have known of the circumstances referred to in paragraph 3A herein and the special disability of the second defendant.
3CIn those circumstances, it was unconscionable for the plaintiff to procure or accept the second defendant’s execution of the loan agreement.
In response to the NAB’s allegation that Mrs Wehbeh was liable under the guarantee, she pleaded as follows:
25AFurther, or in the alternative, at the time of execution of the guarantee the plaintiff well knew or ought to have known that:
(a)the second defendant was not a director of 888 Investments Pty Ltd;
(b)the second defendant was not a shareholder of 888 Investments Pty Ltd;
(c)the second defendant was a volunteer;
(d)the second defendant was married to the first defendant, who was the beneficiary of the proposed loan;
(e)the second defendant would repose trust and confidence in her husband in matters of business and that her husband did not explain the effect of the transaction to her;
(f)the second defendant could not repay the loan if the borrower defaulted;
(g)the second defendant did not be able (sic) to understand the guarantee document due to its length and complexity;
(h)that the borrower had a paid up capital in the sum of $12;
(i)that the risk of default by the borrower was significant;
(j)that the plaintiff already had a fixed and floating charge over the assets of the borrower, and
(k)the second defendant was not aware that any breach of the agreement by the borrower would lead to the second defendant losing her major asset, namely her home.
25ABy reason of the circumstances of its execution which render reliance upon it and its enforcement by the plaintiff unconscionable and (sic) the plaintiff is estopped from asserting the enforceability of the guarantee.
The defences raised in respect of the two transactions are different in concept. In respect of the guarantee transaction, the defence calls upon the principles set out in Yerkey v Jones[30] and Garcia v National Australia Bank[31]. That is, the defence is that Mrs Wehbeh reposed trust and confidence in her husband to enter a transaction in which she received no benefit (a volunteer) and that she failed to properly understand the nature of the transaction. Although it is often described as a species of presumed undue influence, the authorities make it clear that a husband is not presumed to exercise undue influence over his wife.[32]
[30](1939) 63 CLR 649 (‘Yerkey’).
[31](1998) 194 CLR 395 (‘Garcia’).
[32]Meagher Gummow and Lehane’s Equity Doctrines and Remedies (Lexis Nexis Butterworths, 2002, 4th ed) 512.
Such a defence does not require any unconscientious behaviour by the creditor (ie. the NAB): it merely requires that the NAB had notice of the relevant circumstances. A critical factor in this type of defence is that the surety (in the case of a guarantee transaction) is a volunteer. That allegation is specifically made in paragraph 25A of the defence.
On the other hand, the defence raised in relation to the home loan is of a different character. Notably, it is not suggested in paragraphs 3A-3C that Mrs Wehbeh was a volunteer or that she retained no benefit from the transaction. Her defence under these paragraphs is fashioned on the principles derived from cases such as Blomley v Ryan[33], Commercial Bank of Australia Ltd v Amadio[34], and Bridgewater v Leahy[35]. Such a defence focuses on the conduct of the person seeking to enforce the bargain. It looks to see if that person has made unconscientious use of a superior position to the detriment of another who suffers from a special disability or is in a special situation of disadvantage. The bargain often is, but need not necessarily be, one in which there is inadequate consideration moving from the stronger party.
[33](1956) 99 CLR 362.
[34](1983) 151 CLR 447 (‘Amadio’).
[35](1998) 194 CLR 457.
The distinction between the two defences – which may in particular circumstances overlap – was described by Mason J in Amadio in these terms:
Historically, courts have exercised jurisdiction to set aside contracts and other dealings on a variety of equitable grounds. They include fraud, misrepresentation, breach of fiduciary duty, undue influence and unconscionable conduct. In one sense they all constitute species of unconscionable conduct on the part of a party who stands to receive a benefit under a transaction which, in the eye of equity, cannot be enforced because to do so would be inconsistent with equity and good conscience. But relief on the ground of "unconscionable conduct" is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage, e.g., a catching bargain with an expectant heir or an unfair contract made by taking advantage of a person who is seriously affected by intoxicating drink. Although unconscionable conduct in this narrow sense bears some resemblance to the doctrine of undue influence, there is a difference between the two. In the latter the will of the innocent party is not independent and voluntary because it is overborne. In the former the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which he is placed and of the other party unconscientiously taking advantage of that position.[36]
[36]Amadio (1983) 151 CLR 447, 461.
I propose to deal first with the defence raised in respect of the guarantee, then secondly with the defence in respect of the home loan.
Defence to the guarantee – ‘undue influence’.
In Yerkey, Dixon J described the equity to have a transaction set aside which may arise in favour of a wife who enters the transaction to benefit her husband:
In the first place, there is the doctrine, which may now perhaps be regarded as a rule of evidence, that, if a voluntary disposition in favour of the husband is impeached, the burden of establishing that it was not improperly or unfairly procured may be placed upon him by proof of circumstances raising any doubt or suspicion. In the second place, the position of strangers who deal through the husband with the wife in a transaction operating to the husband’s advantage may, by that fact alone, be affected by any equity which as between the wife and the husband might arise from his conduct. In the third place, it still is or may be a condition of the validity of a voluntary dealing by the wife for the advantage of her husband that she really obtained an adequate understanding of the actual nature and consequences of the transaction.
It will be seen that all three of these matters must have a special importance when the transaction in question is one of suretyship and the wife without any recompense, except the advantage of her husband, saddles herself or her separate property with a liability for his debt or debts. [37]
[37]Yerkey (1939) 63 CLR 649, 675-676.
In relation to the position of the ‘stranger’ (such as the NAB in this case), his Honour continued:
That rule is that where there is a relation of influence and the dominant party is the person by or through whom an instrument operating to his advantage is obtained from the other the instrument is voidable even as against strangers who have become parties to the instrument for value if they had notice of the existence of the relation of influence or of the circumstances giving rise to it.[38]
[38]Ibid, 677.
His Honour then distinguished a case in which the equity arises upon proof of the exercise of actual undue influence by the husband over his wife from a second type of case where such proof is not required. Of that second type of case his Honour said:
… where the wife agrees to become surety at the instance of her husband though she does not understand the effect of the document or the nature of the transaction, her failure to do so may be the result of the husband’s actually misleading her, but in any case it could hardly occur without some impropriety on his part even if that impropriety consisted only in his neglect to inform her of the exact nature of that to which she is willing blindly, ignorantly or mistakenly to assent. But, where the substantial or only ground for impeaching the instrument is misunderstanding or want of understanding of its contents or effect, the amount of reliance placed by the creditor upon the husband for the purpose of informing his wife of what she was about must be of great importance.
If the creditor takes adequate steps to inform her and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp some material part of the document, or, indeed, the significance of what she is doing, cannot, I think, in itself give her an equity to set it aside, notwithstanding that at an earlier stage the creditor relied upon her husband to obtain her consent to enter into the obligation of surety. The creditor may have done enough by superintending himself the execution of the document and by attempting to assure himself by means of questions or explanation that she knows to what she is committing herself. The sufficiency of this must depend on circumstances, as, for example, the ramifications and complexities of the transaction, the amount of deception practised by the husband upon his wife and the intelligence and business understanding of the woman. But, if the wife has been in receipt of the advice of a stranger whom the creditor believes on reasonable grounds to be competent, independent and disinterested, then the circumstances would need to be very exceptional before the creditor could be held bound by any equity which otherwise might arise from the husband’s conduct and his wife’s actual failure to understand the transaction: Cf per Cussen J. (1). If undue influence in the full sense is not made out but the elements of pressure, surprise, misrepresentation or some or one of them combine with or cause a misunderstanding or failure to understand the document or transaction, the final question must be whether the grounds upon which the creditor believed that the document was fairly obtained and executed by a woman sufficiently understanding is purport and effect were such that it would be inequitable to fix the creditor with the consequences of the husband’s improper or unfair dealing with his wife.[39]
[39]Ibid, 685-686 (emphasis added).
In Garcia, Gaudron, McHugh, Gummow and Hayne JJ referred to what Dixon J said in Yerkey about the second category of case, and continued:
And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that:
(a)in fact the surety did not understand the purport and effect of the transaction;
(b)the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed);
(c)the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet
(d)the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.[40]
[40]Garcia (1998) 194 CLR 395, 409.
As can be seen from Mrs Wehbeh’s defence at paragraph 25A she alleges three of the four circumstances outlined in the passage from Garcia set out in the preceding paragraph. That is, she alleges:
·She did not understand that a breach of the equipment loan agreement by 888 Investments would lead to her losing her home;
·That she was a volunteer in the transaction; and
·That the NAB knew that she was married to Mr Wehbeh, a beneficiary of the proposed loan in whom Mrs Wehbeh would repose trust and confidence, who may not fully and accurately explain the effect of the guarantee transaction.
Significantly, she does not allege that the NAB failed to ascertain whether an independent person had explained the transaction to her – that being the fourth circumstance referred to in the passage from Garcia above. No doubt that is because Mrs Wehbeh knew that could not prove such an allegation.
Before me, the NAB did not, of course, challenge the fact that Mrs Wehbeh was the wife of Mr Wehbeh or that it was on notice of the possibility that Mrs Wehbeh may repose trust and confidence in him and that he may not adequately explain the transaction to her. Nevertheless, the NAB argued that there were two features of this case which would prevent any equity arising in Mrs Wehbeh’s favour to have the guarantee transaction set aside:
·The first was that she was not a volunteer but in fact had benefited from the equipment loan transaction for which she gave her guarantee.
·Even more significantly, the second was that, so far as the bank was aware, Mrs Wehbeh had received independent advice about the nature and effect of her obligations under the guarantee.
Was Mrs Wehbeh a volunteer in the guarantee transaction?
As to whether Mrs Wehbeh was a volunteer in respect of the equipment loan transaction, the NAB pointed to three particular aspects of the evidence to persuade me she had sufficient interest in, or had obtained sufficient benefit from, the loan so as not to qualify as a volunteer for relevant purposes.
First, she had been a director of one of the three companies comprising the family business for an eighteen month period back in 1999 and 2000.
Secondly, the bank contended that she had played an active role in the conduct of the business. It was put to her that she had been a manager of the Rosebud outlet, a matter which she flatly denied. I am not prepared to accept that she was a manager of any of the outlets. Nevertheless she accepted that she worked part time in the ‘food courts’[41]: the only one she specifically identified was one in Little Lonsdale Street. Otherwise, Mrs Wehbeh maintained that the business was her husband’s business and that her role was confined to being as ‘the mum, the housewife’.
[41]Transcript 76.
Thirdly, the NAB pointed to the fact that since her separation from her husband, the franchising component of the business (which involved two stores) was transferred to a new company, Wehbeh Franchising Pty Ltd of which Mrs Wehbeh was the sole shareholder and director. All the royalties from the franchised businesses were directed to Wehbeh Franchising. For the year ended 30 June 2012, that company had sales of $81 000 and a gross trading profit of $60 000. In fact, it appeared that Mrs Wehbeh, herself, was operating one of the two outlets, the one at ‘Chirnside’.
There was no evidence that the Box Hill outlet, in which the equipment funded by the equipment loan was installed, was one of the outlets from which royalty payments were received by Wehbeh Franchising. So the NAB did not attempt to rely upon any direct financial benefit flowing to Mrs Wehbeh from the equipment loan. Rather, the NAB argued that I should infer from the fact that Mrs Wehbeh has managed aspects of the business since separation from her husband, that she was more experienced in the operation of the former family business than she was prepared to concede.
Each circumstance said to give rise to the special equity need not be looked at in isolation from the others. In this particular case, Mrs Wehbeh was not a shareholder of 888 Investments to which the NAB made a loan. There is no evidence that she worked in the particular outlet that received the direct benefit of the loan, or had anything to do with its operation. Nonetheless, collectively, the family business consisted of the various outlets run or franchised by the different corporate entities. And it is clear from the evidence that Mrs Wehbeh worked in more than one of those outlets. In that way, she played something of a role, and no doubt had an interest in, the conduct of the business as a whole. The fact that she has since taken on the operation of one of the outlets herself, and evidently controls a company which franchises another outlet, is at least consistent with her previously having had some familiarity with the operation of the business. But, that said, I cannot infer from her present role and position that she necessarily had any greater interest in the business than I have already described.
In my opinion, although it cannot be said that she is a person who derived no material benefit from the equipment loan, and so be understood to be a mere volunteer, nevertheless the extent to which she received a benefit would not, of itself, stand against the finding of an equity in her favour if all other factors warranted it. The evidence does not establish a great deal more than the interest of one who derives an incidental benefit that accrues generally to the family of which the wife is a member.[42]
[42]See State Bank of NSW v Chia (2000) 50 NSWLR 587, 601 (Einstein J).
Was Mrs Wehbeh, to the bank’s knowledge, independently advised about the guarantee?
But what stands most significantly against Mrs Wehbeh is the fact that she did receive independent legal advice from Mr Raso about the nature and effect of the guarantee before she signed it, and that the NAB understood that to be the case.
Mr Raso gave evidence before me. He impressed me as a careful witness. The certificate which he signed and gave to the NAB after Mrs Wehbeh executed the guarantee in his presence stated:
I certify that I explained the effect of this guarantee and indemnity to guarantor who appeared to be aware of and to understand the nature and effect of obligations of the guarantor under this guarantee and indemnity, and executed it in my presence.[43]
[43]Exhibit 45, 302.
In evidence, Mr Raso went further and said:
I have a particular view that I don’t like clients signing them [guarantees] if they can find an alternative arrangement. So I always say to clients and have done so for years, that these are documents that you don’t sign lightly, because the consequences are you could lose everything that you’ve got, because you’ve got no guarantee that the borrower will meet all the borrower’s commitments, and you don’t necessarily know if and when the borrowers are meeting all those commitments along the way. And as the guarantor, you might be the last to know when the bank knocks on your door and says … .[44]
[44]Transcript 55.
Mr Raso was unable to recall specifically advising Mrs Wehbeh that she might lose her house. But I am satisfied that he did convey to her, in accordance with his usual practice, that she ‘could lose everything’ that she had. Such a statement must have been understood by Mrs Wehbeh to include the prospect of losing her house. Further to that, Mrs Wehbeh admitted involvement in a similar transaction involving her parents when she and her husband first bought their own home, albeit that it was 18 years earlier. Her parents guaranteed the repayment of the housing loan made to her and her husband, and her parents’ mortgage secured any monies they became liable to pay under that guarantee. Mrs Wehbeh said in her evidence that she understood that transaction, and its effect, when it was made.[45]
[45]Transcript 68.
Mrs Wehbeh’s account of her meeting with Mr Raso differed from his account. What Mrs Wehbeh claimed was that Mr Raso only said to her, in effect, “Sam’s taken out a loan and it’s nothing for you to worry about”. In response to her alleged question to Mr Raso, “do I need to worry?”, he allegedly replied “no, no need to worry, Sam will handle this, Vera”.[46] In my view, Mrs Wehbeh’s account of the conversation was a reconstruction, and it did not occur the way she said it did. Unfortunately, Mrs Wehbeh did not put her account of the conversation to Mr Raso to enable him to comment on it ‑ although she was urged to put any contradictory account to him when she cross-examined him.
[46]Transcript 90.
She did not deny that she understood she was guaranteeing the repayment of the equipment loan should 888 Investments fail,[47] and indeed she said “I didn’t really consider it … I just thought – just went and signed it and walked out of there”.[48]
[47]Transcript 90.
[48]Transcript 91.
I am not prepared to accept her account of what Mr Raso allegedly said to her. It was somewhat glib. It stretches credulity to believe that an otherwise careful and experienced solicitor, engaged specifically to give independent advice on the effect of a guarantee, would give such advice. I prefer Mr Raso’s account. The more probable account of what occurred is that Mr Raso gave the explanation that he certified he gave, gave the warning that he said he typically gave, and that, for whatever reason, Mrs Wehbeh ‘didn’t really consider it…just went and signed it and walked out of there’.
In any event, the real question is what the NAB understood. Even if I was to accept Mrs Wehbeh’s account, that would simply supply the necessary evidence that she was mistaken about the effect of the transaction. But it does not deal with the proposition that the NAB reasonably believed that she had been properly advised about the nature and effect of her entering the guarantee. It received and relied upon a certificate from Mr Raso from which it reasonably believed that she had been adequately advised. As indicated above, it is the knowledge of the NAB that characterises its behaviour as unconscientious or otherwise.
Accordingly, I am not satisfied that the defence that Mrs Wehbeh has raised with respect to the guarantee and equipment loan has been made out. It follows that judgment must be entered against her in respect of the debt due under the guarantee.
Defence to home loan transaction – unconscientious dealing.
Turning then to the defence raised in respect of the home loan, the issue there is whether Mrs Wehbeh was under some form of special disability or a situation of disadvantage which the NAB unconscientiously took advantage of. In Amadio, Dean J described the circumstances in which equity would intervene on this basis as follows:
Unconscionable dealing looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so. The adverse circumstances which may constitute a special disability for the purposes of the principles relating to relief against unconscionable dealing may take a wide variety of forms and are not susceptible to being comprehensively catalogues. In Blomley v Ryan (52), Fullagar J listed some examples of such disability: “poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary”. As Fullagar J. remarked, the common characteristic of such adverse circumstances “seems to be that they have the effect of placing one party at a serious disadvantage vis-a-vis the other”.
In most cases where equity courts have granted relief against unconscionable dealing, there has been an inadequacy of consideration moving from the stronger party. It is not, however, essential that that should be so (see Blomley v Ryan (53); Harrison v National Bank of Australasia Ltd (54); but cf. Lloyds Bank v Bundy (55) and Cresswell v Potter (56)).Notwithstanding that adequate consideration may have moved from the stronger party, a transaction may be unfair, unreasonable and unjust from the view point of the party under the disability. An obvious instance of circumstances in which that may be so is the case where the benefit of the consideration does not move to the party under the disability but moves to some third party involved in the transaction.[49]
[49]Amadio (1983) 151 CLR 447, 474-5.
The first thing to be said is that consideration did move from the NAB directly in favour of Mrs Wehbeh. That is, the home loan that the NAB advanced discharged the debt which Mr and Mrs Wehbeh owed to Perpetual under the pre-existing mortgage.
Secondly, there is absolutely no substance to the suggestion that Mrs Wehbeh was under some form of special disability or disadvantage in dealing with the NAB in relation to this transaction. It cannot be said that she lacked experience in housing loan agreements (and associated mortgages) of the type that she entered into with the NAB in 2008. Mrs Wehbeh was taken in detail through the numerous previous housing loans with which she had been involved, including:
·A housing loan secured by a mortgage, taken from the NAB in 1990 when she and her husband first purchased their family home at Tullamarine.
·A home loan taken from the NAB in 1997 to purchase the Greenvale land.
·A further loan of $200 000 taken in 1998 to fund the construction of their house.
·A security given in 1999 for a loan of $120 000 to be advanced to her brother secured on both her and her parents’ houses.
·The refinance loan and associated mortgage to the Commonwealth Bank in 2001.
·The refinance loan and associated mortgage when the Commonwealth Bank mortgage was refinanced with Perpetual in 2004.
Mrs Wehbeh made no attempt to suggest that she did not understand the nature and effect of the past transactions. Nor did she maintain before me what was suggested by her defence, namely that she was not familiar with or lacked experience in the type of home loan that she entered with the NAB in 2008. She did not suggest before me that she was in any way overborne by her husband to enter the home loan.
In those circumstances I am not satisfied that her defence in relation to the entry into the home loan as pleaded in paragraphs 3A-3C have been made out.
It follows that the NAB is entitled to enforce its security in respect of that home loan as it now seeks to do.
Conclusion
For the reasons stated, the NAB is entitled to possession of the land at 5 Fernyhill Court, Greenvale. Under the terms of the mortgage it is also entitled to recover the costs of the proceeding, including reserved costs, on a standard basis.[50]
[50]Exhibit 31, clause 16.5 . See rule 63.30 of the Supreme Court (General Civil Procedure) Rules 2005. Costs that are reasonably incurred and of a reasonable amount are now referred to as costs on a ‘standard basis’.
Further, the NAB is also entitled to judgment in the sum of $56 650.71 under the guarantee. Interest will be allowed, pursuant to the terms of the guarantee, at 1.5 times the NAB’s Base Indicator Rate per annum[51] from 6 May 2011 to the date of judgment.
[51]Exhibit 45, clause 8.
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