National Australia Bank Ltd v Meeke
[2007] WASC 11
•19 JANUARY 2007
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: NATIONAL AUSTRALIA BANK LTD -v- MEEKE & ANOR [2007] WASC 11
CORAM: JENKINS J
HEARD: 7-10, 13-15, 21-24, 27-30 MARCH & 26 APRIL 2006
DELIVERED : 19 JANUARY 2007
FILE NO/S: CIV 2973 of 2001
BETWEEN: NATIONAL AUSTRALIA BANK LTD (ACN 004 044 937)
Plaintiff
AND
WILLIAM JOHN MEEKE
First DefendantCATHERINE ELIZABETH MEEKE
Second DefendantPULLINGER READHEAD STEWART (A FIRM)
Third Party(BY ORIGINAL ACTION)
WILLIAM JOHN MEEKE
First PlaintiffCATHERINE ELIZABETH MEEKE
Second PlaintiffAND
NATIONAL AUSTRALIA BANK LTD
First DefendantCHRIS KLAASSEN
Second Defendant(BY COUNTERCLAIM)
Catchwords:
Banking and financial institutions - Banker and customer relationship - Management of forward exchange contracts
Guarantee and indemnity - The contract of guarantee - Rights of surety - Action against sureties - Indebtedness of principal debtor - Implied terms - Economic duress - Unconscionability - Misrepresentation - Misleading and deceptive conduct
Legislation:
Australian Securities and Investments Commissions Act 2001 (Cth), s 12CV, s 12DA
Corporations Law, s 232(5) (Rep), s 232 (6) (Rep)
Fair Trading act 1987 (WA), s 10(1)
Trade Practices Act 1974 (Cth), s 51AC, s 51AC(1), s 51AC(2), s 52, s 87
Result:
Original action - The plaintiff's claim against the first and second defendants succeeds
Counterclaim - The first and second defendant's counterclaim against the plaintiff and the second defendant (by counterclaim) fails
Category: B
Representation:
Original Action
Counsel:
Plaintiff: Mr C M Scerri QC & Mr B Dharmananda
First Defendant : Mr M D G Heaton QC & Mr B W Ashdown
Second Defendant : Mr M D G Heaton QC & Mr B W Ashdown
Third Party : Mr K J Martin QC & Mr R A Corboy
Solicitors:
Plaintiff: Mallesons Stephen Jaques
First Defendant : Taylor Smart
Second Defendant : Taylor Smart
Third Party : Mullins Handcock
Counterclaim
Counsel:
First Plaintiff : Mr M D G Heaton QC & Mr B W Ashdown
Second Plaintiff : Mr M D G Heaton QC & Mr B W Ashdown
First Defendant : Mr C M Scerri QC & Mr B Dharmananda
Second Defendant : Ms P E Cahill
Solicitors:
First Plaintiff : Taylor Smart
Second Plaintiff : Taylor Smart
First Defendant : Mallesons Stephen Jaques
Second Defendant : Jackson McDonald
Case(s) referred to in judgment(s):
AGC (Advances) Ltd v West (1984) 5 NSWLR 590
Bank of India v Transcontinental Commodity Merchants Ltd & Patel [1983] 2 Lloyd's Rep 298
Barclays Bank Plc v Quincecare Ltd [1992] 4 All ER 363
Commercial Bank of Australia Ltd v Amadio (1982) 151 CLR 447
Durban Roodepoort Deep Limited v Newshore Nominees Pty Ltd [2005] WASCA 231
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480
Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112
Greenough v McClelland (1860) 2 El & El 429
Hollier v Eyre (1842) 9 Cl & Fin 1
Hurley v McDonalds Australia Ltd (2000) ASAL 55‑041
Karak Rubber Co Ltd v Burden (No 2) [1972] 1All ER 1210
Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia (2002) 122 FCR 110
National Australia Bank Ltd v Hokit Pty Ltd (1996) 39 NSWLR 377
National Australia Bank Ltd v Landmount Investments Pty Ltd & Ors [2003] QDC 042
O'Day v Commercial Bank of Australia Ltd (1933) 50 CLR 200
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451
Rouse v Bradford Banking Company Limited [1894] AC 586
Ryan v Bank of New South Wales [1978] VR 555
Sansom v Westpac Banking Corporation (1996) 7 BPR 14,615
Selangor United Rubber Estates Ltd v Craddock (No 3) [1968] 2 All ER 1073
Tai Hing Cotton Mill Limited v Liu Chong Hing Bank Limited [1986] AC 80
West v AGC (Advances) Ltd (1986) 5 NSWLR 610
Westpac Banking Corporation v Robinson (1993) 30 NSWLR 668
Case(s) also cited:
ACCC v Simply No-Knead (Franchising) Pty Ltd (2000) 104 FCR 253
Airpeak Pty Ltd v Jetstream Aircraft Ltd (1997) 73 FCR 161
Allen v Atalay (1993) 11 ACSR 753
Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549
Arbest Pty Ltd v State Bank of New South Wales [1996] ATPR41-481
Artistic Builders Pty Ltd v Elliot & Tuthill (Mortgages) Pty Ltd (2002) 10 BPR 19,565
Australian and New Zealand Banking Group Ltd v Karam [2005] NSWCA 344
Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd (2003) 214 CLR 51
Australian Competition and Consumer Commission v Lux Pty Ltd [2004] FCA 926
Australian Joint Stock Bank v Hogan [1902] 2 SR (NSW) 7
Australian Securities Investment Commission v National Exchange Pty Ltd [2005] FCAFC 226
Awaroa Holdings Ltd v Commercial Securities and Finance Ltd [1976] 1 NZLR 19
AWA Ltd v Daniels (1992) 7 ASCR 759
Bank of Credit and Commerce International SA v Ali [2001] UKHL 8
Bank of Montreal v Wilder (1987) 32 DLR (4th) 9
Bank of Nova Scotia v Neil (1968) 69 DLR (2d) 357
Bartley v Myers (2002) 83 SASR 183
Beach Petroleum NL v Johnson (1993) 43 FCR 1
Biala Pty Ltd v Mallina Holdings Ltd (1993) 11 ACLC 757
Bond v Hongkong Bank of Australia Ltd (1991) 25 NSWLR 286
Boral Formwork & Scaffolding Pty Ltd v Action Makers Ltd (2003) ATPR 41‑953
Broken Hill Proprietary Company Ltd v Bell Resources Ltd (1984) 8 ACLR 609
Cameron v Qantas Airways Ltd (1995) 55 FCR 147
Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561
Chew v The Queen (1991) 173 CLR 626
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
Commonwealth Bank of Australia v McArthur [2003] VSC 31
Commonwealth v Verwayen (1990) 170 CLR 394
Corumo Holdings Pty Ltd v C Itoh Ltd (1991) 24 NSWLR 370
Covino v Bandag Manufacturing Pty Ltd [1983] 1 NSWLR 237
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72
Credit Lyonnais Australia Ltd v Darling (1991) 5 ACSR 703
Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40
Curwen v Yan Yean Land Co Ltd (1891) 17 VLR 745
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Dimskal Shipping Co SA v International Transport Workers Federation (The Evia Luck No 2) [1992] 2 AC 152
Egbert v National Crown Bank [1918] AC 908
Elkhoury v Farrow Mortgage Services Pty Ltd (in liq) (1993) 114 ALR 541
Emlen Pty Ltd v St Barbara Mines Ltd (1997) 24 ACSR 303
Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50
Esso Australia Resources Ltd v Plowman (1994) 183 CLR 10
Executor Trustee Australia Ltd v Deloitte Haskins & Sells (1996) 135 FLR 314
Foley v Hill (1848) 2 HL Cas 28
Fortron Automotive Treatments Pty Ltd v Eurotime Holdings Pty Ltd [2001] WASCA 275
Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41‑703
Geelong Building Society (In Liq) v Encel [1996] 1 VR 594
GE Capital Australia v Davis (2002) 180 FLR 250
Gilbert v Shanahan [1998] 3 NZLR 528
Giorgianni v The Queen (1985) 156 CLR 473
Giumelli v Giumelli (1999) 196 CLR 101
Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641
Hampic Pty Ltd v Adams (1999) ASAL 55-035
Hawkins v Clayton (1987) 164 CLR 539
Indrisie v General Credits Ltd [1985] VR 251
Invensys Australia Superannuation Fund Pty Ltd v Austrac Investments Ltd (2006) 198 FLR 302
Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526
Jenkins v Wyatt (1900) 17 WN (NSW) 162
Joachimson v Swiss Bank Corporation [1921] 3 KB 110
Jones v Dumbrell [1981] VR 199
Kabwand Pty Ltd v National Australia Bank Ltd (1989) ASC 55-718
L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235
Lam v Ausintel Investments Aust Pty Ltd (1989) 97 FLR 458
Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548
Liverpool City Council v Irwin [1977] AC 239
Lloyds TSB Bank Plc v Shorney [2001] EWCA Civ 1161
Lockhart v Osman [1981] VR 57
Love v Ledger, unreported; SCt of WA (Scott J); Library No 940607; 31 October 1994
Maguire v Makaronis (1997) 188 CLR 449
Manzo v 555/255 Pitt Street Pty Ltd (1990) 21 NSWLR 1
March v E & M H Stramare Pty Ltd (1991) 171 CLR 506
Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494
McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457
Mesenberg v Cord Industrial Recruiters (1996) 39 NSWLR 128
Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274
National Westminster Bank plc v Riley [1989] BCLC 268
Neeson v Wrightson NMA Ltd [1989] ANZ ConvR 605
Pao On v Lau Yiu Long [1980] AC 614
Permanent Trustee Australia Ltd v Perpetual Trustee Co Ltd (1994) 15 ACSR 722
Permanent Trustee Co of New South Wales Ltd v Hinks (1934) 34 SR (NSW) 130
Qantas Airways Ltd v Cameron (1996) 66 FCR 246
Qantas Airways Ltd v Gubbins (1992) 28 NSWLR 26
QIW Retailers Ltd v Davids Holdings Pty Ltd (No 2) (1992) 37 FCR 57
R v Byrnes (1995) 183 CLR 501
Rhone-Poulenc Agrochimie S A v UIM Chemical Services Pty Ltd (1986) 12 FCR 477
Ridout Nominees Pty Ltd v Commonwealth Bank of Australia [2003] WASCA 158
Robins v Incentive Dynamics Pty Ltd (In Liq) (2003) 175 FLR 286
Shivas v Bank of New Zealand [1990] 2 NZLR 327
Smith v William Charlick Ltd (1924) 34 CLR 38
Spira v Commonwealth Bank of Australia (2003) 57 NSWLR 544
State Bank of Victoria v Parry (1988) 7 ACLC 226
Travel Compensation Fund v Tambree t/as R Tambree and Associates (2005) 222 ALR 263
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603
Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
Waterhouse v Waterhouse (1998) 46 NSWLR 449
Watts v Shuttleworth (1861) 158 ER 510
Westpac Banking Corporation v Cockerill (1998) 152 ALR 267
With v O'Flanagan [1936] Ch 575
Yorke v Lucas (1985) 158 CLR 661
Yorkshire Bank plc v Tinsley [2004] All ER (D) 311 (Jun)
TABLE OF CONTENTS
Credibility Issues
Facts
Events of 1997
Events in 1998
The appointment of Mr Klaassen
The Master Agreement for Foreign Exchange Contracts
The NAB international manual
FEC liability reports
Events in 1999
The 1999 $900,000 Bill Acceptance Facility and the second guarantee
The events leading up to the FEC settlement
Events of 2000
The Malaga Road property
The 8 February 2000 forbearance letter
"Renewal" of facilities on 5 October 2000
Events of 2001
The NAB's claim against Mr and Mrs Meeke
The NTHLP
The $600,000 FRIOL and $1,000,000 FRIL
The 2000 MOF, 2000 $900,000 BAF and third guarantee and indemnity
As at 5 October 2000, was the NAB entitled to terminate Janalyn's facilities?
As at 5 October 2000, did the NAB know that Janalyn would be unable to make the $100,000 repayments?
Length of time needed by Janalyn to obtain alternative finance
Janalyn's ability to repay its debts to the NAB in October 2000
Did the NAB engineer Janalyn's default in December 2000?
The Klaassen FECs
Mr Klaassen's authority to enter into FECs
The implied term
Surety Contract
Repudiation by the NAB of Janalyn's facility
Misleading and deceptive conduct
Unconscionable conduct
The NAB's alleged failure to disclose
Monies not due to the Bank
Conclusion as to the NAB's claim against Mr and Mrs Meeke
Mr and Mrs Meeke's counterclaim against the NAB
Mr and Mrs Meeke's counterclaim against Mr Klaassen
Conclusion
JENKINS J: This claim and counterclaim arise from money lent by the plaintiff, the National Australia Bank Ltd ("NAB") to the first and second defendants, William John Meeke ("Mr Meeke") and Catherine Elizabeth Meeke ("Mrs Meeke"), respectively, and money advanced by the NAB under various facilities to an associated company, Janalyn Pty Ltd ("Janalyn"). Mr and Mrs Meeke guaranteed the advances to Janalyn and indemnified the NAB in respect of them.
The NAB seeks to obtain possession of Mr and Mrs Meeke's former home at 54 Yaltara Road, City Beach ("the Yaltara Road property") pursuant to a mortgage which secured the loan to them and the guarantee and indemnity they gave in respect to the advances to Janalyn. The NAB also seeks orders for the payment to it of the outstanding balance of the loan to Mr and Mrs Meeke, the outstanding balances of Janalyn's facilities guaranteed by Mr and Mrs Meeke, interest, costs and other expenses.
Mr and Mrs Meeke deny that the NAB lent them money. Instead, they say that the subject loan was made to Janalyn and Mr and Mrs Meeke guaranteed that loan. They refer to that guarantee as "the Surety Contract". They say that the Surety Contract has been discharged because of the Bank's conduct, particularly in respect of its management of foreign exchange transactions between it and Janalyn.
Mr and Mrs Meeke deny any liability under the Janalyn guarantee and indemnity on the basis that the guarantee and indemnity is void and unenforceable because of the conduct of the Bank.
Mr and Mrs Meeke counterclaim against the NAB for various orders to the effect that the Surety Contract and the guarantee and indemnity are void or unenforceable. They further seek relief under the Trade Practices Act 1974 (Cth) and the Australian Securities and Investment Commissions Act 2001 (Cth).
Mr and Mrs Meeke also counterclaim against Janalyn's former employee, the second defendant (by counterclaim), Chris Klaassen ("Mr Klaassen"), for damages and other relief arising out of his conduct in respect of the foreign exchange transactions, which conduct Mr and Mrs Meeke allege was misleading and deceptive.
Credibility Issues
I consider the credibility of Mr Meeke, Mr Hicks, an employee of Janalyn who gave evidence on behalf of Mr Meeke, Mr Klaassen and Mr Anderson, an employee of Janalyn who gave evidence on behalf of Mr Klaassen, when I determine whether Mr Klaassen was authorised to enter into forward exchange contracts ("FECs").
I also heard evidence from a number of NAB employees and former employees. I am satisfied that each of these witnesses did their best to accurately recollect the matters on which they testified, although each had a limited memory of them. In the case of some witnesses this led them to reconstruct events based on what they think they would have said or done in the past. Before relying upon such a reconstruction, I have carefully examined the contemporaneous documentary evidence to ensure that it is consistent with the witness' testimony.
In respect to the balance of the witnesses it is unnecessary for me to make general findings as to their credibility. Where it has been necessary to do so I have made specific findings as to whether I accept or reject their evidence on an issue.
Facts
The following facts are agreed or have been found by me after considering all the relevant evidence. Where a significant matter of fact is in dispute I set out the positions of the relevant parties before stating my finding and the reasons for it. I defer making some findings of facts related to matters of substantial controversy between the parties until that part of these reasons which considers the legal issues between the parties.
Mr Meeke was born in 1945. He left school prior to completing his Leaving Certificate but he has held a number of responsible positions in his working life. In 1980 he moved to Perth from Adelaide to become the managing director of a regional airline. He eventually became the chief executive of the Sky West group of companies. In 1994 Mr Meeke became the group general manager of Intellect Holdings. This position involved international business management in research, development and manufacturing. Mr Meeke left Intellect Holdings in 1995 to seek an alternative business opportunity.
Mrs Meeke was born in 1953. She completed High School in 1970 and a Bachelor of Arts majoring in early childhood education in 1994.
Mr and Mrs Meeke were married in 1980 and in 1986 they purchased a family home, the Yaltara Road property, in their joint names. As at April 1996 it was unencumbered.
In early April 1996 negotiations commenced between Mr Meeke and officers of the Osborne Park branch of the NAB in respect of Mr and Mrs Meeke's application for finance to purchase a business then known as Mediterranean Ceramics Gallery ("Mediterranean Ceramics"). Mediterranean Ceramics sold tiles, mainly imported from Spain and Italy, to retail and trade customers from premises in Osborne Park. On 4 April 1996 one of the bank's officers, Mr Henry Habekost, wrote to Mr Meeke suggesting the following method of funding the purchase:
1.NAB tailored home loan package ("NTHLP") for $600,000 for 10 years at an interest rate of 8.75 per cent fixed for the first two years and then variable;
2.Fixed rate instalment loan ("FRIL") for $500,000 for five years;
3.Fixed rate interest only loan ("FRIOL") for $900,000 for three years; and
4.FRIOL for $1,000,000 for five years.
It was proposed that NAB take security in the form of a first registered mortgage debenture over all the assets of Janalyn, the corporate entity which was to be used to purchase Mediterranean Ceramics, a guarantee and indemnity from Mr and Mrs Meeke supported by a first registered mortgage over the Yaltara Road property and life insurance cover over the life of Mr Meeke, assigned to the Bank.
Mr Kevin Mosey, the then regional business manager within the Business Banking Centre ("BBC") at the Osborne Park branch, recollects that he suggested structuring the Bank's funding proposal to include the home loan. One of his reasons for doing so was that there was a difference between the interest rate charged by the Bank in respect of business loans and home loans. Mr Mosey knew that the inclusion of the home loan, would lower the overall cost of the funding proposal. The exhibits indicate that the two year fixed interest rate on the home loan was approximately two per cent lower than the interest rates applicable to any of the other facilities proposed by NAB. Further, he was aware that Mr and Mrs Meeke were the owners of the unencumbered Yaltara Road property. Consequently it could be used by the Bank as security.
In order to obtain legal advice about the proposed purchase Mr Meeke instructed the solicitors Pullinger, Readhead and Stewart and in particular Mr Phillip Pullinger of that firm.
Janalyn was incorporated on 12 April 1996. On the same date Mr Meeke was appointed the sole director of Janalyn. Its only shareholder was Satoga Pty Ltd as trustee for the Meeke Family Trust ("Satoga"). Satoga was jointly owned by Mr and Mrs Meeke.
On 15 April 1996 Janalyn entered into a contract to purchase Mediterranean Ceramics. The purchase price was $2,750,000 plus the value of the stock which was agreed at $400,000. Thus the total purchase price was $3,150,000. It seems that Janalyn paid a deposit of $160,000.
On 29 April 1996 an officer at the Osborne Park branch of the NAB completed an internal application for a line of credit for Janalyn to purchase Mediterranean Ceramics. The officer recommended that NAB finance the purchase by means of loans to Janalyn by way of an overdraft facility ("ODF") with a limit of $100,000, FRIL of $1,000,000 and two FRIOLs of $600,000 and $900,000 respectively. It further recommended a loan to Mr and Mrs Meeke by way of a NTHLP of $600,000.
On 10 May 1996 Mr Mosey wrote to Mr and Mrs Meeke advising them that the NTHLP in the amount of $600,000 for a term of 10 years had been approved. The letter requested Mr and Mrs Meeke to "take a few moments" to read the attached NTHLP contract in order to make sure they understood and agreed with what it said. The contract, which was enclosed with the letter, stated that the customers were Mr and Mrs Meeke and that the loan would only be made if it was secured by a first mortgage over the Yaltara Road property.
The offer included a fixed interest rate of approximately 8.95 per cent per annum for two years and a variable interest rate for the balance of the term. The variable rate was NAB's rate for owner occupied home loans which was then 10.5 per cent per annum. The offer provided that the balance of the loan, interest and charges had to be paid "immediately" if Mr and Mrs Meeke were in default for 31 days after NAB gave them notice specifying the default. The offer specified that Mr and Mrs Meeke would be in default if, amongst other things:
(a)they did not pay a repayment or any or other amount on time; or
(b)they breached any other of the terms and conditions of the NTHLP or a provision of any security or other agreement they had with the Bank.
There was no mention of Janalyn or the purchase of Mediterranean Ceramics in the NTHLP documents or the letter to Mr and Mrs Meeke.
On the same date Mr Mosey wrote to Mr Meeke, as director of Janalyn, advising him that the other facilities had been approved. The loan documents enclosed with Mr Mosey's letters provided for the following terms and conditions of the facilities.
| Loan | Borrower | Fixed Term | Length of Term | Securities |
| FRIOL $900,000 | Janalyn t/as Mediterranean Ceramics | Yes | 3 years | 1. First mortgage debenture over all of Janalyn's assets; and 2. Guarantee and indemnity for $2,600,000 executed by Mr and Mrs Meeke, Satoga in its own right and as trustee for the Meeke Family Trust. The guarantee and indemnity to be supported by: (i) First mortgage debenture over all of Janalyn's assets; (ii)First mortgage over Yaltara Road property; (iii)Mortgage over life policy in the name of Mr Meeke; and 3. Letter of undertaking stating that no external borrowings are to be entered into, including leasing, without the Bank's consent. |
| FRIOL $600,000 | Janalyn t/as Mediterranean Ceramics | Yes | 2 years | As above |
| FRIL $1,000,000 | Janalyn t/as Mediterranean Ceramics | Yes | 5 years | As above |
| ODF $100,000 | Janalyn t/as Mediterranean Ceramics | Expiry date 31 July 1996 | N/A | As above |
On 15 May 1996 Janalyn's board, constituted solely by Mr Meeke, met and resolved to accept the NAB's offers. The NTHLP was not considered. Similarly, Satoga's board, constituted by Mr and Mrs Meeke, met and resolved to accept the NAB's offers to Janalyn. Again, the NTHLP was not considered.
It is not in dispute that the offers were accepted and the securities were given. Mr and Mrs Meeke signed mortgage numbered G191074, in favour of the NAB, which was subsequently registered on the title to the Yaltara Road property. In that mortgage cl 1 provides that Mr and Mrs Meeke shall on demand in writing made upon them at any time by the NAB pay to the NAB "the moneys hereby secured" or such part thereof as specified in the demand, subject to any contrary agreement in writing between Mr and Mrs Meeke and the NAB. The phrase "the moneys hereby secured" is defined in the mortgage to mean all moneys and amounts at the date of the mortgage or at any time thereafter falling within a number of specific descriptions including moneys owing or remaining unpaid to the NAB in any manner or on any account whatsoever by Mr and Mrs Meeke whether alone or jointly with any other person and whether as principal or surety, the amount of any costs, charges, expenses and liabilities of any description incurred by the NAB in respect to the mortgage and in the exercise or enforcement or attempted exercise or enforcement of any power or remedy under the mortgage and interest.
A guarantee and indemnity ("the first guarantee") was also executed on 15 May 1996 by Mr and Mrs Meeke and Satoga. It provided that Satoga was acting in a trustee capacity for the Meeke Family Trust. The basic liability was stated to be $2,600,000 plus interest, banks fees, costs, charges, expenses and taxes and any amount in connection with fixed rate facilities. By cl 10.1 the guarantors agreed to indemnify the Bank up to the maximum liability against any loss the Bank may suffer if, for any reason, Janalyn did not pay the Bank any amounts which it owed the Bank.
Additionally, on 15 May 1996 Janalyn and Satoga as trustee of the Meeke Family Trust, executed debentures charging all of their property with the payment of the amounts advanced by the NAB.
On 28 May 1996 the various advances approved by the NAB were drawn down and settlement of the purchase of Mediterranean Ceramics by Janalyn occurred. There is no dispute between the parties that the funds from the NTHLP were applied towards the purchase.
Soon after settlement a dispute arose between the vendors and Janalyn in respect of the value of the stock. There was apparently a lot more stock than Mr Meeke had been led to believe prior to settlement. The essence of the dispute was that the vendors had valued the stock at $400,000. That value was incorporated into the purchase price with provision in the contract for deferred payment for stock in excess of that value. Mr Meeke claimed that the value of the stock was closer to $3,200,000. As a consequence of negotiations with the vendors, Janalyn did not pay a substantial amount of money for this extra stock. However, Mr Meeke continues to claim that the undervaluing of the stock resulted in a misrepresentation to him by the vendors of the business efficiency of Mediterranean Ceramics. In addition, the large amount of stock on hand was a continuing issue between Janalyn and the NAB because the NAB pressed Janalyn to realise the value of this asset.
Mr Meeke also claims that it was only after the purchase of the business that he discovered that there were overseas drafts for outstanding purchases from suppliers in excess of what he had been advised by the vendors. He claims that he had been advised that there were overseas drafts in the amount of $163,600 whereas by mid‑June Mr Meeke became aware that there were outstanding drafts to a value of $275,000. Thus, within a couple of months of the settlement of the purchase, Mr Meeke's view was that these problems and poor sales results meant that it was likely that he would be unable to meet the principal loan repayments that he undertook. However, I note that this view was expressed when Mr Meeke was negotiating with the vendor over the amount to be paid for the excess stock. It may have been part of his negotiating strategy. Also, as I have already noted, Janalyn did not pay a substantial amount for the excess stock and yet it had the benefit of it.
On 2 August 1996 the NAB approved an ODF on Janalyn's account in the sum of $100,000 to expire on 31 January 1997. This ODF replaced the first ODF which expired on 31 July 1996 and it was subject to the same terms and conditions as the first ODF.
In the same letter in which Janalyn was advised of this approval, Mr Mosey advised that a documentary letters of credit facility ("LOCF") had been approved with a limit of $60,000 to expire on 31 May 1997. Mr Meeke requested this facility to enable Janalyn to manage payments of its overseas suppliers. The approval required that finance and/or refinance of trade transactions under this facility be limited to a maximum of 180 days. Security for the LOCF was to be given by Satoga over a term deposit it had with the NAB.
On 14 October 1996 Mr Meeke signed a documentary credit agreement on behalf of Janalyn with respect to the LOCF. The agreement, in summary, provided that Janalyn could request the Bank to establish documentary credits in favour of its suppliers and that, if the Bank did so, Janalyn agreed to the Bank debiting its account for all the sums paid or incurred by the Bank in connection with the credits. Janalyn agreed to accept, on presentation, and to pay, at maturity, any drafts drawn on it under any credit and to provide the Bank with funds to meet any acceptance or to repay any financial accommodation arranged or extended by the Bank in relation to any credit. The LOCF was essential in order to enable Janalyn to order and purchase tiles from overseas suppliers. Without the LOCF various suppliers would have been unwilling to take orders from Janalyn.
Events of 1997
On 19 February 1997 the NAB renewed the ODF to 31 May 1997 on the same terms and conditions as the original ODF.
In February 1997 Janalyn employed Mr Peter Drown, a retired bank officer, to assist in office management, payroll, bookkeeping, accounts payable and receivable, bank reconciliations and the preparation of profit and loss statements and balance sheets.
Mr Meeke took Mr Drown to the Osborne Park branch of NAB to meet Mr Mosey. On 19 February 1997 Mr Meeke provided the NAB with written authority to release overseas draft documents to Mr Drown. Around the same time Janalyn commenced using FECs to facilitate its purchase of overseas goods. The following explanation of an FEC is taken from the NAB's internal instructions to its staff:
"Where a customer expects to receive or make payment of a fixed amount of overseas currency at a future date, there is the risk that the rate of exchange could change by the time payment is made. To offset this exchange risk, the customer may enter into an FEC agreement with the Bank:
•Under an approved facility
•For a specified amount of overseas currency
•To be delivered on a specific future date (Fixed Term FEC) or within a specified period (Optional Term FEC)
•At a predetermined rate of exchange
Future movements in the rate of exchange will not affect the FEC rate. Therefore the customer is able to determine the exact amount of Australian dollars (AUD) to be paid/received for the future transactions."
The reason Janalyn used FECs was so that it could be certain of the price which it would have to pay for tiles it ordered in overseas currency and for which it did not pay until a future delivery date. Without FEC coverage, fluctuations in the value of the Australian dollar may have resulted in a container load of tiles costing significantly more (or less) than was estimated at the time it was ordered. In evidence, the purchase of FECs was described as a form of hedging against currency fluctuations. Mr Meeke had previously been involved in hedging in the airline industry. Mr Meeke testified that he thought that it was a very good idea to adopt a hedging policy and from February 1997 he did so.
At that time the NAB's internal policies required a written application by the customer for an FEC. In practice, Mr Drown would ring the international officer at the Osborne Park branch of the NAB and tell him the amount and type of the foreign currency and term of the FEC required by Janalyn. The international officer would then contact the overseas department of the Bank and obtain the exchange rate and advise the same to Mr Drown. Subsequently, the Bank would forward a written application with those details contained in it to Janalyn. Mr Meeke would then sign the application and it would be returned to the Bank.
The parties do not agree on the date on which the FEC became binding under this procedure. It matters little, as the oral advice provided by the Bank to Mr Drown was, as far as I am aware, always honoured. Conversely, once Mr Drown had obtained the rate from the international officer, as far as the evidence discloses, Mr Meeke always signed the following application.
Sometimes Janalyn would not use an FEC by the end of its term. In such a case Janalyn could apply for an extension of the FEC, which was always agreed to by the NAB. However, in early 1997, the relevant internal policy required bank officers to consider the credit risk when considering extensions. The internal policy document referred to the risk that a customer may extend an FEC to avoid a potentially large cancellation cost. Thus, the extension may be an attempt to avoid immediate payment of a substantial cancellation fee by rolling over an inherent debt.
Unusually for a suburban branch, the NAB branch at Osborne Park had its own international officer. This was because it also was a BBC. The international officer was directly involved with Janalyn's international dealings through the NAB. These included receiving import collections, arranging for these to be signed by Janalyn and receiving and acting on Janalyn's instructions to pay its overseas suppliers. Janalyn instructed the Bank to make payments to its overseas suppliers either by using an FEC or the rate of exchange on the date of payment ("the spot rate").
Mr Stephen Jarvis, the international officer at the Osborne Park branch of the NAB between September 1997 and June 1999, described the process in the following way:
"Generally, when a shipment of goods is made the exporter's bank forwards the import collection documents to the importer's bank. The importer's bank presents the collection documents to the importer for acceptance. Once the importer has accepted by signing the collection document its bank must make payment on the due date. Generally, payment of the amount due under an import collection will be made in a foreign currency.
…
Mediterranean Ceramics imported goods from Europe and the bank regularly received import collection documents on behalf of Mediterranean Ceramics in relation to its imports. The import collection documents were sent to me by the ISC after the ISC had received them from the bankers to Mediterranean Ceramics' overseas suppliers.
Between September 1997 (when I started at the Osborne Park BBC) and about July 1998, I generally dealt with Peter Drown in my dealings with Mediterranean Ceramics … Peter Drown was the person who generally instructed me in relation to international matters for Mediterranean Ceramics (until he left in about July 1998). He attended at the Osborne Park BBC to accept and collect Mediterranean Ceramics' import collection documents."
Mr Jarvis went on to say:
"Between September 1997 and July 1998 I generally received requests from Mediterranean Ceramics to enter into FEC's by telephone. Peter Drown telephoned me and told me what currency was required, how much and when Mediterranean Ceramics' supplier was due to be paid. I put Peter Drown on hold while I called the currency booking officer at the ISC to obtain the exchange rate for the FEC. I then gave Peter the exchange rate and, if he instructed me to proceed, I confirmed the transaction with the ISC and they established the FEC for Mediterranean Ceramics. I then completed a 'forward exchange contract – bank to sell overseas currency – application' ('FEC Application') and sent the FEC application to Mediterranean Ceramics for signature …
Once the FEC Application was signed and returned to the Bank by Mediterranean Ceramics, a confirmation notice was sent to Mediterranean Ceramics by the ISC. …
If an FEC is not going to be used by the maturity date (for example, if a shipment from an overseas supplier is delayed so that payment falls due on a later date), the FEC can be cancelled or extended. If an FEC is cancelled there will usually be a cost or a benefit to the customer (depending on movements in the exchange rate). The ISC debits or credits the customer's account with the amount of the costs or benefits. If an FEC is extended a fee is payable for each extension. At that time the fee was $15.00.
When Mediterranean Ceramics extended an FEC a 'Forward Exchange Contracts Extension/Cancellation Request' form was completed. These were signed either by Mr Meeke or Mr Drown …
When an import collection came due for payment, I received an internal message from the ISC to inform me that payment was due. If I had not already received instructions from Mediterranean Ceramics I checked with Peter Drown … how Mediterranean Ceramics wanted to pay the import collection. They generally instructed me to use a particular FEC or sometimes a combination of FECs to settle the import collection. Sometimes they instructed me to use the spot rate or a combination of FECs and the spot rate. On some occasions I received instructions by fax.
Once I had instructions from Mediterranean Ceramics, I sent an internal message to the ISC (later International Operations) confirming how the import collection was to be paid. …"
The initials "ISC" stand for the NAB's international service centre.
Mr Meeke testified that during this initial period Janalyn had to provide evidence of specific overseas orders to the NAB before it would provide the FECs. However, I am satisfied from looking at the maturity dates of some of the FECs, the extensions to them and the way in which they were used that this was not so. For example, FEC 70237 taken out on 22 May 1997 had a maturity date of 21 May 1998 and was for 60 million Italian lire ("LIRE"). It was delivered on nine separate occasions and was not in fact fully utilised until July 1998. Contrary to NAB's internal policy no bank officer considered the credit risk when extending Janalyn's FECs. They assumed that Janalyn knew what was in its best interests and that it would be able to meet its obligations under each FEC.
Even during this early period the NAB permitted Janalyn to extend FECs so that the FEC had a maturity date that was months beyond the original maturity date. Mr Meeke also conceded in cross‑examination that when he was involved in establishing FECs in 1997 and 1998 there were FECs that were "under water" from time to time. The term "under water" refers to when the value of the Australian dollar has risen, since the date of purchase of the FEC, against the foreign currency in which the FEC has been purchased. It was then disadvantageous for Janalyn to use the FEC purchased at an earlier point in time to buy its overseas goods as it was buying them at an exchange rate that was less favourable than the spot rate.
In August 1997 Mr Mosey was transferred from the Osborne Park branch of the NAB and Mr Nicholas Aves was appointed Janalyn's business banking manager. Mr Pieter Bergshoeff was Mr Mosey's direct replacement as regional business manager.
In mid‑1997 Mr Meeke on behalf of Janalyn requested the NAB to restructure two loan facilities from principal and interest to interest only facilities. These were the NTHLP for $600,000 and the FRIL for $1,000,000. The proposal given to the NAB by Mr Meeke was to convert the loans to interest only and to invest the capital component of the present repayments so as to obtain a return on the investment which would enable Janalyn to retire its debts earlier. The proposal referred to the current depressed trading conditions as being one of the reasons for the proposal. The proposal was declined by the NAB. However, the discussions that took place in respect to it revealed to Mr Aves that Janalyn had made a net loss for the previous 12 months and that a number of the Bank's covenants had not been met. A review of Janalyn's facilities took place.
On 22 September 1997 Mr Meeke sent Mr Aves a background paper in which he agreed that he had "willingly embraced" the loan arrangements on a fixed rate interest basis with the principal retirement profile of his choice. He referred to the incorrect financial data provided by the vendors as well as the downturn in residential constructions as being reasons why the current financial facilities were no longer appropriate. Mr Meeke sought some flexibility by way of reduction in the repayment of principal whilst the economic conditions were not favourable.
On 16 October 1997 Mr Aves completed an internal credit memorandum which he submitted to the NAB's State credit bureau for approval. Mr Aves recommended a continuance of the existing loan facilities, which at that time totalled $2,285,941, renewal of the ODF for $100,000 for a further 12 months, an increase in the FEC facility from $20,000 to $50,000 and the release of a $60,000 term deposit that the Bank held in respect to the LOCF. The increase in the FEC limit was purely an internal NAB matter. The limit on the FEC facility had not been advised to Janalyn. The memorandum stated that the increase was to "cover peak requirements".
The credit memorandum outlined the poor sales results that Janalyn had experienced. It stated that Mr Meeke had advised that sales for the industry peaked in the 1995 fiscal year with 1996 showing a downturn and with the 1997 financial year "being the worst trading conditions experienced by the industry in the last 12 to 15 years". Mr Aves recommendations were approved by officers in the credit bureau. However, the officer's written comments expressed concern about Janalyn's performance.
I accept that the NAB advanced money to Janalyn on the basis that Mr Meeke had represented there would be a "quick amortisation programme". Whereas the financial information provided by late 1997 revealed that Janalyn's projected profits had not been achieved and that Janalyn was likely to seek to reduce its amortisation programme during the next 12 months at least.
Mr Aves wrote to Mr Meeke on 12 November 1997 advising that the LOCF had been renewed to 31 October 1998 in the sum of $60,000 and the ODF in the sum of $100,000 had been renewed to 31 October 1998. Those renewals were said to be subject to quarterly management prepared financial data to be provided to the Bank along with debtors and creditors aged listings, including results of actuals to budget. The Bank also required a quarterly certificate confirming that all statutory payments were up to date. It was a condition of the renewals that no external borrowings be entered into without the consent of the NAB and that all individual international transactions greater than $100,000 were to be covered by forward exchange cover. The renewals were additionally subject to covenants that Janalyn's financial charges cover ratio (earnings before interest and taxation divided by total interest charges) be at least 1.5 to the end of June 1998, increasing to a minimum of 2.0 by June 1999, that net tangible assets to total tangible assets increase by 7 per cent per annum, that stock turnover be less than 365 days and that debtor's turnover to be less than 40 days. The letter went on to say that in order to enable the Bank to continue to rely on the first guarantee the enclosed "letter of concurrence" had to be executed by all guarantors and returned to the Bank. It said that on receipt of the letter of concurrence the term deposit would be released. The letter noted that the existing FRIL and two FRIOL's continued unchanged.
Enclosed with the letter was a renewal advice in respect to the ODF. It stated repayment terms, events of default and the securities required by the Bank which were all the same as it had previously required. It stated that Janalyn's continued drawing under the facility constituted an acceptance by it of the terms and conditions in the renewal advice.
There were communications between Mr Aves and Mr Meeke concerning the previous financial charges cover ratio and stock turnover requirements. By letter dated 12 November 1997 Mr Aves wrote to Mr Meeke as director of Janalyn stating that Mr Meeke had advised that these conditions precedent had not been met. Mr Aves advised that no action was proposed at this time but that the Bank reserved its rights under the terms and conditions of the letter of offer. By letter dated 18 November 1997 Mr Meeke replied that he had volunteered this information to Mr Mosey in July 1996 when he first became aware of the real situation in respect of stock at Mediterranean Ceramics. He said that Mr Mosey had indicated that the factors in respect to the excess stock were understood by the Bank and that Mr Meeke need take no further action at that time. Mr Meeke said that he accordingly did not feel comfortable with the proposition that he had breached his undertakings to the Bank or that the Bank was only recently aware of such a breach. There is no evidence of any further communications regarding these breaches.
Mr Meeke, Mrs Meeke and Satoga executed the letter of concurrence by which they acknowledged that the NAB intended to advance further moneys to Janalyn and confirmed that notwithstanding the increase, the Bank may continue to rely upon the first guarantee. They covenanted and agreed to continue to be bound by the terms and conditions of the first guarantee and to observe and perform all obligations in terms thereof. The approved facilities referred to in the letter of concurrence were the ODF, the FRIL, the two FRIOL's and the LOCF.
Events in 1998
In February 1998 Mr Meeke, on behalf of Janalyn, applied for access to the Bank's national on‑line business service. Once he had obtained this service, it was possible for him to view existing FECs on‑line but it is not clear to what extent Mr Meeke used this facility.
On 19 May 1998 Mr Aves wrote to Janalyn advising that the LOCF had been increased and restructured. In effect this was a new facility which combined the LOCF with a trade refinance facility ("LOC/TRF"). The limit of the new facility was $160,000 and it had an expiry date of 31 October 1998. The letter also offered an ODF with a limit of $150,000 and an expiry date of 31 October 1998. The LOC/TRF was subject to the following provisions:
"1.Quarterly Management prepared financial data is to be provided along with Debtors and Creditors aged listings including results of actuals to budget. Date is to be provided within 45 days of quarter end and signed as correct by a Director.
2.Quarterly certificate to be provided … signed by Director/s confirming that all statutory payments are up to date. To be provided within 45 days of quarter end.
3.No external borrowings are to be entered into, including leasing, without the consent of the Bank.
4.Term of trade refinance for each individual transaction to be a maximum of 180 days.
5.All individual international transactions greater than $100,000 are to be covered by Forward Exchange Cover."
The facilities were also subject to the following covenants:
"5.Financial charges cover ratio (earnings before interest and taxation divided by total interest charges) to be at a ratio of 1.5 times, as a minimum to 6/98 increasing to a minimum of 2.0 times by 6/99.
6.Net Tangible Assets: Total Tangible Assets to increase by 7% pa
7.Stock Turnover to be less than 365 days and debtors turnover to be less than 40 days."
The letter required the guarantors to sign a letter of concurrence. It also stated that the FRIL and the two FRIOL's continued unchanged. In respect to the foreign exchange dealing limits the letter stated that the Bank had arranged for internal limits "as discussed" to cater for Janalyn's ongoing exchange requirements. Those internal limits were not stated in the letter to Janalyn.
An ODF renewal advice was enclosed with the letter. It contained the same provisions as the previous ODF renewal advice except in respect of acceptance. This renewal advice stated that in order for Janalyn to accept the terms and conditions contained in the letter it must provide the Bank with a certified copy of its board's resolution authorising the acceptance of the facility.
On 20 May 1998 Mr and Mrs Meeke and Satoga executed the letter of concurrence, which was essentially in the same terms as the previous letter of concurrence to which I have referred.
On the same date Mr Meeke executed minutes for Janalyn which stated that Janalyn had resolved to request the increase and restructure of the ODF and the LOC/TRF as well as to continue the other facilities with the NAB, including the foreign exchange dealing limits. The minutes also recorded that Janalyn resolved that the securities required by the NAB would continue to secure the approved facilities from the NAB. It was further minuted that Janalyn would adhere to the financial covenants stated in the NAB's letter of 19 May.
The appointment of Mr Klaassen
Around this time Mr Meeke decided to appoint somebody to replace Mr Drown. Mr Drown wished to retire and did not wish to become involved in the future computerisation of Janalyn. Mr Meeke drafted up a document titled "Person Specification, Office Manager, Mediterranean Ceramics". In it he said that the title of the position would either be office manager or financial controller and that this was yet to be decided. In view of the conflict between the parties about the role of Mr Klaassen in Janalyn, it is relevant to set out some of the characteristics and the role of the person who was to replace Mr Drown. The specification said that the person Janalyn sought would report directly to the managing director, Mr Meeke, and would relieve him of much of "his present financial and commercial workload". It said that the person who was being sought would be competent in "international banking letters such as letters of credit, overseas drafts, foreign exchange contracts, overseas trading facilities, etc". The specification also said that the person should have an ability "to liaise effectively with important external parties such as the bank …"
Mr Meeke admits that he drew up the specification in these terms but he denies that Mr Klaassen was subsequently authorised to deal with FECs.
An advertisement for Mr Drown's replacement appeared in the West Australian newspaper on 20 June 1998. It was headed "Accountant" and sought a qualified accountant to work closely with the managing director. Mr Klaassen responded to the advertisement. He was not a qualified accountant but he held the degree of bachelor of business with a double major in accounting and finance. He had completed his degree in 1988. Since completing his studies he had held a number of positions, including positions as office manager/company accountant. However, Mr Klaassen had not had any experience with FECs. The notes of Mr Klaassen's interview record that he was being interviewed for the position of accountant.
During his first interview for the position Mr Klaassen was provided with a copy of the "Person Specification" that Mr Meeke had drawn up for the job. During the second interview for the position Mr Klaassen says that he was told that the position involved monitoring and entering into FECs for Janalyn. I accept his evidence on this point. I make this finding, although it is denied by Mr Meeke, because it is consistent with the "Person Specification" and the role, I believe, Mr Meeke saw the successful applicant fulfilling.
Mr Klaassen says that he was offered and he accepted the position of accountant/financial controller and office manager of Janalyn. He says that at the time he accepted the position the exact title had not been determined. Mr Meeke on the other hand says that Mr Klaassen accepted the position of office manager.
After considering the written records, in particular, I accept that Mr Klaassen believed that he was Janalyn's financial controller, internal accountant and office manager. Mr Meeke referred to him as the internal accountant in various documents as well as the office manager. Mr Meeke was also aware that Mr Klaassen referred to himself as the financial controller and Mr Meeke did not attempt to stop him from doing so. In dealings with the NAB Mr Meeke referred to Mr Klaassen as the internal accountant/office manager.
Mr Klaassen commenced his employment with Janalyn on 13 July 1998. On 15 July 1998 Mr Meeke took Mr Klaassen to the Osborne Park branch of the NAB and introduced him to Mr Aves and Mr Bergshoeff. Mr Klaassen testified that the meeting lasted 15 to 20 minutes. He said that Mr Meeke told the bank officers that he would be taking over Mr Drown's job and that given his experience, Mr Meeke would be able to delegate more of Janalyn's dealings with the NAB to Mr Klaassen. He further testified that Mr Meeke told the bank officers he had authority to deal with the NAB in relation to foreign exchange transactions on behalf of Janalyn.
Mr Meeke says that the meeting was very brief and that he said that Mr Klaassen would be progressively taking over from Mr Drown, would be doing the daily banking, would be the first line of contact for the Bank for queries and would, from time to time, collect drafts.
Mr Aves recalls the meeting but does not recall what was specifically said during it. He recalls Mr Meeke being pleased with the appointment of Mr Klaassen and that he said Mr Klaassen would replace Mr Drown. He can not recall the conversation that Mr Klaassen recalls but would not say that it did not occur. He recalls being told that Mr Klaassen was an accountant and that one of the reasons why Mr Meeke was pleased with the appointment was because the job had become too complex for Mr Drown. The fourth participant in the meeting, Mr Bergshoeff, did not give evidence.
In my view Mr Klaassen's and Mr Aves' recollections of this meeting are to be preferred to Mr Meeke's recollection. It is clear from the "Person Specification", the advertisement for the position and the role that Mr Klaassen undertook that Mr Meeke wanted and got an employee who would and did take on a significant financial role within Janalyn and more responsible duties than Mr Drown had fulfilled. Mr Drown was a man at the end of his working career and he did not want to learn computerised procedures. As Mr Meeke identified in the "Person Specification", Janalyn needed someone who was better qualified and who had experience in modern office and accounting procedures. Mr Klaassen fulfilled this need except that he was not a qualified accountant. It would be contrary to these findings to accept that Mr Meeke introduced Mr Klaassen to the NAB officers as, simply, Mr Drown's replacement.
On the same date Mr Meeke sent the Bank a letter authorising Mr Klaassen to accept Janalyn's drafts and uplift shipping documents as required. It cancelled Mr Drown's authority to do the same.
By 20 July 1998 Mr Klaassen had requested an upgrade from the NAB's "National on‑line business" service to the "National on‑line corporate" service.
On 22 July 1998 Mr Meeke wrote a memorandum to Mr Klaassen concerning matters he wanted Mr Klaassen to attend to. One of them was in respect to an overseas draft and another was a request to Mr Klaassen "to look into FEC covers". Mr Meeke makes the comment in the memorandum that "this needs to be monitored daily if we are going to avoid getting 'caught out' again". In cross‑examination Mr Meeke denied that his memorandum amounted to instructions to consider on a daily basis whether or not Janalyn should be taking out FECs to protect it from adverse fluctuations in exchange rates. In Mr Meeke's statement of evidence he says that he discussed with Mr Klaassen the need to monitor foreign exchange rates as a backup, as he had become aware that there had been a spike in the exchange rates that he had missed and the opportunity of securing a favourable exchange rate was lost. He said that he instructed Mr Klaassen to monitor the amount of forward payment obligation Janalyn had in each currency, check the exchange rates daily in the morning paper and be on the lookout for any trends, alert him to any specific opportunities with respect to exchange rates and if he, Mr Meeke, thought that risk was appropriate he would advise Mr Klaassen how much of each currency was required and would prepare an instruction for the Bank in Mr Meeke's name. He says he instructed Mr Klaassen to track the use of FECs by way of an Excel spreadsheet. Mr Klaassen denies receiving these specific instructions and says that he was led to believe by Mr Drown that it was his job to contact the Bank to obtain FEC cover.
From this memorandum alone I am not able to determine whether Mr Meeke authorised Mr Klaassen to enter into or extend FECs without Mr Meeke's prior approval. However, the memorandum does satisfy me that at that time Mr Meeke expected Mr Klaassen to take responsibility for monitoring exchange rates on a daily basis, monitoring the company's forward payment obligations in foreign currency and, at the very least, keeping Mr Meeke up to date with this information. Later in these reasons I will return to the issue of Mr Klaassen's authority to enter into and extend FECs.
On 10 August 1998 Mr Meeke signed documents relating to the "National on‑line corporate" service. Mr Meeke says he applied for the upgrade because Mr Klaassen told him that it was required in order for Janalyn to process its payroll electronically. Mr Klaassen denies that this was the reason for upgrading the electronic banking system because he says that the payroll was already managed electronically through the existing "National on‑line business" service.
Mr Drown did not use any on‑line banking service whilst he was employed by Janalyn. Thus, it seems unlikely that the payroll was prepared electronically prior to the arrival of Mr Klaassen. However, that does not mean that the "National on‑line corporate" upgrade was necessary in order to do the payroll electronically. However, it does explain why Mr Meeke associates the introduction of electronic payroll processing with the "National on‑line corporate" upgrade. Those two things and the arrival of Mr Klaassen would have all happened at roughly the same time.
Mr Jarvis was unsure but he favoured Mr Klaassen's view that the payroll could be processed electronically using "National on‑line business". I am satisfied that the upgrade to "National on‑line corporate" service was consistent with Janalyn's move to modernise and computerise its systems wherever possible.
The "National on‑line corporate" upgrade request, signed by Mr Meeke, identified Mr Klaassen, whose title was stated to be "financial controller", as Janalyn's "contact person". It provided for two passwords, that is, for two persons to be given authority to use the service. No evidence satisfies me that the request for two passwords was inserted after Mr Meeke signed the document. It was consistent with Mr Klaassen's duties that he would need to use the service and thus need a password.
Mr Meeke also signed a "National on‑line corporate" international trade and international funds transfer document. In it he authorised the NAB to contact Mr Klaassen in respect to problems with international trade documentation and international funds transfer instructions. He also stated that Mr Klaassen was authorised to issue instructions in these areas on Janalyn's behalf. There is no evidence before me that this document expressly authorised Mr Klaassen to enter into FECs or extend FECs on behalf of Janalyn. Consequently I do not find that it did. However, the document is a clear indication that Mr Klaassen was trusted and authorised by Mr Meeke to give instructions to the NAB in respect of a range of important financial matters, including giving instructions to use FECs to pay for tiles since this was included in the description of international funds transfer instructions contained in the document. The request to upgrade from "National on‑line business" to "National on-line corporate" was affected on 2 September 1998.
In September 1998 the NAB approved finance to Satoga as trustee for the Meeke Family Trust to assist with the purchase of 250,000 $1 units in the Malaga Investment Trust ("the Satoga facility"). The original unit holders and beneficiaries of the trust were Mr and Mrs Meeke as trustees for the Meeke Retirement Fund and Satoga as trustee for the Meeke Family Trust. The finance provided to Satoga, by way of a multi‑option facility with an expiry date of 30 June 2001, was secured by a mortgage debenture given by Satoga as trustee for the Meeke Family Trust over the whole of the assets and the undertaking of that company and trust and a guarantee and indemnity for $250,000 given by Janalyn, Satoga in its own right and Mr and Mrs Meeke, personally, and as trustees for the Malaga Investment Trust. The guarantee and indemnity was to be supported by a registered mortgage debenture given by Janalyn over the whole of its assets and a registered mortgage over a property at Lot 41 Agett Road, Malaga ("the Malaga property") given by Mr and Mrs Meeke as trustees for the Malaga Investment Trust.
On 21 September 1998 Mr Aves wrote to Mr Meeke and advised him that the Bank had analysed the financial records of Janalyn and noted that the trading results to 30 June 1998 showed the business had recorded a significant trading loss on top of the loss reported for the previous year. Mr Aves advised that the Bank was presently at its maximum level of assistance to the group and that any further capital requirements would need to come from shareholder contributions and/or retention of profits. The letter advised that as a result of the trading performance to 30 June 1998 loan covenants regarding interest cover and stock turnover had not been met. In the same paragraph Mr Aves acknowledged that the stock turnover covenant would be difficult to achieve in the short term. The letter said that "a letter of non‑waiver of covenants breach is enclosed". However, this letter does not form part of the evidence in this case. Mr Aves finally said that, to enable the annual review of the group's facilities due by 31 October 1998 to be completed, accounts and other related material had to be provided to the Bank by no later than 15 October 1998.
The Master Agreement for Foreign Exchange Contracts
On or about 11 October 1998 Mr Meeke, on behalf of Janalyn, signed a "Master Agreement for Foreign Currency Transactions" ("the Master Agreement"). The Master Agreement was part of an initiative by the NAB to introduce electronic means by which an FEC could be entered into or extended. The Bank requested all its customers which conducted international business to sign a Master Agreement. The Master Agreement had a warning printed on its first page stating:
"Foreign currency transactions involve the risk of loss because of movements in exchange or interest rates.
You should not enter into these transactions if you do not understand the risks.
It is your responsibility to monitor your transactions.
We will not be liable for your losses in any circumstances."
The Master Agreement applied to all FECs which were not fully executed by the date of the signing of the Master Agreement, being about 11 October 1998. The Master Agreement provided that:
(a)an FEC could be initiated or extended by telephone, in writing, by telex or other electronic means;
(b)the parties were bound by a transaction from the time that the NAB treasury communicated the transaction's exchange rate to the Bank's international area, the branch that received the application or Janalyn, whichever occurred first;
(c)the Bank would send a confirmation setting out the details of each transaction;
(d)within one business day of receiving the confirmation Janalyn must notify the Bank if there is an error in the confirmation;
(e)Janalyn was bound by the confirmation unless it told the Bank there was an error within that time; and
(f) the transaction was valid even if Janalyn did notify the Bank of an error or the Bank failed to send a confirmation.
Clause 5.3 of the Master Agreement provided:
"You must give us on request a list of persons authorised to enter and settle transactions on your behalf. You must tell us of any changes to that list from time to time."
It is common ground that the NAB did not request, from Janalyn, a list of persons authorised to enter and settle transactions on its behalf.
I have previously explained the process by which Janalyn entered into FECs prior to the Master Agreement. As to extending an FEC, prior to the Master Agreement the NAB required a written request for an extension. These were predominantly signed by Mr Meeke but there were occasions on which they were signed by Mr Drown. Prior to the Master Agreement, there was no formal agreement between the NAB and Janalyn governing all FEC transactions. Thus, the Master Agreement wrought a significant change in the way FECs were initiated and managed.
Mr Meeke says that although the Master Agreement is dated 11 October 1998 he did not sign it on that date because this was a Sunday and he was not in Perth on that date. He says that on another unspecified date he returned to Mediterranean Ceramics after being out and Mr Aves was already at the premises with Mr Klaassen. He says that Mr Aves came into his office and handed him the Master Agreement and he asked Mr Aves to show him the "safeguards". He says that Mr Aves showed him the last page of the agreement and told him that he, Mr Meeke, should sign the bottom as an authorised person and that if he wanted to authorise anyone else to purchase FECs they would sign below Mr Meeke. Mr Meeke says that he told Mr Aves that he wanted to remain the sole signatory. He asked him for the definition of an authorised person and Mr Aves said words to the effect that if no one else signed the agreement then the Bank had to have a list of authorised persons who could purchase FECs. If no other person was authorised by the Master Agreement, Mr Meeke would be the only person who could purchase FECs. Mr Meeke says that he then agreed to sign the document and did so. Mr Meeke says that Mr Aves also told him that all of the previous arrangements still stood. They were that Janalyn was required to substantiate its currency needs by way of committed forward payments, Janalyn was not allowed to speculate in currencies and Janalyn would continue to deal with the international officer at Osborne Park BBC. Mr Meeke denies that he gave any authority to Mr Klaassen to enter into or extend FECs or that he knew, prior to September 1999, that Mr Klaassen had entered into any FECs. He says that during Mr Klaassen's employment he did not see the need for Janalyn to enter into any FECs because of the value of the Australian dollar.
Mr Aves denies discussing the Master Agreement in the detail suggested by Mr Meeke as he says that he was not extensively familiar with it or with FECs. He says that if Mr Meeke had asked him about such matters he would have referred him to another officer at the Bank. Mr Aves says that he does not recall Mr Meeke telling him that Mr Meeke was to be the only person authorised to enter into FECs on behalf of Janalyn and that if Mr Meeke had told him that then he would have made a note of it on the file as it was an important matter. He says that there is no such note on the file.
Mr Aves testified that he did not have a recollection of the meeting at which the Master Agreement was executed. Indeed, he testified that he possibly sent the Master Agreement to Janalyn by mail. However, there is no covering letter which would assist to prove that this had occurred.
Mr Klaassen's evidence supports the possibility that the Master Agreement was sent to Janalyn by mail. He says that he recalls a telephone conversation with Mr Jarvis in which Mr Jarvis told him that the Bank was introducing a document to govern foreign currency transactions. He recalls that Mr Jarvis said that Janalyn was required to enter into a Master Agreement but that this would not change the way that Mr Klaassen had previously dealt with the NAB. Mr Klaassen would continue to enter into FECs over the phone. Mr Klaassen says that within a few days of this conversation Janalyn received the Master Agreement. He says he took the document to Mr Meeke and said words to the effect that he had spoken with Mr Jarvis about it, that Mr Jarvis had told him that the Bank was introducing a system to govern foreign exchange transactions, that the Bank required Janalyn to enter into the Master Agreement but that it would not change the way Mr Klaassen had previously dealt with the NAB and he could continue to enter into FECs over the phone. Mr Klaassen says that he cannot recall whether Mr Meeke said anything in response but he left the Master Agreement with him. Mr Klaassen does not recall whether Mr Aves was present at Janalyn's premises when the Master Agreement was signed. It also seems, from Mr Klaassen's evidence, that after the Master Agreement was signed the FEC confirmation and extension notices were sent to Janalyn electronically.
Mr Jarvis agrees with Mr Meeke that Mr Aves arranged for Mr Meeke to sign the Master Agreement. Mr Jarvis says that from the time he was introduced to Mr Klaassen by Mr Meeke, it was his understanding that Mr Klaassen was authorised by Janalyn to instruct the NAB in respect to matters concerning FECs, including the establishment and extension of FECs. In fact, Mr Jarvis had received some signed extensions from Mr Klaassen before the Master Agreement commenced. Mr Jarvis testified that he believed that Mr Meeke was aware that Mr Klaassen booked in FECs after the Master Agreement was signed, as on some occasions when Mr Klaassen rang up for indicative exchange rates he told Mr Jarvis that he had to check with Mr Meeke and call him back. Generally, Mr Jarvis considered that Mr Klaassen was authorised by Janalyn in respect of all aspects of Janalyn's international payments including the establishment of FECs that were used for those payments. He said that as he was already dealing with Mr Klaassen in respect to these matters when the Master Agreement came into effect he did not request a further list of authorised persons as specifically provided for in the Master Agreement. He acknowledged that Mr Klaassen did not actually book in any FECs prior to the Master Agreement. He said that when Mr Klaassen booked in an FEC he did not inquire as to what the FEC was required for as he assumed that there was an underlying transaction that required the establishment of or the extension of an FEC. After the Master Agreement was executed, Mr Klaassen would ring and book in the currency amount, the rate and the maturity date. Following that the NAB would send a written confirmation to Janalyn.
The conflicts between the evidence of Mr Meeke, Mr Klaassen and Mr Aves in respect to when the Master Agreement was signed and what was said at or about the time it was signed are not able to be resolved by me simply by considering the evidence of these witnesses as to what they recall was said or done on or about 11 October 1998. Therefore, I return to these issues when I consider whether Mr Klaassen was authorised to enter into FECs on behalf of Janalyn.
It is common ground that between 8 October 1998 and 26 August 1999 Mr Klaassen entered in 54 FECs, purportedly on behalf of Janalyn. Mr Klaassen extended 17 of these FECs on more than five occasions. The FECs which were extended the most were entered into in 1998. Most extensions occurred when the FECs were underwater (as defined in the next section). Mr Klaassen used these FECs to pay for goods Janalyn had ordered from overseas suppliers. The NAB officers accepted all instructions from Mr Klaassen and did not make any enquiries of him or Mr Meeke as to his authority to enter or extend FECs or the wisdom of doing so. As a consequence of a subsequent rise in the value of the Australian dollar, Janalyn paid more for overseas goods than it would have done if Mr Klaassen had not entered into the FECs and, instead, had used the spot rate to pay for the goods. Janalyn suffered a direct loss of $69,000 as a consequence of the Klaassen FECs. An important issue in this action is whether Mr Klaassen was authorised to enter into and extend FECs on behalf of Janalyn. I determine this issue after I have considered all the facts.
The NAB international manual
At all relevant times the NAB maintained an international manual. This was an internal Bank document which instructed Bank officers on the way in which they should manage FECs. The existence of and content of the international manual was not communicated to Janalyn prior to the commencement of these proceedings.
In January 1998 and on 13 July 1998 the NAB amended its international manual. The July 1998 amendment instructed that all customers with an FEC facility must execute a Master Agreement for foreign currency transactions before establishing FECs. It was only where a customer sent FEC instructions by facsimile that a signed facsimile letter of authority had to be held in addition to the Master Agreement. Mr Klaassen did not send instructions by facsimile.
The January 1998 instructions deleted the requirement for branches to maintain FEC liability cards and provided that weekly FEC liability reports and customer liability reporting system information would be made available to the account control manager ("ACM"). The July 1998 amendments did not alter this arrangement.
The July 1998 amendment prohibited customers from entering into speculative FECs and required that all FECs must have a genuine underlying transaction. It provided that where an FEC was established by telephone no application form was to be completed. However, whether or not an application form was completed, a confirmation advice was sent to the customer with the terms of the FEC being the same as detailed in the Master Agreement. There was also the same warning printed on the confirmation advice that appeared on the Master Agreement.
In respect to extensions the internal manual provided that should a manager receive a request for an extension a full investigation of the circumstances was required to ensure that the underlying trade transactions still existed, to identify the emergence of any "hard core debt" and to identify any movement of trade finance short term debt into capital long term debt. Applications for extensions were authorised in the manner referred to in the Master Agreement. Thus, in Janalyn's case, applications for extension could be made by telephone.
The July 1998 amendments to the international manual provided a definition of an underwater FEC. The manual said:
"A customer's FEC is said to be 'underwater' where, if it was cancelled, there would be a cost (ie. a loss) to the customer.
… It is in these cases that the customer is tempted to ignore the FEC and convert their transaction at the current rate. However, the amount of 'profit' customer makes by doing this is at least offset by the 'loss' in cancellation of the FEC. … It is therefore most important for ACMs to recognise this possible situation and take action if appropriate, ie. do not extend the FEC (but cancel/enter into a swap)."
The manual said:
"A swap is achieved by closing out (cancelling) the maturing FEC and using the spot cancellation rate (on day of cancellation) as the base rate for a new FEC (adjusted by the new premium/discount for the period).
The effect is the same overall as if the FEC had been extended at the historical rate, except that customer receives or pays any foreign exchange loss/profit inherent in the maturing FEC."
FEC liability reports
The international manual provided for weekly FEC liability reports which were to be sent each Thursday to the ACM.
An FEC liability report was an electronic summary of a customer's FEC position for internal bank use. The report listed each customer's outstanding FECs and the total liability of the customer as at close of business on each Wednesday and on the last business day of each quarter. Each report contained a number of columns containing, relevantly, the date each current FEC was taken out, its due date, its balance in the Australian dollar and the foreign currency, its "notional liability", its "excess", the customer's "total FEC liability" in Australian dollars for each FEC and for all FECs and the actual profit or loss if the FEC was cancelled at the date of each report. Some of the terms used in the FEC liability reports require further explanation. The "notional liability" was, generally, 10 per cent of the Australian dollar equivalent of each FEC. This was used by the Bank to notionally assess the risk to the customer if the FEC was cancelled. The "excess" indicated the amount that the FEC was in excess of the notional liability. The "total FEC liability" was the notional liability plus the excess.
The manual provided that the ACM was responsible for reviewing the FEC liability reports to identify any irregular facilities or underwater FECs, ensuring appropriate action was taken to bring FECs into order, ensuring a customer was contacted for outstanding FECs due to mature in the following week and recording a customer's FEC limit on the FEC liability report.
The July 1998 instructions provided that ACM approval must be obtained prior to "historical rate extensions". A "historical rate extension" was defined as an FEC extended on the maturity date for an additional period based on the historical FEC rate as opposed to a swap.
On 30 September 1998 the NAB added further instructions to the international manual in respect to historical rate extensions. Those instructions provided that the maximum period of any extension was three months, the maximum number of extensions was three with the combined terms being no more than six months and the ACM must hold an authorisation letter from the customer's company secretary or equivalent that its representative had authority to undertake extensions. Additionally, the ACM was required to provide written confirmation of the underwater FEC liability to "the company secretary for the attention of the directors" of the company, to ensure the directors or management of the customer were fully aware of their underwater FEC being extended.
The instructions in the international manual were not directly applicable to the Osborne Park BBC and its customers. This was because the customers of the Osborne Park BBC had direct access to an international officer. This access caused confusion between the ACM and the international officer as to who was responsible for monitoring Janalyn's FEC liability reports. The international officer took the view that the ACM remained responsible for these duties whereas the ACM took the view that as the customer was dealing directly on a day‑to‑day basis with the international officer that the international officer took responsibility for monitoring the FEC liability report. This resulted in no one in the Bank keeping a close eye on Janalyn's FEC liabilities or complying with the instructions in the international manual.
In November 1998 Mr Aves resigned from the NAB and Mr Peter Morris became the NAB's ACM or business banking manager for Janalyn. Mr Morris reported to Mr Bergshoeff until July 1999 when Mr David Stafford replaced Mr Bergshoeff as the regional banking manager. Mr Morris left the Osborne Park BBC in May 2001. Mr Jarvis was still the international officer at the Osborne Park BBC in November 1998. He remained in that position until June 1999 when he transferred elsewhere.
On 14 October 1998 Mr Meeke asked Mr Klaassen to investigate ways to reduce Janalyn's banking fees which he had noted were up to $1,000 per month. Despite this increase Mr Meeke says that at this time he did not appreciate that Janalyn was incurring substantial fees by establishing and extending FECs. I also note that if, as Mr and Mrs Meeke submit, Mr Klaassen was entering into FECs without authority, this conversation would have placed Mr Klaassen on notice not to enter into further FECs. Yet that did not occur.
On 17 December 1998 Mr Morris wrote to Janalyn to advise that the NAB had renewed the LOC/TRF, with a limit of $160,000, and the ODF, with a limit of $150,000. Both facilities had an expiry date of 31 October 1999. The terms of the facilities were stated to be:
"1.Quarterly Management prepared financial data;
2.Quarterly certificate signed by Director/s confirming that all statutory payments were up to date: To be provided within 45 days of quarter end;
3.No external borrowings to be entered into, including leasing, without the consent of the Bank;
4.Term of trade refinance for each individual transaction to be a maximum of 180 days; and
5.All individual international transactions greater than $100,000 to be covered by Forward Exchange Cover."
The facilities were also subject to the following covenants:
"5.Financial charges cover ratio to be at a ratio of 2.0 times as a minimum to June 1999;
6.Net Tangible Assets: Total Tangible Assets to increase by 7% pa measured over the financial year June 1998 to June 1999; and
7.Stock Turnover to be less than 365 days and debtors turnover to be less than 50 days."
The term that required all individual international transactions greater than $100,000 to be covered by Forward Exchange Cover obliged Janalyn to take out an FEC to cover a transaction worth more than $100,000. However, this term was not the subject of any evidence in the trial other than evidence relating to its existence.
The letter also confirmed that the FRIL and the two FRIOLs continued unchanged.
Finally, the letter noted that "(t)he Banker has arranged for internal limits as discussed to cater for your ongoing exchange requirements".
The ODF renewal advice stated that the ODF was extended against the following securities:
1.A first mortgage debenture over the whole of Janalyn's assets;
2.Continued reliance on the guarantee and indemnity for $2,600,000 executed by Mr and Mrs Meeke, Satoga in its own right and as trustee for the Meeke Family Trust, supported by;
(a)A first mortgaged debenture over the whole of Satoga's assets;
(b)First registered mortgage over the Yaltara Road property;
(c)Mortgage over life insurance policy in the name of Mr Meeke; and
3.Letter of subordination from Janalyn regarding non‑repayment of loan funds to shareholders and others without the prior consent of the Bank.
That leaves the final allegation of Mr and Mrs Meeke that the NAB was not entitled to impose the increased interest rates, fees and costs upon Janalyn which were contained in the 8 February 2000 forbearance letter. Mr and Mrs Meeke submit that there was no default as at February 2000 due to the requirement on the NAB to credit Janalyn's account with the value of the transactions under the Klaassen FECs and the agreement to combine the ODF and LOC/TRF into the multi‑option facility with an increased limit. Thus, they submit that the NAB had no right to impose such terms and conditions as contained in the forbearance letter.
The NAB submits that Janalyn was in default at the time of the forbearance letter and as a condition of its forbearance it was entitled to impose conditions in respect to increased interest rates, fees and costs.
The NAB alleges that Janalyn defaulted on the ODF from about 22 September 1999 by exceeding its limit. It says that Janalyn defaulted on the $600,000 FRIOL when the ODF was put in default. This was because cl 5(a)(ii) of the terms of the FRIOL provided that interest would be debited to Janalyn's ODF account. Clause 10(a) provided that Janalyn defaulted if the debiting of interest to that account put it in default. It submits that from about 30 September 1999, the debiting of interest on the $600,000 FRIOL to the ODF account put Janalyn in default and consequently Janalyn defaulted on the $600,000 FRIOL.
It makes the equivalent submission in respect to instalments paid under the $1,000,000 FRIL. It further submits that there were further cross defaults in respect to the facilities. I do not need to go into the details of these as it is clear that all the alleged defaults rely upon the truth of the submission that Janalyn defaulted on the ODF from about 22 September 1999. Given my previous findings in respect to the ODF, I am of the opinion that as of late September 1999 Janalyn was operating the ODF in default of its limits. Thus, the NAB was entitled to increase interest rates, fees and costs as a condition of forbearing from demanding repayment of the ODF and Janalyn's other facilities which were also in default because of the breach of the ODF.
Consequently, Mr and Mrs Meeke have not satisfied me that the NAB repudiated Janalyn's facilities or subjected Janalyn and them to economic duress. It follows that on these grounds also Mr and Mrs Meeke have failed to satisfy me that the third guarantee is void and unenforceable.
Misleading and deceptive conduct
Mr and Mrs Meeke's next plea (DEF 46) is that the NAB engaged in misleading and deceptive conduct contrary to the Trade Practices Act 1974 (Cth), s 52, alternatively the Australian Securities and Investments Commission Act 2001 (Cth), s 12DA, by reason of which Mr and Mrs Meeke have suffered loss and damage being the obligations under the third guarantee. This pleading, however, relies upon proof of the Representation, being that the only foreign exchange Klaassen FECs were those referred to in the September letters. As I have found that that Representation was not made, Mr and Mrs Meeke have failed to prove this allegation.
Unconscionable conduct
Mr and Mrs Meeke's next pleading (DEF 47 – DEF 50), is that as at 5 October 2000 the NAB:
(a)was in a much stronger bargaining position than Mr and Mrs Meeke by reason of the time that Janalyn would require to obtain financial accommodation equivalent to the facilities provided by the NAB and the existing commitments of Mr and Mrs Meeke as sureties to the Bank;
(b)had exerted undue pressure on, and used unfair tactics against, Mr and Mrs Meeke by adopting the position that it was entitled to terminate Janalyn's facilities when it was not so entitled; and
(c)had stated a position in the 5 October 2000 letter in terms that were not negotiable.
Mr and Mrs Meeke say that by virtue of these matters the NAB engaged in conduct that was unconscionable contrary to the Trade Practices Act 1974 (Cth), s 51AC, alternatively the Australian Securities and Investment Commission Act 2001 (Cth), s 12CV, in relation to the execution of the third guarantee.
This pleading relies upon proof that the NAB had exerted undue pressure on, and used unfair tactics against, Mr and Mrs Meeke by adopting the position that it was entitled to terminate Janalyn's facilities when it was not so entitled. As I have already found that Mr and Mrs Meeke have failed to prove this allegation, this pleading fails.
However, because other matters are relied upon by Mr and Mrs Meeke I will consider whether those matters make out this pleading.
No details are given in the defence as to whether s 51AC(1) or (2) is relied upon. That is, it is not clear to me whether it is suggested that the NAB acted unconscionably in connection with the supply or possible supply of goods or services to Mr and Mrs Meeke, the acquisition or possible acquisition of goods and services from Mr and Mrs Meeke, the supply or possible supply of goods or services to Janalyn or the acquisition or possible acquisition of goods or services from Janalyn. These distinctions are important as the NAB submits that there is significant doubt about whether Mr and Mrs Meeke may rely on s 51AC. The Bank cites Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia (2002) 122 FCR 110 wherein it says that the Full Federal Court held that s 51AC is concerned only with dealings in connection with the acquisition or supply of goods or services and it is not concerned with the impact of the conduct on third parties. The NAB says that Mr and Mrs Meeke are properly third parties to the acquisition by or supply of services due to Janalyn. On the other hand, Mr and Mrs Meeke rely upon National Australia Bank Ltd v Landmount Investments Pty Ltd & Ors [2003] QDC 042, where a Judge of the District Court of Queensland declined to follow Monroe Topple (supra) on the grounds that it was an unduly restrictive interpretation of the statutory provisions. The Judge in that case construed the defendant's case as being that unconscionable conduct in relation to the giving of a guarantee is conduct in connection with the contract between the banker and the customer. It does seem to me that the Trade Practices Act, s 87 is broad enough to provide that a guarantor who has suffered or is likely to suffer loss by the conduct of the person engaging in the unconscionable conduct is entitled to seek the remedies contained in that section, even though they are not a party to the contract between the contravenor and the customer.
However, in my opinion, the NAB did not engage in unconscionable conduct either in respect to the guarantee or in respect to its dealings with Janalyn. The parties are in agreement that whatever unconscionable means, it describes serious misconduct or something which is "clearly unfair or unreasonable": Hurley v McDonalds Australia Ltd (2000) ASAL 55‑041. Mr and Mrs Meeke allege that the NAB was in a much stronger bargaining position. I accept that the NAB was in a stronger bargaining position because it had the power to provide facilities or not and if it chose not to then there was nothing that Janalyn could do. However, this finding has to be balanced against the fact that the NAB was also in a vulnerable position, in that if it imposed conditions on Janalyn which it could not meet then it risked losing the large amount of money which it had advanced to Janalyn. The NAB officers were aware that Janalyn had made a loss each year since it purchased Mediterranean Ceramics and they had concluded that the security that it had for the advances was insufficient.
The mere fact that the parties were in an unequal bargaining position does not lead to a conclusion that the NAB acted unconscionably. The NAB must be found to have unlawfully, unfairly or unreasonably taken advantage of its stronger bargaining position.
Mr and Mrs Meeke claim that the positions stated in the Bank's letter of 5 October 2000 was not negotiable. However, the fact is that Janalyn and the NAB had previously negotiated the terms. Janalyn did not seek to renegotiate those terms after it received the letter of 5 October. It accepted the terms in the letter of 5 October 2000.
In light of the facts as I have found them, I am not of the view that the NAB's conduct in sending the letter of 5 October 2000 and its enclosures and stating the terms upon which it was prepared to continue to finance Janalyn, was "clearly unfair or unreasonable". The NAB had a large amount of money at risk. When the facilities were first granted they were granted on the basis that Janalyn would comply with the terms and conditions of its facilities and be able to repay its debts in a timely fashion. Whereas, it had failed to comply with the covenants on the facilities, had exceeded the limits of the LOC/TRF and ODF, had never made a profit and was seeking further funds from the NAB. The NAB worked closely with Mr Meeke to assist Janalyn to meet and repay its debts. In June 2000 Mr Meeke provided the NAB with financial information which included a programme of debt amortisation by repayment of $100,000 in each of December 2000, March 2001 and June 2001. After close consideration of the financial information provided by Janalyn, the NAB agreed to a debt amortisation programme which required a first payment of $100,000 on 31 December 2000. Janalyn agreed to this programme without making any counter offer, seeking alternative finance or considering the sale of the business. Thus, the actions of the Bank as of 5 October 2000 were not unconscionable.
This pleading also relies upon the same factual allegations as are relied upon in respect to the reasons for entering into the 2000 MOF (DEF 40). For the reasons earlier expressed, Mr and Mrs Meeke have not made out this claim.
The NAB's alleged failure to disclose
Mr and Mrs Meeke allege that the NAB was bound to disclose the circumstances and extent of the Klaassen FECs to them as sureties (DEF 51). This obligation, they say, arises because non‑disclosure of such matters materially misrepresented the nature of the financial circumstances of Janalyn. Further, they allege that they entered into the third guarantee in the false belief, induced by the alleged Representation, that the extent of the Klaassen FECs had been disclosed (DEF 52). Consequently, they say they are entitled to, and elect to, rescind the third guarantee (DEF 53).
This plea fails for at least two reasons. First, I am not satisfied that the Representation was made. I have previously set out my reasons for this view. Secondly, I am not satisfied that the NAB was obliged to further disclose "the circumstances and extent" of the Klaassen FECs to Mr and Mrs Meeke.
The legal principles concerning a creditor's obligation of disclosure were considered in Westpac Banking Corporation v Robinson (1993) 30 NSWLR 668 at 686 ‑ 690. Clark JA (Handley JA agreeing) thoroughly reviewed all the relevant authorities. A number of principles emerged from that review:
1."The effect of a misrepresentation, either fraudulent or innocent, upon a contract of guarantee is that the contract is voidable at the suit of the person to whom the representation is made:";
2." … A creditor who discovers before the guarantee is executed that a representation it earlier made in good faith to the proposed guarantor is false must notify the guarantor of that fact and if it does not do so the guarantor, assuming it relied on the representation in entering into the guarantee, will be entitled to avoid the contract:";
3."The general rule is that silence does not affirm because, in the ordinary case, a party to a contract is under no duty to disclose material facts known to him but not to the other party …"; and
4."There is a special rule relating to contracts of guarantee … . … Under this rule a duty to disclose would only arise where there existed facts the non‑disclosure of which would affectively misrepresent material aspects of the transaction which the guarantor was undertaking to guarantee".
In Commercial Bank of Australia Ltd v Amadio (1982) 151 CLR 447, a number of the Justices of the High Court considered a creditor's duty to disclose matters to a guarantor, although the case was ultimately decided on the equitable principle of unconscionable conduct rather than breach of any duty.
Mason J, at 463, after referring to the duty of disclosure by a bank to a guarantor said:
"It has been said that this duty to disclose does not require a bank to give information as to matters affecting the credit of the debtor or of any circumstances connected with the transaction in which he is about to engage which will render his position more hazardous … . No surety is entitled to assume that the debtor has not been overdrawing, the proper presumption being in most instances that he has been doing so and wishes to do so again …"
Putting aside the Representation, which I have found was not made, I cannot accept that the application of these principles required the NAB to advise Mr and Mrs Meeke of the "circumstances and extent" of the Klaassen FECs.
Janalyn's financial position was well known to Mr Meeke and, in general terms, by Mrs Meeke at the time they entered into the third guarantee. It is not alleged that the NAB misrepresented Janalyn's financial position. Further, whatever had occurred with respect to the Klaassen FECs was in the past. Mr Klaassen was no longer employed by Janalyn and thus there was no possibility of Mr Klaassen entering into further FECs. No further disclosure to Mr and Mrs Meeke concerning the Klaassen FECs was going to alter Janalyn's financial position or going to enable Mr and Mrs Meeke, as proposed sureties, to protect their position.
Thus, in my view, the alleged non‑disclosure did not materially misrepresent the nature of Janalyn's financial circumstances.
Mr Meeke said in evidence that if he had known of the Klaassen FECs he would have been able to exact further concessions from the NAB, which would have improved Janalyn's financial position. The first thing I say about that proposition is that it suggests that there was a duty to disclose to Janalyn, an issue I have already dealt with, rather than the proposed sureties. Secondly, it suggests that, armed with this information, Janalyn may have been able to improve its financial situation and its bargaining power with the NAB. Even if either or both of those positions are correct, what they mean is that Mr and Mrs Meeke entered into the third guarantee for a lesser sum than earlier guarantees, believing that Janalyn's financial position was worse than it should have been. I do not see how it could be said that, thus, the lack of disclosure prejudiced their position as potential guarantors.
Monies not due to the Bank
Mr and Mrs Meeke allege that if they are liable to the NAB then the amount due to it should be adjusted by approximately $50,000 which they say are monies which were allegedly deducted from Janalyn's account but which were not due to the NAB (DEF 54).
Other than to admit that the particularised amounts were withdrawn from Janalyn's overdraft account the NAB otherwise joins issue with this claim.
Some of the items claimed related to fees associated with the Klaassen FECs and the NTHLP. Consistent with these reasons, I am not prepared to find that those fees were not due from Janalyn to the NAB. In respect to the balance of the sums, I do not have any evidence concerning them apart from a brief line description of each sum and the date of its withdrawal from the account. Such material being contained in Janalyn's bank statements. That information is insufficient for me to conclude in respect to any one of the items that they are not due to the NAB.
Conclusion as to the NAB's claim against Mr and Mrs Meeke
The NAB has proven that Mr and Mrs Meeke are liable to it under the NTHLP and the third guarantee. I am not satisfied that any of the matters raised in Mr and Mrs Meeke's defence have been made out.
Mr and Mrs Meeke's counterclaim against the NAB
Mr and Mrs Meeke rely upon their DEF to seek various orders against the NAB, including declarations that the NTHLP is a contract of surety and the third guarantee is void and unenforceable. The only new allegations against the NAB in the defendants' counterclaim, is that the NAB aided and abetted, counselled or procured, or was knowingly concerned in or a party to:
(a)Mr Klaassen's contraventions of the Corporations Law;
(b)The misleading and deceptive conduct of Mr Klaassen contrary to the Fair Trading Act (DEF 76 and DEF 84).
These pleadings in turn rely upon proof that the Klaassen FECs were unauthorised and that Mr Klaassen, in entering into the FECs and concealing them from Janalyn, contravened the Corporations Law and the Fair Trading Act.
For the reasons I have given and will give when I deal with the counterclaim against Mr Klaassen, I do not find that these matters have been proved. Consequently the counterclaim against the NAB fails.
Mr and Mrs Meeke's counterclaim against Mr Klaassen
The first claim against Mr Klaassen is that he made improper use of both information and his position to the detriment of Janalyn contrary to the Corporations Law, s 232(5) and (6) (Rep) to cause detriment to Janalyn by reason of which Mr and Mrs Meeke suffered loss and damage, being the obligations under the third guarantee (DEF 75).
The Corporations Law, s 232(5) (Rep) stated:
"An officer or employee of a corporation, or a former officer or employee of a corporation, must not, in relevant circumstances, make improper use of information acquired by virtue of his or her position as such an officer or employee to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation."
To prove this claim Mr and Mrs Meeke rely upon their DEF and, in particular, their allegation that the Klaassen FECs were unauthorised. For the reasons I have given Mr and Mrs Meeke have failed to prove the matters upon which they rely. Thus, the first claim against Mr Klaassen fails. However, the counterclaim makes further allegations against Mr Klaassen and given the seriousness of those allegations it is appropriate that I deal with them.
The tenor of a number of allegations made against Mr Klaassen accuse him of serious misconduct. For example, they allege that he met in secret with NAB agents, that he altered the NAB on‑line application form to obtain a password, concealed evidence relating to the Klaassen FECs from Mr Meeke and entered into FECs at a branch or department of the NAB at which Janalyn or Mr and Mrs Meeke did not conduct business.
I do not find evidence of such impropriety. Specifically I do not find that Mr Klaassen did any one of those things that I have just particularised.
Some of the conflict between Mr Meeke and Mr Klaassen may have resulted from Mr Klaassen being somewhat less meticulous than Mr Meeke would have liked and from Mr Klaassen not being sufficiently skilled in FEC transactions and other duties. However, I am entirely unpersuaded that Mr Klaassen indulged in the alleged improper conduct.
The second claim made against Mr Klaassen is that he impliedly represented that no foreign exchange contracts had been entered into by him (DEF 81 and DEF 82). It is alleged that he made this implied representation by, amongst other things, his silence generally and in connection with the enquiries into bank fees, concealing the letter of Mr Morris dated 19 August 1999, his telephone call with Mr Morris on 23 August 1999 and his seeking of employment with the NAB without disclosing the existence of the Klaassen FECs. The counterclaim alleges that the representation was false and constituted misleading and deceptive conduct under the Fair Trading Act 1987 (WA), s 10.
The Fair Trading Act 1987 (WA), s 10(1) states:
"(1)A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive."
In order to prove the representation, Mr and Mrs Meeke rely upon the same matters as in respect to the first claim against Mr Klaassen. Thus, for the reasons already given, this second claim must fail too.
Also, this aspect of the counterclaim relies upon Mr Klaassen's silence about the FECs as being part of an implied representation by Mr Klaassen that he had not entered into the Klaassen FECs. It may be that Mr Klaassen was not very vocal about the part his FECs played in the increase in Janalyn's bank fees at the time that Mr Meeke started to make enquiries about Janalyn's bank fees. This could have been for a number of reasons. Mr Klaassen may have been embarrassed because he had entered into a few more FECs than was strictly prudent, as he admitted to Mr Morris, or he may have felt that it was unnecessary to articulate the role of the FECs in the bank fees because Mr Meeke was already aware of them. However I am not persuaded that by his silence he represented that there were no Klaassen FECs. Such a finding would be entirely contrary to my finding that Mr Meeke authorised Mr Klaassen to enter into the Klaassen FECs.
For these reasons the counterclaim against Mr Klaassen fails.
Conclusion
The NAB has proven that Mr and Mrs Meeke are liable to it under the NTHLP. It is also proven that Mr and Mrs Meeke are liable under the third guarantee for the debt Janalyn owes to it. Mr and Mrs Meeke have failed to prove their counterclaim against the NAB or Mr Klaassen. I will hear counsel as to final orders.
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