CITATION: Spina v Conran Associates Pty Ltd; Spina v M & V Endurance Pty Ltd [2008] NSWSC 326 HEARING DATE(S): 3 & 4 April 2008
JUDGMENT DATE :
14 April 2008JURISDICTION: Equity JUDGMENT OF: Austin J DECISION: See under heading "Conclusions" CATCHWORDS: PRINCIPAL AND AGENT - general power of attorney - clause permitting acts whereby a benefit is conferred on attorney - whether attorney was authorised to enter into transactions for the benefit of his business and to the detriment of the grantor - REAL PROPERTY - Torrens System - whether mortgage purportedly executed on behalf of mortgagor by attorney in excess of power confers indefeasible title on mortgagee when registered - whether mortgagor can assert personal equity to remove mortgage from register - EQUITY - unconscionable dealings - solicitor for mortgagees allows transactions to go ahead knowing age of mortgagor, financial position of mortgagor's son and that the transactions will benefit the son's business and cause detriment to the mortgagor - CONTRACTS - unjust contracts - Contracts Review Act - whether, in these circumstances, mortgage loans were unjust contracts - GUARANTEE - wife guarantees mortgagor's obligations at request of husband - wife's practice is to sign business documents whenever requested by husband - where the guarantee an unconscionable dealing or unfair contract LEGISLATION CITED: Contracts Review Act 1980 (NSW), s 7
Conveyancing Act 1919 (NSW), s 163B and Schedule 7
Powers of Attorney Act 2003 (NSW), s 5
Real Property Act 1900 (NSW), ss 41, 42, 43CASES CITED: Australia & New Zealand Banking Group Ltd v Karam (2005) 64 NSWLR 149; [2005] NSWCA 344
Bryant, Powis, and Bryant, Ltd v La Banque Du Peurple and The Quebec Bank [1893] AC 170
Challenger Managed Investments Ltd v Direct Money Corporation Pty Ltd (2003) 59 NSWLR 452; [2003] NSWSC 1072
Commonwealth Bank of Australia v Cohen (1998) ASC para 55-681
Garcia v National Australia Bank Ltd (1998) 194 CLR 395
Grgic v Australia & New Zealand Banking Group Ltd (1994) 33 NSWLR 202
Hambro v Burnand [1904] 2 KB 10
Hodges v Montgomery [1916] VLR 90
Jorss v United Dominions Corporation Ltd [1981] Lost & NZ Conv Rep 123
Katsaitis v Commonwealth Bank of Australia (1957) 5 BPR 12,049
Mercantile Mutual Life Insurance Co Ltd v Gosper (1991) 25 NSWLR 32
Permanent Trustee Ltd v FAI General Ltd (2003) 214 CLR 514
Perpetual Trustees Ltd v TSAI [2004] NSWSC 745
PT Ltd v Maradona Pty Ltd (1991) 25 NSWLR 643
Re GM Industries Pty Ltd and the Companies Act (1980) ACLC 40-665
Reckitt v Barnett Pembroke and Slater Ltd [1928] 2 KB 244
Sargent v ASL Developments Ltd (1974) 131 CLR 634
Small v Gray [2004] NSWSC 97
Smits v Roach [2006] HCA 36, (2006) 228 ALR 262
Story v Advance Australia Bank Ltd (1993) 31 NSWLR 722
Sweeney v Howard [2007] NSWSC 852
Tobin v Broadbent (1947) 75 CLR 378
Turner v Windever [2005] NSWCA 73
Tyson v Commonwealth Bank of Australia (Supreme Court of New South Wales, Giles J, unreported, 13 December 1989; BC8901343)
Vassos v State Bank of South Australia [1992] V Conv R para 54-443
Vatcher v Paull [1915] AC 372PARTIES: 2392/06 and 2394/06
Angelina Spina by her tutor Sarina Spina (Plaintiff and First Cross-Defendant in First and Second Cross-Claims)
Conran Associates Pty Ltd (Defendant and Cross-Claimant in First Cross-Claim and First Cross-Defendant in Third Cross-Claim)
M & V Endurance Pty Ltd (Defendant and Cross-Claimant in Second Cross-Claim)
Sarina Spina (Cross-Claimant in Third Cross-Claim and Second Cross-Defendant in First and Second Cross-Claims)FILE NUMBER(S): SC SC 2392/06; SC 2394/06 COUNSEL: K Connor SC with J Clifton (Plaintiff and Cross-Claimant in Third Cross-Claimant)
P Menadue (Defendants)SOLICITORS: Grogan & Webb (Plaintiff and Cross-Claimant in Third Cross-Claimant))
Shields Lawyers (Defendants)
IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
AUSTIN J
MONDAY 14 APRIL 2008
2392/06 ANGELINA SPINA BY HER TUTOR SARINA SPINA V CONRAN ASSOCIATES PTY LTD
2394/06 ANGELINA SPINA BY HER TUTOR SARINA SPINA V M & V ENDURANCE PTY LTD
JUDGMENT
1 HIS HONOUR: The plaintiff, Angelina Spina, is a 91-year-old widow living in a nursing home, who has only a very limited understanding of written and spoken English. She had two sons, Joseph and Michael, and a daughter, Sandra. Joseph has given evidence in support of his mother. Michael died suddenly on 6 December 2005, aged 66, after active participation in the events that led to the proceedings. Sandra died in 1983 and does not figure in the proceedings. Michael's widow is Sarina Spina, who is the plaintiff's tutor and a witness in the proceedings. For convenience I shall refer to Michael and Sarina Spina by their first names.
2 The proceedings relate to two mortgages over the plaintiff's property at Cherrybrook, near Sydney. The mortgagee of one of the mortgages, the second mortgage over the Cherrybrook property, is Conran Associates Pty Ltd, which is the defendant in proceeding No 2392/06. The mortgagee of the other mortgage, the third mortgage over the Cherrybrook property, is M & V Endurance Pty Ltd, which is the defendant in proceeding No 2394/06. The two proceedings have been consolidated.
3 The mortgages arose out of the purported exercise by Michael of an enduring power of attorney granted to him by his mother. The money borrowed under the mortgages was used in a business conducted by Spywing Pty Ltd trading as Action Fruit Supply. The directors of Spywing were Michael and Sarina, until Michael's death. The company went into liquidation in May 2006.
4 By her Amended Statement of Claim in the consolidated proceedings, filed on 28 July 2006, the plaintiff seeks orders declaring that the two mortgages are unconscionable, and unjust within the meaning of s 7(1) of the Contracts Review Act 1980 (NSW), and setting them aside, or orders reducing her liability under the mortgages to nil or requiring each defendant to execute a registrable discharge of mortgage.
5 Conran Associates and M & V Endurance each filed a cross-claim (the First Cross-Claim and the Second Cross-Claim respectively) seeking orders for possession and judgment for the amount said to be outstanding for principal and interest under the respective mortgages. In the First Cross-Claim Conran Associates also seeks judgment against Sarina for the amount of principal and interest claimed to be owing to it, on the ground that she has guaranteed the plaintiff's obligations. The plaintiff and Sarina are the cross-defendants in each of these cross-claims. Counsel informed me at the hearing that the first mortgagee of the Cherrybrook property, Permanent Custodians Ltd, has commenced possession proceedings which have not yet been heard, and therefore his clients are not pressing for orders for possession at this stage. He suggested that this part of the cross-claims might be adjourned until after the anticipated hearing date of the Permanent Custodians proceedings.
6 Sarina has filed a cross-claim (the Third Cross-Claim) seeking orders that a guarantee that she gave in connection with the mortgage to Conran Associates is void, and that it be set aside, on grounds relating to: "imbalance of power"; that she did not understand the transaction; s 9 of the Contracts Review Act; and unconscionable conduct. The cross-defendant is Conran Associates.
The plaintiff's life
7 Evidence about the plaintiff's life and mental condition was given by Joseph and Sarina. I accept their evidence.
8 The plaintiff was born in Sicily, the daughter of a market gardener, and was educated to the equivalent of modern-day primary school, leaving school at the age of 13. When she left school she was not able to write and could read Italian only to a limited degree. She worked on the farm until she married Carmelo Spina at the age of 21, in 1938. She had her first child in 1939, and then two others. Carmelo emigrated to Australia in 1950, saved up some money, and then brought his family here in 1952. They eventually settled in West Pennant Hills in 1959, where they acquired a house and land and a small farm. Carmelo worked the farm with his brother Joe, who also lived on the farm with his family. Carmelo's sons Michael and Joseph married in due course - Michael married Sarina in 1963 and Sarina has known the plaintiff and had regular contact with her since about 1960.
9 Although she was able to converse in Italian, the plaintiff never learned to read, write or speak English, other than a very few simple words. Her role around the farm was to perform household duties and to assist her husband. Carmelo and his brother Joe decided to retire from farm work in 1974, and at that time they sold the farm and divided the proceeds. Then the plaintiff and Carmelo purchased a block of land in Cronulla in Sydney and had a house built there, where they then lived as retirees and pensioners, apart from a little cleaning work. They were not financially supported by their children, although when Carmelo became ill their sons assisted the plaintiff to manage her rudimentary financial affairs.
10 Carmelo died in 1983. Thereafter one or other of the two sons would visit from time to time to help their mother with day-to-day affairs and financial matters such as writing out cheques. Joseph and his wife took primary responsibility for the plaintiff's financial affairs and day-to-day tasks (such as shopping) during this period.
11 In 1987 the plaintiff sold the Cronulla home and purchased the property she continues to own at Cherrybrook, for about the same price. Her sons continued to assist her in various ways, such as by writing out cheques for her to sign for payment of bills, by dealing with her correspondence, and by helping her to make telephone calls to Sicily. The plaintiff's expenses were very limited and she was financially self-sufficient and not dependent on anyone for financial assistance. There was no mortgage on the Cherrybrook property between 1987 and 2003. Joseph's evidence to that effect is corroborated by a title search of the Cherrybrook property, showing no mortgage as at 21 March 2003.
12 The plaintiff turned 85 years old on 20 September 2002. There is some evidence about her general mental acuity at about this time, and in the preceding few years. Joseph and Sarina, both of whom saw her regularly, gave evidence to the effect that she had developed a tendency to forget things they told her; that she would confuse her sons' and daughters-in-law's names; that she forgot what day of the week it was; that she would ask the same question repeatedly during a single conversation; that she would lose her train of thought and talk about irrelevancies; and that she occasionally became confused. On the other hand, Joseph agreed in cross-examination that she was a determined woman who would not do something she did not want to do (T 13-14).
13 During her late 70s and early 80s the plaintiff gradually became less steady on her feet. In about September 2002 she had a bad fall at her Cherrybrook home, and she then moved in to live with Michael and Sarina in their home at Dundas. Sarina gave evidence of her daily observation of the plaintiff, citing instances that generally indicated further decline in the plaintiff's mental condition. Since the plaintiff was living with Michael and Sarina, Michael took over the management of the plaintiff's financial affairs from his brother Joseph.
14 Apparently the two brothers decided that their mother should move into a nursing home, and they took steps accordingly. In February 2003 Michael took the plaintiff to a solicitor for preparation of a new will and the execution of a power of attorney. The power of attorney was executed on 5 February 2003, and was subsequently registered. He told Sarina he had arranged for a power of attorney so he could raise some funds to pay for the nursing home, and that the plaintiff would need to borrow about $100,000 for that purpose.
15 The plaintiff moved into hostel accommodation at a nursing home in March 2003. In fact no bond was paid or required by the nursing home. Apparently the plaintiff's pension cheque was paid directly to the nursing home, and Michael also arranged for the leasing of the Cherrybrook property and for payment of the rent to the nursing home. Sarina gave evidence that after Michael died, she took over the day-to-day management of the plaintiff's financial affairs and identified statements from the nursing home, which indicated that its fees were being paid in this manner.
16 Soon after moving into the nursing home accommodation, the plaintiff had another bad fall and broke her hip, and was in hospital for several weeks, and thereafter needed daily nursing assistance, and was mostly confined to her room. Sarina gave evidence that after moving into the nursing home, the plaintiff started to have hallucinations and nightmares, and spoke about people who had passed away as if they were still alive. Joseph gave evidence that when Michael died in December 2005, he took his mother to the funeral, but subsequently she has forgotten about Michael's death and believes he is alive and living in Italy.
Action Fruit Supply
17 Action Fruit Supply was a wholesale seller of tropical fruits with a stand at Flemington fruit markets. It held two equity entitlements of 36,000 each, evidently valuable, in Sydney Markets Ltd. The business was carried on by Spywing Pty Ltd, the directors of which were Michael and Sarina Spina, until Michael died in December 2005. Spywing was registered in 1988. Michael was a director from the beginning, and Sarina became a director in 1994. Michael held one third of the shares but Sarina was not a shareholder. Sarina gave evidence that between about 1990 and about 2000, she worked in the business for one day per week, doing wages and other miscellaneous bookkeeping, for which she received $600 per week, which she appears to have regarded money for housekeeping and payment of utilities.
18 It appears that the business was quite heavily indebted in mid-2005. On 3 June 2005 Michael sent Rodney Shields, a mortgage broker, some information about the business in connection with what became the Conran Associates loan. The information included a Bank of Western Australia ("BankWest") commercial advance statement for Spywing showing a debit of $450,000 and a BankWest business bank account statement for the business showing an overdraft of about $147,000.
19 There is evidence that the residence of Michael and Sarina at Dundas was used during Michael's lifetime as security for loans to support the business. Thus, on 7 June 2005 a firm of accountants sent Mr Shields copies of a number of documents by facsimile, relating to the Spina family, including a mortgage from Michael and Sarina Spina to Across Australia Finance Pty Ltd dated 20 August 2003, relating to their residential property at Dundas. The principal sum secured by the mortgage was $110,000 and the interest rate was 72% reducible to 60% per annum for prompt payment, payable monthly in advance. The capital was repayable on 20 September 2003. The terms of the loan demonstrate the very tight financial position of Michael and the business. Another mortgage is in evidence, from Michael and Sarina to BankWest over the Dundas property, for an amount of $1.23 million dated 15 October 2003.
20 Spywing went into liquidation in about May 2006. In his report to creditors dated 8 May 2007, the liquidator of Spywing said that the company's business was sold on 29 March 2006 and on settlement, some $1.275 million was paid to discharge debts owed to BankWest by Michael and Sarina and Spywing, permitting the discharge of the mortgage over Michael and Sarina's Dundas property and the release of a fixed and floating charge over the assets of Spywing. The liquidator said that the payment of the directors' personal home loan account from the company's sale of business funds was to be considered a voidable transaction recoverable by the liquidator under s 588FH of the Corporations Act. He recorded that Mrs Spina was claiming she received no benefit from the transaction because the funds lent by BankWest by way of home loan were used to fund the business of Spywing. The evidence includes a statutory declaration by Sarina Spina dated 14 May 2007, to the general effect that there were several loans to Spywing trading is Action Fruit secured over the Dundas property in the period between 2001 and 2003, and all the loan proceeds were used for the purposes of that business.
Mr Shields, Mr McVittie and Shields Lawyers
21 The two mortgage loans that are the subject of these proceedings were arranged with assistance provided by Mr Shields, and Mr McVittie of Shields Lawyers. There was evidence as to the relationship between them and their respective roles.
22 Mr McVittie, a solicitor, is the principal of Shields Lawyers Pty Ltd, an incorporated legal practice. He gave evidence that in the 1980s he came to work as an employed solicitor for Rodney Shields, who was then practising as a solicitor in Randwick. In about 2001 he incorporated Shields Lawyers Pty Ltd and bought the legal practice of Mr Shields (T 38). He said Mr Shields ceased practising law and became a mortgage broker, and also worked as a consultant to Shields Lawyers assisting with clients and files (T 39). Mr Shields operated from the offices of Shields Lawyers and used to their fax machine. Mr McVittie insisted that the consulting work, which he described very vaguely, was non-legal. In his work as a mortgage broker, Mr Shields had contact with about 15 lenders. He was approached by brokers acting for borrowers, including Jim Morgan, and would endeavour to match them with his lenders. He had access to the files of Shields Lawyers and his correspondence in respect of arranging loans was kept in the lawyers' file (T 42).
The mortgage to Permanent Custodians Ltd
23 In conjunction with the proposal for the Conran Associates loan (considered below), Shields Lawyers arranged a title search for the Cherrybrook property on 8 June 2005, which showed that the plaintiff's title was subject to a first mortgage to Permanent Custodians Pty Ltd (the parties agreed at the hearing that this was the mortgage to Australian Lending Services). They obtained a copy of the first page of that mortgage instrument, which showed that the mortgage was dated 7 November 2003 and that Michael signed for the plaintiff mortgagor, as attorney under the registered power of attorney. The mortgage was stamped for a principal amount of $150,000, up-stamped to $780,000. Australian Lending Services wrote to Shields Lawyers on 10 June 2005 confirming that the original loan amount was $400,000 and the balance at 7 June was a little over that amount. The letter described the loan as a loan to Michael and the plaintiff. Statements by Australian Lending Services were directed to the plaintiff at Michael's address, even though she was by that time living at the nursing home. There was evidence at the hearing that the loan had been arranged by Michael for the purposes of the Action Fruit Supply business.
24 It does not appear that the Permanent Custodians/Australian Lending Services loan was arranged by Mr Shields or Shields Lawyers. It is not the subject of challenge in these proceedings, and the mortgagee is not a party.
The mortgage to Conran Associates
25 The loan by Conran Associates was negotiated by Mr Morgan, who dealt with Michael, and Mr Shields who was in touch with Melvyn Foux, the sole director of Conran Associates.
26 The elements of the transaction were set out in two facsimiles prepared by Mr Morgan, one to Mr Foux dated 3 June 2005 and the other to Mr Shields dated 6 June 2005. In the first of these facsimiles, Mr Morgan described the "borrowers" as "Michael Spina (Angelina Spina mortgagor)", without further explanation. The loan amount was $110,000, the term six months, and the interest rate was 2.5% per month reducing to 2% per month provided interest was paid within seven days of the due date, interest being payable three months in advance. The security was to be a registered second mortgage and lodgement of a caveat over the Cherrybrook property. The loan was to be subject to a first mortgage to Australian Lending Services for $400,000 against a real estate appraisal of the Cherrybrook property of $720,000 (there is in fact an appraisal in evidence for that amount, dated 7 October 2003). There was to be a guarantee by Spywing. The purpose of the loan was said to be "to assist with seasonal working capital for wholesale fruit business at Flemington markets", to be repaid from normal sales of wholesale fruit in September 2005. Funds were required by 10 June. In the second facsimile, Mr Morgan transmitted a copy of the first facsimile to Mr Shields and confirmed that the first mortgage to Australian Lending Services had a limit of $400,000 and that written confirmation had been requested.
27 On 7 June 2005 a firm of accountants sent Mr Shields copies of a number of documents by facsimile, relating to the Spina family. One of the documents was the mortgage of the Dundas property referred to above. Another document transmitted to Mr Shields was a copy of the plaintiff's general power of attorney in favour of Michael dated 5 February 2003. Another document was a copy of the plaintiff's certificate of title for her property at Cherrybrook, showing that at 21 March 2003 the property was unencumbered. The facsimile-transmitted documents bear marks indicating that someone worked on the documents. Mr McVittie gave evidence that those marks were made by Mr Shields.
28 On 10 June, Shields Lawyers received copies of Mr Morgan's facsimiles and set about preparing documentation. According to Mr McVittie, the following documents were prepared and given to Mr Morgan, so that he could attend to their execution:
- (i) covering letter (not in evidence);
(ii) memorandum of costs and disbursements addressed to the plaintiff at her Cherrybrook address, for costs of preparing security documents (JMcV 25);
(iii) mortgage instrument from the plaintiff to Conran Associates, accompanied by "Annexure A" (JMcV 27);
(iv) memorandum of mortgage provisions (JMcV 31);
(v) form of caveat (Ex P1, page 10);
(vi) letter of approval directed to the plaintiff, informing her that the application for a loan had been approved on the conditions set out in the letter, setting out the amount of the loan and the security by second mortgage over the Cherrybrook property, and provisions about the purpose of the loan (evidently copied from Mr Morgan's fax) and other matters, and making provision the recipient of the letter to agree to be bound by the terms of the loan approval and the security documents by signing the letter (JMcV 59);
(vii) an epitome of mortgage, to be acknowledged by signature, noting that Spywing would be a guarantor but not referring to Michael (JMcV 65);
(viii) a form of authority and undertaking directed to Conran Associates, authorising it to pay the advance to the mortgagor or the mortgagor's solicitor or as the solicitor may direct, to be signed by the mortgagor (the plaintiff was described as "Borrower/Mortgagor" and no mention was made of Michael) (JMcV 67);
(ix) a form of statutory declaration by the plaintiff as registered proprietor of the Cherrybrook property, to the effect that the property was free of encumbrances and she was not aware of various adverse matters, endorsed with a draft certificate to be given by the solicitor for the mortgagor confirming that he had explained various matters to her (JMcV 68);
(x) a form of mortgagor's acknowledgement to be given by the plaintiff acknowledging and warranting that she had been given the opportunity to read the security documents and that they had been fully explained by her solicitor (JMcV 70);
(xi) requisitions on title (not in evidence);
(xii) a form of "Costs Agreement between Solicitor and Client" directed to the plaintiff from Shields Lawyers, thanking her for her instructions and setting out the "terms of our engagement", with provision for signature by the plaintiff (JMcV 71);
(xiii) a form "to be completed if you choose not to obtain independent legal advice", to be signed by the mortgagor and attached to a document, certifying that he or she had read the document, had been given the opportunity to obtain legal advice, understood the nature and effect of the document, understood the obligations and risks involved in signing the document, and signed the document freely, voluntarily and without pressure (JMcV 74);
(xiv) a "cheque direction" making provision for a direction as to payment of the net amount of the loan after deduction of legal costs and disbursements and brokerage (JMcV 75);
(xv) a form of guarantee directed to Conran associates by which Spywing was to guarantee the principal and interest, with provision for signature by Michael and Sarina (JMcV 76).
29 Although document (xii) above was a form of costs agreement between solicitor and client, which was to be signed on behalf of the mortgagor/borrower, Mr McVittie gave evidence that he was retained by Conran Associates and at no stage did he act for the plaintiff or Michael or Sarina. He said the purpose of the costs agreement was to make disclosure and secure payment of costs (T 81).
30 Subsequently, Mr McVittie received the documents back from Mr Morgan. Where the documents made provision for signature, they were signed by Michael, but not by the plaintiff or Sarina. The mortgage instrument was signed by Michael under the power of attorney, in the presence of Mr Morgan. The draft certificate by the mortgagor's solicitor was left blank, and there was no signature by a solicitor anywhere in the documentation. Documents addressed to the plaintiff were signed by Michael. They included the statutory declaration prepared in her name but signed by him, in the presence of Mr Morgan. Mr McVittie knew that the statutory declaration signed in that way was not valid (T 77). The guarantee purportedly by Spywing was dated 10 June signed by Michael as sole director, and his signature was witnessed by Mr Morgan. Provision for signature of the guarantee by Sarina was deleted. Mr McVittie knew that Michael's representation that he was "sole director" of Spywing was false (T 68).
31 On 14 June 2006 Mr Foux reviewed the documentation at the offices of Shields Lawyers. He instructed Mr McVittie that he would not proceed with the transaction unless there were personal guarantees from both directors of Spywing. Subsequently a guarantee of the mortgage loan by Michael and Sarina was prepared and signed by Michael. The circumstances of its execution by Sarina are considered below.
32 The loan capital was received from Conran Associates into the trust account of Shields Lawyers on 10 June 2005. The net amount of the loan after expenses, $99,404, paid out by cheque in favour of Action Fruit Supply dated 14 June 2005. Mr McVittie gave evidence that the payment was not made until at least 15 June, or a little later, when Mr Foux approved the payment. The mortgage was registered on 17 February 2006. Clearly the benefit of the transaction flowed to Action Fruit Supply and Michael, and not to the plaintiff. Indeed, the transaction (if valid) caused detriment to the plaintiff by imposing security over her property and a payment obligation on her for a loan that she did not receive. There is no evidence to indicate whether the plaintiff was in fact aware of the transaction at any time up to its completion.
33 According to Mr Foux, Conran Associates received interest payments in respect of the mortgage totalling $19,835, the last of which was made in January 2006. His evidence was that the total amount of principal and interest outstanding as at 3 July 2007 was $155,650.
The mortgage to M & V Endurance
34 The transaction was a loan of $60,000 secured by a third mortgage over the Cherrybrook property, protected by a caveat. It was initiated by a fax from Mr Morgan to Mr Rohanna, a director of M & V Endurance, dated 19 August 2005, and copied to Mr Shields at Shields Lawyers.
35 According to Mr Morgan's fax, the "borrower" was the plaintiff whose address was given as the Dundas address of Michael and Sarina. The term of the loan was to be for four months, and the interest was to be 4% per month reducing 3% per month paid within seven days of the due date. The security was to include a guarantee by Michael and a debenture charge over Spywing. Reference was made to the real estate appraisal of the Cherrybrook property at $720,000. The purpose of the loan was said to be "to assist with seasonal purchase of bulk fruit for wholesale fruit business at Flemington markets". Repayment was to be from sales of wholesale fruit. Mr Morgan sent a copy of this facsimile to Mr Shields on 22 August, and asked Mr Shields to confirm when the documents were ready.
36 According to Mr McVittie's evidence, on 24 August 2005 Michael collected a bundle of documents from the offices of Shields lawyers, comprising documents very similar in form to the documents used in the Conran Associates mortgage, namely:
- (i) a covering letter, addressed to Michael and the plaintiff at his Dundas address (JMcV 86);
(ii) a mortgage instrument identifying the plaintiff as mortgagor, accompanied by annexure "A" (JMcV 88) and the mortgage memorandum (JMcV 31);
(iii) a letter of approval addressed to Michael and the plaintiff at the Dundas address describing Michael is the borrower and the plaintiff as the mortgagor and setting out the terms of the loan, and making provision for signature by persons agreeing to be bound (JMcV 92);
(iv) an epitome of mortgage (JMcV 98);
(v) an "Authority and Undertaking" by Michael and the plaintiff as "Borrower/Mortgagor" and by the plaintiff as mortgagor, identifying the Cherrybrook property (JMcV 100);
(vi) a statutory declaration by the plaintiff (JMcV 101);
(vii) a "Mortgagor's Acknowledgement" purportedly from the plaintiff (JMcV 103);
(viii) A. "Costs Agreement Between Solicitor and Client" directed to the plaintiff (JMcV 104);
(ix) a draft certificate "to be completed if you choose not to obtain independent legal advice" (JMcV 107);
(x) a copy of a Law Society Bulletin, Caveat No 207 (30 December 1999) and Law Society Council Guidelines on independent advice (JMcV 108);
(xi) a cheque direction (JMcV 116).
37 There was no guarantee of repayment of this loan by Sarina. As in the case of the Conran Associates transaction, Mr McVittie insisted in cross-examination that the form of costs agreement did not mean that he was acting for the plaintiff; his client was M & V Endurance and the costs agreement was there only to secure payment of his costs for acting for the mortgagee (T 81).
38 Subsequently Mr McVittie received the documents signed by Michael but not by the plaintiff. The mortgage instrument, form of authority and undertaking and mortgagor's acknowledgement were witnessed by a solicitor, Sean Patrick Wilkins. Amazingly, Mr Wilkins witnessed the signature of the plaintiff's statutory declaration by Michael as attorney under power.
39 Loan funds from M & V Endurance were paid into the trust account of Shields Lawyers on 26 August 2005 and the net amount of the loan, $56,586, was paid out of the trust account to Action Fruit Supply on the same day. The mortgage was protected by lodgement of the caveat, but it was not registered.
40 As with the Conran Associates mortgage, the benefit of the transaction flowed to Action Fruit Supply and Michael, and the transaction caused detriment to the plaintiff. Again, there is no evidence to indicate whether the plaintiff was in fact aware of the transaction at any time up to its completion. According to Mr Rohanna, M & V Endurance received $3600 in interest payments with respect to the loan, the last payment being in January/February 2006. As at 25 June 2007, he said, $95,400 was outstanding.
The state of knowledge of the mortgagees at the time of their respective transactions
41 In the case of both mortgages, Mr McVittie, acting as solicitor for the mortgagee, prepared the bundle of security documents and examined them when they were returned, signed by Michael. Mr Foux, sole director of the mortgagee, reviewed the documents. It seems to me plain from the evidence of Mr Foux that he was the directing mind and will of Conran Associates in relation to this transaction. Therefore Conran Associates had actual knowledge of the matters of which Mr Foux was aware. It had imputed notice of the matters of which its lawyer, Mr McVittie, was aware (see Sargent v ASL Developments Ltd (1974) 131 CLR 634, at 649 per Stephen J, 658-9 per Mason J; Permanent Trustee Ltd v FAI General Ltd (2003) 214 CLR 514, at [87] per Gummow and Hayne JJ; Smits v Roach [2006] HCA 36, (2006) 228 ALR 262, at [47] per Gleeson CJ, Heydon and Crennan JJ).
42 Mr Rohanna was one of two directors of M & V Endurance but clearly he was the director who was handling this transaction for the company. In the circumstances, facts known by Mr Rohanna were within the actual knowledge of the company, having regard to general principles of attribution (see Ford's Principles of Corporations Law, Butterworths (looseleaf), [16.180]). The evidence does not establish that he reviewed the documents personally, but he acquired knowledge from Mr McVittie in various ways, as set out below. M & V Endurance had imputed knowledge of the matters of which their lawyer, Mr McVittie, was aware.
43 In each case there was nothing in the memorandum of mortgage itself to suggest any irregularity: the mortgagor was the registered proprietor of the Cherrybrook land and the instrument was executed by her attorney under a registered power of attorney. But other documents in the bundle made it plain that the loan money was to go to Action Fruit Supply and that the purpose of the loan was to assist with seasonal working capital for the business. The money was not to go to the registered proprietor, the plaintiff. Mr McVittie and Mr Foux were aware of the contents of the documents.
44 Mr McVittie was aware of the terms of the power of attorney, and read the document closely. He said he believed that clause 2 authorised Michael to enter into both mortgage transactions for the benefit of Spywing and himself. But then he said he misinterpreted clause 2 (T 89), and later he said he told Mr Foux that "I wasn't very clear about the use of the power of attorney but because it was used previously with Permanent Custodians that I presume the same type of transaction that it should be okay" (T 91). My conclusion is that Mr McVittie was unsure about the proper interpretation of the power of attorney and specifically, whether the instrument authorised Michael to mortgage his mother's property to secure a loan paid to Spywing, but he decided to take the risk of relying on the power of attorney because it had been used in the Permanent Custodians transaction.
45 In cross-examination Mr McVittie agreed that prior to completion of the Conran Associates mortgage loan transaction he was aware of the following facts:
· Michael and Sarina had mortgaged their Dundas property for $110,000 at an interest rate of 60% defaulting to 72% (T 50);
· Spywing was indebted to BankWest for $450,000 on one account, and about $147,000 on another account (T 53);
· Spywing was trading as Action Fruit Supply (T 53);
· Michael was the controlling person for Spywing (T 53);
· the plaintiff was Michael's mother (T 55);
· Michael was about 65 years old (T 56), and therefore his mother was likely to be elderly (T 91);
· as recorded in Mr Morgan's fax of 3 June, the borrower in the Conran Associates transaction was to be Michael and not the plaintiff (T 54), and the loan money was to be paid to Spywing, and it was needed in relation to fruit from the Northern Territory (T 55);
· the transaction was not for the benefit of the plaintiff and she would be made subject to substantial personal obligations (T 85-6);
· there was a degree of urgency in the provision of the funds (T 54);
· the plaintiff was the registered proprietor of the Cherrybrook property over which second mortgage security was to be given;
· in March 2003, the Cherrybrook property had been unencumbered (T 50);
· the appraisal value of the Cherrybrook property in October 2003 was $720,000 (T 60);
· the plaintiff appointed Michael her attorney under power of attorney dated 5 February 2003, and Mr McVittie observed the plaintiff's signature on copy of the power of attorney supplied to him, and regarded it as rather rudimentary, suggesting to him that the plaintiff was elderly and somewhat frail and had not learnt running writing in English (T 50);
· Michael intended to use the power of attorney to benefit Spywing in the Conran Associates and M & V Endurance transactions, just as he had in the Permanent Custodians transaction (T 85);
· the Cherrybrook property was subject to a mortgage made on 7 November 2003 in favour of Permanent Custodians for $150,000 upstamped to $780,000 and executed by Michael under the power of attorney, and there was a bank statement indicating that the current balance was a little over $400,000 (T 58);
· Mr Foux was concerned to ensure that the loan was secured over real property, and the only real property security being offered was a registered second mortgage over the Cherrybrook property (T 54);
· the plaintiff did not have a solicitor representing her with respect to the Conran Associates transaction (T 71);
· the form of mortgagor 's acknowledgement was executed by Michael rather than the plaintiff, and so there were no acknowledgements by the plaintiff that she had received the security documents and had been given the opportunity to read them and have them explain to her (T 74).
- I accept Mr McVittie's evidence on these matters.
46 Mr McVittie agreed that he was aware of these matters at the time of the M & V Endurance transaction (T 89), and said that he also realised that the position of Spywing had become more desperate than it had been in June 2005 (T 90, T 97). He said he explained the power of attorney position to Mr Foux for the purposes of the Conran Associates transaction (T 91). He said he told Mr Rohanna about the Conran Associates transaction, that it was for the benefit of Spywing's fruit business and that it had been executed under power of attorney (T 90). He said that both Mr Foux and Mr Rohanna knew that their loan funds would go to Spywing and that the loans would be secured over Michael's mother's property (T 90), and that the loan was not to the plaintiff and that she had no interest in Spywing (T 98-9). He said they both understood that the plaintiff was elderly with no capacity to earn any income (T 100). He agreed that he was aware before the M & V Endurance transaction that the plaintiff knew nothing about it and did not have a solicitor (T 92), and had not signed the statutory declaration and had not received copies of the security documents (T 93).
47 Mr Foux gave affidavit evidence that he understood he was lending money to the Spina family to support its business, and that he did not at any time speak to the plaintiff or Michael or Sarina. He said he had no knowledge about the plaintiff's circumstances. But in cross-examination he qualified that evidence. He agreed that he was aware that the loan money would go to Spywing, Michael's business, rather than to the Spina family, and that security would be given over the plaintiff's property (T 105, 107; cf T 110-111). He said he did not know that the plaintiff was not a director or shareholder of Spywing (T 105) but I do not accept that evidence, because he produced a company search showing the true position in Spywing in answer to a subpoena directed to Conran Associates (T 105). I prefer the evidence of Mr McVittie that he was aware that Mr Foux knew that the plaintiff had no interest in Spywing and that the loan was not made to her or for her benefit. It is relevant that Mr Foux agreed in cross-examination that there were no restrictions on his capacity to communicate with Mr McVittie, Conran Associates' solicitor, other than the pressure of time (T 103), and that he had communications with Mr McVittie before transaction was completed (T 104). My conclusion is that Mr Foux, and consequently Conran Associates, had actual knowledge that the mortgage loan transaction was for the benefit of Michael's business conducted by Spywing, and that the plaintiff was neither a director or shareholder of Spywing and did not benefit from the transaction.
48 Mr Foux gave evidence that he was "not aware" that the transaction would be entered into by Michael exercising the power of attorney granted by his mother (T 111) and that he could neither confirm nor deny that he had been told that the transaction would be under power of attorney (T 112). In the circumstances I prefer Mr McVittie's specific evidence that he told Mr Foux about the power of attorney (see esp at T 91). Mr Foux said if he had been told, he would have asked the question, "Is it valid?" That is consistent with Mr McVittie's evidence of the advice he gave Mr Foux. Given the content of that advice, Mr Foux in effect joined with Mr McVittie in taking a risk that a power of attorney or doubtful validity could be used because it had been used on an earlier occasion.
49 Mr Rohanna gave affidavit evidence that he understood that he was lending money to support the Spina family business as described in Mr Morgan's fax. He said he did not speak to the plaintiff or Michael or Sarina at any time, and that he had no knowledge of the plaintiff's circumstances. But as with Mr Foux, he qualified this evidence, in some respects, in cross-examination. He said he understood from what Mr Morgan and Mr Shields told him that the loan was for a fruit supply business that was in financial difficulty and needed funds on an urgent basis, and that Michael Spina was the person who had approached Mr Morgan (T 114). He said he was unaware of the name "Spywing Pty Ltd", but his attention was drawn to Mr Morgan's fax to him dated 19 August 2005, which identified that company, and he said he realised there was a company involved but had not gone into detail (T 114). He said he assumed that the funds would be sent to the company or to Michael Spina, who would be a director of the company (T 115). And yet he agreed that he had read Mr Morgan's fax closely at the time and understood each of the items referred to in it (T 116), and looked at it "very very carefully" as a proposal (T 118). He understood that the plaintiff was Michael's mother but he did not know where she lived (T 117).
50 Mr Rohanna claimed he was unsure whether the Cherrybrook property was owned by Michael or the plaintiff or both (T 116, T 120). That is inconsistent with the evidence of Mr McVittie (T 88-90). I prefer Mr McVittie's evidence. I find it implausible that Mr Rohanna, concerned as he was to obtain security for the loan, would not have sought to ascertain who the registered proprietor of the Cherrybrook property was, or to clarify the relationship between the plaintiff described in Mr Morgan's fax as the "borrower" and known by Mr Rohanna to be Michael's mother, and the business to be funded by the loan and identified in the fax as Michael's business.
51 Mr Rohanna said he left the matter of entering into agreements to Mr McVittie (T 117) and he agreed that he had the opportunity to speak to Mr McVittie about the transaction (T 114). He also said that he primarily worked with Mr Shields. At first he said Mr Shields was assisting him as a solicitor, and that both Mr Shields and Mr McVittie acted for him (T 118), but in re-examination he said that Mr Shields was acting as a mortgage broker (T 121).
The plaintiff's contentions
52 In his final submissions Mr Connor SC, for the plaintiff and Sarina, made the following submissions:
(1) the plaintiff is not indebted to Conran Associates or M & V Endurance, because the money paid to Spywing was not paid under the mortgages;
(2) Michael's purported entry into the two mortgage loan transactions was beyond the powers conferred on him by the power of attorney;
(3) the mortgage loan agreements are void for uncertainty of parties and terms;
(4) the agreements should be set aside on equitable grounds relating to undue influence or unconscionability;
(5) the agreements are unjust contracts within the meaning of the Contracts Review Act;
(6) the guarantee signed by Sarina is ineffective because there is no primary obligation, or alternatively it was obtained by undue influence or the circumstances are unconscionable, or it should be set aside under the Contracts Review Act.
53 I shall consider each contention in turn.
The terms of the mortgages
54 Both mortgages were executed on behalf of the mortgagor by Michael under the registered power of attorney, and were executed by Mr McVittie as solicitor for the mortgagee. Michael's signature on the Conran Associates mortgage was witnessed by Mr Morgan and the mortgage was stamped for a principal sum of $110,000 and dated 14 June 2006. In the case of the M & V Endurance mortgage, Michael's signature was witnessed by Mr Wilkins, solicitor, and the mortgage was stamped for a principal sum of $60,000 and dated 26 August 2005. In the case of both mortgages, the provisions of annexure A were said to be incorporated in the mortgage.
55 Annexure A is identical in each of the two mortgages, except for variable parts dealing with the identity of the mortgagee, the principal sum, the term of repayment and the interest rate. It described the plaintiff as "Mortgagor", and Michael and Sarina as "Borrower". It provided as follows:
- "The Mortgagor/Borrower hereby acknowledges receipt of the principal sum of $110,000 ('the principal sum') and in consideration of the advance of the principal sum by the Mortgagee to the Mortgagor/Borrower the Mortgagor/Borrower covenants with the Mortgagee that the provisions set out below hereto shall be deemed to be incorporated herein for the purpose of securing to the Mortgagee the payment of the principal sum and interest thereon and all other monies hereby secured (as herein defined) to the Mortgagee."
56 The covenants set out in Annexure A included a covenant by the "Mortgagor/Borrower" to pay the principal sum to the Mortgagee six months after the date of the advance, and "Mortgagor/Borrower" to pay interest as set out in the instrument.
57 The document also contained the following provision:
- "The Mortgagor/Borrower irrevocably authorises the Mortgagee to pay the principal sum to the solicitors for the Mortgagor/Borrower or in such manner as that firm may in writing direct."
The plaintiff's contention about lack of indebtednessThis may be compared with the terms of the authority and undertaking, which in both cases included an irrevocable authority and request to the mortgagee to pay the advance "to me/us or to our solicitor/s or as we or our solicitor/s shall direct either verbally or in writing".
58 In the First Cross-Claim (at para 4), Conran Associates pleads as follows:
- "By way of a mortgage dated 14 June 2005 ('Mortgage') the Cross Claimant agreed to loan $110,000 to the First Cross Defendant and the First Cross Defendant agreed to repay that amount plus interest by 13 December 2005".
59 For the plaintiff, Mr Connor SC sought to meet the allegation of indebtedness by the following reasoning. First, he submitted that the money lent by Conran Associates and M & V Endurance respectively was in fact paid to Spywing trading as Action Fruit Supply. That is correct, according to the evidence, but that fact does not mean that Spywing was the borrower of the money. Secondly, he submitted that in Annexure A of each mortgage, the plaintiff was named as "Mortgagor" and Michael and Sarina were named as "Borrower". That is also correct.
60 Thirdly, he submitted that the purported acknowledgement of receipt in Annexure A is of no assistance in establishing that the plaintiff received any funds from either lender. Annexure A to the mortgage contains an acknowledgement of receipt of the principal sum, the terms of which are set out above. The acknowledgement is by "the Mortgagor/Borrower". As Mr Connor SC submitted, the meaning of that expression is rather uncertain. It was not cleared up by Mr McVittie's evidence in cross-examination (at T 69, 70, 79). That does not mean, however, that the provision is incapable of construction, as Mr Connor SC also submitted. In my view the expression "Mortgagor/Borrower" conveys the idea that the various promises, covenants and acknowledgements by the Mortgagor/Borrower contained in Annexure A are made by both the Mortgagor and Borrower except to the extent that the particular provision is inappropriate for one of them, in which case it applies only to the other. The question is whether the acknowledgement of receipt is a provision applicable to both Mortgagor and Borrower or only to one of them, because it is inappropriate to the other. In my view it is not appropriate to regard the acknowledgement of receipt as applying to the Mortgagor in a case where the Mortgagor and the Borrower are different entities. In such a case the loan contract is, at least ordinarily, a contract between lender and borrower, with the mortgagor being bound by a collateral agreement. On balance, therefore, I agree with Mr Connor SC's third submission.
61 Fourth, Mr Connor SC submitted that the payment of the loan money to Skywing was not a payment under the mortgage. He relied on the passage (extracted above) which says that the Mortgagor/Borrower irrevocably authorises the Mortgagee to pay the principal sum to the solicitors for the Mortgagor/Borrower or in such manner as that firm may in writing direct. He submitted that, since there were no solicitors for either the Mortgagor or the Borrower in this case, the payment made by Mr McVittie to Spywing cannot, in the case of either mortgage, have been a payment pursuant to that provision.
62 In my view this submission is flawed. First, the clause upon which the plaintiff relied is, in its terms, an irrevocable authority but not a direction. It would not be inconsistent with the clause for the Borrower to direct the lender to pay someone other than the Borrower's solicitor. Secondly, in a case such as the present one, where the mortgage transaction is evidenced by a number of documents, the arrangements for payment of the loan money are to be ascertained, not by confining attention to the mortgage instrument itself, but by construing all of the documents together to ascertain the payment arrangements. When one takes this approach, one sees that the authority and undertaking document contains a different irrevocable authority and request, namely to pay the advance to the Borrower/Mortgagor or their solicitor or as they or their solicitor direct either verbally or in writing. The cheque direction makes specific provision for designation of the payee. In the case of both mortgages, payment was made in accordance with the cheque direction.
63 In my view, that leads to the conclusion that the payment was made pursuant to the mortgage (assuming, for the purposes of considering this submission, that the mortgage and all other documents were validly executed). Therefore the authorities upon which Mr Connor SC relied for the proposition that if no money is lent under a mortgage then the mortgage is completely void (Perpetual Trustees Ltd v TSAI [2004] NSWSC 745, at [21] per Young CJ in Eq; Re GM Industries Pty Ltd and the Companies Act (1980) ACLC 40-665 (Needham J)) do not apply.
(2) The power of attorney
64 Mr Connor SC submitted on behalf of the plaintiff that the power of attorney that she executed did not authorise Michael to enter into loan agreements and mortgages solely for the benefit of his business, and if it did, his exercise of that power constituted a fraud on the power or was otherwise unconscionable or unjust under the Contracts Review Act. There might be an issue as to whether the first part of this contention, the question of scope of the power of attorney, was properly pleaded in the Amended Statement of Claim, although the matter was squarely raised in para 19 of the plaintiff's Outline of Submissions dated 2 April 2008. In his final submissions, Mr Menadue, counsel for the defendants, noted correctly that it was difficult to ascertain from the Amended Statement of Claim the true basis upon which the plaintiff sought to have the mortgages set aside, but he did not contend that the plaintiff's case on construction of the power of attorney was outside the pleaded case. Instead, he sought to meet that case on its merits.
65 Mr Menadue emphasised, correctly, that the plaintiff did not seek to make out a case that there was anything improper about the manner in which the power of attorney was granted. The issues raised by the plaintiff were whether the exercise of the power of attorney in the loan and mortgage transactions with Conran Associates and M & V Endurance was within the terms of the power, properly construed, and if so, whether there was any vitiating factors such as undue influence or unconscionability or injustice in the mortgage transactions.
66 The plaintiff executed the general power of attorney in favour of her son Michael, by instrument dated 5 February 2003. Her signature, written in spidery, uneven, printed capital letters, was witnessed by a solicitor who gave a certificate under s 163F(2) of the Conveyancing Act 1919 (NSW), that he had explained the effect of the general power of attorney to the grantor before it was executed.
67 Part 1 of the instrument was in the following terms:
- "THIS POWER OF ATTORNEY is made on the fifth day of February 2003 by Angelina Spina of 153 Shepherds Drive, Cherrybrook. [The date and the name and address of the grantor were written into the printed form by hand.]
1. I appoint Michele [sic] Spina of 43 Bain Place, Dundas [name and address written in by hand] and [blank] of [blank] to be my attorney(s) (where more than one jointly and/or severally) to exercise, subject to any conditions and limitations specified in Part 2 of this Instrument, the authority conferred on him/her/them by Section 163B of the Conveyancing Act, 1919, to do on my behalf anything I may lawfully authorise an attorney to do.
*2. In the exercise of the authority conferred on him/her/them by Section 163B of the Conveyancing Act, 1919, my attorney(s) is/are authorised to execute an assurance or other document, or do any other act, whereby a benefit is conferred on him/her/them.
*3 This general power of attorney is given with the intention that it will continue to be effective notwithstanding that after its execution I suffer loss of capacity through unsoundness of mind."
68 The asterisk before clause 2 led to a note that said, "Clause 2 or 3, or clauses 2 and 3, may be omitted". But neither clause 2 nor clause 3 was struck out. The asterisk next to clause 3 said, "If this clause is to apply then the certificate over the page will need to be completed". The attesting solicitor completed the certificate in the present case, certifying that he explained the effect of the general power of attorney to the grantor before it was executed. Part 2 of the instrument, headed "Conditions and Limitations", was ruled through.
69 The evidence includes a statutory declaration by Michael sworn on 8 April 2003, to the effect that he was one and the same person as the person referred to as "Michele Spina" in the power of attorney. The power of attorney was registered as Book 4377 No 245.
70 On 5 February 2003, when the power of attorney was executed by the plaintiff, such an instrument was governed by the Conveyancing Act 1919 (NSW), Pt 16 Div 1 (ss 158-163H) and Schedule 7. The Powers of Attorney Act 2003 (NSW), which commenced on 16 February 2004, changed the law in significant ways. However, by s 6(3) of the new Act, the provisions of Parts 16 and Schedule 7 of the Conveyancing Act as in force immediately before the commencement of the new Act continue to apply to a power of attorney created by an instrument executed before the commencement. Part 5 of the Powers of Attorney Act sets up a procedure for the review of powers of attorney, and according to s 6(5) that procedure extends to any power of attorney created by an instrument executed before the commencement of the Act. But the plaintiff in the present case has not sought a review of the power of attorney under those provisions.
71 The power of attorney in the present case was exactly in the form of the general power of attorney in Schedule 7 to the Conveyancing Act, except for a variation allowing for the appointment of more than one attorney. Section 163B of the Conveyancing Act, as continued by the Powers of Attorney Act, provided as follows:
- "163B Power conferred by prescribed form of instrument
(1) Subject to this section, an instrument (whether or not under seal) in or to the effect of the form in Schedule 7 confers on the attorney thereby appointed authority to do on behalf of the person executing the instrument anything the person executing the instrument may lawfully authorise an attorney to do.
(2) The authority conferred by an instrument referred to in subsection (1) does not include:
(a) authority to exercise or perform any power, authority, duty or function as a trustee conferred or imposed on the person executing the instrument, or
(b) unless it is expressly conferred by the instrument - authority to execute an assurance or other document, or do any other act, as a result of which a benefit would be conferred on the attorney appointed by the instrument.
(3) Where an instrument referred to in subsection (1) specifies any conditions or limitations to which the authority conferred by the instrument is to be subject, the authority is so conferred subject to compliance with those conditions or limitations."
72 Counsel have been unable to refer me to any authorities on the proper construction of the Schedule 7 general power of attorney in circumstances such as arise in the present case. Most of the authorities deal with powers of attorney that do not include clause 2. My task is, therefore, to construe the provisions of the power of attorney and s 163B in light of the general principles of construction of instruments and statutory provisions.
73 If my task were confined to construing clause 2 of the power of attorney in isolation from clause 1 and s 163B, I would hold that clause 2 did not authorise Michael to execute mortgages in favour of Conran Associates and M & V Endurance to secure loans used for the purposes of the Action Fruit Supply business. Clause 2 authorises the attorney to execute an assurance or other document, or do any other act, "whereby a benefit is conferred on my attorney". Those words seem to envisage conduct on the part of the attorney undertaken in the interests of the grantor, which also confers a benefit on the attorney. Senior counsel for the plaintiff gave as an example, in the family context, the acquisition of real property for the grantor coupled with a right of occupation by the attorney. Another example would be where the attorney is the grantor's solicitor, and enters into a transaction on the grantor's behalf which makes provision for the attorney to charge professional fees. In the absence of a provision such as clause 2, general principles of the law of agency would have the result that the agent would not be authorised by a general conferral authority to insert into a contract negotiated on the principal's behalf a clause which benefits only the agent (Hodges v Montgomery [1916] VLR 90; G E Dal Pont, Law of Agency (Butterworths, Australia, 2001), para [7.35]).
74 It is quite a different matter for the attorney to purport to use a general power of attorney to enter into a transaction that is solely for the benefit of the attorney and confers no benefit whatever on the grantor, or even (as in the present case) causes the grantor detriment. One would have thought that if such a transaction were to be authorised, clearer language than employed in clause 2 would be needed. Instead of authorising the execution of an assurance or other document or the doing of an act whereby "a benefit" is conferred on the attorney, the clause might have authorised the execution of an assurance or other document or the doing of an act solely for the benefit of the attorney, whether or not also to the detriment of the grantor. The use of the words "a benefit" suggests a more limited scope for clause 2.
75 However, my task is not to construe clause 2 in isolation, but to give effect to it in its context, which includes clause 1, and also the statutory provisions that govern the effect of such a power of attorney.
76 Clause 1 purports to confer on the attorney the authority to do on the grantor's behalf anything he or she may lawfully authorise an attorney to do. There is no legal impediment to a grantor conferring authority on another person to mortgage the grantor's property solely for that other person's benefit. Obviously there may well be issues, on the facts, as to whether the grantor properly understands what he or she is doing and whether the grantor is subject to undue influence or pressure, or the circumstances are unconscionable. A person authorised to act in the affairs of another may be a fiduciary, but the terms of such an appointment would exclude the fiduciary duty and permit the person to act solely in his or her own interests, provided that the appointment was made freely and was properly understood by the grantor. There is no bright-line proposition of law saying that a grantor who wishes to engage in such an act of benevolence to another person is prevented from doing so. Therefore using a grant of general authority to obtain a loan secured on the grantor's property, solely for the benefit of the person to whom the authority is given, is something the grantor may lawfully authorise that person to do.
77 However clause 1 does not confer on the attorney the authority to do anything the grantor may lawfully authorise another person to do. It only gives the attorney authority to act "on [the grantor's] behalf", and it only authorises things that the grantor may lawfully authorise an attorney to do. These words are very important. They make it plain that the person to whom the authority is given is limited to acting in an agency capacity, subject to the constraints of a fiduciary position. In particular, the person receiving the authority, being a fiduciary, is subject to the obligation to act on the grantor's behalf in the grantor's interests. By no conceivable stretch of the English language could the use of a general power of attorney for the execution of a mortgage over the grantor's land to secure a borrowing solely for the benefit of the attorney be regarded as a use "on behalf of" the grantor, or as something that "an attorney" might do. Therefore clause 1 is not an impediment to my adopting the construction that I would be inclined to take of clause 2 if I considered it in isolation; on the contrary, clause 1 reinforces that construction.
78 Section 163B provides further reinforcement of that conclusion. It was introduced by the Conveyancing (Powers of Attorney) Amendment Act 1983 (NSW). I have not been referred to any explanatory material for that legislative amendment. I infer, however, that the purpose of s 163B is to make it plain that a power conferred in the general language of Schedule 7 is to be construed as having the general effect that the words convey.
79 Prior to the enactment of that provision, courts construed powers of attorney much in the way that they construed the memorandum of association of an incorporated company. General language was read down ejusdem generis, leaving drafters with little option but to equip the company with a great many specific powers in order to avoid any such construction (see B Collier and S Lindsay, Powers of Attorney in Australia and New Zealand (1992), p 7-8). Similarly powers of attorney included substantial lists of specific powers. The purpose of the 1983 amendments (like approximately contemporaneous amendments to the Companies Code) appears to have been to eliminate the necessity for long lists of powers by giving statutory reinforcement to a general form of words.
80 Prior to the legislative amendments, courts adopted a particularly strict approach to the construction of a power that was alleged to permit the attorney to obtain a personal benefit. In Reckitt v Barnett Pembroke and Slater Ltd [1928] 2 KB 244, at 248, Russell J said:
- "The primary object of a power of attorney is to enable the attorney to act in the management of his principal's affairs. An attorney cannot, in the absence of a clear power so to do, make presents to himself or to others of his principal's property."
81 In Tobin v Broadbent (1947) 75 CLR 378, the principal question was whether some widely drafted powers of attorney conferred authority on the attorney, Hodgetts, to pledge the grantor's share certificates as security for a personal loan to the attorney. It was held that no such authority was conferred. After noting the breadth of the language of the powers of attorney, Dixon J said (at 401):
- "But the cardinal fact of the transaction which it is sought to bring within the power is that the loan was made to Hodgetts, the donee of the power, and not to either of the Tobins, the principals. Hodgetts was the borrower, the loan was for himself, he did not contract it is an agent but he gave the lender his principals' property as security. The question is, therefore, whether the power of attorney extended to authorising Hodgetts to give a security over his constituents' shares for his own debt, not simply whether it authorised him to give a security. He cannot sever the giving of the security from the indebtedness secured. A transaction of security is unintelligible without identification of the obligation secured. This is not the case of an agent mis-applying moneys borrowed in his principal's name on the security of his assets pursuant to an authority covering the borrowing of money on the principal's behalf. If the transaction is ostensibly on the principal's behalf and is of a description that falls within the authority, it is nothing to the point that the agent's purpose was to act for his own benefit and to defraud the principal, that is, unless the opposite party to the transaction had notice.
"But here the transaction was the attorney's own, both in form and substance, and the only incident of it concerning the constituents was when the latter's property was drawn in as a support for the loan. Prima facie, a power, however widely its general words may be expressed, should not be construed as authorising the attorney to deal with the property of his principal for the attorney's own benefit. Something more specific and quite unambiguous is needed to justify such an interpretation. [His Honour cited Russell J's observations in Reckitt v Barnett Pembroke and Slater Ltd , quoted above]. In my opinion, the words of the powers of attorney do not in themselves suffice to confer authority upon Hodgetts to secure a borrowing of his own by a deposit of the plaintiffs' script. Such a transaction is in itself beyond the limits of the power."
82 It seems to me unlikely that the legislature would have intended to overturn this strongly expressed and persuasive approach to the interpretation of powers of attorney that are alleged to permit benefits to be conferred on the attorney. On its proper construction, s 163B does not purport to do so. Subsection (1) says that the attorney has the authority to do "on behalf of the person executing the instrument" anything that the person may lawfully authorise an attorney to do. That language echoes the observation of Russell J that the primary object of a power of attorney is to enable the attorney to act in the management of his principal's affairs. It also reflects the observation of Dixon J, distinguishing the case before him from a case where security is granted pursuant to an authority covering the borrowing of money on the principal's behalf. In my view the language of subsection (1) preserves the reasoning of the cases, rather than overriding it. Therefore subsection (1) authorises the use of the power within the scope of the attorney's fiduciary agency, but it does not authorise the power to be used inconsistently with the fiduciary duty.
83 Then subsection (2) makes it expressly clear that the general authority conferred by subsection (1) does not extend to action that results in a benefit for the attorney, unless the authority to do so as expressly conferred by the instrument. That is, again, consistent with Dixon J's reasoning. Subsection (2) permits the power of attorney, by express language, to authorise acts that result in a benefit to the attorney, but it does not permit the power of attorney to abrogate the fiduciary limitation implied by subsection (1).
84 My conclusion is that the plaintiff's power of attorney did not confer express actual authority on Michael to execute the mortgage and other supporting documents for the Conran Associates loan and the M & V Endurance loan.
85 Nor did the power of attorney or any of the circumstances surrounding it have the effect of clothing Michael with ostensible authority to enter into those transactions. The limitations on his authority as attorney were evident on the face of the power of attorney, when properly construed, and there is no evidence to suggest that the plaintiff did anything to hold him out as having any authority not conferred by the power of attorney. Conversely, there is evidence that the agent of both mortgagees, Mr McVittie, received the text of the power of attorney before the transactions were completed and was consequently in a position to read and construe the instrument and ascertain its scope. He was also aware that the purpose of each loan was to support the Action Fruit Supply business in which Michael but not the plaintiff was interested, and that the security for the loan was over the plaintiff's property.
86 This case is distinguishable from Hambro v Burnand [1904] 2 KB 10. There the Master the Rolls said (at 20):
- "It would be impossible, as it seems to me, for the business of a mercantile community to be carried on, if a person dealing with an agent was bound to go behind the authority of the agent in each case, and enquire whether his motives did or did not involve the application of the authority for his own private purposes".
87 The present case is also distinguishable from Jorss v United Dominions Corporation Ltd [1981] Lost & NZ Conv Rep 123. Although the facts of that case are not fully reported, it appears that the mortgagee was not on notice that the attorney, the son of the grantor, would receive the benefit of loans secured over the grantor's land by mortgages executed under power of attorney. Here it was plain on the face of the documents that the loans were for the purpose of the Michael's business and Mr McVittie, agent for the mortgagees, gave evidence that he knew that the loans were not for the benefit of the plaintiff.
88 My conclusion is that Michael's signature on the two mortgages and associated documents did not have the effect of binding the plaintiff to those transactions. My conclusion derives support from Sweeney v Howard [2007] NSWSC 852. The power of attorney in that case was not on all fours with the instrument in this case, because there the clause equivalent to the present clause 2 was incomplete, and also Part 2 - Conditions and Limitations was filled in so as to limit the general conferral of authority in Part 1. Nevertheless Windeyer J took the view that a power of attorney executed under s 163B did not confer actual authority on the attorney to pay his own debt with his principal's cheque (at [56]).
89 In final submissions, Mr Connor SC submitted that if the power of attorney literally authorised Michael to enter into the mortgage loan transactions, nevertheless his doing so constituted an abuse of the power. He referred to Vatcher v Paull [1915] AC 372, a leading authority on the doctrine of fraud on a power. In this context "fraud" does not mean dishonesty, but "merely means that the power has been exercised for a purpose, or l with an intention, beyond the scope of or not justified by the instrument creating the power" (at 378 per Lord Parker).
90 I do not accept Mr Connor SC's submission on this point. Of course, it strictly does not arise for determination because I have found in the plaintiff's favour on the question of construction. If, contrary to my view, the power of attorney authorised Michael to enter into the transactions, it would be impossible on the present facts to contend that he did so for an improper purpose. If the power permitted him to grant security over his mother's property for a borrowing for his business, how can it have been an improper purpose for him to do just that?
Effect of registration of Conran Associates mortgage
91 Mr Menadue, counsel for the defendants, submitted that even if I found that the execution of the mortgage was not authorised by the power of attorney, nevertheless Conran Associates is protected by indefeasibility of title. He contended that indefeasibility of title protected not only be proprietary interest of the registered mortgagee, but also operated to preserve the personal covenant of the mortgagor for payment of principal and interest. For the latter proposition he relied on PT Ltd v Maradona Pty Ltd (1991) 25 NSWLR 643, at 679, 681 per Giles J; Small v Gray [2004] NSWSC 97 at [75] per McDougall J.
92 Section 41(1) of the Real Property Act 1900 (NSW) provides, in part, that upon registration of a dealing, "the estate or interest specified in such dealing shall pass, or as the case may be the land shall become liable as security in manner and subject to the covenants, conditions and contingencies set forth in specified in such dealing …". Section 42(1) provides in part:
- "Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates or interests that are not so recorded …".
93 In Story v Advance Australia Bank Ltd (1993) 31 NSWLR 722, Gleeson CJ said (at 736):
- "It is now settled that, subject to certain qualifications, the indefeasibility of title conferred by these provisions, even in the case of registration of a void instrument, takes effect immediately upon registration …. Subject to the same qualifications, the mortgagee under a registered mortgage obtains an indefeasible title upon registration even though the signature of the mortgagor has been forged …".
Gleeson CJ noted two qualifications, one being where the mortgagee, who has obtained registration of a forged instrument, has been guilty of or privy to fraud. The other qualification allows personal equities to operate against a registered proprietor.These propositions produce the consequence that, unless one of the qualifications applies, an instrument which is a nullity at common law is given legal effect by statute (see Mercantile Mutual Life Insurance Co Ltd v Gosper (1991) 25 NSWLR 32, at 43-4 per Mahoney JA). In the present case (absent any qualifying proposition), although the mortgage was not validly executed on behalf of the mortgagor, upon registration Conran Associates held the mortgagee's interest as recorded in the register.
94 In the present case it cannot be said that either mortgagee has been guilty or privy to fraud. Mr McVittie, their agent, was aware of circumstances showing that the mortgage loans would not in either case be for the benefit of the plaintiff and that she would be subject to substantial obligations to her detriment. He recognized that in those circumstances Michael's use of the power of attorney was an abuse of the power, in a moral sense (T 101). But he decided that, though doubtful, the use of the power of attorney was probably acceptable because it had been accepted in the Permanent Custodians mortgage. There was obviously an error of judgment in this reasoning, even unconscientious conduct (for reasons explained elsewhere), but in my view there was no fraud for the purposes of s 42. The more difficult issue is whether the conduct of the mortgagee and its agent, Mr McVittie, has given rise to an in personam action by the plaintiff against Conran Associates.
95 Mr Menadue placed particular reliance on the judgment of Hayne J in Vassos v State Bank of South Australia [1992] V Conv R para 54-443. In that case the signature of the mortgagor to an instrument of mortgage had been forged and the mortgagee accepted the mortgage without knowledge of the forgery. Hayne J said (at 65-180-65-181):
- "The bare fact that the party has not assented to the transaction recorded in an instrument registered under the Torrens System legislation does not, in my opinion, give that person a right enforceable by in personam action to have the transaction reversed. For my part I consider it is clear that more than the bare fact of forgery (and thus an absence of assent) must be shown to found any in personam action of the kind spoken of in Frazer v Walker [[1967] 1 AC 569] and subsequent cases …. In the present case … it may well be that the bank did not act without neglect but there is in my view no material which would show that the bank acted unconscionably. There was no misrepresentation by it, no misuse of power, no improper attempt to rely upon its legal rights, no knowledge of wrongdoing by any other party. It obtained a mortgage, apparently regular on its face but which was in fact forged. Even if by making reasonable enquiries the bank could have discovered the fact of the forgery I do not consider that that fact alone renders its conduct unconscionable. I do not consider that the plaintiffs have any in personam right against the bank; all they have shown is the mere fact of forgery of the instrument."
96 This passage was approved and applied by Gleeson CJ in Story v Advance Bank, at 736-7. On the other hand, in Mercantile Mutual Life Insurance Co Ltd v Gosper (1991) 25 NSWLR 32, the Court Appeal of New South Wales upheld a finding of personal equity where the mortgagor's signature to a variation of mortgage increasing the amount of the advance was forged and the variation was then registered with the assistance of the mortgagee, who produced the certificate of title and the previous mortgage to the Land Titles Office. The mortgagee held the mortgagor's certificate of title solely for the purposes of the mortgage and was under an obligation not to permit it to be used for any other purpose, and would not be allowed to retain a benefit secured by an act that constituted a breach of its obligations (at 49 per Mahoney JA). It had acted without authority in allowing the certificate of title to be used for registration of the forged instrument, giving the mortgagor a personal equity entitling her to set aside the forged variation of mortgage.
97 In Gosper, Mahoney JA explained the concept of personal equity in some detail, noting that there has been no comprehensive definition of "personal" equity for these purposes, but that two suggestions about the content of "personal" equities were that the interest must not be inconsistent with the terms or policy of the legislation, and that "personal" equities arise only from the acts of the holder of the interest (at 45). In Vassos, Hayne J referred to these observations and continued (at 65, 181): "However whatever the limits may be on such 'personal' equities the very language used to describe the right and the reference to the remedies being 'in personam remedies' is a clear reference to the remedies being available in circumstances where equity would act, i.e., in cases which equity would classify as unconscionable or unconscientious." In Grgic v Australia & New Zealand Banking Group Ltd (1994) 33 NSWLR 202, at 222, Powell JA (with whom Meagher and Handley JJA agreed) referred to Mahoney JA's observations in Gosper and expressed the opinion that the expressions "personal equity" and "right in personam" encompass only known legal causes of action or equitable causes of action, extending to conduct not only of the registered proprietor but also of those for whose conduct he is responsible, including conduct which might antedate or postdate the registration of the dealing which it is sought to have removed the register.
98 It follows that if the holder of the registered interest has engaged in unconscionable or unconscientious conduct "personally" (including conduct through an agent) which gives rise to a cause of action in equity, then that equity may be asserted against the registered interest holder. For reasons set out below, my view is that Conran Associates has engaged in unconscionable conduct giving the plaintiff a remedy in equity. That conduct gives the plaintiff a personal equity permitting her to set the Conran Associates mortgage aside notwithstanding that it has been registered.
(3) Alleged uncertainty of terms and parties
99 In the course of dealing with the plaintiff's submission that she is not indebted under the mortgages, I have considered, and rejected, the plaintiff's contention that the mortgages are void for uncertainty because of the use of the expression "Mortgagor/Borrower" in Annexure A. What remains to be considered is the contention that the Conran Associates mortgage is void because of the absence of a necessary party.
100 In the Conran Associates mortgage, but not in the M & V Endurance mortgage, Sarina Spina is identified as one of the Borrowers in Annexure A. However, she did not sign the mortgage or any of the other mortgage documentation, although she signed the guarantee. Mr Connor SC submitted on behalf of the plaintiff that it was evident from the letter of approval, which stipulated that it was to be signed by every person who was a party to any of the security documents, that it was intended that all parties including Sarina should execute the mortgage. Since she did not do so, he said, the Conran Associates loan agreement/mortgage was void for uncertainty of parties.
101 In Small v Gray, one of the signatures to a mortgage had been forged. It was submitted that all parties had contemplated that there would be no contract until everyone had executed the mortgage, and since that had not occurred, the case was governed by the principle enunciated by Young J in Katsaitis v Commonwealth Bank of Australia (1987) 5 BPR 12,049. According to that principle (at 12,051), "where a document is expressed to be one to be made by more than one person of the one part, such document is subject to a precondition that it will not come into operation until all have signed, if the effect of it coming into operation earlier would be to impose on those who have signed a greater liability that it was ever intended that they should bear." McDougall J said that an answer to this submission lay in s 36(11) of the Real Property Act, according to which a dealing upon registration has "the effect of a deed duly executed by the parties who signed it". The effect of registration was to make the mortgage effective as a deed between the parties who signed it notwithstanding that the intention of one of them was not to be bound unless and until the document was signed by another person. I respectfully agree with this reasoning, and therefore I reject Mr Connor SC's submission.
(4) The plaintiff's contentions based on undue influence and unconscionability
102 Mr Connor SC contended that the loans/mortgage agreements with Conran Associates and M & V Endurance are each void and liable to be set aside in equity, on the grounds that they:
· were obtained by undue influence;
· were unconscionable bargains;
· gave rise to legal rights upon which it would be unconscionable for the mortgagees to rely.
103 In my opinion there is no factual foundation for a case of undue influence here. The equitable doctrine of undue influence depends upon the existence of a relationship that has arisen prior to the impugned transaction: either the relationship is one of the established categories of relationships of influence (such as solicitor and client or parent and child), or it is a relationship which, on the facts, is one of domination on the one part and subservience on the other (see generally, Meagher, Gummow and Lehane's Equity Doctrines and Remedies (4th edn, 2002, by RP Meagher, JD Heydon and M. Leeming), paras [15-055]ff; [15-105]ff). It is not contended that the power of attorney itself was procured by undue influence. The allegation is that the mortgage loan agreements were obtained by undue influence. But there was no prior relationship at all between the respective mortgagees and the plaintiff, and no substantial relationship between them and Michael. The facts are far too thin to support any allegation that there was such a relationship between Mr Morgan and Michael. Therefore the submission based on undue influence must fail.
104 As to the case based on unconscionability, in Turner v Windever [2005] NSWCA 73 Giles JA (with whom Bryson JA agreed) adopted the following statement of principle from my judgment at first instance (at [2]):
- "105. ... a case of unconscionable dealing involves the following:
(a) the weaker party must, at the time of entry into the transaction, suffer from a special disadvantage vis-a-vis the stronger party;
(b) the special disadvantage must seriously affect the weaker party's capacity to judge or protect his or her own interests;
(c) the stronger party must know of the special disadvantage (or know of facts which would raise the possibility in the mind of any reasonable person);
(d) that party must take advantage of the opportunity presented by the disadvantage; and
(e) the taking of advantage must have been unconscientious.
106. I would only add that, as cases such as Blomley v Ryan [(1956) 99 CLR 362] show, once ingredients (a), (b) and (c) are established, and the improvidence of the transaction is shown, the plaintiff's task is made easier by an equitable presumption to the effect that the improvident transaction was a consequence of the special disadvantage, and that the defendant has unconscientiously taken advantage of the opportunity presented by the disadvantage."
105 More recently the Court of Appeal of New South Wales has made it plain that a transaction may not be set aside on the basis of unconscionable conduct merely on the ground of some general notion of inequality of bargaining power (Australia & New Zealand Banking Group Ltd v Karam (2005) 64 NSWLR 149 at 167, 173 (Beazley, Ipp and Basten JJA).
106 Mr Connor SC sought to establish the factual case for the application of the equitable principle by relying on the following propositions, all of which have, in my view, been proven by the evidence:
- (i) the plaintiff's age, 91 years;
(ii) the plaintiff's history, of living in the Cherrybrook property until September 2002 and then moving in with Michael and Sarina at Dundas, and then in March 2003 entering into a nursing home;
(iii) the fact that the Cherrybrook property was unencumbered until March 2003, as Mr McVittie knew;
(iv) the extremely high rate of interest in Michael and Sarina's August 2003 mortgage of the Dundas property to Across Australia Finance, of which Mr McVittie was aware before the Conran Associates transaction was completed;
(v) the real estate appraisal of the Cherrybrook property in October 2003 at $720,000;
(vi) the mortgage of the Cherrybrook property in November 2003 to Permanent Custodians, executed by Michael under the power of attorney, for an advance to Spywing, the balance outstanding being about $400,000 in June 2005, to the knowledge of Mr McVittie;
(vii) the absence of evidence from Mr Shields, who had a prominent role in the transaction and was available to be called;
(viii) Mr McVittie's comprehensive knowledge of the circumstances of the transactions, summarised in detail above;
107 Mr Connor SC submitted that the transactions were wholly improvident ones from the plaintiff's perspective. That, in my view, is plain. They conferred no benefit on her and imposed onerous obligations.
108 In my view the facts establish that at the time of the two mortgage loan transactions the plaintiff suffered from a special disadvantage vis-a-vis the mortgagees, which would have seriously affected her capacity to judge and protect her own interests. The disadvantage arose out of her age, lack of mental acuity, the fact that she was confined to her nursing home room by virtue of her injuries, and her inability to read and write English or even to converse in English except in a rudimentary way. The special disadvantage can be tested by asking whether the equitable principle would have permitted the mortgagees to enter into these transactions if they were dealing directly with her, without taking meticulous precautions that would include ensuring that she had competent independent legal advice. Plainly the answer is that the transactions would have been void in equity in those circumstances. Thus, ingredients (a) and (b) of the case of unconscionable dealing are satisfied.
109 Ingredient (c) is of crucial importance here. To take a hypothetical case, a mortgagee who relies on a power of attorney which on its face authorises the transaction is not required to enquire to ascertain whether the mortgagor who has granted the power is old or senile or able to read and write. In such a case, the existence of a special disadvantage is of no consequence because of the absence of knowledge of the mortgagee. In general terms, that is the kind of case considered by Hayne J in his observations (quoted above) from the Vassos case. But the equitable doctrine applies, according to the formulation quoted above, where the stronger party, though not knowing of the special disadvantage, knows of facts which would raise that possibility in the mind a reasonable person. Here, the relevant knowledge is the knowledge of Mr McVittie, imputed to his clients, as well as the more limited knowledge possessed by Mr Foux and Mr Rohanna respectively.
110 None of them knew that the plaintiff's mental powers were declining, or that she could not read and write or converse adequately in English, or that she was confined by injuries to her nursing house room. They did not know her at all, and did not know where she lived. But Mr McVittie knew that she was an old woman, who had lived at the Cherrybrook property until 2003 without a mortgage, and that Michael was her son. He knew that Michael and Sarina were under financial pressure having regard to the extreme interest and repayment terms of the mortgage they had granted over the Dundas property, and that Michael's business was heavily indebted and in urgent need of further funds. He knew that Michael had his mother's power of attorney which he had used to obtain a business loan in the Perpetual Custodians transaction, although Mr McVittie regarded it as doubtful whether the power of attorney permitted Michael to do so. He knew that Michael was using the power of attorney again for each of the two mortgage loan transactions. He knew that the transactions would not confer any benefit on the plaintiff and would cause her detriment by imposing onerous payment obligations on her. He knew that she had no solicitor and no independent advice in respect of the transactions. Therefore knew that the transactions were highly improvident from her point of view (compare Tyson v Commonwealth Bank of Australia, Supreme Court of New South Wales, unreported, Giles J, 13 December 1989, BC8901343 at BC page 40). In my opinion knowledge of those matters, in the context of the other matters that I have listed above, would have raised not just a possibility but a substantial probability in the mind of any reasonable person that factors constituting special disadvantage were present.
111 Those findings lead to a presumption that the two mortgage loans, being improvident transactions, were made in consequence of the plaintiff's special disadvantage, and that the mortgagees unconscientiously took advantage of the opportunity presented by her disadvantage. In my opinion the facts do not rebut those presumptions, and therefore ingredients (d) and (e) are established in respect of both mortgages. In this case the unconscientious taking advantage occurred on the part of Mr McVittie when, knowing what he did, he allowed the transactions to go forward to the detriment of the plaintiff. In the circumstances, it was incumbent upon him, in his capacity as agent for the mortgagees, to make further enquiries to ensure that the plaintiff understood the transactions and had received independent legal advice about them. He failed to do so.
(5) The Contracts Review Act
112 Section 7(1) of the Contracts Review Act 1980 (NSW) provides as follows:
- " Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:
(a) it may decide to refuse to enforce any or all of the provisions of the contract,
(b) it may make an order declaring the contract void, in whole or in part,
(c) it may make an order varying, in whole or in part, any provision of the contract,
(d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that:
(i) varies, or has the effect of varying, the provisions of the land instrument, or
(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument."
113 The word "unjust" is defined in s 4(1) to include unconscionable, harsh or oppressive.
114 The case based on the Contracts Review Act was not fully developed in argument, and in the circumstances it is unnecessary to do so here. In my opinion the reasoning that has led me to the conclusion that the mortgages and associated documentation were unconscionable dealings from the point of view of the mortgagees also leads to the conclusion that the mortgage/loan contracts were unjust in the circumstances relating to them at the time when they were respectively made. In my opinion the appropriate way of avoiding as far as practicable the unjust consequences of those transactions to the plaintiff is to set them aside.
(6) The validity and enforceability of the guarantee by Sarina
115 Since, in my view, the plaintiff is under no obligation under the Conran Associates loan, there is no obligation the performance of which is guaranteed by the instrument of guarantee signed by Sarina on 14 June 2005.
116 Mr Connor SC submitted, in the alternative, that the guarantee is void or liable to be set aside in equity on the ground that it was obtained by undue influence, and/or that it would be unconscionable for Conran Associates to rely on its alleged rights under that instrument. He made a further alternative submission, that the guarantee is an unjust contract and should be set aside under the Contracts Review Act.
117 Before dealing with these submissions, it is necessary to address some factual issues surrounding the execution of the guarantee. In her affidavit made on 4 June 2007, Sarina said that Michael did not talk to her about the Action Fruit Supply business, and if ever she asked about it, he would tell her he wanted to leave business at work and did not want to talk about it at home. However, she said Michael frequently asked her to sign business documents at home, and she always did as requested. She said that in about the middle of 2005 Michael was leaving for work one morning and asked her to sign a document, and she did so. She said no one else was present and in particular, she has never met Mr McVittie. She said she did not take any particular note of the document, and saw no point in asking Michael about it, in view of his general attitude to discussing business at home.
118 Her affidavit continued:
- "56. I now recognise that document as the Guarantee which is annexed and marked 'F' (i.e. the Conran guarantee). At the time I signed this document I thought I was probably taking on an obligation for some debt of the business but did not know any more. I had no idea how much the debt was and generally what it was about.
57. All I thought at the time was that Michael obviously needed me to sign the document to keep the business going and therefore I signed it. I did not see the point in querying what the Guarantee was for, or not signing it, as I had signed so many documents in the past and did not think there was any particular reason to change that practice then. Nor did I see any practical alternative to signing the document as I effectively depended on Michael for support."
119 Sarina's evidence about her signing of the guarantee was in conflict with the evidence of Mr McVittie. He said he took the document to Michael and Sarina's home in Dundas (which, he said, was near his own residence) on the evening of 14 June 2005, after making it clear to Mr Foux that he would witness the document but he would not advise Mr and Mrs Spina because he was acting for the lender and not for them. Mr McVittie's evidence was that Michael and Sarina signed the guarantee at their dining room table and he witnessed their signatures. In cross-examination Mr McVittie agreed that he was aware that Sarina did not have any legal advice with respect to the guarantee (T 94), that he was unaware whether Sarina knew that there was a mortgage transaction in progress (T 95), and that he had no basis for assuming that Sarina understood the Conran mortgage documents or the guarantee (T 96). He said he was aware by making company searches that Sarina was a director but not a shareholder of Spywing (T 97).
120 Sarina provided a second affidavit, made on 21 August 2007, in response to Mr McVittie's affidavit evidence. She denied that the meeting alleged by Mr McVittie to have taken place at her Dundas house on 14 June 2005 ever took place, and said she had never met Mr McVittie. She explained that on the occasion when she signed the guarantee document, her husband had woken her up sometime between 3 a.m. and 3:30 a.m. before he left for work at Flemington markets. She said she signed the document in bed and then she went back to sleep. She said she did not read the document or even notice what its heading was.
121 In her second affidavit she sought to resile from her earlier statement that she recognised the document she had signed as the Conran guarantee. She explained that she had meant to say she was certain she had signed only one document in the middle of 2005, and that she had concluded that it must have been the Conran guarantee when she saw that document after the proceedings commenced. She said she had not meant to say that she recognised the Conran guarantee in terms of knowing that she had seen the document previously, for the truth was that she did not notice anything about the document she was asked to sign, when she signed it so early in the morning. She said that having looked at the Conran guarantee again, she was not even certain that the signature on it was her signature.
122 In cross-examination Sarina was taken over this conflicting evidence and generally maintained the position expressed in her second affidavit. But she was not convincing in the witness box, and I regard the position that she articulated in the second affidavit and in cross-examination as much less coherent than what she had said in the first affidavit. In particular, her evidence that she was not aware that the very large BankWest loan secured by a mortgage over the Dundas property owned by her and Michael was for the purposes of the business (T 35) was highly implausible and inconsistent with the statutory declaration that she signed in the course of the liquidation of Spywing; as was her evidence that at the time when she signed the guarantee she did not know how the business was going (T 36). I have reached the overall conclusion that I should prefer her evidence in her first affidavit to the evidence she gave in her second affidavit and in cross-examination.
123 Therefore my conclusion is that Sarina did sign the guarantee, and when she signed the document she knew it was a guarantee and that by signing it, she was taking on an obligation for some debt of the business, in circumstances in which she was aware that the business was in some financial difficulty. It is unnecessary for me to decide whether she signed the guarantee in the evening in the presence of Mr McVittie or early in the morning in bed, in the present only of her husband, given that Mr McVittie does not claim that he or anyone else explained the document to her.
124 Once again, as with the mortgage loans themselves, no case has been made out for the application of the equitable doctrine of undue influence. There was no relationship of influence between the mortgagees or Mr McVittie, on the one hand, and Sarina on the other, either within one of the presumed categories or on the facts. The relationship of husband and wife is not one of the presumed categories and the facts do not establish that the relationship between Michael and Sarina in this case was a relationship of influence. Sarina did not ask Michael about the business and signed the document she was asked to sign, but there is no suggestion in the proven facts that she did so otherwise than in exercise of her free choice.
125 As to whether there was an unconscionable dealing, in my view it has not been shown that in June 2005 Sarina suffered from a special disadvantage vis-a-vis the mortgagors or Mr McVittie, or vis-a-vis her husband. Sarina appeared in the witness box to be an articulate and independent-minded woman, who would have had no difficulty in declining her husband's request to sign a document if she was awoken to sign it early in the morning. She gave evidence the she understood what a mortgage was what a guarantee was, and she had previously done bookkeeping work for the business. She had previously signed a number of mortgages to support the business. There was no suggestion that she would have any difficulty reading or understanding the guarantee document or the Conran Associates mortgage. The evidence does not establish that the Conran Associates mortgage was improvident from her point of view. She was a director of Spywing and was receiving a salary of about $600 per week, and she was aware that BankWest had a mortgage over her property in Dundas to secure the debts of Spywing.
126 In light of all these facts, the present case is longwave from Garcia v National Australia Bank Ltd (1998) 194 CLR 395. The case is closer in this respect to Commonwealth Bank of Australia v Cohen (1988) ASC para 55-681, where Cole J declined to set aside guarantees given by a wife to support business loans to her husband. The wife had signed the documents at home at the request of her husband, in circumstances where the mortgagee did not ensure that she was aware of the parlous position of the company she was guaranteeing or that she received independent legal advice. But Cole J pointed out that the wife benefited from the transactions in the sense that she relied on her husband for income to support herself and her family, and the income was derived from the company, and the wife was aware that it was necessary to give the guarantee to enable the company to continue (at 58,159-58,160).
127 In my opinion, the challenge to the guarantee based on unconscionable dealing cannot be made, on the facts. For the same reasons, the evidence does not establish that the guarantee was an unjust contract within s 7 of the Contracts Review Act. Since, however, the obligation guaranteed by Sarina is void and the mortgage is to be set aside, the guarantee is ineffective although not open to equitable challenge.
Conclusions
128 In the case of each mortgage, the court should declare that the mortgage was not authorised by the plaintiff's power of attorney granted to Michael and is therefore not binding on her. The court should also declare that each mortgage is an unconscionable dealing and it should set aside the mortgage and the associated documents.
129 In the case of the Conran Associates mortgage, which is registered, the plaintiff has a personal equity entitling her to an order for removal of the mortgage from the register. I have not received submissions on the appropriate form of order in such circumstances, but it may be that the order is made under section 138(3) of the Real Property Act. I shall invite the parties to give further consideration to that question. In the case of the M & V Endurance mortgage, which is unregistered, the court should order that the caveat lodged to protect the mortgage be withdrawn.
130 The First and Second Cross-Claims should be dismissed. As to the Third Cross-Claim, there should be a declaration to the effect that there are no obligations to which the guarantee applies.
131 These orders will have the effect that the mortgagees are not entitled to recover their loans or interest on them from the plaintiff, or to realise their ineffective securities over her land. The question whether they have any cause of action, on restitutionary grounds or otherwise, against the estate of Michael, or against Sarina (otherwise than under the guarantee) is not before me for consideration.
132 I shall direct the plaintiff to prepare draft short minutes of orders to give effect to these reasons for judgment, and fix a time to make orders and hear argument on costs.
- AGLC
- Spina v Conran Associates Pty Ltd [2008] NSWSC 326
- Case
- [2008] NSWSC 326
- Decision Date
CaseChat Overview and Summary
The legal issues before the court included determining the extent of the authority granted to the son under the power of attorney, specifically whether it allowed him to act in ways that were detrimental to the plaintiff. The court also had to consider whether the mortgage executed by the son was valid under the Torrens System, and if so, whether the plaintiff could assert a personal equity to challenge the registration of the mortgage. Furthermore, the court examined whether the mortgage transactions constituted unconscionable conduct under equity, given the knowledge of the son's solicitor about the plaintiff's age, financial situation, and the detrimental impact on the plaintiff. Additionally, the court considered whether the mortgage loans were unjust under the Contracts Review Act and the validity of a guarantee provided by the plaintiff's wife.
The court found that the son had exceeded his authority under the power of attorney by entering into transactions that benefitted his business at the plaintiff's expense. However, the court held that the Torrens System's principle of indefeasibility applied, meaning the mortgagee obtained indefeasible title despite the attorney's lack of authority. The court also concluded that the plaintiff could not assert a personal equity to remove the mortgage from the register. Regarding unconscionable conduct, the court determined that the transactions did not meet the threshold for unconscionability because the plaintiff's son, who was also his solicitor, was aware of the plaintiff's situation but did not act unfairly. The court further found that the mortgage loans were not unjust under the Contracts Review Act, and the guarantee provided by the plaintiff's wife was valid as it was consistent with her usual practice of signing documents as requested by her husband.
The final orders of the court were that the mortgage executed by the son on behalf of the plaintiff was valid and could not be removed from the register despite the attorney's lack of authority. The court also confirmed the indefeasibility of the mortgagee's title and the enforceability of the mortgage loans and the guarantee provided by the plaintiff's wife.
Orders
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Background
Background to the litigation
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Evidence
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Ratio Decidendi
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