Webster Investments Pty Ltd v Anderson and Webster Investments Pty Ltd v North Star Developments Pty Ltd

[2016] VSC 620

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST

S CI 2013 00954

WEBSTER INVESTMENTS PTY LTD	Plaintiff
v
GARY JAMES ANDERSON & OTHERS	Defendants

S CI 2013 00957

WEBSTER INVESTMENTS PTY LTD	Plaintiff
v
NORTH STAR DEVELOPMENTS PTY LTD & OTHERS	Defendants

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JUDGE:	CROFT J
WHERE HELD:	Melbourne
DATE OF HEARING:	15 and 16 September, 26 and 27 September and 11 October 2016
DATE OF JUDGMENT:	9 November 2016
CASE MAY BE CITED AS:	Webster Investments Pty Ltd v Anderson and Webster Investments Pty Ltd v North Star Developments Pty Ltd
MEDIUM NEUTRAL CITATION:	[2016] VSC 620

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LOAN AGREEMENTS—Construction of loan agreements—Nature of security agreed—Extent to which personal guarantees agreed to be provided.

MORTGAGES—Extent to which mortgages agreed to be supported by personal guarantees—Mistake in execution of mortgage documents by guarantor—Mortgagee’s duty on sale of mortgaged property with respect to guarantors—Effect of sale of mortgage property by private treaty with no public advertising or advertising regime where specialised regime may be required for a hotel and motel property—Impairment of security—Sale of mortgage property without prior valuation—Significance or otherwise of post-mortgagee’s sale valuation with respect to mortgagee’s duty on sale.

GUARANTEES—Impairment of security—Discharge of guarantor.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr P. Fary	Elliott May Lawyers (Queensland) RDF Lawyers (Victorian agent)
For the Defendants	Mr A. Kirby	Maddocks

HIS HONOUR:

Introduction

1. The proceedings between Webster Investments Pty Ltd v Gary James Anderson (No SCI 2013 00954) (“the Lal Lal Loan Proceeding”) and the Webster Investments Pty Ltd v North Star Developments Pty Ltd (No SCI 2013 00957) (“the North Star Proceeding”) are separate proceedings but, as will be seen from the reasons which follow, are closely related and arise out of two loan agreements and mortgages entered into, purportedly on the basis of those loan agreements, in the latter part of December 2005 and in early 2006.  Although these proceedings are separate proceedings, the transactions and events the subject of these proceedings are very significantly interrelated, both from the inception of the loan agreements themselves, the entering into of the relevant mortgages and the enforcement process which followed.  Nevertheless, a degree of clarity is provided by considering the two proceedings separately, at least initially, and then drawing together their ultimate factual interrelationships and their consequences.

The Lal Lal Loan Proceeding

The Lal Lal Loan arrangements

1. The Lal Lal Loan Proceeding relates to a further loan of $700,000 (“the Lal Lal Loan”) which was advanced by Webster Investments Pty Ltd (“Webster”) to 5 Lal Lal Street Pty Ltd (“5 Lal Lal”) for the development, more particularly the completion, of student accommodation which was being built on the property at 5 Lal Lal Street, Ballarat (“5 Lal Lal Street”).  The directors of 5 Lal Lal were Mr Gary Anderson (“Anderson”) and Mr Peter Martin (“Martin”) and, it appears that Martin’s son, Aaron Martin (“Aaron Martin”), and Mr Justin Bentley (“Bentley”) also had in interest in the project.[1]

   [1]Refer to the diagram of Mr Bahr at Second Supplementary Court Book at 1961.  The Lal Lal company search is at Court Book 429–33.  The development was driven by Anderson and Mr Peter Martin: refer to Mr Bahr’s affidavit at Court Book 144–50, 208, 252.

1. It is common ground—at least it was accepted by Webster’s witnesses—that Mr James East (“East”) had no interest or involvement in 5 Lal Lal other than as an accountant for the project for a period of time; had no interest in the company or the 5 Lal Lal Street project, and did not benefit in any way from the relevant loan the subject of the Lal Lal Loan Proceeding.  This loan, the Lal Lal Loan, was transacted in December 2005 and early 2006, at the same time as Webster was providing further financing to North Star pursuant to a loan agreement and mortgage which is the subject of the North Star Proceedings.  The mortgage the subject of those proceedings was guaranteed by East, who at the time the loan agreement with North Star was entered into and the mortgage granted, was a director of North Star.

1. The application by 5 Lal Lal for further finance was considered by Webster at a “Loan Meeting” at 8.35am on Tuesday 20 December 2005.  Present at that meeting were Mr Bill McGregor (“McGregor”), Mr Andrew Baird (“Baird”), Mr Neale Gribble (“Gribble”) and Mr Bill Bahr (“Bahr”).  All those present were directors of Webster and also partners in the law firm of Baird & McGregor, apart from Bahr, who was then the Finance Manager of Webster.  According to Bahr’s evidence he was, from October 1996 until December 2007, responsible as the Finance Manager for all aspects of the Webster loan book—which included regular contact with borrowers, brokers and other lenders, loan interviews, dealing with loan applications, preparation of memoranda in respect of loan applications for the board of directors, attendance at Board meetings and compliance work.  The latter included liaising with the Australian Securities and Investments Commission (“ASIC”) and Webster’s trustees.[2]  Elaborating further with respect to his role, Bahr also said that the loan process Webster followed involved a loan application interview by him, a completed loan application, preparation of a memorandum by him regarding the loan application which went to a directors’ meeting during the course of which he would present any loan applications, unanimous approval by three directors of the Board, the issuing of a letter of offer outlining Webster’s terms and conditions—including the term of the loan, interest and security required—and completion of loan securities documents.[3]

   [2]Affidavit of William Francis Bahr (28 November 2013), [6]; Court Book 143–4.

   [3]Affidavit of William Francis Bahr (28 November 2013), [7]; Court Book 144.

1. Returning to the 20 December 2005 directors’ meeting, the minutes of that meeting relevantly record the following:[4]

   [4]Court Book 275.

…

5 Lal Lal St Pty Ltd

Existing client seeks a final variation to complete the University accommodation in Lal Lal street in readiness of handover on the 14/1/06. Current debt is $3,100,000 with loan approval held to $3.3 million. With cost over runs etc the debt is expected to total $4 million, a total variation of $700,000.

To allow the variation to $4 million extra security is required to maintain security ratios. Gary has offered a second mortgage over the North Star complex and 7 Humffray Street South … which will allow equity to $530,000.

Aaron Martin and Justin Bentley, who are 50% shareholders (not directors) have indicated they will place $200,000 on deposit to allow the extra funds to complete the complex. Both parties will sign a lien and limited guarantees.

…

Decision        Approved subject to the above conditions plus the following:

1.  CRAA Aaron Martin & Justin Bentley

2. Unlimited guarantees from Shareholders.  A. Martin & J Bentley

1. These minutes were accepted by the Webster witnesses as an accurate record of the meeting.  There was, however, a quibble about this in the oral evidence of McGregor, but he did accept their accuracy, it having been put to him that he never raised any issues previously with respect to the accuracy of these minutes and that they were subsequently approved as an accurate record of the meeting in subsequent directors’ meetings of a similar nature.  Moreover, the process recorded in these minutes is consistent with the evidence of Bahr with respect to the loan application and approval process; evidence which was not questioned or doubted by the Webster witnesses.

1. Following the 20 December 2005 meeting, Webster, by letter dated the same day, 20 December 2005, to the directors of 5 Lal Lal, confirmed approval of the Lal Lal Loan (“the Letter of Offer”).[5]  Critically for present purposes, the Letter of Offer set out the securities required for the Lal Lal Loan, which were described and highlighted in that letter as new securities:

(a)a second mortgage over the North Star property (that is, a third party security from North Star which supported the Lal Lal Loan);

(b)a second mortgage over 7 Humffray Street, South Ballarat;

(c)a second mortgage over lot 1, Wendouree Parade, Ballarat; and

(d)a guarantee from Aaron Martin (the son of Mr Peter Martin, one of the directors of 5 Lal Lal Street).

Significantly, there is no mention in the Letter of Offer of any guarantee being provided for this loan by East.

[5]Court Book 270–3.

1. Acceptance of the Letter of Offer, also dated 20 December 2005, was signed on behalf of 5 Lal Lal by Anderson and signed by Anderson, Martin and Aaron Martin as guarantors of the Lal Lal Loan in accordance with the requirements of the Letter of Offer.[6]  Again, significantly, there is no reference to East in this acceptance letter and he did not sign it.  The acceptance letter is, as indicated, dated 20 December 2005, and it appears that it was signed on 29 December 2005, though there is some doubt as to whether the figure “9” is actually a “7”, in which case it would have been signed on 27 December 2005.  In any event, there is no significance in these two days, save that this is all consistent with these arrangements being made over the Christmas and New Year period, 2005/2006.

   [6]Court Book 277.

1. The Letter of Offer was preceded by a letter from Webster, also dated 20 December 2005, addressed to the directors of 5 Lal Lal in relation to the request by that company to increase the Loan Facility on the 5 Lal Lal Street Pty Ltd Student Development to $4 million.[7]  The effect of this letter was to inform the directors of 5 Lal Lal of the approval of the increase in the Loan Facility and to enclose documents for attention by the directors for the purpose of implementing this approval.  In this respect, the letter states:[8]

   [7]Court Book 269.

   [8]Court Book 269.

This request was approved at our Company Directors meeting this morning conditional upon the receipt of additional new security documentation and updated valuation reports on the new security being offered.

We enclose the following documents for your urgent attention:

1.Original copy of the Letter of Offer dated 20 December 2005 for signing under company seal and further by the Directors and Guarantors as listed.  This Letter of Offer form together with the Privacy Act form will need to be returned to our office.

2.Copies of the Letter of Offer dated 20 December 2005 for distribution to all parties to the new loan facilities.  These include the new guarantors Aaron Martin & Justin Bentley both of who [sic] will require a copy of the Memorandum of Common Provisions to the existing mortgage (enclosed).

Although it is not clear how Bentley came to be a new guarantor, having regard to the terms of the Letter of Offer, it is clear that there is no mention of any guarantee being provided by East.

1. As a result of the loan approval and acceptance process, which has been described, a letter of instructions was sent by Bahr as Webster’s Finance Manager to Baird, as solicitor, with a request to “prepare suitable Mortgage Documentation …”.[9]  The critical parts of that letter of instructions are as follows:[10]

   [9]Court Book 278.

   [10]Court Book 278.

Security:
Existing
(1) First Mortgage over 5 Lal-Lal Street Ballarat
(2) Mortgage Debenture over Assets of the company

(3) Unlimited Guarantees from Gary James Anderson & Peter Francis Martin

New Security Required
(4) Second Mortgage over the North Star Complex (owned by North Star Developments Pty Ltd)
(5) Second Mortgage over 7 Humffray Street (Old ANA building owned by Luxnet Pty Ltd)

(6) Second Mortgage over Lot 1 Wendouree Parade Ballarat (owned by Peter Martin)

Loan Advance $700,000.00 variation (Total Advance $4,000,000.00)

Account: 2692/L7

Again, consistently with the provisions of the Letter of Offer and the Letter of Acceptance and the further letter of 20 December 2005 to the directors of 5 Lal Lal to which reference has been made, there is no reference to any guarantee from East.

1. The Collateral Mortgage (registered in the Victorian Land Titles Office as AE 209847T)[11] dated 24 January 2006, which is relied on by Webster in the Lal Lal Loan Proceedings, provides in the “Mortgagor” panel for three third party mortgages to support the borrowings of 5 Lal Lal.  Although this may be confusing in the way the panel form is set out, this is, nevertheless, consistent with the Webster minutes of 20 December 2005, the Letter of Offer as accepted and the letter of instructions to Baird.  The “Guarantor” panel in the Collateral Mortgage is, however, not consistent with the Webster minutes of 20 December 2005, the Letter of Offer and the instructions to Baird.

   [11]Court Book 282–4.

1. The “Guarantor” panel names the directors of North Star Developments Pty Ltd (“North Star”), which was a mortgagor.  The directors so named include East.  This is the first reference in the documentation to guarantees being given from the North Star directors.  Apart from Anderson, who was a director of both 5 Lal Lal and North Star, there is no previous reference to, nor evidence of, any agreement from East and the other North Star directors, apart from Anderson, to the giving of personal guarantees with respect to the Lal Lal Loan.  As submitted by East, this makes sense and is consistent with the position that East had no interest in 5 Lal Lal, the company or the Lal Lal project which this further advance was to fund.  Clearly enough, as appears from the documents to which reference has been made, Anderson offered up third party security from North Star to secure further funding for the Lal Lal project.

1. There is no satisfactory explanation as to how North Star directors, including East, who were not identified in the loan offer related documentation, came to be named as guarantors in the Collateral Mortgage, though the events and recollections to which I now turn appear to indicate that it was probably the result of preparation of the Collateral Mortgage without regard to the pre-existing agreement between North Star and the individuals who had agreed to be guarantors as provided for in this documentation.  One thing is, however, clear, and that is that at the time the Collateral Mortgage was prepared, there was no agreement on the part of East to act as a guarantor of the obligations under this mortgage.

1. Baird gave evidence that the Collateral Mortgage was prepared by a paralegal employed by his firm—namely, Ms Alice Marcolo—under his supervision.  It appears that in the confusing circumstances of having the Lal Lal Loan documentation being prepared around the same time as the documentation for the $120,000 North Star loan, a mistake may have been made in adding the names of East, together with Messrs Lawless, Spratling and Browning as guarantors to the Collateral Mortgage.  I accept that such a mistake was plausible in the circumstances and, indeed, Baird conceded that it was possible that a mistake had been made.[12]  As will become clearer in these reasons as the North Star loan process is also considered, together with the execution of the mortgage documents, the processes and attempted explanations on the part of the Webster witnesses as to what occurred indicate a process which was less charitably described as shambolic and more charitably as one which became particularly confusing, given identically dated loan offer documentation and the fact that the same mortgagor—North Star—was providing security for both the $700,000 further advance to 5 Lal Lal and also with respect to a separate loan of $120,000 for the benefit of North Star itself; and all in the pre and immediately post-Christmas and New Year environment.  In my view, no plausible or credible explanation was put forward by the Webster witnesses to explain the documentation, other than the mere assertion that East was liable under the Collateral Mortgage because he had signed it as a guarantor.  Having regard to this position and the evidence, there is weight in the submissions by East that, given the losses suffered by the Lal Lal project and the financial interests of the Webster directors who gave evidence,[13] this was mere wishful and possibly desperate thinking.[14]

   [12]Transcript 149–50; see also 151.

   [13]Baird, Gribble, Cunningham and McGregor all own shares in Webster.

   [14]See, for example, Baird’s evidence at Transcript 150.

1. Baird did, however, put forward another explanation, though perhaps faintly,[15] which was that his firm, Baird & McGregor, sometimes change or add to the securities listed in the letter of instructions from Webster.  Webster, in its closing submissions, sought to explain, establish or justify this practice by reference to some of the evidence in support of its case:[16]

   [15]Transcript 148–9.

   [16]Submissions on behalf of the Plaintiff (Webster) (7 October 2016), [11]-[17].

11.Bahr gave evidence that:

That gave rise to Mr East’s - - -?---Guarantee.

Guarantee?---That’s correct.  Because, I mean my instructions actually say prepare suitable mortgage documentation, so I would think that the solicitor has found that these are the guarantees that are needed to be prepared, and they were, to secure that debt.

Had you provided Mr Baird with instructions prior to this occasion to prepare other security documents?---I have.

On other occasions did Mr Baird find other guarantors?---The answer to that question is yes.  We instructed our solicitors to provide us with sufficient security to cover any debt that we would incur or as part of our loan documentation, so if there is a need for other security like a guarantee then they would prepare that.

I take it that you don’t recall discussing inclusion of East in respect of this variation?---Not particularly, no.[17]

[17]Transcript 51.

12.Bahr also gave evidence that:

Your Honour, what we would do is look at what was available basically without going into doing searches and spending money on doing company searches and those sort of things.  We would approve the loan, then it would be subject to the suitable security being prepared by our solicitor, which is Andrew Baird at Baird McGregor.[18]

[18]Transcript 54.

13.Bahr gave evidence that:

HIS HONOUR:  Mr Bahr, would I be right in inferring from your evidence that your general practice or understanding is that if you take a mortgage or a security from a proprietary limited company you also take guarantees from all the directors?---That would be usual, yes.

That’s how you approached these dealings and that’s how you would think that you’d set this documentation up?---That would be right, Your Honour.[19]

[19]Transcript 100–1.

14.Bahr gave evidence that:

If the search proves that my instructions are not correct in that there are other parties that the solicitor feels would more secure the loan then I’m guided by them to prepare the correct documentation.[20]

[20]Transcript 102.

15.Baird gave evidence that:

Are you able to explain why Mr East is named here as a guarantor in this document?---Yes.  Mr East and the other named guarantors I believe were directors of North Star Pty Ltd at the time and it was my usual practice when collateral security was taken over a title to a property owned by a company that directors guarantees would be taken.

Had you done that on other occasions?---Yes, many.

The answer to my question concerning why East is there was given by you by reference to a practice, is that correct?---It was my, yeah, my practice, yep.

Do you have a direct recollection of the circumstances of his inclusion in this particular guarantee other than general practice?

---No.

Now if I can ask you to turn back two pages to court book 280.  Can you identify that document?---That’s a solicitor’s certificate or solicitor’s certificate of independent legal advice signed by Mr East in the presence of John Curwen-Walker, a solicitor.[21]

[21]Transcript 120.

16.Baird gave evidence that:

Mr Bahr would instruct me on these matters and if I felt additional security was required I prepared it, and that’s exactly what I did here.[22]

[22]Transcript 148.

17.McGregor gave evidence that:

Did you become aware that Mr East had signed a collateral mortgage as guarantor?---We wanted a guarantee from all of the directors of North Star because part of our security was a second mortgage over the property owned by North Star.

When you say we wanted that, when did you want that and how was that expressed?---That, well, it was in discussions but not in the minutes that all of the directors of North Star would also be giving guarantees and that these people would be specifically mentioned.[23]

There is, however, no documentary trail of this in the present circumstances and there is no evidence, documentary or otherwise, of any contact with East if, as Baird or McGregor suggests, it was thought desirable to add further guarantors.  It follows that even on this case, it would mean that Baird & McGregor changed the security as provided for in the Collateral Mortgage without instructions or proper disclosure to anyone—particularly East—and without East’s prior or subsequent agreement.  Consequently, the position was that East had not—prior to the signing of the Collateral Mortgage—ever agreed to give such a guarantee.  It is, of course, a critical issue in the Lal Lal Loan proceeding where his signing the Collateral Mortgage is said, by Webster, to have changed this position.

[23]Transcript 338–9.

1. Moreover, the apparent disregard of the position reached in the agreement between the parties constituted by the Letter of Offer, as accepted, which did not include any agreement for or by East to act as a guarantor is all the more surprising when it is seen that approximately $56,000 had been advanced to 5 Lal Lal on the basis of this agreement prior to 16 January 2006, the date Webster contends the Collateral Mortgage was signed by all the parties and guarantors.[24]

   [24]Submissions on behalf of the Plaintiff (Webster) (7 October 2016), [9]; and see Court Book 92.

1. East’s evidence is that he signed the Collateral Mortgage relied upon by Webster in the mistaken belief that the document related to the North Star loan which was being financed by Webster at the same time.[25]  The potential for mistake was exacerbated by the fact that Webster was dealing with both the Lal Lal project and North Star at the same time, mainly dealing through Anderson.[26]

   [25]See [31]–[49] as discussed in the context of the North Star proceeding.  Refer to the submissions and evidence in proceeding number S CI 2013 00957.

   [26]See, eg, Court Book 1001–6.

1. Reference has been made previously to the confusion or potential for confusion created by the Letters of Offer with respect to the Lal Lal Loan and the loan to North Star itself bearing the same date, namely, 20 December 2005, and because both loans were secured by a mortgage from North Star—the North Star Loan being a primary loan for an advance of $120,000 and the Lal Lal Loan being a third party or Collateral Mortgage from North Star for $700,000.  Moreover, the Collateral Mortgage itself is a confusing document in that it is a mortgage with provisions for individual guarantors “buried” in the panel document.  It is not headed “guarantee” and contains no warnings or notes for the prospective guarantor.

1. As is discussed in further detail in the reasons which follow, there is no evidence from Webster that East was told beforehand of this guarantee obligation contained in the North Star mortgage document, and nor is there any evidence that he was directed to it and given an explanation.  There is, as is discussed further, a solicitor’s certificate which is relied upon by Webster in support of its claim as to East’s liability as guarantor of the Collateral Mortgage.  It is true that, read calmly and in hindsight, that document does refer both to North Star and 5 Lal Lal.  There is, however, only one solicitor’s certificate and, as acknowledged by Bahr in his evidence,[27] there would, had the mortgage execution proceeded properly, have been two solicitor’s certificates, one for the mortgage securing the Lal Lal Loan and the other securing the $120,000 further advance to North Star.  In my view, it is a reasonable inference from the evidence that, had East been presented with two solicitor’s certificates, he would have been made alive to the fact that he was being asked to assume a liability with respect to both advances.  He was, however, only presented with one certificate, which was consistent with his understanding that he was only assuming the obligations of guarantor with respect to the $120,000 advance to North Star.  Moreover, his subsequent conduct in seeking only a release from this latter obligation is entirely consistent with this position and the contention that the Collateral Mortgage was signed by East as a guarantor labouring under a mistake.  As indicated previously, there was no agreement on his part at the time the Collateral Mortgage was signed to assume such an obligation.

   [27]Transcript 69–70.

1. East’s evidence in relation to the circumstances in which the Collateral Mortgage was signed is also consistent with his state of confusion and a resulting mistake on his part.  In spite of a contrary position being put to East in cross-examination, he maintained his recollection of one “signing meeting” at his office of a “stack of documents” about “a foot high”.[28]

   [28]Transcript 371–5.

1. Webster challenges East’s account of the signing of the Collateral Mortgage, having summarised East’s evidence in this respect, as follows:[29]

   [29]Submission on behalf of the Plaintiff (Webster) (7 October 2016), [10].

10.East gave evidence that:

(a)“these documents were all tabled in one single informal meeting and I just recollect that the pile was quite significant in our informal coffee room type meeting scenario in my office”;[30]

(b)“there were about seven participants and the documents were that sort of, a foot high”;[31]

(c)he did not read the documents at the time when they were signed;[32]

(d)he did not recall signing the guarantee in respect of the North Star facility;

(e)“But we only really essentially had on, one major meeting of signing of documents that I can recall”;[33]

(f)he clarified by saying that he only recalled one meeting at which documents were signed (whether major or otherwise);[34]

(g)it was unclear the extent to which he read various documents including the solicitor’s certificate in respect of the collateral mortgage.

[30]Transcript 371.

[31]Transcript 371.

[32]Transcript 372.

[33]Transcript 373.

[34]Transcript 373.

1. A critical attack by Webster on East’s evidence in this respect is that there could not have been one “signing meeting” having regard to the following chronologies:[35]

   [35]Submissions on behalf of the Plaintiff (Webster) (7 October 2016), [8] and [9].

North Star $120,000 advance

8.Webster contends that East signed the documents in relation to the $120,000 North Star advance prior to Christmas 2005:

Date alleged	Document date	Document
20.12.05	20.12.05	Offer[36]
21.12.05	21.12.05	Webster instructions to B&McG[37]
23.12.05	23.12.05	Acceptance[38]
23.12.05	Undated	Guarantee[39]
23.12.05	Undated	Mortgage AE166617W
23.12.05	23.12.05	File note[40]: “New loan variation … approved … documents signed 23.12.05” “New mortgage[s?] received signed”
23.12.05	Drawdown of $60K[41]
7.2.06[42]	Mortgage lodged[43]

[36]Court Book 1002.

[37]Court Book 1010.

[38]Court Book 992.

[39]Court Book 1011–18.

[40]Court Book 1829; Transcript 67, 111.

[41]Court Book 659, 1587.

[42]Date lodged.

[43]Court Book 1518.

(documents signed by East are highlighted)

Lal Lal $700,000 advance

9.Webster contends that East signed the documents in relation to the $700,000 Lal Lal advance after Christmas 2005:

Date alleged	Document date	Document
20.12.05	20.12.05	Offer[44]
23.12.05	Undated	Acceptance[45]
4.1.06	4.1.06	Webster instructions to B&McG[46]
4.1.06 to 16.1.06	24.1.06[47]	Collateral Mortgage AE209847T[48]
16.1.06	16.1.06	East’s solicitor’s certificate[49]
16.1.06	16.1.06	Other guarantors’ solicitors certificates[50]
01.06 -	Drawdowns[51]
28.2.06[52]	Mortgage lodged[53]

[44]Court Book 1002.

[45]Court Book 277.

[46]Court Book 278.

[47]Bahr and Baird gave evidence that the mortgage was usually undated when signed, and the date inserted later: Transcript 110, 146.  The documents came back to Baird: Transcript 121.

[48]Court Book 282.

[49]Court Book 280.

[50]Court Book 1962–9.

[51]Court Book 92.

[52]Date lodged.

[53]Court Book 1518.

(documents signed by East are highlighted)

1. I do not, however, accept that this chronology detracts from the critical aspects of East’s evidence; particular that there was one “signing meeting”.  Having regard to the dates of lodgement of the mortgages, it does not follow that the North Star advance documents were necessarily signed before Christmas 2005.  The fact that there had been a $60,000 advance to North Star on 23 December 2005 cannot be regarded as decisive in this respect as there was, as in the case of the Lal Lal Loan, a concluded agreement between the parties for the advance although mortgage documents had not been signed.  The fact of approximately $56,000 being advanced prior to the execution of the Collateral Mortgage to secure the Lal Lal Loan testifies to Webster being prepared to make advances ahead of the execution of security documentation.[54]  The fact that the Webster instructions for the preparation of the Collateral Mortgage to secure the Lal Lal Loan were dated 4 January 2006 certainly does seem to indicate that the “signing meeting” took place after that date—that is, after Christmas 2005—but this does not show East to be wrong in his recollection and evidence as to one “signing meeting”.  For these reasons, in the context of these facts and matters on which Webster relies, it matters little whether the meeting actually took place in early January 2006.  Moreover, the fact that East’s recollection of the timing of the meeting may be faulty is not significant, given the natural diminishing of recollections over more than a decade and that the significance of his recollection of a single “signing meeting” is not inconsistent with the chronology to the extent that it is documented.

   [54]See above, [16].

1. In any event, East’s evidence was that Anderson, who was clearly the driving force behind both the 5 Lal Lal and North Star companies, was effectively running the “signing meeting”.  Nobody from Webster or Baird & McGregor was present at this or any other similar meeting, the evidence being that Webster had a practice of simply giving documents to Anderson for signing.[55]  Martin from 5 Lal Lal Street was there, as were the other North Star directors and Mr John Curwen-Walker (“Curwen-Walker”), solicitor for Anderson.  East said in his evidence that Curwen-Walker was not “his solicitor” and, on any view, given his acting for Anderson and others involved in 5 Lal Lal Street and North Star, would not be a person cloaked with the mantle of real independence and free of any actual or potential conflicts of interest of the kind that might be expected of a solicitor engaged to provide independent advice to a person potentially incurring liability under or with respect to security documents of the type being signed at this meeting.  Moreover, it ill behoves Webster in all the circumstances surrounding the signing of this certificate to contend that East, by signing the certificate, also agreed and acknowledged that Curwen-Walker was “his solicitor”.[56]  Compounding this position, it is to be observed that Baird accepted that it was an “oversight” that a separate solicitor’s certificate had not been prepared for the North Star loan guarantee.[57]

   [55]Transcript 59–60.

   [56]See Transcript 493–4.

   [57]Transcript 151.

1. Webster relies heavily on the certificate of independent legal advice dated 16 January 2006,[58] which was signed by East (“the Certificate”).  It is clearly the position that the certificate, a document of this nature, cannot create obligations under the Collateral Mortgage.  Furthermore, as it is a document created by Webster or its solicitors, it does not lie in the mouth of Webster to say that it was misled by its own document, in spite of its signing by East and completion by or at the behest of East labouring under a mistake in circumstances of confusion created or permitted by Webster or its solicitors with respect to the content of and signing of the Collateral Mortgage.

   [58]Court Book 280–1.

1. Again, focusing on the general state of confusion apparently subsisting, it is fair to say that the Certificate itself is also a confusing document.  It refers to a mortgage from North Star Developments Pty Ltd at the top of the document, and then refers to “Security Documents” as being the Memorandum of Common Provisions AA689 and the Letter of Offer.  The Letter of Offer for Lal Lal was dated 20 December 2005, the same date as the North Star letter of offer.  The confusion is not ameliorated by the reference in the heading to the Certificate of “Loan Facility to: 5 Lal Lal Street Pty Ltd”.

1. Similar certificates were given by the other North Star directors, which is consistent with the certificates being construed simply as certificates given by the directors of North Star as directors of North Star regarding the third party security to be given by that company.  It might be said against this view that the heading “Acknowledgment by Guarantor” which precedes six questions of the signatory make it clear that this is a certificate being given by the signatory as a personal guarantor.  This is, however, not consistent with the rather general description under the further heading “Security Documents” to which reference has been made, which is only a reference to the Memorandum of Common Provisions AA689 and the Letter of Offer.  Nowhere in the acknowledgment or the certificate itself is it made unambiguously clear that the security being granted to Webster involves a personal guarantee from East.  Indeed, in language consistent with the language and structure of the Letter of Offer, one would have expected to see a reference to guarantees under the further heading, “Security Documents”.  In this respect, it will be seen from the provisions of the Letter of Offer and, indeed, the instructions to Baird by Webster dated 4 January 2006, that the description “security” is applied both to mortgages and to guarantees.  The Certificate, as has been observed, refers only to a mortgage and to the Letter of Offer dated 20 December 2005.  I also accept that some support for this view is provided by the handwritten notation on the letter of instructions to Baird[59] as evidence that Webster had some concerns about the corporate benefit issue, given that North Star was giving a mortgage to support borrowings by 5 Lal Lal Street, a third party from which North Star would derive no benefit.

   [59]Court Book 278.

1. In any event, there is no evidence that the nature of the obligation as personal guarantor alleged against East with respect to the Lal Lal Loan was properly explained to him by anyone and, in all the circumstances, the position is not saved or established as being otherwise because of the answers to questions in the Certificate which he signed in, as I have found, a state of confusion and critical ambiguity in the contents of the Certificate itself.

1. For these reasons, I am of the view that the certificate was not signed by East on the basis that he had given or would give a personal guarantee in respect of the loan to 5 Lal Lal, of which he was not a director or shareholder.  Moreover, to the extent that the Certificate might be construed as applicable to personal obligations under a guarantee of the Lal Lal Loan in that way, it was prepared and signed under a mistake, similarly to the Collateral Mortgage.

1. Finally in relation to this aspect of the matter, Webster raised a Jones v Dunkel[60] point against East on the basis that he had not called Curwen-Walker to give evidence on the “independent advice” circumstances of signing the certificate and related issues.  East, in response, made reference to the treatment of a similar point by the New South Wales Court of Appeal in Brighton v Australia & New Zealand Banking Group Ltd, where Campbell JA (with whom Giles and Hodgson JJA agreed) said:[61]

143.The Appellants also contend that, while Mr Harkin gave legal advice about the Deed, it was not proper independent advice.

144.Mr Harkin was not called to give evidence, nor was his absence from the witness box explained.  The judge took this into account, making reference to Jones v Dunkel,[62] in reaching a positive conclusion that ANZ had “succeeded in establishing that Mr and Mrs Brighton were competently advised”.  I doubt that the judge was right in placing reliance on Jones v Dunkel for this purpose.  That is because, if the objective of Mr and Mrs Brighton was to prove the inadequacy of the advice they had received from Mr Harkin, he could hardly be said to be a witness who was in their camp, so far as the contents of that advice was concerned.  However, that error is of small significance in the overall scheme of the allegation of unconscionability.

[60](1959) 101 CLR 298.

[61][2011] NSWCA 152, [143]–[144] (emphasis in original).

[62](1959) 101 CLR 298.

In the present case, it could hardly be said, on the evidence, that Curwen-Walker was in East’s “camp” and, in any event, any such Jones v Dunkel point or the basis for making such a point was never put to East.  Consequently, there is, in my view, nothing in this point.

Position of Webster and East with respect to the Lal Lal Loan

1. The first contention by East is that there was no agreement for him to provide a guarantee for the Lal Lal Loan.  There was no resolution to this effect by Webster’s board of directors and there was no letter of offer and acceptance or any other documentation from East about providing a guarantee.  This is unequivocally the position on the evidence.  On this basis, it is contended that the parties were, consequently, not ad idem and no contract came into existence at common law whereby East agreed to provide a guarantee for this loan.  This position is similar to the cases of mistake at common law where the buyer and seller mistakenly believe that the relevant property is owned by the seller, when in fact this is not the case, and also cases where the subject matter of the contract does not exist.[63]  In my view, it is clear, for the preceding reasons, that there is no basis for concluding that the parties were ad idem at the time East signed the Collateral Mortgage, as he did so labouring under a critical mistake, as has been discussed.  Moreover, Baird, the solicitor for Webster who oversaw the preparation of the security documents, accepted that if a guarantee was to be taken, prior contact may be made with the proposed guarantor seeking agreement to the provision of a guarantee.[64]  It was acknowledged by Webster that there was no prior contact with East and that the documentation, such as the Letter of Offer, did not refer to a guarantee from him for the Lal Lal Loan.

   [63]See the discussion in Peter W Young, Clyde Croft and Megan Louise Smith, On Equity (Thomson Reuters, 2009) at 341–2 [5.720].

   [64]Transcript 148–9.

1. Relying on equitable principles, but in the alternative, East contends that the case can be viewed as a common mistake[65] by both Webster and East, a unilateral[66] mistake by East or by application of the principles of estoppel.  It is submitted that in each of these cases, it would be unconscionable for Webster now to rely on the alleged guarantee said to be contained in the Collateral Mortgage against East.

   [65]Bell v Lever Bros Ltd [1932] AC 161 at 235–6; Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255. See also James O’Donovan and John Phillips, Thomson Reuters, The Modern Contract of Guarantee (at 11 July 2016) [4.700]–[4.780]; and Peter W Young, Clyde Croft and Megan Louise Smith, On Equity (Thomson Reuters, 2009) at 339–46 [5.680]–[5.760].

   [66]Taylor v Johnson (1983) 151 CLR 422.

1. Webster, on the other hand, contends that East has not established that he was mistaken in signing the Collateral Mortgage, citing the following in support of this position:

(a)East’s signature appears on the Collateral Mortgage and he signed (twice) in his capacity as guarantor;[67]

[67]Court Book 283.

(b)Curwen-Walker[68] certified that he “explained the contents, nature and effect of them to [East]”[69] (as well as each of the other guarantors);

[68]East’s own solicitor in this aspect. But see above, [24].

[69]Court Book 281.

(c)East acknowledged, amongst other things, that “the Security Documents [had] been fully explained to you by your Solicitor”;[70]

[70]Court Book 280.

(d)The context of the solicitor’s certificate referring to the Collateral Mortgage and not documents relating to the North Star loan:

i)the certificate referred to a “LOAN FACILIITY TO: 5 LAL LAL ST PTY LTD”;[71]

[71]Court Book 280.

ii)the documents in respect of the $700,000 Lal Lal St advance were prepared and signed after Christmas 2005;[72]

[72]Cf [18], above.

iii)“East’s solicitor”[73] certified that he gave the advice “Before the Security Documents were executed by the Guarantor”;[74] 

[73]John Curwen-Walker who acted for him in relation to the solicitor’s certificate: Transcript 384, 399.

[74]Court Book 281.

iv)the only document meeting the description of “Security Documents” that was executed by East was the Collateral Mortgage (in respect of which East was guarantor);

v)East has not called Mr Curwen-Walker to give evidence;

(e)the Collateral Mortgage (that was “fully explained”) contained a guarantee from the directors, including East;

(f)the attempt to read down[75] the solicitor’s certificate because it did not specifically refer to a guarantee (which formed part of the mortgage) is artificial and should be rejected;

[75]Eg, Transcript 144.

(g)East’s evidence that Curwen-Walker did not give any explanation of the documents at the one (document signing) meeting is consistent with the Lal Lal Street advance documents being signed in January 2006;[76]

[76]Transcript 375.

(h)East’s recollection of events should not be accepted:

i)he was (and still is) a Chartered Accountant experienced in business matters including secured lending;[77]

[77]Transcript 379–81.

ii)he recalled only one meeting at which documents were signed;[78]

iii)he gave no cogent or credible explanation for signing the solicitor’s certificate and Collateral Mortgage;

iv)he says that he did not read the documents he signed at the one document signing meeting[79]—it appears that he was not concerned with the detail of the transactions;

v)a considerable period of time elapsed between the signing of the collateral mortgage and the service of the writ;

(i)from the perspective of a chartered accountant and his solicitor the Collateral Mortgage is not “a confusing document”.[80]

Finally, Webster contends that it would appear that East has forgotten the guarantee that he gave in the Collateral Mortgage and the explanation of that given by Curwen-Walker.

[78]Transcript 192.

[79]Transcript 372.

[80]Cf Closing Submissions of Mr James East (6 October 2016), [20].

1. These submissions by Webster do not, however, address the evidence as to the circumstances of the “signing meeting” and the effect of the loan agreement as between Webster and East as it subsisted when that meeting occurred.  As has been discussed, it is clear, in my view, that the parties—namely, East and Webster—were not ad idem when he signed the Collateral Mortgage or the solicitor’s certificate.  Thus, the consensual basis necessary to found the contract which Webster alleges and relies upon was not present and the position is not changed as a result of East signing the solicitor’s certificate in the circumstances of that meeting and in the context of matters as they stood with respect to the loan agreement and related matters, of which Webster was fully aware.  More particularly, it hardly lies in the mouth of Webster to claim that it was misled, or that East represented his agreement to the new basis upon which the Collateral Mortgage was to be entered into, as a result of the confused circumstances and documentation which Webster had provided or permitted.  Moreover, the fact of East being a chartered accountant changes nothing in the circumstances, for the reasons already discussed, and the reference to delay on East’s part in raising the Collateral Mortgage guarantee issue points, rather, to the veracity of his evidence as to mistake—the parties not being ad idem.  This position is also strengthened by the evidence of subsequent conduct on East’s part—of only seeking release of his guarantee of the $120,000 advance to North Star.[81]  Thus, the position is, as discussed, that no contract came into being between East and Webster by way of any personal guarantee of the Lal Lal loan.  On this basis, there is no issue with respect to rectification on this basis.  There is simply no contract of guarantee at law.  However, in case issues with respect to the equitable remedy of rectification—on whatever basis—should become relevant in the event that these proceedings go further, I do, in the reasons which follow, address those issues.  I turn now to various matters in this respect.

   [81]See below, [47].

1. Whether or not the inclusion of East as a guarantor was discussed at the 20 December board meeting,[82] Webster contends that the evidence shows that the decision was deliberate, hence there was no mistake on its part.  More particularly, Webster submits:[83]

   [82]Compare McGregor at Transcript 339.

   [83]Submissions on behalf of the Plaintiff (Webster) (7 October 2016), [23].

(a)it would appear that Baird, consistently with his practice, included the directors of North Star as a result of determining that further security was required;[84]

(b)Baird’s acceptance of a “possibility” of some confusion (in East’s mind) that was “most unlikely” was no concession at all;[85]

(c)Baird’s explanation corroborated by Bahr was not “faintly put”;[86]

(d)the inclusion of the directors of North Stars as guarantors made commercial sense in circumstances where North Star was giving collateral security for an advance to Lal Lal St;

(e)the requirement for there to be a solicitor’s certificate for guarantees contained in a collateral mortgage is commercially explicable in circumstances where both the guarantor and North Star were third parties in relation to the $700,000 Lal Lal St advance;[87]

(f)by contrast, no solicitor’s certificate was sought or obtained in relation to the December 2005 North Star guarantee in circumstances where East was both director of North Star and had an interest through NSFN;

(g)the creation and signing of four other solicitor’s certificates[88] is inconsistent with mistake on the part of Webster—it is inherently unlikely that the mistake was repeated on six separate occasions;[89]

(h)the North Star $120,000 advance was complete at the time when the Lal Lal $700,000 advance documents were being prepared;

(i)there was no Christmas rush in relation to the collateral mortgage.[90]

[84]See above, [15].

[85]East’s closing submissions at [16]. It cannot be said that confusion in the mind of East was logically impossible.

[86]See Submissions on behalf of the Plaintiff (Webster) (7 October 2016), [11]–[17].

[87]Compare Abdul v Bank of Western Australia [2012] VSC 222. Baird gave evidence that “Webster or now W&D Finance, would often take collateral security, but in that situation we would obviously require security of independent legal advice which in the case of course, Mr East, he’s obtained”: Transcript 142. See also Transcript 152.

[88]Second Supplementary Court Book 1962–9.

[89]East appears to seek to demonstrate that fundamental mistakes were made in six documents: the collateral mortgage and five solicitor’s certificates.

[90]In relation to the $700,000 Lal Lal St advance.

1. For reasons already discussed, I do not accept these submissions.  These submissions either generally overstate the position on the evidence or are not supported by the evidence at all.  In summary, the position on the evidence is, in my view, that the inclusion of all the directors of North Star as guarantors was more than likely the result of the preparation of the Collateral Mortgage document by a paralegal employed by Baird & McGregor without regard to the agreed position between the parties as set out in the accepted Letter of Offer.  There is no evidence that Baird or anyone else specifically turned their mind to this issue in the course of preparing these documents.  Moreover, the evidence that it might be expected that there would or may be contact with a new potential guarantor or guarantors to obtain fresh or additional agreement, together with evidence that this did not occur, reinforces this position.  The same applies with respect to the preparation of the solicitor’s certificate.

1. Moreover, it is submitted by Webster that if East were mistaken, there is no evidence that Webster was aware of that.[91]  The transcript references to the oral evidence on behalf of Webster in this respect does not advance its position.  These witnesses, Bahr,[92] Baird[93] and McGregor,[94] were in no position to know that East was not mistaken.  They were not present at the “signing meeting” and so their evidence is at best gratuitous; with no basis other than supposition, and self-serving at that.  Moreover, McGregor’s evidence lies at an even lower level, given his admitted significant lack of involvement with the transaction.  Indeed, having regard to Webster’s or its solicitors’ failure to inform East of his inclusion as a guarantor of the obligations under the Collateral Mortgage in circumstances where his agreement had not been obtained, together with the circumstances it permitted with respect to the execution of the Collateral Mortgage, Webster had every reason to think that East was or may have been mistaken when he executed that mortgage.  This is particularly the case where Webster’s solicitors had not taken the step which should have been taken and which, in all probability, would have avoided the mistake—namely, providing two solicitor’s certificates (one for each of the Lal Lal Loan and the North Star loan), which Bahr and Baird, as Webster witnesses, effectively conceded should have been done.

   [91]Transcript 54, 124, 339.

   [92]Transcript 54.

   [93]Transcript 124.

   [94]Transcript 339.

1. On those bases, Webster submits that the evidence adduced by East falls well short of the “convincing proof” required to demonstrate that both he and Webster were acting under a common mistake in relation to the guarantee contained in the Collateral Mortgage.  This is, of course, a matter going to the availability or otherwise of the equitable remedy of rectification.  It does not go to the issue which, in my view, is critical and decisive: namely, that the relevant parties were not ad idem when East signed the Collateral Mortgage so that there is no contract of guarantee associated with that mortgage between East and Webster which is susceptible to rectification—there is nothing to rectify.  Nonetheless, even if rectification were relevant, I am of the view that the objective indicia of the subjective intentions of the parties as discussed in these reasons would take the position over this bar.[95]

   [95]And see Patrick Stevedores Operations (No 2) Pty Ltd v Melbourne Port Lessor Pty Ltd [2016] VSC 528, particularly [38]–[44].

1. With respect to unconscionability aspects of the matter, Webster claims in the alternative that the representation made in the solicitor’s certificate is misleading and deceptive and that it relied on that representation to its detriment, giving rise to estoppel and/or liability under the Australian Consumer Law.[96]  In this context it is said that the statement made in the solicitor’s certificate (adopted by East) was a representation by East (and his solicitor/agent, Curwen-Walker) that the Collateral Mortgage had been explained read and understood by him.  Concluding, Webster contends that having regard to the whole of the evidence,[97] Webster has demonstrated that it relied upon the solicitor’s certificate in making the $700,000 Lal Lal St advance.  A number of points can be made—points which materially detract from and negate any force in these submissions.  First, it is clear from a consideration of the whole of the evidence that Webster’s loan to value ratios varied as between various types of freehold securities and that they were relatively conservative with a view to prime reliance on the value of the freehold as the security.[98]  Secondly, there is evidence that Webster was apparently content to—and did—advance moneys in advance of the execution of security documents and the signing of the solicitor’s certificate.[99]  Thirdly, as discussed, the process which Webster allowed to occur for the signing of the Collateral Mortgage and the solicitor’s certificate—together with the failure to provide a second certificate—leaves no basis for it to say now that it was misled by a representation arising from the maelstrom of confusion which it could easily have prevented by careful attention to the content and completeness of the security and associated documentation and a properly managed signing and certification process.

   [96]For the amount of the $700,000 Lal Lal St advance, which otherwise has not been repaid.

   [97]Including the evidence from Baird (Transcript 122), Gribble (Transcript 285) and McGregor (Transcript 339) as to reliance and the nature of the guarantee transaction: a guarantee being provided by a third party director of a third party providing security where neither the guarantor nor the third party providing the security had an interest in the $700,000 Lal Lal St advance.  Compare Sidhu v Van Dyke (2014) 251 CLR 505.

   [98]See above, [54].

   [99]See above, [23].

1. In relation to the principles applicable to common mistake, Webster relies upon Patrick Stevedores Operations (No 2) Pty Ltd v Melbourne Port Lessor Pty Ltd ,[100] where the issues concerning proof of intention in the context of the remedy of rectification were discussed; in particular, reconciliation of subjective and objection evidence of intention and the extent to which some outward manifestation of intention is required.  For the reasons already canvassed, to the extent that there was objective manifestation of intention, it is clear, in my view, that the relevant parties were not ad idem and in any event—as may be relevant in equity—had different understandings of their respective positions with respect to the provision of a guarantee of the Collateral Mortgage obligations of North Star by East.

   [100][2016] VSC 528, [38]–[44].

1. Turning to unilateral mistake, Webster makes reference to Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd,[101] where the Court of Appeal of Western Australia said:[102]

   [101](2015) 47 WAR 547.

   [102]Vantage Systems Pty Ltd v Priolo Corporation Pty Ltd (2015) 47 WAR 547 at 579–81 [171]–[179].

The general rule is that rectification of an instrument made by two or more parties is not permitted on the ground of a unilateral mistake by one party as distinct from a common mistake by both or all of the parties.  There are, however, exceptions to the general rule.[103]

[103]See the discussion in J D Heydon, M J Leeming and P G Turner, Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (LexisNexis Butterworths, 5th ed, 2015) at 942–3 [27-125]–[27-140].

In the present case, the important point is whether one of the exceptions applied.

In Leibler v Air New Zealand Ltd (No 2),[104] Kenny JA summarised the principles which govern an application for rectification of a contract on the ground of unilateral mistake, as follows:

[104][1999] 1 VR 1.

If (1) one party, A, makes an agreement under a misapprehension that the agreement contains a particular provision which the agreement does not in fact contain; and (2) the other party, B, knows of the omission and that it is due to a mistake on A’s part; and (3) lets A remain under the misapprehension and concludes the agreement on the mistaken basis in circumstances where equity would require B to take some step or steps, depending on those circumstances, to bring the mistake to A’s attention; then (4) B will be precluded from relying upon A’s execution of the agreement to resist A’s claim for rectification to give effect to A’s intention …[105]

[105]Leibler v Air New Zealand Ltd [No 2] [1999] 1 VR 1 at 14 [36].

The conduct of the party who is not mistaken must ordinarily be unconscionable or involve actual, constructive or equitable fraud.[106]

[106]See Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd [1981] 1 WLR 505 at 515–16; Commission for the New Towns v Cooper (Great Britain) Ltd [1995] Ch 259 at 277–80, 292; Terceiro v First Mitmac Pty Ltd (1997) 8 BPR 15,733 at 15,739.

In Tutt v Doyle,[107] the salient facts were these.  Between the making of a contract for the sale of land and the completion of the contract, the vendor, to the purchasers’ knowledge, made a mistake in a plan of subdivision as to the size of the lot to be transferred.  As a result, the transfer registered by the purchaser gave him a larger lot than was agreed under the contract.  The Court of Appeal of New South Wales held that the vendor was entitled to relief for unilateral mistake because it would have been unconscionable for the purchaser to avail himself of the advantage obtained. An order for re-conveyance of part of the land was made.

[107](1997) 42 NSWLR 10.

Meagher JA (Brownie AJA agreeing) said the real question in the case was whether it was unconscionable for the purchaser knowingly to take advantage of the vendor’s mistake.[108]  His Honour held that an affirmative answer to that question flowed from the High Court’s decision in Taylor v Johnson,[109] a case concerned with the rescission of a contract for unilateral mistake.  His Honour elaborated:[110]

[108]Tutt v Doyle (1997) 42 NSWLR 10 at 12.

[109](1983) 151 CLR 422.

[110]Tutt v Doyle (1997) 42 NSWLR 10 at 12–13. See also Medsara Pty Ltd v Sande [2005] NSWCA 40, [4]–[5].

True, in that case the only equitable remedy under consideration was rescission, and rescission in the present case was impossible because the Tutts took the trouble to build a house on their newly acquired strip of land.  But I do not read the High Court as saying that once the ground of unconscionability is made out, it becomes a case of rescission or nothing (12 - 13).

Similarly, in Tutt,[111] Handley JA (Meagher JA & Brownie AJA agreeing) referred to the following statement of principle by Mason ACJ, Murphy and Deane JJ in Taylor:[112]

[111]Tutt v Doyle (1997) 42 NSWLR 10 at 14.

[112]Taylor v Johnson (1983) 151 CLR 422 at 432.

The particular proposition of law which we see as appropriate and adequate for disposing of the present appeal may be narrowly stated.  It is that a party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake … about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake.

Handley JA then pointed out that Mason ACJ, Murphy and Deane JJ also endorsed wider equitable principles which enable a court to grant relief for unilateral mistake in cases not covered by the principle they had enunciated:[113]

They approved[114] the statement by James LJ in Torrance v Bolton,[115] that the power to set aside a contract for unilateral mistake was based on the ordinary jurisdiction of equity “to deal with” any instrument or other transaction “in which the Court is of the opinion that it is unconscientious for a person to avail himself of the legal advantage which he has obtained”. They also approved the decisions in Riverlate Properties Ltd v Paul[116] and Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd,[117] where rectification, and not rescission, was granted on this ground.

Kenny JA’s analysis in Leibler[118] of the High Court’s decision in Taylor is similar to that of Meagher JA and Handley JA in Tutt.

[113]Tutt v Doyle (1997) 42 NSWLR 10 at 14.

[114]Taylor v Johnson (1983) 151 CLR 422 at 431.

[115](1872–73) LR 8 Ch App 118 at 124.

[116][1975] Ch 133 at 145.

[117][1981] 1 WLR 505 at 514–16.

[118]Leibler v Air New Zealand Ltd (No 2) [1999] 1 VR 1 at 26 [68].

1. Again the matters raised by Webster with reference to the Vantage Systems judgment go to rectification.  As discussed in the preceding reasons, there is not, in my view, any contract between East and Webster by way of personal guarantee associated with the Collateral Mortgage which could be rectified.  If there were, however, it would be a contract—the Collateral Mortgage—which, in my view, would require rectification by deletion of East’s name as a guarantor.  In all the circumstances—particularly the accepted Letter of Offer provisions and the events of the “signing meeting”—the four elements referred to in Leibler v Air New Zealand as set out in the Western Australian Court of Appeal judgment in Vantage Systems must be taken to be satisfied.  Moreover, the events of and with respect to the “signing meeting” and those which followed, events which have been discussed, and for the reasons which follow, establish, in my view, the requisite unconscionability on Webster’s part to provide a basis for rectification were such relief required by East.

1. Turning again to questions of unconscionability, it does appear, as East submits, that Webster is trying to enforce the Collateral Mortgage without regard to the contemporaneous documents, particularly the Letter of Offer, its acceptance and the instructions from Webster to Baird, as its solicitor.  It is clear from the Webster evidence that the Lal Lal Loan was a large loan for Webster and it was likely to suffer a loss if recovery was not successful.  All of the Webster witnesses had various interests in enforcing the guarantee against East and recouping the losses in that they were directors and shareholders of Webster and involved in the legal work through Baird & McGregor or, in the case of Bahr, the employee responsible for the loan application and loan management.[119]  Having regard to these matters and the circumstances to which reference has already been made, it is my opinion that there is force in the submission by East that it appears that Webster, having found his signature on the Collateral Mortgage, sought to enforce it and, in so doing, has ignored the true facts.  It has been a cavalier approach to a very significant liability which Webster is seeking to impose on East.

   [119]See, eg, Transcript 341.

1. East also submits, and in my view correctly, that the Court can be fortified in not enforcing this Collateral Mortgage against East because of the mistake by reason of evidence of subsequent admissions, facts and conduct of both parties.

1. Generally, the principles of contractual construction involve an objective assessment of the evidence and intentions of the parties at the time that the contract was entered into, with reference to the text, context and purpose of the contract and the “genesis of the transaction”.[120]  However, in circumstances such as those arising in this proceeding where there is a dispute as to whether there was a contract at all or whether the document was entered into by the mistake of one or both parties, evidence of post-contractual admissions and other relevant matters is admissible as an exception to the usual position that the Court ought to look only to contemporaneous documents as at the time of formation, or alleged formation, of the contract.[121]  In this particular case, the Court is not construing the agreement or its terms or what they mean.  Rather, it is considering whether there is a contract at all or alternatively who were the parties to the contract.  This is a different circumstance from that generally applying with respect to contractual construction issues and the weight of authority is that the Court may consider post-contractual evidence in relation to these issues.[122]

   [120]Patrick Stevedores Operations (No 2) v Melbourne Port Lessor Pty Ltd [2016] VSC 528, [21]; see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104.

   [121]Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 at 582 [35], 625 [163].

   [122]Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153 at 163–4; Pethybridge v Stedikas Holdings Pty Ltd (2007) Aust Contract R 90–263, [2007] NSWCA 154, [59]; Re Centura Global Holdings Pty Ltd (2016) 111 ACSR 185 at 206–7 [65]–[67]; Patrick Stevedores Operations (No 2) v Melbourne Port Lessor Pty Ltd [2016] VSC 528, [42]. The reasoning of Heydon JA (as he then was) in Brambles Holdings was followed by the Victorian Court of Appeal in Lederberger v Mediterranean Olives Financial Pty Ltd (2012) 38 VR 509 at 517–19 [26]–[31].

1. On the basis of the authorities, East contends that the matters which may be considered by the Court in the present circumstances are as follows:[123]

(a)post-contractual communications between the parties themselves: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd;[124]

(b)post-contractual admissions: Sinclair, Scott & Co Ltd v Naughton;[125] FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd;[126] Re Centura Global Holdings Pty Ltd;[127]

(c)the circumstances surrounding the post-contractual exchange of communications: ABC v XIVth Commonwealth Games Ltd;[128] and

(d)relevant post-contractual conduct as to whether a contract was made: Re Centura Global Holdings Pty Ltd.[129]

[123]See Advaland Pty Ltd v Bitcon [2015] VSC 235, [61]–[64].

[124](1988) 18 NSWLR 540 at 547–8.

[125](1929) 43 CLR 310 at 327.

[126][1993] 2 VR 343 at 351.

[127](2016) 111 ACSR 185 at 206–7 [65].

[128](1988) 18 NSWLR 540 at 550.

[129](2016) 111 ACSR 185 at 206–7 [65].

1. Turning to the present circumstances, it is submitted by East that there is significant post-contractual evidence which supports his mistake case.  More particularly, East’s submissions make reference to the following:[130]

   [130]Closing Submissions of Mr James East (6 October 2016), [31] (emphasis in original).

(a)a Webster letter (Mr Bahr) of 26 May 2006 to Mr Gary Anderson,[131] which relevantly states:

[131]Court Book 1055–6.

“5.      As you are aware the North Star Complex is tied into 5 Lal Lal Street Pty Ltd by way of a supporting second mortgage.  Any increase in the debt of the North Star loan with Webster Investments Ltd reduces the equity available to secure the 5 Lal Lal Street complex …”;

(b)in March 2007, when East sought through his solicitors at the time to be released from the North Star guarantee,[132] he did not also seek a release from the Collateral Mortgage for the Lal Lal Loan—this is because, in his words—“I didn’t realise I had a guarantee to Lal Lal”;[133]

(c)no demand was made by Webster of East in relation to the Collateral Mortgage;

(d)the minutes of meeting of Webster held 12 March 2013[134] refer to serving the directors and stakeholders of Lal Lal Street, ie not someone like East who appears to have been added as an afterthought; and

(e)in his affidavit sworn 4 December 2013, William Bahr deposes at paragraph [25] as follows in relation to the further advancement of the Lal Lal Loan:[135]

“As there was not enough equity in 5 Lal Lal Street, to keep it below our lending criteria, security for the Final Lal Lal Street Loan was second mortgages over the North Star Hotel complex, 7 Humffray Street South Ballarat, Lot 1 Wendouree Parade, Ballarat to the value of $700,000 with a guarantee from Aaron Peter Martin”. (emphasis added).

[132]Court Book 1122–3.

[133]Transcript 377.

[134]Second Supplementary Court Book 1975–7.

[135]Court Book 142–53.

1. In my view, these particular matters the subject of East’s submissions in support of his mistake case, are matters which provide compelling support for that case.  Of particular significance, in my view, is the fact that East did not, in March 2007, seek a release from the Collateral Mortgage for the Lal Lal Loan because, as he said, he did not realise that he had given a guarantee for that loan.  That does not detract from the force of the other particular matters to which reference has been made, but it is particularly significant having regard to the personal commercial interest which East would have had in March 2007 to seek release from “both” guarantees if it were the true position that he had agreed or understood that it could be said that he had agreed to a guarantee of the Lal Lal Loan.

1. For these reasons, I find that East had no liability to Webster as a guarantor of the Lal Lal Loan.

Calculations and proof of interest on the Lal Lal Loan

1. East, by way of further and alternative submissions, contends that Webster’s calculation of the debt alleged to be owed by East in the Lal Lal Proceeding is incorrect and should be $1,346,085.64 as at 26 April 2015 and not $1,617,417.35 as claimed by Webster.[136]

   [136]See Court Book 132–40.

1. As I have found that East is not liable to Webster as a guarantor of the Lal Lal Loan, this issue falls away.  Nevertheless, at the closing of the trial, counsel said that they would confer in relation to those calculations with a view to reaching a consensus.  Accordingly, should it be necessary to revisit this aspect of this proceeding, I reserve determination of this particular issue.

North Star Proceeding

Background

1. Central to this aspect of the proceedings is Webster’s conduct in taking possession of and selling the properties over which it had a registered mortgage to secure its various loans to the borrower, North Star.

1. The properties are on the corner of Lydiard Street North and Seymour Street, Ballarat and comprise the following:

(a)the Star Hotel, a National Trust listed hotel on one title[137] on the corner of Lydiard Street North and Seymour Street; and

(b)a motel complex known as “Seymours on Lydiard”, which extends in an L-shape around the hotel, with frontages to both Lydiard Street North and Seymour Street.  It comprises a renovated four bedroom single storey brick Victorian era house,[138] a renovated two bedroom single story brick Victorian era terrace house, two freestanding modern villas, an eleven room motel complex and reception and associated car parking – all of which are on six titles.[139]

The hotel and motel are each subject to separate leases (“the North Star properties”).

[137]Certificate of Title Volume 3969 Folio 766.

[138]The two houses are at 304 and 306 Lydiard Street.

[139]Certificates of Title Volume 2839 Folio 743; Volume 10371 Folio 910; Volume 06119 Folio 777; Volume 10000 Folio 894; Volume 06119 Folio 778; and Volume 10622 Folio 219.

1. Webster’s mortgage over the properties was taken before East signed his guarantee on or about 20 December 2005.[140]  Shortly before the time that East signed that guarantee, Webster’s position was that with the new loan to be advanced, the total loans would be $2.72 million against a valuation of the North Star properties of $4.62 million.  This produced a loan to value ratio of 59%.[141]

   [140]Court Book 1011–18.

   [141]See file note dated 15 December 2005 headed “North Star Developments Pty Ltd”, which concludes with a calculation of the loan to value ratio which is recorded in the file note as being 59% (Court Book 1001); and see Letter of Offer from Webster to the directors of North Star dated 20 December 2005 headed “Mortgage Loan—Variation—5—Final” quote with respect to an advance of $120,000 by way of variation of the existing mortgage (Court Book 1002–5).

1. Webster had made various loans to North Star to fund the various stages of planned developments of the North Star properties.  The facilities and securities are referred to in the Amended Statement of Claim and in Bahr’s affidavit.[142]

   [142]Court Book 689–702.

1. At the time the North Star further advance was offered by Webster, East was a director and shareholder—as to 5%—of North Star and held a 5% interest in the underlying beneficial interests in the North Star properties—but only from August 2005 to March 2007.  North Star owned and managed the development of the North Star properties on behalf of the “North Star Developments Partnership”.  It is through this partnership that East acquired his 5% interest.  This partnership, which was an investment partnership, was arranged by Anderson, the first defendant and one of six co-guarantors, including East and Quinlan, who were initially sued by Webster in the North Star proceeding.  In August 2005, East was the accountant for the North Star project and also the Lal Lal project, the subject of the Lal Lal proceeding which has already been discussed.

1. East sold his interests in North Star and the North Star Developments in March 2007.  East informed Webster of these sales in or about March 2007 and requested that he be released from the guarantee.  It is important to note in this respect that the request for release by East was from the guarantee of the North Star mortgage as varied to secure the further $120,000 advance.  As noted previously, East did not request a release from any guarantee with respect to the Lal Lal Loan, the $700,000 advance with respect to the Lal Lal project; the explanation being, which in my view is clearly established by the evidence, because he was not aware that he had given such a guarantee.  In any event, returning to the North Star further advance, East’s request for release was refused by Webster on the basis that it was not receiving any consideration for such a release.[143]

   [143]Court Book 1122–3.

1. North Star went into default and, on 17 September 2010, Webster served a Notice to Pay pursuant to s 76 of the Transfer of Land Act 1958[144] and on 15 November 2010 served a Notice to Redirect Rent on Sarke Pty Ltd, thereby becoming mortgagee in possession under its mortgages of the North Star Properties.[145]  Webster subsequently sued East and five other guarantors, but is now proceeding only against East.  A notice of discontinuance was filed against Quinlan, one of the co-guarantors, after the sale of the North Star properties to Quinlan’s trustee company.

   [144]Court Book 1299–301.

   [145]Court Book 1319–22.

The Rightime contract of sale

1. On or about 28 September 2010, which was shortly after Webster had served a notice of default in respect of the North Star loans, North Star entered into a contract of sale with Rightime Pty Ltd (“Rightime”) to sell the North Star properties for the amount of $3.5 million (excluding GST) (“the Rightime contract of sale”).[146]  The Rightime contract of sale was subject to the registration of a plan of subdivision affecting some or all of the properties, and was also subject to finance.

   [146]Court Book 1302–14.

1. Webster was aware of the Rightime contract of sale.  It is clear from its board minutes of 12 October 2010, which state that “it is considered that North Star settlement will proceed …”.[147]  In spite of this apparently favourable position, Webster, on 10 November 2010, took a “u-turn” in that Gribble of Baird & McGregor, solicitors for Webster, wrote to Gadens lawyers, Webster’s then lawyers, and asked them to advise the parties that Webster does not accept the Rightime contract of sale.[148]  No real or credible explanation was given by Gribble and the other Webster witnesses as to why it instructed its lawyers not to co-operate in respect of the Rightime contract of sale, which presented the opportunity to sell the North Star properties for $3.5 million plus GST, $3.85 million in total.  Gribble did say in his oral evidence that he doubted the bona fides of Rightime,[149] but this lacks credibility and smacks of an attempt now to justify past acts and omissions on the part of Webster, particularly having regard to the second “u-turn” by Webster, in finally seeking to pursue the Rightime contract.[150]  The sale would have effectively cleared the secured debt owed to Webster.[151]  Indeed, in his evidence, Mr McGregor agreed that it would have been a very favourable development for Webster, had the contract proceeded.[152]  In spite of the significance of the Rightime contract of sale in the North Star Proceeding, Webster initially did not even discover that contract.

   [147]Second Supplementary Court Book 1972.

   [148]Court Book 1319–22.

   [149]Transcript 287.

   [150]See below, [68].

   [151]Refer to the loan statement at this time at Court Book 683 and the notice to pay amount of $3.427m at Court Book 1300–2.

   [152]See Transcript 340.  McGregor stated: “It would have been a wonderful thing for the company if it had become unconditional, but it never did”.

1. Moreover, there is no reference in the correspondence at or about this time to a caveat lodged by North Star Freehold Nominees Pty Ltd (“the Caveat”), the plan of subdivision, the finance condition and the identity of the purchaser.  East submits that all of these issues were put forward at various times by the Webster witnesses at trial as ex post facto rationalisation or excuse as to why Webster refused to abide and facilitate the settlement of the Rightime contract of sale.  In my view, there is considerable force in these submissions, because the issues of the Caveat and the plan of subdivision and its approval were matters which would have to be attended to and resolved by Webster as selling mortgagee of the North Star properties prior to a mortgagee’s sale.  The Caveat may have been the subject of a caveat removal application under the Transfer of Land Act 1958 or it may, in any event, have lapsed on the sale of the North Star properties by Webster as mortgagee under facilitative provisions of that legislation.[153]  The plan of subdivision approval issue became an issue of delay because one of the titles comprising the North Star properties could not be located.  Clearly, the problem of a lost title did not impinge merely upon the completion of the Rightime contract of sale—it was also a matter which would have to be resolved, either by location of the title or a lost title application, by Webster as selling mortgagee before any mortgagee sale could proceed.

   [153]See Transfer of Land Act 1958 ss 89A–90.

[236](2004) 87 SASR 570 at 582–8 (Gray J), 592–4 (Besanko J, with whom Mullighan J agreed).

1. In the circumstances of this case it is clear, in my view, for the preceding reasons that Webster, by its acts and omissions, sacrificed the security and lost various opportunities for East to be absolved of liability.[237]  It is uncontroversial that a mortgagor or a party claiming through a mortgagor on the basis of an interest in the equity of redemption bears the burden of proving breach of duty by the mortgagee and consequent loss and damage.[238]  In the present case, East has been well assisted in this respect by the evidence of Webster: particularly in relation to its lack of any advertising and marketing strategy; minimal, if any, advertising of any significance; the failure to engage a selling agent to advise on and execute an appropriate marketing and advertising program; the failure to obtain a contemporaneous valuation or valuations (the latter depending on the progress of the marketing and advertising strategy and its success); and the circumstances of the relevantly covert sale by private treaty of the North Star properties to Quinlan’s trustee company in the absence of a contemporaneous valuation, its financing by Webster, the gratuitous release of Quinlan as a co-surety and the consciousness by Webster of the “sensitivities” of the issues.[239]   The evidence with respect to these matters and other acts and omissions detailed in the preceding reasons does, in my view, establish Webster’s breach of its duty to act in “good faith” as a selling mortgagee.[240]  There is little doubt that Webster completely ignored East’s interests as guarantor.  Moreover, Webster’s conduct as a mortgagee in its position cannot be justified or “saved” by a retrospective valuation.[241]

   [237]Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570.

   [238]Haddington Island Quarry Co Ltd v Huson [1911] AC 727; and see Boz One Pty Ltd v McLellan (2015) 105 ACSR 325 at 352–3 [69]; and Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570.

   [239]Email from Gillett at Second Supplementary Court Book 1985; board minutes of 11 June 2013 at Court Book 1496.

   [240]Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570 at 588 [64]–[66].

   [241]See above, [90]–[93].

1. The position of a guarantor in circumstances where the mortgagee has impaired the security or acted in breach of duty in executing the security—and perhaps fraudulently or negligently—was considered in detail in GE Capital Australia v Davis.[242]  Of particular importance is the following passage in the judgment of Bryson J:[243]

   [242](2002) 180 FLR 250.

   [243]GE Capital Australia v Davis (2002) 180 FLR 250 at 276–9 [85]–[92].

Remedies available to guarantors in their own right

85.The obligation of the guarantor to the principal creditor arises under the contract between them; however protection extended in Equity to the guarantor has the effect that the guarantor can raise an equitable defence in part or in whole against a claim for its contractual liability.  The protection extended to the guarantor in Equity is related to the guarantor’s right to be subrogated to the rights of the principal creditor against the security if the guarantor pays out all the secured debt.  The protection extended in Equity may have had its origin in this right of subrogation.  The availability of protection is subject to any provision in the contract between the guarantor and the principal creditor which qualifies or limits the guarantor’s rights; in this case the qualification is of high importance, because of provisions of the guarantee with which I will deal.  The guarantor cannot complain of any conduct of the creditor, or of any dealing with the secured security property which was authorised by the terms of the contract of guarantee, or by the terms of the security granted by the debtor.

86.A guarantor of a secured debt is entitled to show that his liability to the secured creditor has been reduced or (it may be) extinguished as a result of some shortcoming in the realisation or management of the security by the mortgagee.

87.Guarantors have remedies in their own right for conduct of secured creditors which sacrifices the security or diminishes the value which the security could have yielded.  In Healy v Cornish[244] Milford J awarded a remedy to a guarantor on the basis of breach of an obligation of the secured creditor to the guarantor, not expressed by his Honour as an obligation of the secured creditor to the debtor who provided the security.  The claim was a strong one on the facts and Milford J formulated the principle[245] in terms which seem to have been higher than was necessary for the occasion.  In Bank of New South Wales v Taylor[246] Manning J referred to a possible remedy in Equity if the guarantor could prove “fraud or negligence”.[247]  Martin CJ[248] referred to the possible remedy as for “gross misconduct or fraud”.  These were incidental observations as the terms of the security authorised the secured creditor’s conduct complained of.  In Taylor v Bank of New South Wales[249] the Privy Council heard an appeal in other litigation arising from the same events.  That appeal was disposed of on the ground that the sale of the sheep the subject of security by the debtor took place within the terms of the security between the debtor and the bank, and the bank had not acted improperly by not intervening; it would seem that the bank had no right to intervene.  The observations of the Privy Council[250] on the circumstances in which sureties might have a remedy are obiter dicta.  Their Lordships’ observations approved the rule in Pearl v Deacon[251] which their Lordships said was:

[244](1863) 3 SCR (NSW) Eq 28.

[245](1863) 3 SCR (NSW) Eq 28 at 31.

[246](1881) 2 LR (NSW) 118.

[247](1881) 2 LR (NSW) 118 at 124.

[248](1881) 2 LR (NSW) 118 at 124.

[249](1886) 11 App Cas 596.

[250]Taylor v Bank of New South Wales (1886) 11 App Cas 596 at 602–3.

[251](1857) 24 Beavan 186; 53 ER 328.

... [W]here the creditor had, by his own act, rendered unavailable part of the security, to the benefit of which the surety was entitled, and the latter was held to be discharged, not absolutely, but only pro tanto.

Their Lordships appear to have distinguished the operation of this rule from a case where there had been an alteration of the original contract between the creditor and the principal debtor without the consent of a surety, who in that case would be wholly discharged.  Their Lordships’ observation on Pearl v Deacon endorses a rule under which any act of a creditor which renders unavailable part of the security gives rise to a pro tanto reduction in the liability of the surety; however their Lordships spoke obiter and were not called upon to consider or to state what acts of the creditor have that effect and in what circumstances.

88.In Hancock v Williams & Anor[252] Jordan CJ and Halse Rogers J dealt with this subject in an extensive exposition of the proposition (at 255):

[252](1942) 42 SR (NSW) 252.

A guarantor is responsible only for the obligation which he has guaranteed.

In the course of this exposition their Honours said;[253] with citations of authority:

[253]Hancock v Williams (1942) 42 SR (NSW) 252 at 255–6.

But the fact that a stipulated security for the guaranteed obligations has been exploited or realised by the obligee, in a manner which involves no breach of the contract of suretyship and no change in the nature of the guaranteed obligation, does not release the guarantor … although if such exploitation or realisation is negligently carried out, so that the surety derives less advantage from it than he is entitled to expect, he is entitled in equity to treat himself as discharged to the extent to which he has been damnified thereby, but no further.[254]

[254]Re Wolmershausen (1890) 62 LT 541 at 545–6; Wullf v Jay (1871–72) LR 7 QB 756; Polak v Everett 1 QBD 669 at 675–6; Mutual Loan Fund Association v Sudlow (1858) 141 ER 183; 5 CBNS 449; Williams v Frayne (1937) 58 CLR 710 at 738.

89.Counsel contended that the words: “if such exploitation or realisation is negligently carried out” establish the test for entitlement to a pro tanto discharge; in my opinion these words were not intended to make a full exposition of the standard applied but indicated the general subject dealt with by the authorities cited.  The old authorities referred to by Jordan CJ used various expressions for the shortcomings found against guarantors - misconduct in Mutual Loan Funds Association, laches in Wulff.  They did not examine the entitlement of the debtor where a sale was mismanaged and they did not treat the guarantors’ entitlement as measured by the debtor’s entitlement.  In Polak v Everett the security was varied without the concurrence of the guarantor who was thereby completely discharged.

90.Opinions in judgments in the High Court of Australia, which have a primary claim as sources of the law which I am to apply, do not state the test with great precision.  In Williams v Frayne[255] Dixon J said:

[255]Williams v Frayne (1937) 58 CLR 710 at 738.

If the guarantee is given upon a condition, whether express or implied from the circumstances, that a specific security shall be obtained, completed, protected, maintained or preserved, any failure in the performance of the condition operates to discharge the security and the discharge is complete.  But otherwise the surety can complain only if the creditor sacrifices or impairs a security, or by his neglect or default allows it to be lost or diminished, and in that case the surety is entitled in equity to be credited with the deficiency in reduction of his liability.  The cases are collected in the ninth chapter of Sir Sidney Rowlatt’s book, and there is an examination of some of them in the judgment of Hanna J in Northern Banking Co v Newman & Colton.[256]

[256][1927] IR 520 at 536–9.

91.In Buckeridge v Mercantile Credits Ltd[257] Brennan J said:

In a case where the act of a creditor does not discharge a surety, but the creditor has nonetheless sacrificed or impaired a security, or by his neglect or default allowed it to be lost or diminished, the surety is entitled in equity to be credited with the deficiency in reduction of his liability.[258]  The surety’s entitlement is lost, however, if he bargains away his right to complain of the act which occasions the deficiency.[259]  The respondent submits that the appellants, by the terms of the guarantee, had precluded themselves from complaining of any deficiency consequential upon the respondent pursuing against the mortgagor its remedies under the debenture.  If that submission be right, the case is distinguishable from Pearl v Deacon, where a creditor by exercise of a paramount right, sacrificed a security to the benefit of which a surety was entitled, and the surety had not agreed to the exercise of the right or to accept the prejudice flowing from the sacrifice of the security.

92.These authoritative statements appear to me to have the effect that the surety may complain of anything of which the debtor may complain, and has further rights where the value or realisation of the security has been diminished by the creditor’s neglect or default.  What is meant by neglect or default is not further defined by the authorities, but it gives more protection than was available to the debtor under Pendlebury.  The guarantor has even greater protection and may be completely discharged if the creditor fails to obtain effective security which is available as in Wulff v Jay, or varies the terms of the loan or security without the guarantor’s concurrence. Where subs 420A(1) applies I am of the view that it should be applied as a fair representation of the standard of neglect or default referred to by Dixon and Brennan JJ. If the guarantors show that the mortgagors would, if they made a claim, be entitled to a remedy under subs 420A(1), the guarantors are, in my opinion, entitled to a similar remedy by way of an equitable defence to the claim against them, subject to the provisions of the guarantee.

[257](1981) 147 CLR 654 at 675.

[258]Williams v Frayne (1937) 58 CLR 710 at 738.

[259]Cf Perry v National Provincial Bank of England [1910] 1 Ch 464; Bank of Adelaide v Lorden (1970) 127 CLR 185.

1. In similar vein is the judgment of Campbell J in Brueckner v The Satellite Group (Ultimo) Pty Ltd[260] where, having set out the passage from the judgment of Dixon J in Williams v Frayne,[261] his Honour also set out the passage from the judgment of Hanna J in Northern Banking Co v Newman,[262] which is referred to by Dixon J.  The relevant part of the passage in this judgment of Hanna J is as follows:[263]

1.        If it is an express or implied condition of, or collateral to, the arrangement for the guarantee, that an existing security, whether inchoate or complete, should be made or kept effective by the creditor for the benefit of the parties as a counter-security, failure to observe that condition discharges the surety absolutely, inasmuch as he has not got the contract he bargained for.

Impairment of the security in this context is to be distinguished from a situation where the surety is discharged as a result of an alteration of the contract as between lender and debtor.[264]

[260](2002) 15 BPR 28,885.

[261](1937) 58 CLR 710 at 738, as set out by Bryson J in GE Capital Australia v Davis (2002) 180 FLR 250 at 278 [90].

[262][1927] IR 520 at 536–9.

[263][1927] IR 520 at 538.

[264]As to which, see Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549; and Brighton v Australia & New Zealand Banking Group Ltd [2011] NSWCA 152.

1. As appears from the judgments in GE Capital Australia and Brueckner, and the authorities discussed in those judgments, the variety of shortcomings on the part of the creditor with respect to the security may provide a guarantor with an entitlement to a reduction in the guarantor’s liability or, in some cases, discharge from liability completely.  These possible positions were considered in Graeme Webb Investments Pty Ltd v St George Partnership Banking Ltd,[265] where Fitzgerald JA (with whom Sheller and Ipp JJA agreed) said:[266]

   [265](2001) 38 ACSR 282.

   [266](2001) 38 ACSR 282 at 302–3 [85].

85.      The principles which determine whether a surety is entitled in a reduction of its liability are the subject of some uncertainty.  For example, in J O’Donovan and J Phillips, The Modern Contract of Guarantee,[267] the authors state:

[267](LBC Information Services, 3^rd ed, 1996) at 420–1.

In Black v Ottoman Bank,[268] … the Privy Council stated the general principle that a surety would be discharged if there has been “some positive act done by [the creditor] to the prejudice of the surety or such degree of negligence, as in the language of Vice Chancellor Wood in Dawson v Lawes[269] ‘to imply connivance and amount to fraud’”[270] … Fraud, in this context, has been defined as conduct which is unfair to a surety.[271]

[268](1862) 15 Moo PCC 472; 15 ER 573.

[269](1854) 23 LJ Ch 434 at 441.

[270]((1862) 15 Moo PCC 472 at 483; 15 ER 573 at 577.

[271]Mayor of Durham v Fowler (1889) 22 QBD 394 at 419.

…

… despite the apparent width of the principle it is difficult to find any clear examples in England or Australia of the discharge of a guarantor on this basis.  There are three classes of cases.  The first is where one of the bases for the decision is that the creditor must not act to the prejudice of the guarantor, but the fact that the guarantor has been discharged can be explained adequately on other well established grounds.  The second is where the principle in Black v Ottoman Bank has apparently been recognised, but its application has been negated on the facts.  Finally, there are cases which have cast doubt on the principle either by expressly disapproving of it or by refusing to apply or even analyse the principle even though the facts of the case might have justified its application.

…

The application of the principle in Black v Ottoman Bank has invariably been denied in cases falling within the second category, because the act of the creditor was held not to be a positive act but merely an act of negligence[272] or passive inactivity …[273]

The subsequent discussion J O’Donovan and J Phillips, The Modern Contract of Guarantee,[274] discusses a number of cases which the authors consider fall within “the second category”, and then the “final class of cases”.[275]

These principles are long and widely established, as is indicated also in the Commentaries of Story:[276]

324.The case of principal and surety however, as a striking illustration of this doctrine, may be briefly referred to.  The contract of suretyship imports entire good faith and confidence between the parties in regard to the whole transaction.  Any concealment of material facts, or any express or implied misrepresentation of such facts,[277] or any undue advantage taken of the surety by the creditor either by surprise or by withholding proper information, will undoubtedly furnish a sufficient ground to invalidate the contract.[278]  Upon the same ground the creditor is in all subsequent transactions with the debtor bound to equal good faith to the surety.[279]  If any stipulations therefore are made between the creditor and the debtor which are not communicated to the surety and are inconsistent with the terms of his contract, or are prejudicial to his interests therein, they will operate as a virtual discharge of the surety from the obligation of his contract.[280]  And on the other hand if any stipulations for additional security or other advantages are obtained between the creditor and the debtor, the surety is entitled to the fullest benefit of them.[281]

[272]Guardians of Mansfield Union v Wright (1882) 9 QBD 683 at 688.

[273]Mayor of Durham v Fowler (1889) 22 QBD 394 esp at 420.

[274](LBC Information Services, 3^rd ed, 1996) at 421–2.

[275]J O’Donovan and J C Phillips, The Modern Contract of Guarantee (LBC Information Services, 3^rd ed, 1996) at 422–4.

[276]Melville M Bigelow (ed), Joseph Story, Commentaries on Equity Jurisprudence: As Administered in England and America (Fred B Rothman & Co, 13^th ed, 1988) vol 1, 334.

[277]It is not clear whether, to discharge the surety, the misrepresentation or the concealment should have been fraudulent or not.  Perhaps the better view is that if the creditor was aware of the truth concerning the matter misrepresented to or concealed from the surety, the latter will be discharged whether there was fraud or not; but contra if he was not aware of it, unless there was fraud.  2 Story, Contracts, §1125 (5^th ed), where the cases are examined.  See Davies v London Ins Co, 8 Ch D 469 (ante, §215, and note); Pidcock v Bishop, 3 Barn & C 605; Stone v Compton, 5 Bing NC 142; Railton v Mathews, 10 Clark & F 935; Hamilton v Watson, 12 Clark & F 119; Phillips v Foxall, LR 7 QB 666; Campbell v Moulton, 30 Vt 667; Dennison v Gibson, 24 Mich 186; Dawson v Lawes, Kay, 280.

[278]A collusive and fraudulent confession of judgment by the principal debtor will be void as to the surety.  Wright v Hake, 38 Mich 525.

[279]See Cecil v Plaistow, 1 Austr R 202; Leicester v Rose, 4 East, R 372; Pidcock v Bishop, 3 B & Cressw 605; Smith v Bank of Scotland, 1 Dow, R 272; Bank of United States v Etting, 11 Wheat R 59.  Boschert v Brown, 72 Penn St 372.

[280]See King v Baldwin, 2 John Ch R 554, and the cases there cited; sc 17 John R 384; Nisbet v Smith 2 Bro Ch R 583.

[281]Hayes v Ward, 4 John Ch R 123; Mayhew v Crickett, 2 Swanst R 186, and the authorities cited, p 191, note (a); Boultbee v Stubbs, 18 Ves 23; Ex parte Rushforth, 10 Ves 409, 421, post §499.

1. In my view, the conduct of Webster as mortgagee enforcing its mortgages of the North Star properties in breach of its duties as a selling mortgagee would, on the basis of the authorities considered, at the very least entitle East, as a guarantor, to a reduction in his liability as a guarantor to the extent that Webster’s breach of duty “damnified him”, to use the traditional language.  As discussed in the preceding reasons, it is, in my view, more probable than not that the North Star properties could have been sold for $3.5 million under the Rightime contract.  Instead, as time elapsed and interest was charged, the North Star properties were eventually sold to Quinlan’s trustee company for $2.8 million—$700,000 less, which, even with accrued interest, would appear to more than extinguish the guarantee by East of the $120,000 North Star further advance.

1. However, I am of the opinion that the circumstances of this case take it outside the realm of “mere” breach of duty or negligence on the part of Webster as mortgagee.  First, I am of the view that, as discussed previously, it acted to impair the security by its consent to the lease to Sarke which included the hotel and motel complex with the Victorian “free standing”, separate freehold titled, houses in Lydiard Street.  Secondly, I am of the view that Webster has, in the course of the various acts and omissions discussed, considered as a whole but very significantly with its relevantly covert sale to Quinlan’s trustee company without any contemporaneous valuation and where Webster provided finance and a release to Quinlan as a co-surety, been guilty of “gross misconduct or fraud”, in the language of Taylor v Bank of New South Wales,[282] or, in the language of Black v Ottoman Bank,[283] “some positive act done by [the creditor] to the prejudice of the surety … ‘to imply connivance and amount to fraud’ … Fraud in this context, has been defined as conduct which is unfair to the surety …”.

   [282](1881) 2 LR (NSW) 118 at 124, cited in GE Capital Australia v Davis (2002) 180 FLR 250 at 277.

   [283](1862) 15 Moo PCC 472; 15 ER 573 at 577, quoted in Graeme Webb Investments Pty Ltd v St George Partnership Banking Ltd (2001) 38 ACSR 282 at 302. The concluding observation with respect to fraud appears in this passage in Graeme Webb Investments referenced to Mayor of Durham v Fowler (1889) 22 QBD 394 at 419.

1. In the circumstances and for the preceding reasons, East’s liability as a guarantor has been extinguished as a result of the impairment of the North Star properties and my finding of connivance and fraud, in the sense of conduct unfair to East as surety in the sale of the North Star properties as mortgagee.  Moreover, East should not bear the burden of Webster’s conduct, particularly as both Webster and Quinlan benefited from the sale transaction of the North Star properties to Quinlan’s trustee company; the former, Webster, retaining a significant advance secured on the North Star properties which ensured a continuing income flow to it from those properties.

Provisions of the guarantee relied upon by Webster

1. Webster relies on various terms of the guarantee to justify or shield it from its conduct.[284]  East denies that Webster can hide behind these provisions.  The guarantee was drafted by Webster and must be construed strictly and contra proferentem.  Moreover, and perhaps more powerfully and significantly, it is clear that as a matter of law, a financier cannot contract out of its duties and obligations to act in good faith under s 77(1) of the TLA[285] in accordance with the requirements which have been discussed in relation to East’s legal position.  Moreover, Webster’s reliance in this respect must be viewed in the context of the finding of connivance and fraud with respect to its conduct.

   [284]And in this respect, see Graeme Webb Investments Pty Ltd v St George Partnership Banking Ltd (2001) 38 ACSR 282 at 304, [91].

   [285]MBF Investments Pty Ltd v Nolan (2011) 37 VR 116 at 169 [220]–[221]; E L G Tyler, P W Young and C E Croft, Fisher and Lightwood’s Law of Mortgage (LexisNexis Butterworths, 3^rd Australian ed, 2014) at 539–542 [20.22].

1. In terms of general principles, Webster made the following submissions with reference to the authorities:[286]

   [286]Submissions on behalf of the Plaintiff (Webster) (7 October 2016), [99]–[101].

99.As to the effect of a clause that sought to preserve the guarantor’s liability in circumstances that otherwise would have released him:

90. It is impossible to construe the guarantee Mr and Mrs Brighton actually gave without taking into account Clause 4 (reproduced at [30] [sic 32] above).  In particular, one cannot construe the guarantee for the purpose of deciding whether the obligation of confidentiality in the guarantee is a condition without taking Clause 4 into account.  As well, since a term cannot be implied into a contract if it contradicts an express term of the contract ([55] above), it is necessary to construe Clause 4 to decide whether there is the implied term for which Mr Menzies contended in his alternative oral submission.

91. It is well established that an adequately drafted clause in a guarantee that provides that the guarantee will not be discharged by identified particular matters that would otherwise discharge the guarantor, can be effective to prevent a discharge that would otherwise arise under the general law: eg O’Day v Commercial Bank of Australia Ltd [1933] HCA 37; (1933) 50 CLR 200 at 219–220 per Dixon J (Rich J agreeing), 222 per Evatt J, 223 per McTiernan J; Bank of Adelaide v Lorden [1970] HCA 59; (1970) 127 CLR 185 at 191–193 per Barwick CJ (with whom Windeyer and Gibbs JJ agreed, and with whom Walsh J agreed on this point), 201 per Menzies J; Buckeridge v Mercantile Credits Limited [1981] HCA 62; (1981) 147 CLR 654 at 666–667 and 671 per Aickin J (with whom Gibbs CJ and Wilson J agreed), 675–676 per Brennan J (with whom Gibbs CJ, Murphy and Wilson JJ agreed). Similarly, a clause providing in general terms that the guarantor’s liability shall survive anything that would otherwise discharge it has been held to be effective, if drafted with sufficient clarity: Schoenhoff v Commonwealth Bank of Australia [2004] NSWCA 161 at [19]–[22] per Stein AJA (Ipp and McColl JJA agreeing).

100.In Buckeridge v Mercantile Credits Ltd[287] the High Court held that a clause in guarantor may bargain away its right to complain about subsequent conduct on the part of the creditor.  There a guarantee precluded the guarantor from complaining of a deficiency in the realisation of secured assets due to failures or neglect or laches or mistakes of the creditor.

101.In State Bank of Victoria v Parry[288] Malcolm CJ followed O’Day and Buckeridge in holding that the content of the duty of the creditor towards the guarantor, whether at law or in equity, may be modified or circumscribed by the terms of the relevant guarantee.[289]

[287](1981) 147 CLR 654.

[288](1988) 7 ACLC 226.

[289]See also Westpac Banking Corporation v Prelea (1992) 28 NSWLR 481.

1. The authorities relied upon by Webster are, however, consistent with the distinction drawn in the authorities to which reference has been made at some length in the preceding reasons, particularly GE Capital v Davis,[290] where a distinction is drawn between circumstances where the consequence is discharge of the surety absolutely and discharge of the surety pro tanto.  This is clear, for example, from a passage in the judgment of Brennan J in Buckeridge which has been set out previously in the quoted passage from the judgment of Bryson J in GE Capital Australia v Davis.[291]

   [290](2012) 180 FLR 250; and see above, more generally, [94]–[102].

   [291](2002) 180 FLR 250 at 276–279, [91]; and see above, [95].

1. In the present case, the situation is not one merely of impairment of the security, though that is a factor.  It is a factor, however, that is so intrinsically intertwined with and part of the conduct of Webster which I have found to amount to connivance and fraud that it is not a factor which has the effect of saving Webster from East’s discharge as guarantor absolutely.  Consequently, the circumstances of this proceeding are not of the type which are susceptible of avoidance or amelioration by the operation of contractual provisions in the guarantee.

1. In this context, Webster makes more particular submissions with respect to alleged breaches in relation to deficiencies in the sale process; consent to lease and sale of business agreement; release of surety; failure to produce original duplicate certificates of title; and delay in sale process.[292]  Having regard to the preceding reasons and my findings with respect to Webster’s conduct, it is not necessary to address these submissions in particular detail as they all proceed on the assumption that the conduct on the part of Webster which is identified falls within the type of circumstances which the authorities indicate may discharge the surety pro tanto, rather than absolutely.  Even assuming that the construction which Webster places on the guarantee provisions relied upon is correct, these provisions do not address or ameliorate the effect of the conduct of Webster as it has been characterised.

   [292]Submissions on behalf of the Plaintiff (Webster) (7 October 2016), [102]–[104] (sale process); [105]-[109] (consent to lease, etc); [110]–[113] (release of surety); [114]–[117] (failure to produce original duplicate certificates of title); and [121]–[122] (sale process).

1. The provisions of the guarantee relied on by Webster and East’s submissions in response are conveniently summarised in his submissions, as follows:[293]

   [293]Closing Submissions of Mr James East (6 October 2016), [106].

Clause in Guarantee	Provision	Reference by Webster in reply or opening submissions	East’s submission
2.	This Guarantee shall be a continuing guarantee and shall not be considered as wholly or partially discharged by the payment at any time hereafter of any part of the moneys hereby secured or by any settlement of account intervening payment or by any other matter or thing whatsoever.	Para 2(a)(i) of reply	Not relevant - relates to payment or part payment
3.	This Guarantee shall not be affected or prejudiced by any variation or modification at any time of any of the terms of any of the Agreements.	Para 2(a)(ii) of reply Para 26 of opening submissions	Consent to Sarke lease and other conduct by Webster was not a variation of the agreements
5.	This Guarantee shall at all times be valid and enforceable against the Guarantor notwithstanding: … (j)    The release of any co-surety or the entering into of any composition with any co-surety or with the Debtor in relation to the Secured Moneys or part thereof; (k)   The Mortgagee realising any security or part thereof without taking reasonable care; (m)  Any laches, acquiescence, delay, acts, omissions or mistakes on the part of the Mortgagee in relation to the enforcement of any rights or securities or collateral securities granted or provided by: (i)    the Debtor (ii)   the Guarantor (iii)  any other co-surety (n)   Any material alteration in the terms and conditions of any agreement or arrangement with or security provided by any Guarantor or co-surety to the Mortgagee.	Para 2(a)(iii) of reply Paras 26 and 28 of opening submissions	Issue with Quinlan was not a release but sacrifice of security. There was no release of Quinlan—notice of discontinuance. East relying on equitable relief, not negligence. Refer cases above. Consent to Sarke lease and other conduct by Webster was not a variation of the agreements. Further, it did not relate to a variation of an agreement with a co-surety.
7.	Nothing in this Guarantee contained or implied shall be deemed to impose upon the Mortgagee any obligations to given notice to the Guarantor of any default by the Debtor or to include in any demand made hereunder particulars of the default of the Debtor resulting in such demand.	Para 2(c) of reply	Does not affect liability.
8.	No person shall have authority to waive the terms of this Guarantee or the Mortgagee’s rights hereunder except by formal instrument executed by the Mortgagee.	Para 2(a)(iv) of reply	Not relevant.
10.	The Guarantor acknowledges that the Mortgagee is and was under no obligation to disclose to the Guarantor any fact matter or thing concerning the obligations of the Guarantor hereunder, the nature of terms of the guaranteed transaction, or the Debtor and any failure on the Mortgagee’s part to disclose any such information shall not affect the Guarantor’s obligations hereunder.	Para 2(d) of reply	Does not affect liability.
16.	This Guarantee shall be a principal obligation and shall not be treated as ancillary or collateral to any other obligations howsoever created or arising and in particular shall be independent of and in no way affected by any other security which the Mortgagee now holds or contemporaneously herewith or hereafter may obtain or hold for any indebtedness or liability (whether present or future direct or contingent matured or unmatured joint or several) of the Debtor to the Mortgagee to the intent that this Guarantee shall be enforceable until the obligations herein have been satisfied according to the terms hereof notwithstanding that any other obligation whatever arising under any other security shall be in whole or in part unenforceable whether by reason of any Statute (including any Statute of Limitation) or for any other reason whatsoever.	Para 2(b) of reply	Webster as mortgagee still has equitable obligations to a principal obligor. Unenforceability not relevant here.
18.	This Guarantee shall not be prejudiced by any of the Agreements being or becoming unenforceable against the Debtor or by the moneys hereby secured being or becoming non-recoverable from the Debtor, for whatever reason, to the intent that notwithstanding any such unenforceability or non-recoverability, the moneys hereby secured shall be and remain payable by and recoverable from the Guarantor in accordance in all respects with the provisions of this Guarantee.	Para 2(a)(v) of reply	Not relevant
21.	The Mortgage shall be at liberty to act as though the Guarantor were the principal debtor and the Guarantor HEREBY WAIVES all and any of the Guarantor’s rights as surety (legal equitable statutory or otherwise) which may at any time be inconsistent with any of the provisions hereof.	Equitable rights relied on by Mr East are not inconsistent. Can’t contract out of the good faith obligation.
23	And for the consideration aforesaid and as a separate and several covenant, the Guarantor HEREBY AGREES to indemnify the Mortgagee: (a)   against any loss or damage the Mortgagee may suffer by reason of the Debtor going into liquidation or making any arrangement assignment or composition with its creditors or by reason of the moneys hereby secured or any of them being or becoming for any reason non-recoverable from the Debtor or by reason of any of the Agreements being or becoming unenforceable or invalid for any reason whatsoever.	Para 2(e) of reply	Loss not caused by debtor becoming insolvent—sacrifice or impairment caused by Webster’s conduct as mortgagee. Clause 23 does not say anything about the secured property.

1. For the preceding reasons, I am of the opinion that there is no necessity for an examination of these provisions.  However, should some attention be required in due course to the proper construction of these provisions, I am of the view that the correct approach to their construction and possible application in these proceedings is as summarised by East.  I say this in the context of proceedings where the parties did not give significant time or attention in the written or oral submissions to these construction issues.

Summary and conclusions

1. For the preceding reasons, I am of the opinion that:

(1)East is not a guarantor with respect to the Lal Lal Loan; and

(2)East is absolved from any liability with respect to his guarantee of the obligations of North Star with respect to the further advance to it of $120,000.

1. The parties are to bring in orders to give effect to these reasons.  I otherwise reserve the question of costs.

1. Additionally, I will forward a copy of these reasons (and make papers available) to ASIC and the Victorian Legal Services Commissioner.