White & v State Bank of New South Wales

NEW SOUTH WALES COURT OF APPEAL

CITATION: WHITE & ANOR v STATE BANK OF NEW SOUTH WALES [2002] NSWCA 241

FILE NUMBER(S):
40012/02

HEARING DATE(S): 20 June 2002
21 June 2002

JUDGMENT DATE: 29/07/2002

PARTIES:
Lesleigh White and DS & L White Carrying Pty Ltd - Appellants
State Bank of New South Wales - Respondent

JUDGMENT OF: Sheller JA Giles JA Campbell AJA

LOWER COURT JURISDICTION: Supreme Court - Common Law Division

LOWER COURT FILE NUMBER(S):
13264/96, 20139/00

LOWER COURT JUDICIAL OFFICER: Cooper AJ

COUNSEL:
A J McQuillen - Appellants
P J Dowdy - Respondent

SOLICITORS:
McKells - Appellants
Abbott Tout - Respondent

CATCHWORDS:
MORTGAGE - first party mortgage over home - guarantors - exclusive clause in mortgage - transfer of funds from fixed term deposit - claim that Bank had breached contractual obligation - Contracts Review Act 1980, s7 - duty of care to guarantors - unconscionability

LEGISLATION CITED:
Contracts Review Act 1980
Companies (NSW) Code

DECISION:
Appeal dismissed with costs

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40012/02
CL13264/96; 20139/00
SHELLER JA
GILES JA
CAMPBELL AJA

WHITE & ANOR v STATE BANK OF NEW SOUTH WALES & ANOR

The appellants, Mrs White and DS & L White Carrying Pty Ltd (the Company), brought an appeal from a decision of Cooper AJ given on 23 and 30 November 2001 in favour of the respondents, State Bank of NSW (the Bank) and Mr White. Mr White took no part in the appeal.

The Company originally obtained a loan from the National Australia Bank to purchase a newsagency business. In 1988 the Company had applied to the Bank to refinance and pay out that loan. The security required by the Bank and agreed to by Mr and Mrs White consisted of a first third party mortgage over their then house, a first equitable mortgage and floating charge over the assets and undertakings of the Company and a first mortgage over the leasehold of the newsagency. Mr and Mrs White were not only mortgagors but guarantors of the Company's debt to the value of the security.

In 1989 Mr and Mrs White sold their house and purchased a new home. The Bank discharged the mortgage over their previous property and in its place took a mortgage over the new property. Subsequently the Company sold the newsagency business and the mortgage over the lease was discharged. The net proceeds of the sale were deposited with the Bank as a fixed term deposit. At that stage Mr and Mrs White's liability under the guarantee and the safety of their house under the mortgage were protected because the amount in the fixed term deposit covered and secured the Company's borrowings from the Bank.

Clause 5.1.2 (the exclusion clause) of the memorandum in the schedule to the mortgage stipulated that the mortgagor(s) shall not be released, nor the mortgagor(s) liability affected by any act or omission, whereby the mortgagor(s) would, under the law relating to suretyship, have been so released.

In 1990 Mr White authorised the Bank to transfer $200,000 from the fixed term deposit into the account of his brother. It had been agreed that Mr White's brother's company would pay to the Company a premium equivalent to 10 per cent on top of the amount which the Company had to pay in interest to the Bank. While some payments were made, by 1991 the liability of the Company to the Bank had increased considerably because of the non-payment of interest.

In 1996 the Bank began proceedings in order to recover the outstanding monies or to take possession of the property. The Bank had earlier desisted from enforcing the security against Mr and Mrs White on their home and instead had been trying to get the money from Mr White's brother or one of his companies.

In 2000, the Company began proceedings against Mr White and the Bank alleging that Mr White, in causing the Company to obtain a partial release of the fixed term deposit funds and in causing the same to be paid to Mr White's brother, breached his duties as an officer of the Company. Further, the Company alleged that the Bank knowingly participated in a dishonest and fraudulent scheme by Mr White and that as a consequence the Bank was liable to compensate the Company.

Both the 1996 and 2000 proceedings were heard together. In both claims, Cooper AJ found for the Bank and Mr White.

On appeal, the appellants argued that the trial Judge had erred in not finding that the Bank had breached its contractual obligation under the guarantee by reducing the value of the security with the payment of funds out of the fixed term account into the account of Mr White's brother. As a matter of construction, the exclusion clause did not apply to excuse this contractual breach. If the exclusion clause did apply as a matter of construction, the Court should refuse to enforce it pursuant to s7 of the Contracts Review Act 1980.

The Bank owed what was described as a "general duty of care" said to be part of the law of guarantees to the effect that a wilful act prejudicing the security held by the creditor released the guarantee pro tanto to the extent of the prejudice. Further, the appellants argued that the Bank had breached its duty to Mrs White because of its failure to disclose relevant details within its knowledge about the adverse financial position of Mr White's brother.

The appellants also claimed that it would be unconscionable for the Bank to be able to enforce the mortgage on the basis of the principles established in Garcia v National Australia Bank Limited (1998) 194 CLR 395 and Royal Bank of Scotland plc v Etridge (No 2) [2001] 3 WLR 1021.

HELD (per Sheller JA, Giles JA and Campbell AJA concurring):

But for the exclusion clause in the memorandum the Bank could not, without the informed consent of the guarantors, have impaired the security by permitting the fixed deposit to be reduced. However, the clause meant that the liability of Mrs White (as mortgagor and guarantor) was not affected by this act albeit that, absent the clause, under the law relating to suretyship she would have been released from her liability under the mortgage at least to the extent of the amount which was transferred from the fixed deposit.
There was no possible basis for the Court to refuse to enforce the terms of the memorandum under s7 of the Contracts Review Act. It was not suggested that Mrs White did not knowingly enter into the mortgage containing the memorandum.
No ground was demonstrated for interfering with the findings of the trial Judge that the Bank had not engaged in collusive or improper conduct for its own benefit to reduce the debt of Mr White's brother while undermining the security it had for the debt owing to it by the Company.
Garcia v National Australia Bank Limited and Royal Bank of Scotland plc v Etridge (No 2) were distinguished on the basis that those cases were directed to the position of a wife entering into a transaction when she was unfairly influenced by her husband to do so. The claim here was not directed to Mrs White's agreement to be a party to the banking arrangements with the Bank or to the mortgage. It was directed to what was said to be the consequence of the Bank paying money out of the fixed term deposit.
ORDER
Appeal dismissed with costs.
**********

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40012/02
CL 13264/96; 20139/00
SHELLER JA
GILES JA
CAMPBELL AJA
Monday, 29 July 2002

WHITE & ANOR v STATE BANK OF NEW SOUTH WALES & ANOR

Judgment

SHELLER JA:
Introduction
The appellants, Lesleigh White (Mrs White) and DS & L White Carrying Pty Limited (the Company), bring this appeal from a decision of Cooper AJ given on 23 and 30 November 2001 in favour of the respondents, State Bank of New South Wales (the Bank) and David Stewart White (Mr White). Mr White took no part in the appeal.
In 1996 the Bank took proceedings (the Bank proceedings) against Mr and Mrs White to recover $442,273.50 and, or alternatively, an order for possession of a property known as 23 Shand Close, Illawong which Mr and Mrs White had mortgaged to the Bank by way of third party mortgage to secure advances made by the Bank to the Company. In her further amended defence and cross-claim, Mrs White, after denying various allegations in the statement of claim, claimed that pursuant to the Contracts Review Act 1980 (the Act) the mortgage was unenforceable or ought not to be enforced against her. She relied on s7 and s9(1) of the Act and gave particulars of matters to be considered under s9(2)(a), (b), (c), (h) and (i). In the alternative, Mrs White claimed that she was in a position of special disadvantage at or about the time of the execution of the mortgage, which the Bank knew or ought to have known, and accordingly it was unfair and unconscientious for the Bank to rely upon the mortgage. In addition, Mrs White claimed that on or about 2 August 1989 the Bank represented to Mr White and her that its security for advances made to the Company by registered first mortgage over a newsagency business owned by the Company was replaced by security taken by the Bank over certain term deposit funds of approximately $350,000. She claimed that in acting in reliance upon the representation she assumed or expected that the registered first mortgage was or would be released as a security and refrained from seeking the release of any of the funds on the term deposit or otherwise dealing with them. Mrs White further claimed that Mr White executed the mortgage without her knowledge or request, that without her knowledge or consent the Bank released part of the fixed term deposit funds to an overdraft account in the name of Gregory J White Pty Limited (GWPL) and that she was entitled to have her liability reduced pro tanto by the value of the moneys transferred from the fixed term deposit.
In her cross-claim Mrs White claimed that the mortgage be set aside pursuant to the Act or under the general law, declarations that the mortgage was unenforceable, that the Bank released funds of $200,000 from the Company’s account without authority and wrongfully, that she and/or the Company were entitled to payment from the Bank of the sum of $200,000 together with interest and equitable compensation or alternatively a declaration that the Bank was not entitled to charge any interest on the balance of the principal under the mortgage. She further sought an order that the Bank pay to her or the Company $200,000 together with interest.
In 2000 the Company began proceedings (the Company proceedings) against Mr White and the Bank alleging that Mr White, in causing the Company to obtain a partial release of the fixed term deposit funds and in causing the same to be paid into GWPL’s account with the Bank, breached his duties as an officer of the Company and had not acted bona fide and in the interests of the Company and did not exercise a reasonable degree of care and diligence. Further the Company alleged that the Bank knowingly participated in a dishonest and fraudulent scheme by Mr White to advantage GWPL and/or the Bank and that as a consequence the Bank was liable to compensate the Company for the amount of loss or damage suffered by it by reason of the improper use to which the funds on fixed term deposit were applied. The Company further alleged that the Bank aided, abetted, counselled or procured or was directly or indirectly knowingly concerned in or a party to a breach of duty by Mr White as an officer of the Company with consequences in terms of contravention of the Companies (NSW) Code. The Company claimed an order that the defendants pay to it the sum of $200,000 and the Bank account for all profits derived by it from the receipt of that sum from the date of such receipt. It also claimed equitable compensation or, alternatively, damages.
Both proceedings came before Cooper AJ and were heard over eight days. His Honour gave reasons for judgment on 23 November 2001. In the Company proceedings, Cooper AJ gave a verdict and judgment for the defendants, Mr White and the Bank, and ordered the Company to pay the defendants’ costs on a solicitor and client basis. In the Bank proceedings his Honour gave judgment in favour of the Bank against both Mr and Mrs White in the sum of $894,497.68 together with interest thereon accruing at the daily rate of $355.23 from 5 November 2001, judgment for possession of the property known as 23 Shand Close, Illawong, judgment in favour of the Bank on Mr and Mrs White’s cross-claims and an order that the defendants pay the Bank’s costs of the action and cross-claims on a solicitor and client basis.
There are thirty grounds of appeal in the amended notice of appeal but counsel conveniently grouped the grounds under several heads with which I will deal.
Reasons for judgment at first instance
Cooper AJ noted that in about 1995 Mr and Mrs White had separated and had since divorced. Mr White appeared unrepresented for some of the hearing. After giving evidence he took no further part.
The Company was incorporated in about 1979. Mr and Mrs White were the sole directors and shareholders and remained so up to the time of trial At first the Company carried on the business of delivering computer equipment but in August 1986 it bought a newsagency business at 121A Anzac Avenue, Engadine and obtained the lease of the premises. It obtained a loan from the National Australia Bank (NAB) for working capital and to buy the business. The security for that loan included a guarantee by Mr and Mrs White secured by registered first mortgage over their then home at 83 Sylvan Ridge Drive, Illawong.
By mid 1988 the Company was having difficulty maintaining the repayments of principal and payments of interest on the loan. Mr White’s brother, Gregory White, suggested they approach his bank, which was the Bank’s branch at Riverwood, for a more satisfactory form of accommodation. On or about 9 August 1988 the Company opened an account with the Riverwood branch of the Bank. A request for banking facilities in the name of the Company trading as West Engadine Newsagency was in evidence. The request was signed by both Mr and Mrs White. It authorised and directed the Bank, inter alia,

to establish for the customer, named as Mr White, “any Banking Facility whether now or at any time in the future, styled as [DS & L White Carrying Pty Limited (trading as West Engadine Newsagency)], which the Bank is prepared to provide including any facility which the customer may wish to establish as trustee for any other person(s)”;
“to act upon this authority until written notice to the contrary is received from any of the customer(s)”;
“to allow each signatory authorised to operate such banking facilities”, inter alia, to give certain receipts and sign requisitions for letters of credit and endorse instruments without enquiry by the Bank.

The request provided that “in addition to the customer(s) or officer bearers the following person(s) are authorised to operate banking facilities pursuant to this authority in accordance with the mode of operation described below”. No additional signatories were named. The banking facilities were to be operated by any one of the Company’s office bearers. The office bearers were Mr and Mrs White. According to the request, one office bearer could operate any banking facility then in existence or which the Bank was prepared to provide to the Company at any time in the future. Cooper AJ said: “Under the terms of this document either Mr (or) Mrs White could operate on the bank facilities”.
By 5 September 1988 the Company had applied to the Bank to refinance and pay out the loan to NAB. Mr and White’s house was valued on behalf of the Bank at $420,000. The Bank made a formal offer dated 11 October 1988 of a fixed term loan for three years for $363,000 comprising a fixed rate term loan of $338,000, an overdraft limit of $15,000 and a standby limit of $10,000 which the Company accepted under its common seal with the signatures of both Mr and Mrs White. The security, required and agreed to, consisted of a first third party mortgage over the land and dwelling 83 Sylvan Ridge Drive, Illawong, a first equitable mortgage and floating charge over the assets and undertakings of the Company and a first mortgage over the leasehold of the newsagency. On 22 November 1988, again under its common seal with the signatures of both Mr and Mrs White, the Company gave an authority to the Bank to fill in blanks in the equitable mortgage and floating charge and in the mortgage of the lease.
On 22 November 1988 Mr and Mrs White signed an acknowledgement and consent of guarantor in the following form:
“We, DAVID STEWART WHITE and LESLEIGH WHITE both of 83 Sylvan Ridge Drive Illawong (hereinafter referred to as ‘the Guarantor’) hereby acknowledge:
I.STATE BANK OF NEW SOUTH WALES (hereinafter called the ‘Bank’) proposes to grant certain credit advances and/or accommodation and/or other banking facilities (hereinafter called the ‘advance’) to D S & L White Carrying Pty Limited (hereinafter called the ‘Customer’).
II.The advance is secured, inter alia by a first mortgage over Certificate of Title Volume 14706 Folio 91 from the Guarantor to the Bank [83 Sylvan Ridge Drive].
III.It is understood that the advance comprises various facilities to the Customer totalling three hundred and sixty three thousand dollars ($363,000.00) with the option of the Bank to extend the advance at the Bank’s discretion. It is further understood that the advance may also include any future liability of the Customer to the Bank either actual or contingent or whether alone or jointly with other persons.
AND IN CONSIDERATION OF THE BANK GRANTING THE ADVANCE TO THE CUSTOMER IT IS HEREBY AGREED AND DECLARED AS FOLLOWS:
A.We take note of the fact that the Bank is granting an advance.
B.We give our consent to the advance being secured in the same manner referred to in paragraphs I. and II. above.
C.We fully understand the facts and circumstances surrounding the advances to be made by the Bank.
D.We are not relying on any statement or representation made by either the Bank and/or the Customer but rely totally on our own judgement or on the advice of a party independent of the Bank and/or the Customer in our consent and acknowledgement herein.
E.We affirm the terms and conditions of the advance.”
Bruce A Swane & Co, Solicitors, acted for Mr and Mrs White in respect of all documentation including the mortgage over their home. On 29 December 1988 the Company under its common seal executed the mortgage of the newsagency lease. On 29 December 1988 Mr and Mrs White executed the mortgage over 83 Sylvan Ridge Drive to the Bank. As mortgagors they acknowledged that at their request certain advances or other facilities had been or were to be made available to them and to the designated customer, which was the Company, and covenanted with the Bank “that the provisions set forth in the Schedule hereto shall be deemed to be incorporated herein” and, for the purpose of securing to the Bank the payment of the monies secured which were, effectively, all monies payable to the Bank by the Company, mortgaged their home to the Bank. Thus Mr and Mrs White were not only mortgagors but guarantors of the Company’s debt to the value of the security. In para (a)(5) of the Schedule the mortgagors covenanted and agreed with the Bank to observe the provisions deemed to be incorporated and set forth in the memorandum in the Land Titles Office No X208233. In para (b) of the Schedule the mortgagors irrevocably appointed the Bank and its assigns to be their lawful agents with full power to do all that was necessary to more perfectly secure the payment of the moneys secured. Endorsed upon a copy of the memorandum was the statement that the enclosed memorandum had been made available to the Company and the Company had been given the opportunity of inspecting it and taking independent legal advice on its contents at its discretion. To this was affixed the Company’s common seal with the signatures of both Mr and Mrs White.

For the purpose of this appeal the critical part of the memorandum was
cl 5.1.2. This read:
“5. MORTGAGOR’S ACKNOWLEDGEMENTS
5.1 The Mortgagor acknowledges the following:
….
5.1.2(Surety) where the mortgagor is a surety under the terms and conditions of this Mortgage:
5.1.2.1the Mortgagor shall not be released, nor shall the Mortgagor’s liability hereunder be affected by any act, omission, matter, fact or thing whatsoever, whereby the Mortgagor would, under the law relating to suretyship, have been so released and/or his obligations under this Mortgage affected but for this provision; and
5.1.2.2without in any way limiting the generality of the preceding sub-clause the Mortgagor shall not be released, nor his liability hereunder affected, by any want of contractual capacity on the part of the Customer and/or debtor to the Mortgagee or by any other thing whatsoever, but shall extend to cover and be a security for all moneys at any time due or owing to the Mortgagee by the Customer and/or said debtor notwithstanding any payment or settlement of account, want of contractual capacity on the part of the Customer and/or said debtor, or other matter or thing whatsoever”
By letter of 30 December 1988 the Bank’s advance to the Company was increased by $18,000 to $356,000. On 9 January 1989 the Company executed the equitable mortgage and floating charge over its assets and on the following day NAB was paid out from the proceeds of the loan obtained from the Bank.
In March 1989 Mr and Mrs White sold 83 Sylvan Ridge Drive for about $450,000 and purchased a new home at 23 Shand Close, Illawong, for about $250,000. The Bank discharged the mortgage over their previous house property and in its place took a mortgage over the property at Shand Close. Bruce A Swane & Co acted for Mr and Mrs White on the sale and purchase and in relation to the mortgages. Settlement of the sale and purchase occurred on 9 May 1989. The funds to purchase the new home were derived from the net proceeds of the sale of the previous home together with a loan from Mr White’s father. The mortgage by Mr and Mrs White to the Bank over 23 Shand Close was dated 11 July 1989. Its terms were identical with those of the earlier mortgage and included a covenant by the mortgagors that they would observe the provisions deemed to be incorporated therein and set forth in memorandum X208233.
By late July 1989 the Company had sold the newsagency business and the mortgage over the lease was discharged. The net proceeds of this sale of about $356,000 were deposited with the Bank as a fixed term deposit. It was approximately equivalent to the total amount borrowed by the Company from the Bank.
Cooper AJ said that the proceeds of sale of the newsagency business were not applied to pay out the loan moneys secured by Mr and Mrs White’s guarantee and the first mortgage over their house because:
1.“Early repayment of the loan attracted a penalty of approximately $15,000.00.
2.The rate of interest paid by State Bank to them on the deposit was slightly higher than the rate of interest the Company was obliged to pay on the loan monies.
3.[Mr and Mrs White] were taking their time to look around for a possible further business.”
The result was that the Company’s borrowings from the Bank were fully secured and covered by the amount in the fixed term deposit. The interest payable by the Company on the loan was satisfied by the interest received from the Bank on the amount deposited. Mr and Mrs White’s liability under the guarantee and the safety of their house under the mortgage were protected.
From August to November 1989 neither Mr nor Mrs White were employed. In November 1989 Mr White obtained employment for which he was paid about $35,000 gross per annum. Mrs White had the care of four young children aged 12, 10, 9 and 1.
On 7 September 1989 Mr and Mrs White executed a security over the fixed term deposit with the Bank. The depositors and customers were described as “DS & L White Carrying Pty Limited, West Engadine Newsagency trading as”. Cooper AJ observed that the document contained terms having a similar effect to clauses 5.2.1 and following of memorandum X208233.
By letters of 30 November and 15 December 1989 signed by Mr and Mrs White the manager of the Riverwood Branch of the Bank was asked to transfer the balance of account and any other documents to the Fairfield Branch of the Bank. The Fairfield Branch, according to the date stamp, received these documents on 3 January 1990.
On 2 February 1990 Mr White, for the Company, signed a letter addressed to Mr F Brooks at the Riverwood Branch which stated:
“I hereby authorise you to release $200,000.00 from the fixed deposit that you are holding in the name of DS & L White Carrying Pty Ltd to Gregory J White Pty Ltd and to invest the balance at the maximum interest rate.”
By debit notes signed by Bank officers and dated 5 February 1990, a total of $200,000 was taken from the fixed term deposit account and credited to the account of GWPL. On 13 February 1990 Mr Brooks, who was the senior manager of the Fairfield Branch, sent a letter addressed to “Mr & Mrs DS White, DS & L White Carrying Pty Ltd, 121 Anzac Avenue, Engadine”. Relevantly, the letter stated:
“We refer to our previous discussions regarding partial release of Term Deposit funds and now advise the following:-
As authorised $200,000.00 has been given to the Company of Gregory White Pty Limited with the remaining funds of $145,654.00 being held on Term Deposit for 30 days at the current rate of 16.85%.
As previously advised, your interest to be charged on your Fixed Rate Term Loan will now be monthly in arrears and a payment of $4,600.00 will commence from 26 February 1990 and thereafter on the 26th monthly. It would be appreciated if you could provide that sum to enable collection in the Company Trading Account.”
After a reference to fees charged to the Company in relation to this transaction the letter concluded:
“It would be appreciated if you could acknowledge receipt of this letter on the duplicate provided and as previously stated, should you have any enquiries, please do not hesitate to contact the writer.
We hereby acknowledge receipt of letter dated 13.2.90.”
The address to which the letter was sent was that of the newsagency which had been sold six months before. It was apparently forwarded or picked up some time later by Mr White who was working casually at the newsagency. It was received back by the Bank on 16 March 1990 signed by both Mr and Mrs White.
Mrs White’s evidence was that it was only when she received this letter that she learnt of the release of $200,000 from the fixed term deposit. She said that at no time did she give her consent or permission to either Mr White or to the Bank to transfer any part of the funds standing to the credit of the Company with the Bank to GWPL or to Mr Gregory White.
Mr White’s evidence was that a verbal agreement was made between him, acting on behalf of the Company, and Mr Gregory White, acting on behalf of GWPL, that GWPL would pay the whole of the interest due by the Company to the Bank and in addition pay to the Company a premium equivalent to 10 per cent on top of the amount which the Company had to pay to the Bank. Mr Gregory White or GWPL did make some payments of interest and premium during 1990, but by 1991 GWPL was considerably in default of its promise. As a result the liability of the Company to the Bank increased considerably because of non-payment of interest.
The Company had no income other than the interest on the reduced fixed term deposit amount and Mr White’s pay of $35,000 per annum. Together this was considerably less than the amount of interest payable on the loan. By a letter dated 14 September 1990 from the Bank to the Company Mr and Mrs White were asked to call in so that a full review could be carried out on the term loan and overdraft facilities. The letter stated:
“The main reason for the review is that the bank wishes to ascertain the Company’s repayment capacity to meet its commitments.”
On 2 October 1990 a further letter in the same terms was sent. Shortly afterwards Mrs White contacted the Bank by telephone saying that she was unable to call in personally and that the loan was for her brother-in-law, Mr Gregory White. On 8 January 1991 the Bank wrote to the Secretary of the Company asking “that you contact us urgently to arrange an early interview date”. The writer pointed out that:
“As a consequence of the above principal reduction the balance of the Term Loan should now be maintained at $206,000 in lieu of $356,000. Due to unpaid interest the Term Loan is currently in excess of this revised limit and early adjustment is essential.
….
We do acknowledge receipt of brief financial details faxed to us on 28 December, but unfortunately the information provided falls well short of that needed for a comprehensive review. The inference that monthly interest payments are to be paid by G White appears to be irrelevant. Our loan arrangements are with DS & L White Carrying Pty Limited as borrower, and David & Lesleigh White as security providers.”
Negotiations took place between Mr and Mrs White and the Bank about repayments of interest due on the loan. On 12 December 1991 Mr Gregory White signed a guarantee in favour of the Company guaranteeing the repayment of $209,000 lent by the Company to it.
In March 1993 one of the Mr Gregory White’s companies was Village Projects Pty Limited (VPPL) which appeared to be the owner of a large shopping centre and to have more substance than GWPL to which the $200,000 had been lent. On 22 March 1993 VPPL wrote to “Mrs White, DS & L White Carrying Pty Ltd”:
“I refer to our recent conversations and confirm that you have agreed to loan $300,000.00 to Village Projects Pty Ltd, for a maximum term of five years at an interest rate to be agreed.
The debt will be secured by a second floating charge over Village Projects Pty Ltd, subject to the approval of the Commonwealth Bank.
I confirm that you will be taking independent legal advice.”
At the same time VPPL wrote to Mr Brittain of the Commonwealth Bank, Kenmore, Queensland as follows:
“I refer to our conversation today and confirm my request to the Bank to pay a cheque for $300,000.0 drawn on Village Projects Pty Ltd into an account in the name of Gregory J White Pty Ltd, pay a cheque for $300,000.00 drawn on Gregory J White Pty Ltd into an account in the name of DS & L White Carrying Pty Ltd and arrange for a cheque for $300,000.00 drawn on DS & L White Carrying Pty Ltd to be paid through your branch at Greenacre into the account in the name of Village Projects Pty Ltd.”
On 16 March 1995 VPPL was placed in voluntary administration. Mrs White received a notice of a meeting of creditors. On 22 March 1995 the Company signed a Statement of Claim for the purpose of voting at the meeting of creditors of VPPL in the sum of $300,000. Mrs White also signed a proxy for Mr Winchester to attend the meeting and a formal proof of debt for $300,000 plus interest dated 21 March 1995. The list of creditors of VPPL showed that the debt of $300,000 owing to the Company was its largest debt. The next largest was $75,000 owing to the Bank. Its total debts were $385,000. At some stage Mr Gregory White went bankrupt.
In 1996 the Bank began the proceedings before the Court. Cooper AJ observed that from 1991 through to 1995 the Bank desisted from enforcing the security against Mr and Mrs White on their home. Instead it was trying to get the money from Mr Gregory White or one of his companies.
In dealing with Mrs White’s defences to the Bank proceedings, Cooper AJ came first to her claim that the Bank represented to her and Mr White that its security by way of registered first mortgage for advances made to the Company was substituted by the security over the term deposit funds. In particular Mrs White relied upon a letter dated 2 August 1989 from the manager of the Bank’s Riverwood Branch to the proprietor West Engadine Newsagency. The letter stated:
“We refer to your Fixed Rate Term Loan of $356,000.00 and advise that security over the Newsagency has been substituted by security over Term Deposit funds.
We have attached your receipt for funds lodged on Term Deposit on the sale of the newsagency.
It would be appreciated if you could sign and return the Security over Deposit to complete our records.”
His Honour said that to understand this letter it had to be borne in mind that whilst the Company owned the newsagency business the loan was secured by a mortgage over the leasehold of the premises in which the business was conducted. That business was sold and the asset was converted into approximately $356,000. The letter clearly referred to the fact that with the discharge of the mortgage over the lease of the premises where the newsagency was conducted in order to enable the sale to take place, the security was transferred from that leasehold to the actual cash on fixed term deposit. His Honour said:
“In no way can it be said that this letter amounts to a representation that the security by way of registered first mortgage over the land of Mr and Mrs White had been substituted or in any way waived”.
Next Cooper AJ dealt with Mrs White’s allegation that on or about 2 February 1990 the Bank, without her authority, caused $200,000 to be transferred from the fixed term deposit to GWPL’s account with the Bank and that the Bank was liable to repay the amount so released. Mrs White alleged that Mr White was in breach of duties owed to the Company by causing the $200,000 to be paid out of the fixed term deposit and that the Bank knowingly participated in a dishonest and fraudulent scheme by Mr White to the advantage of GWPL and the Bank. As a consequence the Bank was liable to compensate the Company or her for the amount of loss or damage suffered by the Company or her by reason of the improper use to which the moneys were applied. It was because of the Bank’s reply, that any relief sought for detriment to the Company required a suit to be brought by the Company itself, that the Company proceedings against Mr White and the Bank were brought. In the Company proceedings are found what his Honour described as similar allegations to those found in the cross-claim.
Cooper AJ observed that in his address counsel for Mrs White (Mr McQuillen, who also appeared for the appellants on this appeal) after the close of evidence raised matters not foreshadowed in cross-examination and conceded matters which were disputed during cross-examination. His Honour summarised the submissions as follows:
“84The Bank sacrificed or impaired the security for the loan to the Company by agreeing to pay out $200,000.00 from the money on Fixed Term Deposit to Gregory J White Pty Ltd. Consequently Mrs White is entitled in equity to be credited with the deficiency in reduction of her liability.
85Reliance was placed upon what was said by Brennan J, in Buckeridge v Mercantile Credits Ltd (1981) 147 CLR 654 at 675:
‘In a case where the act of a creditor does not discharge the 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.’
86Here the security was the sum of $356,000.00 on Fixed Term Deposit with the benefit of the interest payable on the loan being set off against the interest received by the Company from the bank. The payment out of $200,000.00 diminished the security and this was done without the consent or approval of one of the guarantors namely Mrs White and consequently her liability under the guarantee is reduced by the extent to which the security was diminished.
87The submission continues that the Company did not have the absolute right on its own to release $200,000.00 from the deposit because that deposit was in fact assigned to State Bank as security under the document [the security over the fixed term deposit of 7 September 1989]. This document recites that the consideration is the bank making advances to the Company and is security for all monies payable or to become payable to the bank. Under clause 1(a) the bank is directed to hold the monies in the name [of] the Company and is authorised to deduct and retain from the monies deposited such amounts as may become due to the bank. Clause 1(b) assigns to the bank the sums now owing or at any times hereafter to become owing or payable in respect of the deposits to hold unto the bank as security for the due payment to the bank of all monies hereby secured.
88Accordingly, the money could not be paid from the Fixed Term Deposit without the consent of State Bank. By so consenting without the approval of Mrs White in her capacity as a guarantor the bank acted contrary to the principles outlined above in Buckeridge.”
In answer to this claim the Bank, while not conceding it improperly impaired the security, relied upon cl 5.1.2 to 5.1.2.2 of the memorandum X208233 incorporated in the mortgage.
Cooper AJ said:
“90On the face of it this clause is a complete answer to the claim by Mrs White. See Westpac Banking Corporation v Prelea (1992) 28 NSWLR 481, at 486.
91Furthermore in Buckeridge v Mercantile Credits, Brennan J at 675 points out that the surety’s entitlement is lost if he bargains away his right to complain of the act which occasions the deficiency. The words of Clauses 5.1.2 and following clearly bargain away the right to complain of the acts which Mrs White alleges to have occasioned the deficiency of which she complains.”
Mr McQuillen sought to meet the Bank’s reliance on these clauses in the memorandum by a submission that those provisions were unjust in the circumstances relating to the contract at the time it was made and the Court ought to refuse to enforce them in accordance with s7 of the Act.
Counsel for the Bank pointed out that Mrs White pleaded no claim to set aside a particular part of the mortgage such as these clauses. Mr McQuillen had not raised nor at any stage before final address had he indicated that part of Mrs White’s claim was not setting aside the mortgage as a whole but only cll 5.1.2 to 5.1.2.2. Mrs White gave no evidence orally or in her affidavits to the effect that if these clauses had been pointed out to her at the time she would not have signed the mortgage. She was not asked any questions by her counsel to that effect during the course of evidence. Counsel for the Bank submitted that if the issue had been raised during the course of evidence or on the pleadings, as it ought to have been, the Bank would have conducted its case in a different way. It would have called evidence as to the practice of the finance and banking industry and how common such a provision was in bank documents. It would have presented evidence from an expert in the banking and finance industry to indicate the nature and scope, problems and difficulties that banks and lending institutions would suffer if clauses of this type were susceptible to being retrospectively struck out.
Cooper AJ said:
“94I have no hesitation in accepting these submissions of counsel for State Bank. No attack was made on clauses 5.1.2 and following in the pleadings or in addresses or in evidence until the final address after all evidence had been given. I accept that if due notice of this had been given it is probable that State Bank would have conducted its case differently. I also note that in Drummond v National Australia Bank Ltd (1997) 7 Butterworth’s Property Reports 14985 at pages 14990 and following, a clause in similar terms was considered by the Court of Appeal of this State. At page 14993 the Court says:
‘However, such contractual conditions have been the subject of numberless judicial decisions over many years. A sampling of such cases dating from the 1930s until today is given in O’Donovan and Phillips, ‘The Modern Contract of Guarantee’, 3rd edition at pages 350-352. The fact that such conditions have regularly appeared in guarantees for such a long period as to have become part of regular commercial usage, in our view makes it impossible to say that they are of a character requiring explanation to a competent intending guarantor.’
95It should also be noted that Mrs White had solicitors acting for her at the time she, as a guarantor, entered into the mortgage. Furthermore, the subject mortgage was the second she had executed as guarantor in favour of State Bank.
96Accordingly, her claim under the Contracts Review Act fails.”

Cooper AJ rejected a contention that cll 5.2.1 and following on their true construction did not apply to prevent Mrs White succeeding on her claim that the Bank sacrificed or impaired the security for the loan to the Company by agreeing to pay out the $200,000 from the fixed term deposit to GWPL.
Next his Honour came to consider a challenge to the applicability of cll 5.2.1 and following based on an allegation that the Bank had acted fraudulently, dishonestly and improperly in releasing the $200,000 from the fixed term deposit and by so doing acted in a way that the clauses did not protect. This led his Honour to look closely at the facts leading up to and surrounding the release.
Mr White’s brother, Mr Gregory White, during the period from July 1989 up to and including February 1990 had all the outward manifestations of being a very successful and wealthy businessman. He had developed a large and impressive shopping centre. He lived in an opulent house and drove a Mercedes Benz. On one occasion he took Mr White to the Motor Show where he bought a new Mercedes Benz. As far as Mr White was concerned, Mr Gregory White was extremely successful and wealthy.
Not long after the Company received the $356,000 into its fixed term deposit, Mr Gregory White suggested to Mr White that Mr White or the Company should lend him the whole of the amount on deposit and in return Mr Gregory White or GWPL would make the payments of interest due on the Company’s loan plus a premium of 10 per cent of that interest to the Company and repay the total amount of principal when it became due by the Company to the Bank. Mr White regarded this as a very good business venture. It would give extra money to the Company of which he and Mrs White were sole shareholders and directors and thereby better enable the Company to support his family. Mr White told Mrs White about the offer. She felt that it would be a good idea but only if Mr Gregory White or GWPL gave some form of security for the loan. Mr White regarded security as unnecessary. She, according to his evidence, regarded security as quite necessary.
Unbeknown to either Mr or Mrs White, on 21 July 1989 the manager of the Bank’s Fairfield Branch wrote to GWPL advising that the Company overdraft had a limit of $310,000. Some time before Mr White started work in November 1989, he and Mr Gregory White went to see Ms Churchward, the manager of the Bank’s Riverwood Branch where the Company by then had its bank account. In his presence Mr Gregory White told Ms Churchward that he wanted to borrow the total amount in the Company’s fixed term deposit. To this suggestion Ms Churchward responded:
“There is no possible way you could borrow the money because you would have no securities left in the system to cover the money.”
The Bank had the right to refuse to release any part of the fixed term deposit money by reason of the security given over it by the Company. Cooper AJ found on the probabilities that Ms Churchward appreciated that the Company did not have the income to pay the interest on the balance of the loan unless GWPL honoured its obligation to pay the promised amounts to the Company. She was in possession of information which raised some doubts in her mind as to whether GWPL could meet those obligations. Mr Gregory White became quite angry and with Mr White left the interview. Mr Gregory White then suggested to Mr White that he transfer his account from the Riverwood Branch to the Fairfield Branch where Mr Gregory White and GWPL had their accounts. The inducement was that the Company would get a better deal from the Fairfield Branch.
Mr White discussed this with Mrs White and she agreed to the transfer because she thought they would get a better deal at that branch. On 30 November 1989 Mr and Mrs White signed a letter addressed to the Riverwood Branch manager asking for the balance of accounts and all other documents to be transferred to the Fairfield Branch. The letter apparently was mislaid because an identical one dated 15 December 1989 was sent. On 22 December 1989 the Fairfield Branch sent a letter to the Secretary, GWPL informing it of penalties payable on early repayment of a fixed interest term loan and also of the interest rates charged. The letter concluded:
“Please also note that once your Brother’s Accounts are fully established and his relevant files are in our hands, we will then be able to sit down together and work out the necessary transactions to finalise the matter.
Please bear with us and once the information is to hand, I will contact you to arrange a mutual time to discuss the matter with your Brother.”
Cooper AJ said that it was clear that officers at the Fairfield Branch were aware that some arrangements were being made between Mr White and Mr Gregory White or their companies. The Company’s documents and accounts were transferred from Riverwood to Fairfield under cover of a letter dated 27 December 1989, received at Fairfield Branch on 3 January 1990. On 12 January 1990, the manager of the Fairfield Branch prepared an internal memorandum regarding the Company. It stated “customer has recently transferred accounts from Riverwood branch” and “Mr White has requested release of $250,000.00 from cash funds held on deposit.” It then looked at the value of securities held by the Bank to cover its loan to the Company but not at the ability of the Company to meet the interest payments. The submission in the memorandum was for approval to release $195,000, part of the security (being the fixed term deposit) held subject to the following:
“ARemaining existing security
BInterest rates on FRTL to remain at interest rate on ODL (1) to be increased to 22% being 1.5% above reference rate
CReview due 12/1/90 for overdraft not carried out when due by Riverwood branch to be now noted as satisfactory
DApplication fee $200.00; inspection fee $100
ELoan quality rating shall remain LD2
FAmend interest collection to monthly in arrears commencing 26 February 1990 for ease of administration.”
At the foot of the memorandum appeared:
“NBCustomer to be advised conditions to be accepted before release of funds.”
The customer was not Mr or Mrs White, it was the Company. The submission was signed by Mr FR Brookes (sic), senior manager on 12 January 1990. Cooper AJ regarded it as worthy of note that whilst the review concluded quite accurately that the Bank held securities in excess of the amount to be released from the fixed term deposit, it did not consider the capacity of the Company to pay the interest due on the amount of loan outstanding. His Honour said:
“116Having regard to the terms of the letter from State Bank to Gregory J White Pty Ltd of 22 December 1989 (referred to above) coupled with the terms of the Internal Memorandum as well as the evidence of Mr White, I am satisfied on the balance of probabilities that State Bank was aware of the agreement between Mr White and his brother or his brother’s company. But the bank made no suggestion to Mr White or to the Company that either of them ought to obtain some form of security from Gregory J White Pty Ltd or Gregory White to cover the eventuality of these entities defaulting on the agreement with DS & L White Carrying Pty Ltd.
117It ought to have been known (if it was not in fact known) by officers of the Fairfield branch of State Bank that the Company had no business and no income to meet the interest which would become due.”
Cooper AJ referred to a passage in an affidavit of Mr White in which he said that on or about 2 February 1990 Mr Gregory White telephoned him at home and asked him to attend at his home that afternoon. When he arrived Mr Gregory White handed him a document which he took and read and signed in the presence of Mr Gregory White. When he received this document from his brother, Mr Gregory White said words to the effect “it’s all fixed. All you have to do now is sign this letter and I’ll sent it off to Frank Brooks at the bank.” The letter was the letter of the 2 February 1990 addressed to Mr Brooks and signed by Mr White for the Company which authorised the Bank to release $200,000 from the fixed deposits held in the name of the Company to GWPL.
In evidence were bank debit notes from the account of DS & L White totalling $200,000 and a credit note into the account of GWPL for $200,000 all dated 5 February 1990. The bank statement of GWPL showed that on 5 February 1990 there was a deposit of $200,000 from the Company which reduced the debit on the GWPL account from $570,329.17 to $370,329.17. This was still above the overdraft limit of $310,000.
Both Mr and Mrs White gave evidence that Mr White did not advise Mrs White at any time before the funds of $200,000 were transferred out of the Company’s fixed term deposit to GWPL of the steps to effect such transfer. Mr White said he deliberately kept Mrs White in the dark as he believed that if he had told her beforehand she would have objected to such transfer. Mrs White’s evidence was similar. Cooper AJ was satisfied that in giving this evidence there was no collusion between Mr and Mrs White.
The Bank submitted that the letter of 13 February 1990, which I have already set out, constituted an agreement and consent by Mrs White to the release of the $200,000. Mrs White said that her signature did not signify consent to the transaction but merely acknowledged that she had received the letter. Moreover she was not aware that she could reverse the transaction and so did not complain. Cooper AJ said:
“128In fact I am satisfied that she could not reverse the transaction at that stage. The Request for Banking Facilities (exhibit B1 page 20) given by the Company to the bank provided for either director to sign the document of 2nd February 1990. Indeed, counsel for Mrs White concedes that that document was sufficient authority from the Company to State Bank to do what it did.”
Mr McQuillen submitted that because the transfer diminished the security and thereby exposed Mrs White in her capacity as a guarantor to extra risk her consent should have been obtained before the transfer. Various acts of impropriety were alleged, namely:
“(a)In its assessment made on 12 January 1990, [the Bank] assesses the capital value of the security but not the ability of the Company to pay the interest.
(b)In the submission in that assessment the author sought approval for the release of $195,000.00 yet $200,000.00 was released.
(c)In that assessment there were conditions that the customers had to be notified before the money was released. The Company which was the customer was notified, and Mr White in his capacity as director and a co guarantor was notified but not Mrs White in her capacity as guarantor.
(d)The Manager of the Fairfield branch knew that the account of Gregory J White Pty Ltd was overdrawn and therefore ought to have appreciated that there was a real probability that it would [be] unable to meet the substantial payments of interest ($4,600 per month) plus the premium to the Company as promised.
(e)Within the information available to the Manager of the Fairfield branch was the notation appearing at Exhibit B1, page 286, which noted that the customer would not be repaying the fixed rate loan but would be using the cash from the settlement of the sale of the newsagency to secure the loan.
(f)By transferring the money over to the account of Gregory J White Pty Ltd the exposure of the bank to the overdrawn account of that company was considerably reduced and thereby the Manager preferred the interests of Gregory J White Pty Ltd to those of its other customer DS & L White Carrying Pty Ltd.
(g)Thus the bank improved its position at the expense of the guarantors including Mrs White.
(h)Whilst the bank would be precluded by its obligation of confidentiality from revealing the state of the account of Gregory J White Pty Ltd to Mr or Mrs White nonetheless it had the right of veto over the proposed transfer of the $200,000.00 to Gregory J White Pty Ltd. By refusing to exercise its power of veto in all the circumstances it acted dishonestly.
(i)In these circumstances the bank was under an obligation to ensure that both guarantors gave their prior approval to any transaction which diminished the value of the security given by the Company to the bank.
(j)The consent of Mrs White had to be obtained before the release of the money because after the event, in her capacity as guarantor, she had no power to reverse the release of the funds. Also in her capacity as director of the Company she could not reverse it because her husband had the actual and ostensible authority to authorise the payment on behalf of the Company.
(k)Accordingly, she was presented with a fait accompli and had to do the best she could. Consequently her conduct after the event is not evidence of consent to the release of the funds nor is it evidence of consent to the release of the funds given before the event.
(l)This type of conduct is not envisaged in clauses 5.1.2 and following on their true construction.
(m)The receipt of a cheque for $300,000.00 from Gregory J White Pty Ltd followed by the immediate outlay by the Company’s cheque for $300,000.00 to Village Projects Pty Ltd was not a repayment of the loan from Gregory J White Pty Ltd nor was it a novation. It is submitted that this was merely an attempt by the Company to mitigate its losses caused by the wrongful acts of State Bank – albeit an unsuccessful attempt.”
In considering whether on these facts Mrs White had any defence to the Bank’s claims Cooper AJ held that there was nothing special about the arrangement between the Bank and Mr Gregory White or GWPL which imposed upon the Bank any duty of disclosure to Mr or Mrs White or the Company. He was satisfied that in the particular case a surety would have expected that a person or company such as Mr Gregory White or GWPL would have an overdraft arrangement with the Bank. His Honour said he was far from being satisfied on the balance of probabilities that the transaction as a whole could be said to be one which gave one customer of the Bank preference over another customer.
“From the view point of Mr White and the Company the arrangement with Gregory J White Pty Ltd appeared to be beneficial. It gave the Company extra income. It is true that the agreement between the Company and Gregory J White Pty Ltd was not initially in writing but at no stage did Gregory J White [Pty Ltd] or Gregory White ever deny that such a contract was made. Indeed, it was subsequently confirmed by the guarantee in favour of the Company dated 12 December, 1991.”
While true that the payment of $200,000 to GWPL substantially reduced the exposure of the Bank to GWPL’s indebtedness, the Bank did not thereupon close the overdraft account. The Bank statements in evidence demonstrated that the Bank permitted GWPL to continue to operate on the overdraft account so that it was in debit to an even greater extent than the amount standing at the time of the receipt of the $200,000. In his Honour’s opinion the evidence fell far short of satisfying him on the balance of probabilities that officers of the Bank held a belief at that time that Mr Gregory White or GWPL were insolvent. His Honour was not satisfied that either the Bank or the Company or Mr White was guilty of any dishonesty, fraud or improper conduct. He was also not satisfied that cll 5.1.2 and following of the memorandum did not, on their true construction, provide an answer to the cross-claims.
In her defence, Mrs White alleged that she was in a position of special disadvantage at or about the time of execution of the mortgage which position of special disadvantage was known or ought to have been known by the Bank and in the premises it was unfair and unconscientious for the Bank to rely on the mortgage. But his Honour said that the evidence fell far short of satisfying him on the balance of probabilities that Mrs White was in fact in a position of special disadvantage at the time of execution of the mortgage. She was then represented by a solicitor, Mr Swane, and the mortgage contained normal commercial terms. The mortgage sued upon was the second she had joined in granting to the Bank.
So far as the Bank’s authority to release the funds was concerned his Honour noted that Mr McQuillen conceded that the letter of 2 February 1990 was sufficient authority by the Company to release the funds.
In her cross-claim Mrs White alleged that Mr White owed duties to the Company to act bona fide and for the benefit of the Company and to exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties. She alleged that the release of the funds involved a breach of those duties by him. Cooper AJ said:
“141Viewed with the benefit of eleven years of hindsight it can be said that Mr White made the wrong decision. However, in the light of the information then available to him in February 1990 I am not satisfied that he was guilty of failure to exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties. I am further not satisfied that he failed to exercise his powers and discharge his duties bona fide and for the benefit of the Company. The arrangement he made was clearly for the benefit of the Company and for the Company only. It was the one to receive the benefits of the promise of Gregory J White Pty Ltd. As mentioned earlier, at that stage Gregory White exhibited all the indicia of a successful and wealthy businessman. Mr White had every reason to believe that his brother would keep his promises. Indeed, State Bank itself was prepared at that point of time to extend considerable financial accommodation to Gregory White and/or his company.”
Cooper AJ said that the evidence fell far short of satisfying him on the balance of probabilities that Mr White’s conduct constituted a dishonest and fraudulent scheme to advantage GWPL or the Bank. The evidence as a whole comfortably satisfied the trial Judge that the conduct of Mr White was motivated only by his desire to benefit the Company and, through the Company, his wife and children. Accordingly he was not satisfied that either Mr White or the Bank knowingly participated in such a scheme. His Honour distinguished the decision of Williams v State Bank of New South Wales (Young J, 7 April 1993, unreported). In the first place there was no suggestion in that case of the existence in the mortgage of clauses similar to cll 5.1.2 and following. Secondly, Williams was a case where one party to a mortgage increased liability under the mortgage without the knowledge or approval of the other. Thirdly, in the case before him the Bank was not refusing to lend money to GWPL. Rather on the evidence it continued to lend money well after February 1990 to GWPL. Fourthly, in this case Mrs White as a shareholder and director of the Company was entitled to share in the benefits of the agreement between it and GWPL. Cooper AJ summarised his conclusions as follows:
“a.The release of the $200,000 from the Fixed Term Deposit of the Company was duly authorised by the letter of 2 February, 1990 signed by Mr White on its behalf.
b.The motivation of Mr White for such release was not for the benefit of Gregory White or of Gregory J White Pty Ltd or of State Bank. It was for the benefit of DS & L White Carrying Pty Ltd and thereby for the benefit of Mrs White and himself as sole directors and shareholders.
c.Mr White was not guilty of any breach of his duty as a director or of any failure to take reasonable care in releasing the $200,000.
d.Mrs White was aware of the negotiations for the release of the money and approved in principle subject to the loan to Gregory J White Pty Ltd being secured.
e.This is not a case of a guaranteed loan fund being further debited to benefit only a third party without the knowledge or consent of one of the guarantors. Rather it is a case of the guaranteed loan fund being further debited for the benefit of the Company of which the guarantors were the sole directors and shareholders and, therefore, the sole beneficiaries.”

His Honour concluded that the Company proceedings must fail. The Company had failed to satisfy him on the balance of probabilities that Mr White failed to exercise his powers and discharge his duties as a director of the Company bona fide and for the benefit of the Company or failed to exercise a reasonable degree of care and diligence in the exercise of those powers and the discharge of those duties. The Company had failed to satisfy him that in causing the Bank to release $200,000 Mr White was in breach of any duty owed by him to the Company. Further his Honour was not satisfied on the balance of probabilities that the Bank knowingly participated in a dishonest and fraudulent scheme by Mr White to advantage GWPL or the Bank. In fact he was satisfied that the arrangement made by Mr White was made purely and only for the benefit of the Company bona fide and, in the light of the circumstances then existing, with the exercise of due care and diligence. It followed that the Company had failed to satisfy him that the Bank aided, abetted, counselled or procured or was directly or indirectly knowingly concerned in or a party to any breach of duty by Mr White as an officer of the Company.
Appellant’s submissions
Mr McQuillen, as earlier indicated, gathered his submissions for the appellant under the following headings:
1.            The Bank breached its contractual obligation under the guarantee by reducing the value of the security with the payment of $200,000 out of the funds held on the fixed term deposit to GWPL.
2.            As a matter of construction the exclusion clause 5.1.2.1 and following did not apply to excuse this contractual breach.
3. If the exclusion clause did apply as a matter of construction, the Court should grant relief under s7 of the Act and refuse to enforce it.
4.            The Bank owed what was described as “a general duty of care” said to be part of the law of guarantees to the effect that the creditor will not act in a way unfair to the surety. If the Bank did so act towards Mrs White she was released from her obligation under the guarantee. In discussion this was refined to the proposition that a wilful act prejudicing the security held by the creditor released the guarantee pro tanto to the extent of the prejudice. The argument extended the proposition from a wilful act to some act of negligence. Reference was made to O’Donovan and Phillips, 3rd edition at 420-421 and 423.
5.            Non disclosure. Asked what he said should have been disclosed which was not, counsel replied:
“A number of matters but essentially what should have been disclosed is one, the fact that there was a proposal to release the funds on deposit; which was a security given by the Company, that there was obviously an arrangement between David White and his brother Gregory White which the Bank knew about, that the funds were being released to pay a debtor of the Bank in a way that the funds were going to the overdraft account with the same Bank of [GWPL] when that account was out of arrangements to reduce that account. But the fact that the Company would then become exposed to the Bank as a result of a partial release for security, although that’s an unusual feature, and importantly that the Bank having shortly prior to the release of the security had refused further accommodation to [GWPL] as the Bank was not satisfied with the credit standing of [GWPL], the Bank knowing his financial position in some detail. In fact it was intimately involved with [GWPL] being his banker.”
6.            Finally reference was made to ratification or subsequent consent to the release of the security.
The appellant also relied upon unconscionability and what had been said by the High Court in Garcia v National Australia Bank Limited (1998) 194 CLR 395 and the House of Lords in Royal Bank of Scotland plc v Etridge (No 2) [2001] 3 WLR 1021. In that case Lord Nicholls of Birkenhead, whose opinion Lord Bingham of Cornhill said commanded the unqualified support of all members of the House (1028), stated at 1031-2, after discussing cases of abuse of influence and the rebuttable evidential presumption of undue influence:
“The evidential presumption discussed above is to be distinguished sharply from a different form of presumption which arises in some cases. The law has adopted a sternly protective attitude towards certain types of relationship in which one party acquires influence over another who is vulnerable and dependant and where, moreover, substantial gifts by the influenced or vulnerable person are not normally to be expected. Examples of relationships within this special class are parent and child, guardian and ward, trustee and beneficiary, solicitor and client, and medical adviser and patient. In these cases the law presumes, irrebuttably, that one party had influence over the other. The complainant need not prove he actually reposed trust and confidence in the other party. It is sufficient for him to prove the existence of the type of relationship.
It is now well established that husband and wife is not one of the relationships to which this latter principle applies. In Yerkey v Jones (1939) 63 CLR 649, 675 Dixon J explained the reason. The Court of Chancery was not blind to the opportunities of obtaining and unfairly using influence over a wife which a husband often possesses. But there is nothing unusual or strange in a wife, from motives of affection or for other reasons, conferring substantial financial benefits on her husband. Although there is no presumption, the court will nevertheless note, as a matter of fact, the opportunities for abuse which flow from a wife’s confidence in her husband. The court will take this into account with all the other evidence in the case. Where there is evidence that a husband has taken unfair advantage of his influence over his wife, or her confidence in him, ‘it is not difficult for the wife to establish her title to relief’: see In re Lloyds Bank Ltd; Bromze and Lederman v Bomze [1931] 1 Ch 289, 302, per Maugham J.”
The decision of the High Court in Garcia, which binds us, was not referred to in any of the judgments in Royal Bank of Scotland and, surprisingly, apparently not cited in argument. A good deal of attention was directed to explaining the decision of the House of Lords in Barclays Bank plc v O’Brien [1994] 1 AC 180 which was referred to in Garcia. At page 1032, Lord Nicholls said:
“As already noted, there are two prerequisites to the evidential shift in the burden of proof from the complainant to the other party. First, that the complainant reposed trust and confidence in the other party, or the other party acquired ascendancy over the complainant. Second, that the transaction is not readily explicable by the relationship of the parties.”
Discussion and decision
Mr McQuillen put his client’s submissions at some length orally. However, in my opinion it can be disposed of quite shortly. But for cll 5.1.2.1 and following in the memorandum which was part of both the mortgage and the guarantee the Bank could not without the informed consent of the guarantors, Mr and Mrs White, have impaired the security by permitting the fixed deposit to be reduced. However, plainly enough cl 5.1.2.1 meant that the liability of Mrs White as mortgagor and guarantor was not affected by this act albeit that, absent the clause, under the law relating to suretyship Mrs White would have been released from her liability under the mortgage at least to the extent of $200,000.
There was no suggestion that Mrs White did not knowingly enter into the mortgage containing this memorandum. For the reasons that Cooper AJ gave, which included Mrs White’s failure to raise the matter in the pleading or until the evidence had closed, there was no possible basis for the Court to refuse to enforce these terms under s7 of the Act. Moreover quite apart from her signing the acknowledgement of the Bank’s letter of 13 February 1990 the events of the years that followed until the Bank began proceedings in 1996 did not give any hint that Mrs White did not accept that the Bank had acted with propriety and in accordance with the instructions it had under the terms of the banking facility which Mrs White had signed, in transferring the $200,000 into the overdrawn account of GWPL.
In the course of submissions many suggestions were made by the appellant’s counsel that the Bank had engaged in some collusive and improper conduct for its own benefit so as to reduce the debt owing to it by GWPL without undermining the security it had for the debt owing to it by the Company. Cooper AJ more than once found against the Company’s claim that the Bank knowingly participated in a dishonest and fraudulent scheme by Mr White to advantage GWPL and/or the Bank and found that the arrangement Mr White made was one only for the benefit of the Company and for the benefit of Mrs White and their children. No ground has been demonstrated for interfering with these findings.
The argument based upon Garcia and the Royal Bank of Scotland case failed to accommodate the fact that those cases were directed to the position of a wife entering into a transaction when she was unfairly influenced by her husband to do so. The claim here was not at all directed to Mrs White’s agreement to be a party to the banking arrangements with the Bank or to the mortgage. It was directed to what was said to be the consequence of the Bank on Mr White’s instructions paying money out of the fixed deposit the subject of the security in favour of the Bank. The Bank acted in accordance with instructions from a person authorised to give them and in accordance with the terms of contracts to which Mrs White was an informed party. The arrangement with GWPL was, according to Cooper AJ’s findings, a legitimate one for the benefit of the Company, Mr and Mrs White, and their children. As it turned out it was to the disadvantage of all of them but that consequence cannot be laid at the feet of the Bank. No ground was shown for interfering with his Honour’s findings of fact which were clearly open to him.
Order
The appeal should be dismissed with costs.
GILES JA: I agree with Sheller JA
CAMPBELL AJA: I agree with Sheller JA.

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LAST UPDATED: 29/07/2002

[2002] NSWCA 241

29 July 2002

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