WK Marble and Granite Pty Ltd v JKE Holdings Pty Ltd
[2013] NSWDC 308
•20 September 2013
District Court
New South Wales
Medium Neutral Citation: WK Marble & Granite Pty Ltd v JKE Holdings Pty Ltd [2013] NSWDC 308 Hearing dates: 17 and 18 September 2013 Decision date: 20 September 2013 Jurisdiction: Civil Before: P Taylor SC DCJ Decision: (1) Judgment for the plaintiff against the second defendant for the sum of $646,345.59.
(2) Dismiss the cross-claim.
(3) Reserve the question of costs pending the receipt of any further submissions as directed on 18 September 2013.
Catchwords: AGREEMENT - guarantee of debt by mother - non est factum - Contracts Review Act - independent legal advice - absence of unfair conduct Legislation Cited: Contracts Review Act 1980, s 7, s 9 Cases Cited: Petelin v Cullen (1975) 132 CLR 355
West v AGC (Advances) Ltd (1986) 5 NSWLR 610Category: Principal judgment Parties: WK Marble & Granite Pty Limited (ACN 074 331 981) (plaintiff)
JKE Holdings Pty Limited (ACN 099 561 387) (first defendant)
Bahia Elia (second defendant)
Joe Elia (third defendant)
Karen Elia (fourth defendant)Representation: Mr C E Bannan (plaintiff)
Mr M Auld (second defendant)
Eakin McCaffery Cox Lawyers (plaintiff)
JK Solicitors (second defendant)
File Number(s): 2011/326421 Publication restriction: No
Judgment
WK Marble and Granite Pty Ltd ("WK Marble") lent the sum of $590,374 to JKE Holdings Pty Ltd ("JKE") pursuant to a loan agreement. JKE was a company that owned a business conducted by Mr Joe Elia. His wife, Mrs Karen Elia, was the sole director and shareholder of JKE. Mr and Mrs Joe and Karen Elia agreed to guarantee and indemnify JKE in respect of its obligations under the loan. So also did Mrs Bahia Elia, Mr Joe Elia's mother.
In addition to being guarantors under the loan agreement, Mr and Mrs Elia and Mrs Bahia Elia also agreed, pursuant to a deed of charge and a bill of sale, to guarantee and indemnify the plaintiff, WK Marble, in respect of any moneys due by Mrs Karen Elia. The loan obligations were not met, and WK Marble sued JKE, Mr Joe Elia, Mrs Karen Elia and Mrs Bahia Elia.
Judgment has previously been entered against JKE and Mr Joe Elia and Mrs Karen Elia. The only remaining matters concern the claim against Mrs Bahia Elia, to whom I will hereafter refer to as Mrs Elia.
Mrs Elia resists the claim on two bases, and it is agreed between the parties that these are the only issues in the proceedings.
First, she relies on the doctrine of non est factum.
Secondly, she seeks, under the Contracts Review Act 1980, to have the loan agreement and the deed of charge and bill of sale declared void. Or, alternatively, she asks the Court to refuse to enforce the obligations in those documents.
Although there was some cross-examination, most of the factual matters were not in dispute.
On 12 October 2010 Mr Joe Elia informed WK Marble's solicitor that his mother was, "quite happy to put her property as security for the said loan in lieu of [the factory]". The solicitor replied:
"[O]ur client shall require security over [the factory] in addition to any security being provided over your mother's property, and your mother will need to be a signatory to any documentation, and therefore shall also need to provide a certificate of independent legal advice."
This requirement for independent legal advice was reiterated by the solicitors for WK Marble, two days later, in the following terms:
"It is imperative that certificates of independent legal advice be provided in relation to guarantees being provided by yourself, your wife and your mother."
The account given by Mrs Elia of these events was as follows:
"5. On around 27 October 2010 my son Joseph Elia (the third Defendant) came up to me and said to me: "'Mom I want to talk to you about something'. I said: 'What about'. He then said: 'I need your signature on a document, and you are coming with me to a solicitor to sign some papers you want that or not'. I then replied: 'No, I am not signing anything. All I have is the House and this is the house that we bought with your late father. I am not signing anything until I am alive I don't care after I go'.
6. The third Defendant was insisting and continued to say: 'You have no choice you are coming with me I don't care what you say or think, I don't want to force you but I will get you to come with me even if I have to carry you there myself"' He continued after a short pause by saying to me: 'Don't worry you are not signing the house to somebody you are just signing some documents'. I recall at that moment he raised his voice at me and clenched his fists, I knew then that I can not [sic] do anything but go even against my will.
7. I reluctantly attended the lawyer with the third Defendant. I felt very unwell because of the argument that I had with him and I forgot to take my medications that were prescribed to me at the time. As I was leaving the house on my way to the Lawyer, I felt very unwell and weak and felt as I had no control over my body or my actions.
8. I recall on the way to the Lawyer, on number of occasions I was thinking of just returning home and not going there at all. But I just feared that I might be physically forced by the Third Defendant.
9. On around the 27 October 2010 I only remember that I attended with the third Defendant the offices of the solicitor which I know is of Lebanese background. It [sic] seemed to me to be a nice person. I can not recall much of the conference that I had with him and I was just polite but did not understand much what he said to me. I thought that I have to be polite with him because he was nice with me. I must have nodded with my head from time to time or maybe just answered 'yes' to his questions but I did not understand what he was saying to me.
...
16. I reluctantly went to the meeting ... to attend the offices of my then solicitor George Khoury and CO Solicitors to sign documents that I never really understood clearly and the effects it could have on me even after they were read to me."
Mrs Elia also deposed to not understanding English "very much", speaking "very little English", "still grieving the loss" of her husband, "still recovering from an extensive life threatening tumour operation on the brain" and "under heavy medications".
Mrs Elia deposed to having been approached by her son, Mr Joe Elia, "on several occasions prior to the 20 October 2010 to sign some documents".
It is not disputed that Mrs Elia had no interest in JKE and did not receive, at least directly, any of the proceeds of the loan.
Of the loan amount, $150,000 was retained to pay for past debts owing by JKE to WK Marble. There was an amount of $10,353.50 for the costs of the loan and $430,20.50 was advanced to JKE.
The solicitor that Mrs Elia visited in October 2010 was Mr George Khoury. Mr Khoury deposed in his affidavit to the following conversation:
"After I was given a copy of the relevant documents, I had a conversation with Bahia Elia in which we said words to the following effect:
Me:
The solicitor acting for the borrower wants you to get independent legal advice on these two documents.
Bahia:
OK.
Me:
The first document is a deed of charge and bill of sale. It is a mortgage of property by Karen to WK Marble & Granite Pty Limited, and you and Joe will be the guarantors. A bill of sale means that there is stock which is being used as security. The documents list the obligations of the borrower, Karen, and it is like a bank loan - if she doesn't pay or can't afford to pay then you and Joe would have to cover the debts of Karen.
Bahia:
OK.
Me:
The other document is a loan document for a loan between WK Marble and JKE Holdings as the borrower, and you and Joe and Karen are the guarantors. The amount of the loan is $650,000. The clause provides that if the borrower cannot pay, WK Marble & Granite Pty Limited can demand that you Joe and Karen have to pay. If that happens you, Joe and Karen are liable for the whole balance owing.
Bahia:
OK.
Me:
Also in the loan document, there is an overriding clause that, as a guarantor, they can come and sue you and take your property, real and personal. The loan document also refers to a mortgage on your house although there is no mortgage here for you to sign. They can also put a caveat on your property. That means that it's a red light. You can't do anything with your property unless you deal with the person lodging the caveat.
So you can lose everything if the loan is not paid.
Do you understand all of that?
Bahia:
Yes, I do."
Mr Khoury also signed a letter dated 20 October 2010 addressed to WK Marble's solicitor in the following terms:
"I, George Khoury, of George Khoury & Co, solicitors, of 777 New Canterbury Road, Hurlstone Park hereby acknowledge that I have explained the Deed of Charge & Bill of Sale between Karen Elia and W K Marble & Granite Pty Limited and Bahia Elia and Joe Elia and the Loan Agreement between W K Marble & Granite Pty Limited, J K E Holdings Pty Limited and Bahia Elia, Joe Elia and Karen Elia to Bahia Elia.
Mrs Bahia Elia informed me that she understood my explanation of the documents."
Mr Khoury was cross-examined. He knew Mrs Elia by name and he had met her at social functions. They got to like one another and he knew that she had lost her husband 12 years earlier, that she was very fond of her sons and "would do anything for them". Mr Khoury accepted that he had reconstructed the conversation with Mrs Elia based upon his usual practice. I found him to be a credible witness and, indeed, nothing in his evidence was challenged in cross-examination.
It was suggested to him that:
"[W]hen a parent of Lebanese or Middle Eastern origin comes to you and says, 'These are some documents, can I have advice?' You wouldn't advise them as fully as perhaps you otherwise would because you think they're going to help out their children?"
Mr Khoury responded, "I'd advise them, even if I knew what the conclusion was, I'd still advise them. And I have told Mrs Elia exactly that."
The following question was also put to Mr Khoury:
"You would agree with me, wouldn't you, that if someone answered, 'Okay, okay, yes I do' to the complex propositions you putting to them, it maybe that they didn't fully understand the contents of those documents, would you agree?" [sic]
And Mr Khoury answered, "I explained it to her. She didn't ask - she didn't tell me that she didn't understand. If she had told me, I would have gone further into the - and explained it - the document."
Mrs Elia's evidence was given partly in English and partly through an interpreter. Sometimes she answered in English questions directed at her without the aid of the interpreter.
Although Mrs Elia gave evidence that her husband was very close to Mr Khoury, she does not refer to him by name in her affidavit. And in speaking of him she said that the solicitor, "Seemed to me to be a nice person". This evidence suggests an unfamiliarity between Mrs Elia and Mr Khoury, greater than that which existed.
When asked about her affidavit, "But you understood what you were signing?" She replied in English, "Of course. I'm not stupid like that. I know trouble."
In my view, Mrs Elia knew the effect of the documents she was signing. That was the reason she was reluctant to sign them. Her evidence indicates that she recognised that signing the documents put her house at risk, even before any mention was made by her son of her house. I do not accept that she was persuaded by her son's words that she was not signing documents that impacted upon her house, when she signed the documents. Had she been of that belief, she would not have "reluctantly" attended the lawyer.
Further, she thought that the factory was "the main property [at risk] to be taken", but in my view understood also that her home was at risk. Her evidence which suggests that she was coerced into signing the documents indicates that she had a real understanding of their purport. I accept that Mrs Elia believed that if she knew she would lose the house she would not have signed the documents. That is a different matter from whether she had an understanding of the effect of the documents that she was signing. She believed, it seemed, and trusted her son that he would be able to pay the debts so that her house would not ultimately be lost.
Mrs Elia had at least twice previously, since her husband had died, signed mortgages over her house to different banks. An amount in the order of $680,000 was owed to Westpac on the home principally if not wholly from debts incurred after her husband died. Her son or sons had been meeting these obligations. Accordingly, her past practice does not support her assertion in her affidavit that "I categorically state herewith that I would never ever have signed the documents over my family house as I cherish it".
Non est factum
To make out the plea of non est factum, Mrs Elia must establish the documents were "radically different" from what she believed them to be, that she was unable to have a proper understanding of the documents and that there was no carelessness on her part: Petelin v Cullen (1975) 132 CLR 355. I do not accept that Mrs Elia satisfies any of these three conditions. As indicated, I am of the view that she did understand that she was putting her home at risk for the sake of the loan. Although she could not read the document, this disability was remedied by Mr Khoury's presence and explanation. Further, if Mrs Elia told Mr Khoury that she understood his explanation of the meaning of the documents when in fact she did not (which she asserts but which I do not accept), her inability to understand the documents would appear to be due to carelessness on her part in failing to pay attention to her solicitor's explanation and accurately inform him when she was not understanding what he was saying.
Further, I accept Mr Khoury's evidence that included in the conversation he had with Mrs Elia were the words, "So you can lose everything if the loan is not paid. Do you understand all of that?" To which Mrs Elia responded, "Yes, I do."
In addition, there is the contemporaneous written record of the effect of Mr Khoury's explanation of the documents to Mrs Elia, recorded in the letter of 20 October 2010 where Mr Khoury stated, "Mrs Bahia Elia informed me that she understood my explanation of the documents".
I reject the defence of non est factum.
Contracts Review Act 1980
Section 7 of the Contracts Review Act 1980 provides:
"7 Principal relief
(1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:
(a) it may decide to refuse to enforce any or all of the provisions of the contract,
(b) it may make an order declaring the contract void, in whole or in part,
(c) it may make an order varying, in whole or in part, any provision of the contract,
(d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that:
(i) varies, or has the effect of varying, the provisions of the land instrument, or
(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument.
(2) Where the Court makes an order under subsection (1)(b) or (c), the declaration or variation shall have effect as from the time when the contract was made or (as to the whole or any part or parts of the contract) from some other time or times as specified in the order.
(3) The operation of this section is subject to the provisions of section 19."
Section 9 provides:
"9 Matters to be considered by Court
(1) In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of:
(a) compliance with any or all of the provisions of the contract, or
(b) non-compliance with, or contravention of, any or all of the provisions of the contract.
(2) Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include the following:
(a) whether or not there was any material inequality in bargaining power between the parties to the contract,
(b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation,
(c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract,
(d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract,
(e) whether or not:
(i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or
(ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented,
because of his or her age or the state of his or her physical or mental capacity,
(f) the relative economic circumstances, educational background and literacy of:
(i) the parties to the contract (other than a corporation), and
(ii) any person who represented any of the parties to the contract,
(g) where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed,
(h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act,
(i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect,
(j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act:
(i) by any other party to the contract,
(ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or
(iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract,
(k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and
(l) the commercial or other setting, purpose and effect of the contract.
(3) For the purposes of subsection (2), a person shall be deemed to have represented a party to a contract if the person represented the party, or assisted the party to a significant degree, in negotiations prior to or at the time the contract was made.
(4) In determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made.
(5) In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made."
Mrs Elia relies on a number of matters to establish that the contract was unjust at the time it was made. These are as follows:
"a. Mrs Elia was illiterate in both English and her native Arabic;
b. Mrs Elia had no formal education;
c. Mrs Elia was medically unwell and relied on a suite of daily medications;
d. Mrs Elia was recovering from an operation to remove a brain tumour;
e. Mrs Elia had no involvement in the operations of JKE Holdings;
f. took no part in negotiating the Contract;
g. the Contract was negotiated by her son, Mr Joe Elia, on behalf of the borrowers;
h. entered the Contract through the undue influence from Mr Joe Elia, her son;
i. was told that the Contract would not affect her Home;
j. entered the Contract without properly understanding its effects;
k. received legal advice on the Contract which she didn't understand;
I. had no way of repaying the monies secured by the Contract except by resort to her Home;
m. was included as a party to the Contract for the sole purpose of providing security;
n. the Lender had no involvement with Mrs Elia;
o. the Lender was aware that Mrs Elia was elderly;
p. the Lender knew Mrs Elia had no involvement in the operations of JKE Holdings;
q. the Lender knew the Home was Mrs Elia's Home;
r. the Lender accepted Mrs Elia's home as security in these circumstances".
I accept that Mrs Elia could not read English, that she had no involvement in the operation of JKE and that she took no part in negotiating the contract. However, in circumstances where there was no expert medical evidence to provide an opinion of her current state of health and where Mrs Elia claimed to be still grieving the death of her husband after 12 years, I am unable to be satisfied that Mrs Elia was "medically unwell" so as to be disadvantaged in being able to freely and consensually enter the loan agreement and deed of charge. Nor am I satisfied that Mrs Elia's will was overborne by the influence of her son. In my view, she was prepared to help her son, knowing what the documents involved, in the belief (ultimately mistaken) that her son, Mr Joe Elia, would be able to meet the obligations of the loan as he had previously (by and large) in respect of the bank mortgage.
I have found that Mrs Elia understood the substance of the legal advice she received. I accept that it is likely that the loan cannot be repaid except by resort to her home, that her involvement in the loan was to provide security and that the lender, WK Marble, had no involvement with Mrs Elia but I do not regard these matters as significant in determining whether the contract is unjust.
I have had regard to the matters in s 9 of the Contracts Review Act 1980. In my view, Mr Khoury's involvement and Mrs Elia's understanding, in general terms, of the effect of the documents, meant that there was no material inequality between her and WK Marble and that Mrs Elia was able to protect her own interests.
Those interests including having her children continue to meet her existing mortgage obligations and continuing to help her children. Those interests, in my view, persuaded Mrs Elia to enter the contract.
There is no suggestion that WK Marble engaged in unfair tactics. It may be that Mr Joe Elia's assurances to Mrs Elia were misleading. However, I am not persuaded that Mrs Elia was misled other than perhaps that she believed her son would meet the obligations imposed by the documents.
Even if the contract is unjust at the time it was made under s 9, I must still consider whether it is just to make orders, in this case declaring the agreement void or refusing to enforce it under s 7 of the Contracts Review Act 1980. The conduct of WK Marble, in particular, is relevant to whether such an order should be made.
In West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 621G, McHugh JA stated:
"If a defendant has not been engaged in conduct depriving the claimant of a real or informed choice to enter into a contract and the terms of the contract are reasonable as between the parties, I do not see how that contract can be considered unjust simply because it was not in the interest of the claimant to make the contract or because she had no independent advice."
And at 622B:
"a contract will not be unjust as against a party unless the contract or one of its provisions is the product of unfair conduct on his part either in the terms which he has imposed or in the means which he has employed to make the contract."
Of course this is not a case where Mrs Elia had no independent advice and, as I have noted, there is no suggestion of unfair conduct on the part of the lender.
In these circumstances, I am not persuaded that the contract is unjust or that it would be just to refuse to enforce it or declare it void.
There was no issue between the parties about the quantum, being $646,545.59.
The question of costs is to be reserved pending the receipt of further submissions as directed.
The orders of the court are:
(1) Judgment for the plaintiff against the second defendant for the sum of $646,345.59.
(2) Dismiss the cross-claim.
(3) Reserve the question of costs pending the receipt of any further submissions as directed on 18 September 2013.
**********
Decision last updated: 28 March 2014
0
3
1