Zell & Anor v Cwealth Bank of Aus

[1998] HCATrans 240

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S108 of 1997

B e t w e e n -

JENNIFER ANNE ZELL and COLIN MARTIN ZELL

Applicants

and

COMMONWEALTH BANK OF AUSTRALIA

Respondent

Application for special leave to appeal

GLEESON CJ
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 19 JUNE 1998, AT 11.07 AM

Copyright in the High Court of Australia

MR A.W. STREET, SC:   May it please the Court, I appear with my learned friend, MR M.K. CONDON, for the applicant.  (instructed by Andrew P. Quigley & Co)

MR R.G. FORSTER, SC:   May it please the Court, I appear for the respondent.  (instructed by Cowley Hearne)

GLEESON CJ:   Yes, Mr Street.

MR STREET:   Your Honours, there are two matters of general importance in relation to this application for leave.  The first question is the role of the knowledge and capacity of a husband in determining whether a contract made by a wife is unjust.  That first question in essence involves the application of what I might describe as an agency theory in constraining the application of the wide jurisdiction conferred by the Contracts Review Act.

McHUGH J:   Well, that is one way of characterising it, but it is not the real way, is it?  It was not that he was her agent, but that she left it to him and, in all the circumstances, it was not unjust or unreasonable.

MR STREET:   But those were in circumstances though, your Honour, where, in fact Mrs Zell was labouring under an erroneous belief that the transaction was viable, an erroneous belief induced by the Bank’s participation in the loan, an erroneous belief which his Honour found was causally linked to the entering into of the transactions and a belief that the Bank could have dispelled had it exercised reasonable care by carrying out a simple equity debt ratio calculation.

McHUGH J:   But it had no duty.

MR STREET:   So far as that calculation is concerned, it was one which it had ‑ ‑ ‑

McHUGH J:   But the trial judge held the Bank had no duty.

MR STREET:   But, your Honour, in so far as the duty is concerned, it had facts that put it on inquiry had it exercised reasonable care, had it sought to carry out ‑ ‑ ‑

McHUGH J:   Yes, but, Mr Street, you are not bound to pursue inquiries unless you have got a duty to do so and the trial judge held the Bank had no duty.

MR STREET:   But, your Honour, in that regard the Bank clearly had facts in its knowledge which, had it exercised reasonable care, it would have ascertained that the transaction was not viable.  It is one where we say there was both substantive and procedural injustice.  The terms in this contract his Honour found were impossible to comply with.  It is not a case where it was not just, it might not be viable.  Applying the test in section 9 of reasonable ‑ ‑ ‑

McHUGH J:   But the reason that the contract could not be complied with was because the applicant’s husband, who was an authority on these aspects, misled the Bank.

MR STREET:   Your Honour, in that regard, to the extent that that is the case, Mrs Zell was equally ‑ ‑ ‑

McHUGH J:   Well, it is not really to the extent.  I mean, that is the fact.

MR STREET:   But, your Honour, that only highlights the equity in Mrs Zell who was equally misled because she believed the transaction was viable and that they took no steps to ascertain whether or not she, in fact, was labouring under some misapprehension in a transaction that was blatantly not viable and the Bank had a capacity - if one stands back and looks at the capacity of the Bank with its bank officers and its skill and ability to do an equity ratio calculation and Mrs Zell, unsophisticated, so found by his Honour - his Honour expressly found she lacked the capacity to perform such a calculation.  The Bank did not and when one looks then at the consequences as between Mrs Zell and the Bank, Mrs Zell stood to lose not merely her home or matrimonial home for the last 35 years, not merely her means of livelihood, but her children’s future.  It was also the position that she lost her ‑ ‑ ‑

McHUGH J:   These are all powerful emotional factors, but the fact of the matter is we are dealing with a commercial arrangement and, if an impartial bystander had been there at the time, the courts below took the view that that would not have been regarded as unjust.  I mean, here you have - her husband is a highly‑skilled man in this particular field.  He is putting forward figures which the Bank has no reason to disbelieve, having regard to his standing and his expertise, and they act on it and she is a highly‑intelligent woman, well educated.  She knows what she is signing.  She puts her faith in him and the judges in the courts below have held it is not unjust.  Now, it is possible other judges would come to a different view, but we are dealing with discretionary judgments here and you have got concurrent findings against you.

MR STREET:   But, your Honour, here what we say is that both the court at first instance and the Court of Appeal both made this error of principle by applying what we maintain is what your Honour is raising, a concept of knowledge and capacity of the husband to the wife.  The wife is entitled, in my respectful submission, to have her application under the Contracts Review Act looked at based on her knowledge and capacity and she did not have the knowledge and capacity to ascertain that it was not viable.  She did not have the knowledge and capacity to ascertain that the terms were impossible to comply with and it is in those circumstances that one then looks at how the court analysed what I might describe ‑ ‑ ‑

McHUGH J:   But there is more to it than this.  Supposing you actually got up on this point, think of the orders that would have to be made.  Do you think that the applicant and the husband could then just - or the applicant just then walk away from it, having regard to the pre‑existing debt?  These are all background factors that you have got to look at in this case.

MR STREET:   Your Honour, so far as the consequences of the relief to be granted are concerned, in our respectful submission, the case is one where Mrs Zell can and should be put in a position where her half interest in the two properties, “Gowan Brae” and “Mount Pleasant”, would have been left unaffected and immunised from any liability to the Bank because those properties had, in fact, had the mortgages removed by application of the proceeds of her mother’s estate.  The whole of her mother’s estate went to pay off mortgages that existed over those two properties.  Her interests were unencumbered.  She entered into transactions in 1985 and made contracts that were simply impossible to comply with in circumstances where she did not have the means to ascertain that and the person who did was her husband or the Bank.

The Bank, had it exercised reasonable care, could have done so.  It is not a question of duty, in our respectful submission.  It is a  question of  whether the Bank was aware of facts which would have put it on inquiry.  It had facts in its possession that plainly indicated this transaction was not viable.  One then stands back and says, “Did it take advantage of its superior bargaining position?”

McHUGH J:   When you say it had facts in its possession, what do you mean “facts in its possession”?

MR STREET:   It had facts whereby it could have calculated the equity debt ratio.

McHUGH J:   No, it did not have facts, did it?  Well, it had the facts that the husband put forward, but then he had all sorts of predictions, all sorts of estimates and the Bank acted on that.  Now, you say that if the Bank had applied a debt equity ratio it would have realised that it was 58 per cent and it should have been 70 per cent to be viable.  Well, the Bank did not do it.

MR STREET:   And more than that though, your Honour, and the Bank did not take any steps to ensure that Mrs Zell got independent advice, whether from an accountant or a lawyer, and in those circumstances the Bank did not put itself in a position where, applying section 9(4), it was reasonable foreseeable, if one did that calculation under section 9(4), it was impossible to comply with.

McHUGH J:   No, not impossible to comply with.

MR STREET:   That is the finding that his Honour made in relation to the terms.  His Honour made a finding that it was impossible to comply with.  If one goes to page 63 at line 49:

Further in relation to par (d), I recognise that the terms of the loan were not merely difficult to comply with, but impossible to comply with.

Now, that is the finding of fact that his Honour made in this context and it is one where, your Honour, Mrs Zell simply did not have the capacity or ability to so calculate.  If one goes to page 66 at line 45:

As to Mrs Zell, she did not have her husband’s experience and farming expertise, sufficient to fit her to make the same kind of forward assessment as Mr Zell did or could have done.

Now, your Honours, it is in that matrix that, if I could take your Honours back to it, Mrs Zell is labouring under this erroneous belief which was causative to her entering into these transactions.  Could I take your Honours back to page 17 in the application book and at page 17 Mrs Zell at about line 29 identifies she had a belief, she:

would have relied upon those two sets of circumstances as my  recommendation of the viability of the loan.  I had no experience of the finances.

Mrs Zell repeated this theme in relation to subsequent acquisitions.  She wished to emphasise that she regarded the Bank’s willingness to lend on each occasion as conveying an expert opinion that the transaction would not be disadvantageous to the family.  I do not doubt the genuineness of her belief in that regard and that the belief contributed to her willingness to join in the transactions ‑

On page 18 her credit ‑ ‑ ‑

GLEESON CJ:   So the obligation of the Bank was to talk her out of a business transaction that she and her husband were jointly willing and anxious to enter into?

MR STREET:   No, your Honour.  I do not put it that way.

GLEESON CJ:   That would involve the Bank in assuming an interesting role as between husband and wife.

MR STREET:   Your Honour, so far as the Bank is concerned, it is not entitled to treat the wife as in a position where she is subservient to the husband and that is the second error that we say is of importance in this case.

GLEESON CJ:   There is no question of her being subservient.  She was fully actively co‑operative with him.  The picture is painted on pages 131 and 132 of the application book where the President observed that Mr and Mrs Zell had arranged their family affairs in a certain way and your proposition seems to be that the Bank had a duty to intervene as between Mr and Mrs Zell.

MR STREET:   No, your Honours, we seek to not put it on a basis of it being a duty to intervene.  What we seek to put is that this jurisdiction that has been conferred by the Contracts Review Act is not constrained by concepts of agency and one does not approach it on the basis that what one’s husband might be aware of or be capable of doing is not a criteria or factor that is brought to bear when determining whether the wife is entitled to relief under the Contracts Review Act and that error, in our respectful submission, is one made by both the court at first instance and the Court of Appeal because when they look at what occurred so far as the entry into the transaction is concerned and when one looks at the judgment of his Honour Mr Justice Sperling, what he continually pursued was Mr Zell had the ability to do this calculation.  Mr Zell knew these facts.  Mr Zell was capable of carrying out this transaction.  What about Mrs Zell?  And in that regard, what about the Bank, comparing the Bank’s position?

The Bank was in a position where it could have, had it sought to do so, easily exercised and carried out a calculation that would have revealed it was not viable.  Did it take any steps to indicate to Mrs Zell she should seek independent advice, one of the criteria if one goes back West’s Case, picked on by the President in that case?  No independent advice from a solicitor or an accountant.  Now, your Honours, if one stands back from that and says this agency concept of husband and wife is the basis upon which his Honour Mr Justice Sperling has approached whether or not relief should be granted under the Contracts Review Act and, if one accepts that is, in fact, the case, it does involve a question of importance because that theory, in our respectful submission, has no role to play in determining whether a wife is entitled to relief under the Contracts Review Act.

McHUGH J:   But this is a special case.  This is a case where it was a mutually supportive marriage in which each had regard for the interests of others and their three growing sons.  Each partner to the marriage relied upon the assistance and judgment of the other, supplemented at times by assistance from the family accountant, and the husband was probably the foremost authority in the relevant area, in the issue with which we are concerned and his knowledge was far superior to that of the Bank.

MR STREET:   The court held that the Bank was equally capable of carrying it out and we say that the findings that his Honour made were in essence that the Bank was negligent not to do so.  Now, when one looks at the question of notice ‑ ‑ ‑

McHUGH J:   Well, was not the relevant Bank manager, to use a term that was used in one of the judgments, a city slicker who was just out of his depth in this particular area, faced with a man who held various positions in the rural community and was an authority and put forward these predictions which were wrong?

MR STREET:   But, your Honour, that only really emphasises the need not to treat Mrs Zell as in some way impacted upon by her husband’s position and that is the very error that underlines ‑ ‑ ‑

McHUGH J:   But it is a question whether it is unjust or unreasonable in the circumstances and that gives a wide discretion.

MR STREET:   Your Honour, we say that that approach in relation to what Mr Zell knew, his ability, his capacity, his standing in the community, all of that again assumes the very same error that we complain about in relation to this agency theory.  The application of relief under the Contracts Review Act must depend upon the circumstances of the individual, that individual’s capacity, that individual’s knowledge, not attributed through some concept of ‑ ‑ ‑

McHUGH J:   But the ultimate issue is whether the contract is unjust and unreasonable and, in the circumstances of this case, the unanimous opinion of every judge who has considered the matter is no.

MR STREET:   Well, your Honours, the area that we seek to maintain that are ones of both importance and errors of principle are, firstly, this concept whereby the capacity of the husband is being treated as the capacity of the wife and one has to look at the case and say, in my respectful submission, that but for Mr Zell’s capacity, could the court possibly have come to a view that it was not unjust?  It must have been unjust and the only explanation one can put forward for not holding that this contract was not unjust in Mrs Zell’s circumstances is what your Honour has raised and that is the test which really defeats the approach adopted by the courts below because but for Mr Zell’s capacity, this case stands out as clearly as anything that Mrs Zell was entering into a contract that was impossible to comply with, where the risks were so disproportionate, it was not just losing a family home, her livelihood, but her children’s future as well as her mother’s estate.  One cannot approach the case, in my respectful submission, on the basis that the position of Mr Zell was not material and decisive to the outcome of the appeal and the case at first instance.

GLEESON CJ:   There may be circumstances - it is easy to imagine them - in which justice could require a bank to warn a wife against placing too much confidence in her husband, but that would depend, amongst other things, upon an assessment of the husband and an assessment of the wife and an assessment of the circumstances, and all those assessments were made by the judges in the present case and they came to a conclusion against you.

MR STREET:   But, your Honour, to the extent that one is seeking to analyse how the court approached it, the court approached it, in our respectful submission, on this concept of agency and, if one goes to the judgment of the Court of Appeal, at page 133 line 45, here is the kernel of the error revealed:

The Bank was entitled to deal with Mr Zell as the agent for both parties given that they chose him to represent them in most of the pre‑contractual negotiations.

Now, Mrs Zell did not even participate in the negotiations for the acquisition of “Bundally”.  It is just a case where the proposition of agency is not applicable to relief under the Contracts Review Act and that is the kernel of the error, in our respectful submission, which is raised by the decision, both at first instance and in the Court of Appeal.  The second matter we seek to raise, your Honours, is the one relating to the observation made and we say a factor taken into account ‑ ‑ ‑

McHUGH J:   Well, that was a comment, not a reason, was it not?

MR STREET:   Well, it is made in circumstances where his Honour Mr Justice Sperling is analysing and leading to the reasoning as to whether the contract was unjust and he takes into account, in our respectful submission, this notion that Mrs Zell was complying with a mores of her generation, not just a factor that was irrelevant, but, in our respectful submission, a factor that throws up this concept of a lack of recognition of the equality of the sexes and in that regard that Mrs Zell was not to have attributed to her the knowledge and capacity of her husband and it, in essence, comes back to the very same error and it is an area in that regard relating to the equality of sexes which Lord Brown‑Wilkinson commented on in O’Brien in respect of the public policy considerations and its importance in that regard.

Your Honours, finally, I would wish to submit that this question that we have raised in respect of this erroneous agency theory runs into not just the Contracts Review Act in terms of that....., but also in relation to unconscionable conduct.  If the Court pleases.

GLEESON CJ:   Thank you, Mr Street.  We do not need to hear you, Mr Forster.

This case called for the application to the particular facts and circumstances of well established principles of law.  The Court is not persuaded that there is sufficient reason to doubt the correctness of the decision of the Court of Appeal and the application for special leave to appeal is refused.

Do you oppose an application for costs, Mr Street?

MR STREET:   No, your Honour.

GLEESON CJ:   The applicant must pay the respondent’s costs of the application.

The Court will adjourn for a short time to reconstitute.

AT 11.26 AM THE MATTER WAS CONCLUDED