State Bank of NSW v Watt [2002] ACTSC 74 (2 August 2002)

Last Updated: 5 August 2002

STATE BANK OF NEW SOUTH WALES LIMITED t/as STATE BANK OF NEW SOUTH WALES v ALLAN JAMES WATT and FAY ELIZABETH WATT [2002] ACTSC 74 (2 August 2002)

CATCHWORDS

EQUITY - mortgage and guarantee - unconscionable conduct - whether mortgagors/ guarantors under special disability.

EQUITY - mortgage and guarantee - duty of disclosure - whether unusual or unexpected matters related to secured debt - whether undue influence exerted.

Trade Practices Act 1974 (Cth), s 52

Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447

Bank of Nova Scotia v Neil (1968) 69 DLR (2d) 357

Goodwin v National Bank of Australasia Ltd [1968] HCA 30; (1968) 117 CLR 173

Blomley v Ryan [1954] HCA 79; (1956) 99 CLR 362

Garcia v National Australia Bank [1998] HCA 48; (1998) 194 CLR 395

Garcia v National Australia Bank (1993) 5 BPR 11,996; [1993] ANZ Conv R 603

Barclays Bank Plc v O'Brien [1993] UKHL 6; [1994] 1 AC 180

Hornsby Building Information Centre and Anor v Sydney Building Information Centre Ltd (1978) 140 CLR 217

Bank of Victoria v Mueller [1925] VLR 642

Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649

No. SC 271 of 1995

Judge: Gray J

Supreme Court of the ACT

Date: 2 August 2002

IN THE SUPREME COURT OF THE )

) No. SC 271 of 1995

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: STATE BANK OF NEW SOUTH WALES LIMITED t/as STATE BANK OF NEW SOUTH WALES

Plaintiff

AND: ALLAN JAMES WATT and

FAY ELIZABETH WATT

Defendants

ORDER

Judge: Gray J

Date: 2 August 2002

Place: Canberra

THE COURT ORDERS THAT:

1. The plaintiff have leave to bring in minutes of order to give effect to the findings contained in the reasons for judgment in relation to its claim against the defendants.

2. The defendants' cross-claim be dismissed.

1. The plaintiff, the State Bank of New South Wales Limited trading as State Bank of New South Wales (the plaintiff), claims possession of a residential property at 3 Barrett Street, MacGregor in the Australian Capital Territory. The defendants, Allan James Watt and Fay Elizabeth Watt, are the registered proprietors.

2. The plaintiff claims that the defendants are in default under a registered memorandum of Mortgage of Crown Lease dated 30 August 1991 (the mortgage) and that, as at 18 December 2001, the amount outstanding secured by the mortgage was $1,263,020.89. The default is admitted and the amount in default is not disputed.

3. In answer to the plaintiff's claim, the defendants claim that the plaintiff was in breach of its duty to disclose what were said to be unusual or unexpected matters relating to the secured debt. They also claim that the plaintiff's conduct in obtaining the mortgage from them was unconscionable and in that regard made a further distinction between the position of the defendant Fay Elizabeth Watt, and that of her husband, the defendant Allan James Watt. The defendants also counter-claim for a declaration that the mortgage is not enforceable and, in the alternative, that an order be made setting it aside ab initio.

The Background

4. The first defendant, Mr Watt, is retired. He was born on 5 February 1928 and prior to his retirement was an Assistant Commissioner of the Australian Federal Police. His wife, the other defendant, was born on 29 August 1927 and is also retired. Whilst in employment she was employed as a typist. She appears to have left work a few years before her husband's retirement.

5. Mr Watt retired in 1987. In 1989, he and his wife agreed to assist their son-in-law, Graham Dyer, and their daughter, Gayle, in their newsagency business. At the time the business was purchased, it seems that Mrs Watt lent them $40,000.00, a sum which has never been repaid.

6. At about that time, their son-in-law suggested that they become involved in the business and from November 1989 the defendants became directors and shareholders with their son-in-law and daughter in Dyspurrs Pty Ltd (Dyspurrs). Dyspurrs is a proprietary company which, at the time that the loan was granted, was the corporate vehicle used by the defendants' son-in-law, principally at that stage in respect of the newsagency business at Charnwood in the ACT as well as to enable him to carry on a subsidiary business venture involving modifying and selling imported classic motor cars. Since November 1989, the defendants each owned 15% of the shares in Dyspurrs, their daughter and son-in-law each held 35%. From 1 November 1989 the defendants, their daughter and son-in-law were the directors of the company. The defendants resigned as directors on 14 November 1994.

7. In late 1989, Mr Dyer requested his parents-in-law assist the business by providing security to the Commonwealth Bank for a loan to Dyspurrs. The security proposed was a mortgage over 3 Barrett Street, MacGregor, the defendants' matrimonial home and principal asset.

8. At the time, according to Mr Watt, his wife was against giving the mortgage requested because she did not think her son-in-law a good manager. She was persuaded on the basis that the arrangement would be temporary. A period of three years was mentioned. Mrs Watt, for her part, says that she left all business arrangements to her husband and "reluctantly" said that she would agree to assist. She understood the assistance was to be by way of mortgage but she says that she did not know exactly what that entailed. She relied upon her husband. She said that she trusted her husband and her son-in-law. She says that at all times she just signed what was put in front of her, without seeking to read or understand the documents that she was signing.

9. In any event, a mortgage was given over the defendants' property to the Commonwealth Bank to secure advances to Dyspurrs. I am satisfied that Mr Watt was fully aware of the implications of this transaction and that Mrs Watt was aware at least of the general effect of it as a security over their property. I am also satisfied that both knew that they had an interest in the business as shareholders and directors of it.

10. The defendants assisted in the business from time to time. Mr Watt did some general work drawing cheques and paying bills. Mrs Watt says she helped out occasionally with routine tasks. They did not receive any dividends, wages or salary and did so, as they say, in order to help their family. In February 1991, they took an extended holiday in Europe.

11. Before leaving, Mr Watt says that he discussed withdrawing from the business with his son-in-law. He says that he did so because he regarded his son-in-law as "a one man band", rarely discussing the financial affairs of the business with him. No directors' meetings were held. He was reassured by the business' accountant and requested by his son-in-law not to do so and it appears that nothing further transpired about that.

12. In about March or April 1991, and after the defendants had left for overseas, Mr Dyer, on the advice of the business' accountant, negotiated with the State Bank of New South Wales to change banks. There was no suggestion of any difficulty with the company's account with the Commonwealth Bank. The change was to primarily take advantage of a competitive offer by that bank for the banking business. In order to affect the transfer it was necessary to obtain the concurrence and signatures of the defendants to the transfer.

13. It was not suggested that there was a requirement to re-finance because of business difficulties. Mr McLaren, the plaintiff's Branch Manager at the time, completed a comprehensive analysis of the business. He expressed the firm view that the business conducted by the company was sound. He referred to errors that had been made in stock control and over-ordering but regarded as impressive the increase in turnover of the newsagency business. He concluded that it was "a good cash flow business" and "a sound proposition to increase our [sic] market share". His views in that regard were not shaken in cross-examination and I accept that was the position.

14. The plaintiff approved the loan on 25 June 1991. Thereafter, in accordance with the plaintiff's normal procedures, letters enclosing the standard loan forms and loan detail forms were prepared. The plaintiff's solicitors were instructed and Mr Power of Crossin Power and Haslem forwarded the security documents which included the proposed mortgage and guarantee to Mr Marques of Macphillamy Cummins & Gibson whom he understood was acting for the company Dyspurrs. The mortgage documents included a first mortgage on the defendants' residential property predicated on a discharge of the existing mortgage to the Commonwealth Bank as well as a second mortgage in respect of the son-in-law's and daughter's residential property. All the directors were to give guarantees.

15. The business' accountant had advised the plaintiff that the current borrowing level of the business was $530,000.00. An estimated borrowing requirement was made of $550,000.00 but there was an expectation expressed that the debt level would be reduced by $100,000.00 over the ensuing 12 months. That reduction was to occur from the reduction in "trading stock". On this submission it appeared that there was no increase being proposed in the exposure of the guarantors. This reduction was to be achieved by divesting Dyspurrs of its stock of classic motor vehicles. The fact is that such divestiture did not impact on the newsagency business, but if effected, would directly reduce the potential liability of the guarantors under their guarantees.

16. It is unclear whether the plaintiff's bank officers were aware that the defendants were overseas. Mr Marques, the solicitor acting for Mr Dyer and Dyspurrs, was told by the Commonwealth Bank from which the account was being transferred that they were. The letters forwarding the loan facility forms were addressed to their residential address. Whether those documents were sent or not, it appears that they and the security documents prepared by the plaintiff's solicitor were taken overseas by Mr Dyer to where his in-laws were holidaying with friends in Malmo, Sweden. There he obtained their signatures to the documents.

17. Mr Watt says that he was only told that "we're going over to the State Bank of New South Wales and they want you to sign some papers". He was told the State Bank was offering better terms. Mrs Watt agrees that she understood the purpose. There was no discussion about the documents themselves. Mr Dyer produced the documents a very short time before leaving Sweden the next morning. The defendants signed them without reading them. Both defendants said that they were unaware that the documents contained a mortgage over their property or personal guarantees in respect of the business. I am prepared to accept those assertions as to the particulars of the documents before them, but I am satisfied that they understood the broader proposition that they were executing documents to have effect in them, and their company Dyspurrs, having the benefit of and being liable to the State Bank of New South Wales instead of their former bank, the Commonwealth Bank.

Events at settlement

18. Mr Dyer obtained the defendants' signatures on 22 July 1991. The documents were returned to the plaintiff. When the plaintiff received the mortgage documents, Mr McLaren, on its behalf, drew Mr Marques' attention to the fact that Mr Dyer had witnessed the defendants' signatures and he was not a qualified witness. Mr Marques arranged for Mr Dyer to make an attesting witness declaration. This was done before settlement took place.

19. In the middle of August it came to the attention of the plaintiff's solicitors that the Commonwealth Bank also held a second mortgage in respect of the Dyer's residential property. That circumstance had not previously been disclosed to the plaintiff. The terms of the arrangement required that the registered second mortgage on that property be given to the plaintiff. Accordingly, the plaintiff, principally it seems through Mr McLaren, arranged that a personal loan be given to Mr and Mrs Dyer to cover the amount outstanding in respect of this mortgage. Rather than delay settlement, the monies owing ($16,728.23) were provided by drawing down the Dyspurrs facility and the account credited a month later on settlement of the personal loan. No advice was ever given to Mr and Mrs Watt concerning this matter. At settlement, this sum, together with the sum of $502,269.17 to pay out the amount secured by the defendants' mortgage to the Commonwealth Bank, was paid.

Subsequent events to settlement

20. In November 1991 the defendants returned from their overseas trip.

21. On the material before me it appeared that the plaintiff expressed some concerns about the business near the middle of 1992 citing high stock levels and slowing of turnover. It is significant that in around October 1992, the defendants signed an acceptance increasing the overdraft facility from $50,000.00 to $100,000.00. That document contained a recital of the security related to the defendants' properties and amendments to the defendants' names in relation to that security that were initialled by Mr Watt. Mr Watt says he did not read the document but, at the very least, the defendants participated in and did not register any objection to that transaction.

22. It appears that the business continued to have financial difficulties but it was certainly significantly affected by the decision of The Canberra Times in late 1993 to deliver its newspaper direct to subscribers. Mr Watt described this as having "a disastrous effect" on the business.

23. In the middle of 1994 a further attempt to restructure the business finances was made which involved a further document being signed by the defendants again recognising the security given by them.

24. Surprisingly, no evidence was given in chief nor were Mr and Mrs Watt cross-examined about this document. The significance of that document is that, notwithstanding the "disastrous" effect on the business of the Canberra Times direct delivery, the defendants were party to and signed an offer by the bank to extend the loan facilities to $682,000.00, again on condition of unlimited joint and several guarantees and a third party mortgage over their property. Again, like the document that they signed in or about October 1992, amendments to the defendants' names in relation to the security were apparently initially by them or at least by Mr Watt.

25. The defendants, as directors of Dyspurrs, resigned with effect from 14 November 1994. On 17 November 1994, for the first time their solicitors raised with the bank the matter of the third party mortgage, the subject of these proceedings.

The defendants' claim

26. Arising out of these circumstances, the defendants now claim that the mortgage should not be enforced and that it should be set aside. The defendants' case, as pleaded, maintained that the plaintiff failed in its duty to disclose certain of the circumstances material for the surety to know before he or she executes the guarantee. In further answer to the plaintiff's claim to enforce the mortgage, it was said that, in all the circumstances, it would be unconscionable to enforce it.

Duty of disclosure

27. It was put that in taking the guarantee and securing it by the mortgage the plaintiff had a duty to disclose that which the surety would not naturally expect particularly if it affects the nature or degree of the surety's responsibility (see Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 at 457 per Gibbs CJ). The rationale was explained, at 455, as:

"The reason why a creditor is bound to reveal to an intending surety anything in the transaction between himself and the debtor which the surety would expect not to exist is that a failure to make disclosure in those circumstances would amount to an implied representation that the thing does not exist."

28. In that regard, the defendants say that the arrangement entered into whereby the second mortgage on the Dyers' residential property was discharged was such a matter, as was the proposal to reduce the debt level by divesting the stock of classic motor vehicles.

29. The fact that a circumstance is not usual is not enough to invoke the duty. As Gibbs CJ observed in Amadio (supra) at 457:

"It would be commercially unreal to suggest that a bank has a duty to reveal to a surety all the facts within its knowledge which relate to the transactions and financial position of a customer in any case where those transactions are out of the ordinary."

30. It seems to me that the matter is best tested by the effect of non-disclosure on the nature or degree of the surety's responsibility. The temporary use of the company's overdraft facility to discharge the Dyers' second mortgage before repayment by personal loan does not really affect that responsibility. The sum involved was $16,728.23 in the context of a $550,000.00 facility. Extending the facility to the Dyers is not significantly different from not disclosing the extension of credit to a principal debtor outside the ambit of the surety arrangement (cf Bank of Nova Scotia v Neil (1968) 69 DLR (2d) 357), or the principal debtor personally guaranteeing to the creditor the account of another party, thereby exposing the surety to an additional contingent liability (cf Goodwin v National Bank of Australasia Ltd [1968] HCA 30; (1968) 117 CLR 173). Those somewhat similar circumstances have not given rise to a duty to disclose. The advance was supported by a personal loan undertaken by the Dyers and was repaid by the end of the month. I do not regard the plaintiff as under any duty to disclose this aspect of the transaction with the Dyers.

31. The proposal that the business divest itself of the stock of imported classic motor vehicles was to achieve a reduction in the overall debt level by some $100,000.00 over 12 months. The company owned six motor vehicles which were to be sold within that time frame. The assessment made by the bank of the business viability related to the newsagency business and the defendants' exposure was in relation to that business. The motor vehicle stock was not factored into the plaintiff's valuation of the business. The sale of these assets would reduce the defendants' exposure. I do not consider that the circumstances called for the plaintiff to disclose this circumstance to the defendants. It does not materially extend the surety's responsibility, or could be thought to affect any decision to enter into the guarantee, particularly in the context which was to give effect to the transfer of the company's banking business.

Unconscionable conduct

32. The defendants seek equitable relief on the basis that the plaintiff took unconscionable advantage of the defendants. The defendants claim that the conduct of the plaintiff in obtaining the mortgage and associated documents from them was unconscionable. In Amadio at 461, Mason J referred to the class of case in which a party makes unconscientious use of that party's superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage. He explained that the will of the innocent party, even if independent and voluntary, is the result of the disadvantageous position in which the party is placed and the other party unconscientiously taking advantage of it. He went on to explain his use of the word "special" at 462:

"I qualify the word "disadvantage" by the adjective "special" in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party."

33. See, too, Deane J at 474-475.

Special disadvantage in this case

34. I agree that I should take account of all the circumstances surrounding the transaction to consider whether the defendants were in a position of special disadvantage vis-à-vis the plaintiff. I refer to what Fullagar J said in Blomley v Ryan [1954] HCA 79; (1956) 99 CLR 362 at 405 and which was cited with approval by both Mason and Deane JJ in Amadio:

"The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other."

35. The defendants point to their age and their inexperience in commercial loans and associated security transactions as disadvantaging them. They then point to a number of circumstances which they maintain disadvantaged them in respect of the transaction but which only by considerable ingenuity can be said to place them in a position of special disadvantage vis-à-vis the plaintiff.

36. For example, they complain that they were told by their son-in-law that the purpose of the documents was to allow Dyspurrs to bank with the plaintiff rather than the Commonwealth Bank. It is difficult to see how the commercial advantage, which is said to result to a company in which they are both directors and shareholders, places them in a disadvantageous position.

37. Other matters to which they refer to as affecting the transaction itself such as the alleged lack of benefit that they would receive by giving the mortgage give no account to their shareholding in Dyspurrs. It was said that Mr Dyer conducted the business and was a "one man band". Accepting that, I do not regard the company and the defendants' shareholding in it as a creation of Mr Dyer's, of which he was in complete control so as to say that the defendants would obtain no benefit from the company's business (cf Garcia v National Australia Bank [1998] HCA 48; (1998) 194 CLR 395 at 401).

38. It is common ground that the defendants did not receive any legal or financial advice concerning the transaction. In my view, something more must be shown for this to specially disadvantage them. The matters of which they were not advised concerning the transaction are part of the background to be assessed, but those matters must, in some way, put them at a disadvantage. The reliance placed on what was said to be the increase in the borrowing commitment and the payment out of the Dyers' second mortgage in respect of their property is offset by the plaintiff obtaining a personal loan in respect of the latter matter and the agreed reduction of the stock of classic motor cars to lower the overall indebtedness. I have already considered whether the bank had a duty to disclose these matters and am of the view that it did not. Moreover, even if the defendants were unaware of the proposed stock reduction, its effect could only strengthen the core business of the company.

39. Further, the fact that the defendants were overseas at the time and the circumstances under which they signed the documents is relied upon as contributing to the defendants' disadvantage. Mr Dyer told the defendants of the change of banks and put as the basis for the change that the plaintiff was offering better terms. That circumstance was not in contest. Nor do I consider that there was any "manufactured" urgency in the signing. It appears that it was the only opportunity for the documents to be signed in respect of the timetable that the plaintiff had set. There was, in fact, ample opportunity for Mr Dyer to discuss the matter with the defendants and the fact that little or no discussion took place was a matter of choice by the defendants. Mr Dyer believed that he could only contact the defendants at one place in their itinerary in Europe in the period. It is not suggested, nor was it put to Mr Dyer, that the defendants' signatures were obtained as the product of manipulation by Mr Dyer.

40. In the course of submissions, it was suggested that Mr Dyer misled the defendants although it was expressly denied that any such misleading was deliberate or intended. As far as I could gather, the argument sought to pick up Kirby J's reformulation in Garcia of the principles applied by Lord Browne-Wilkinson in Barclays Bank Plc v O'Brien [1993] UKHL 6; [1994] 1 AC 180 at 198-199 in which a creditor might be fixed with constructive notice of a surety's right to set aside a transaction. That reformulation was, at 430-431:

"It is my view that the principle should be stated thus: where a person has entered into an obligation to stand as surety for the debts of another and the credit provider knows, or ought to know, that there is a relationship involving emotional dependence on the part of the surety towards the debtor: (1) the surety obligation will be valid and enforceable by the credit provider unless the suretyship was procured by the undue influence, misrepresentation or other legal wrong of the principal debtor; (2) if there has been undue influence, misrepresentation or other legal wrong by the principal debtor, unless the credit provider has taken reasonable steps to satisfy itself that the surety entered into the obligation freely and in knowledge of the true facts, the credit provider will be unable to enforce the surety obligation because it will be fixed with notice of the surety's right to set aside the transaction; (3) unless there are special exceptional circumstances or the risks are large, a credit provider will have taken such reasonable steps to avoid being fixed with constructive notice if it warns the surety (at a meeting not attended by the principal debtor) of the amount of the surety's potential liability, of the risks involved to the surety's own interests and advises the surety to take independent legal advice. Out of respect for economic freedom, the duty of the credit provider will be limited to taking reasonable steps only."

41. The majority in Garcia (supra) (at 402) did not find it necessary to enter upon the matter of the acceptance of the reasoning in O'Brien's case. In the present case, even if the principles are reformulated as Kirby J suggests, it does not assist the defendants. I am satisfied that the defendants have not made out such a situation of emotional dependency on the part of the defendants as sureties toward Mr Dyer as debtor (accepting for this argument that he is Dyspurrs) so as to invoke the principle. Further, I do not regard the circumstances giving rise to the execution of the documents by the defendants as constituting "undue influence, misrepresentation or other legal wrong" to which Kirby J refers in the passage I have quoted. Here it is said that the failure of Mr Dyer to draw the plaintiff's attention to the mortgage and guarantee constituted a misrepresentation as did Mr Watt's direction to Mrs Watt to sign the documents without drawing attention to their nature. It was put that such misrepresentation could be unintentional and reference was made to cases on misleading and deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth). I assume the plaintiff's argument draws on a comment by Murphy J in Hornsby Building Information Centre and Anor v Sydney Building Information Centre Ltd (1978) 140 CLR 217 at 234:

"Conduct is deceptive or misleading if it has the capacity or tendency to mislead or deceive; intention to mislead or deceive is not required."

42. I do not agree that the conduct complained of need only meet this criteria but even if it were so, I just do not see how it can be said that the defendants were deceived or that Mr Dyer's discussion with Mr Watt to the effect that transferring to the plaintiff bank "was going to help the business" had the capacity or tendency to mislead or deceive.

43. In this case, the benefit of the transaction discharges the defendants' then existing security obligations and moves to a third party (Dyspurrs) in which the defendants have a substantial interest. Although it was not put that the relationship of son-in-law to parents-in-law created, of itself, a situation of special disability, it was put that Mrs Watt stood as such in respect of the trust and confidence that it was said she reposed in her husband Mr Watt. I shall deal with that aspect separately, but I do not accept the notion that because it is also alleged that Mr Watt reposed confidence in the son-in-law, either Mr or Mrs Watt is placed in some special category as a consequence.

44. In this case, there was evidence of the financial viability of the business at the time of the transfer. No persuasive reason was advanced by way of cross-examination of the plaintiff's witnesses why I should not accept the view of Mr McLaren, the plaintiff's manager at the time, that the business conducted by the company was sound. In so far as might be suggested (and if it was, it was only but faintly), that it was an improvident transaction on the part of the defendants, I find that it was not.

45. It was put that the defendants derived no real or adequate benefit from giving a mortgage to secure a "larger borrowing commitment" of Dyspurrs. In this case, the defendants owned 30% of Dyspurrs, the principal debtor, and the effect of the transaction was to transfer the security burden that the defendants had already undertaken with another bank. No reduction occurred in the defendants' entitlement to the company's assets. It is true that the company's accountant put to the plaintiff a current borrowing level of the business of $530,000.00 and an estimated borrowing requirement of $550,000.00. That increase in borrowing needs to be considered in the light of the trading stock reduction proposed. So regarded, there was no larger borrowing commitment. I cannot regard the defendants as in a position to someone who can be said to be making a "voluntary donation" (cf Bank of Victoria v Mueller [1925] VLR 642 at 649).

Mrs Watt and Garcia's case

46. A particular submission based upon the principles that the High Court considered in Garcia v National Australia Bank (supra) was advanced on behalf of Mrs Watt.

47. The principle that the defendants would wish me to apply in this case and which the majority of the High Court (Gaudron, McHugh, Gummow and Hayne JJ) drew from the decision of Dixon J as he then was, in Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649 related to what the court referred to as the "second kind of case" (being a case other than where there is actual undue influence by a husband over a wife). The court said in referring to Yerkey v Jones (supra):

"It holds, in what we have called the first kind of case, that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds, further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her."

48. The majority of the court in that case were at pains to point out that case was concerned only with the circumstance of the wife acting as surety for her husband (see 404). In order to make that case applicable here it is said that regard should be had to Mr Watt's interest in Dyspurrs and that as a consequence, the fact that Mrs Watt did not understand the purpose and effect of the documents she signed and that she relied upon her husband, required the plaintiff, in this case, to take steps to explain the transaction to her or to find out that a stranger had explained it to her.

49. The submission fails to appreciate that in this case Mrs Watt has as much an interest in the transaction as her husband. She had the same interest in the company and was also a director. She had as much interest in securing her husband's signature to the documents as her husband had to secure hers. No equity can be said to arise out of her husband's conduct (which in no way could be said to be improper) or to be such as to take advantage of the trust she reposed in him and her actual lack of understanding of the transaction. Nor can it be said that her husband's conduct is such that the creditor should be bound by it. The present is just not a case where a husband procures his wife to become surety for his debt in circumstances where it would be unconscionable for the creditor to take advantage of it.

50. Although reference was made to the trust that Mrs Watt reposed in her son-in-law, it was not really suggested that that relationship should have put the plaintiff on notice such as marriage would. The other significant factor which distinguished Garcia's case from the present is that I cannot regard this as a voluntary transaction on Mrs Watt's part. By reason of her interest in the company shareholding she stood to gain from the transaction. It was submitted that I should ignore the shareholding as in Garcia's case the appellant was a director of companies that were in the "complete control" of her husband. But the majority of the High Court in that case relied upon the trial judge's finding that she had no financial interest in the fortunes of the company (see at 412). In this case it cannot be said that Mrs Watt's interest is not sufficiently substantial (see the discussion by Young J on this aspect in Garcia v National Australia Bank (1993) 5 BPR 11,996 at 12,001 and 12,002; [1993] ANZ Conv R 603 at 605). As Young J observed after discussing the authorities:

"It will be a matter of considering the facts to see whether the plaintiff's interest was sufficiently substantial for it to be said that she had voluntarily guaranteed the debt of an entity in which her husband was virtually the sole beneficiary."

51. Here, Mrs Watt had exactly the same interest as her husband. In any event, not only did the transaction discharge her conterminous liability to the Commonwealth Bank but also she was owed at least $40,000 by the company in respect of monies that she had advanced to it. She had a very real interest in the company's affairs. Finally, there was no reason to regard the transaction as improvident. The refinancing was to obtain a better banking deal for a business with very good prospects not to shore up a business in difficulties.

Awareness of special disadvantage

52. In my view, there was nothing in the circumstances concerning the transaction to show that the plaintiff had knowledge that either or both of the defendants occupied a position of any special disadvantage as to each other or as to their son-in-law. The special disadvantage must be "sufficiently evident" to the creditor to make it unconscientious for the creditor to accept the guarantor's consent to the transaction. This does not necessarily mean actual knowledge but awareness of facts raising that possibility in the mind of a reasonable person (Amadio (supra) at 467 per Mason J).

53. It was suggested that awareness of the possibility of that situation existing or awareness of sufficient facts to raise that possibility could be drawn from the fact in certain respects the plaintiff's own procedures for informing mortgagors/guarantors were not followed. The plaintiff's Solicitors Manual refers to a requirement that documents be signed in the presence of a bank officer or solicitor. They were not so signed in this case because the defendants were overseas. Nothing adverse can be drawn from this and the plaintiff's solicitor required that the witness' signature be attested to by the person that he believed was the defendants' solicitor. What is also important is that the solicitor engaged by the bank dealt with the solicitor acting for Mr Dyer and Dyspurrs and it was not indicated to him that that solicitor was not also acting for the defendants. Requisitions as to the defendants' property were answered by that solicitor. There was nothing to alert the bank's solicitor to the fact that the solicitor acting for Mr Dyers and the company was not acting for the defendants. It was not unreasonable to assume that he was. In the context of the circumstances taken as a whole, the bank was entitled to regard this transaction as an ordinary commercial transaction to effect a change of financiers to obtain, from the point of view of the business, better banking facilities. As far as the plaintiff could be reasonably aware, the defendants received the documents through their solicitor. I can see nothing in the whole of the circumstances to raise for the plaintiff the possibility that there was a situation of special disability as far as the defendants were concerned. The argument must fail.

54. The consequences of this decision must be catastrophic to the defendants. They entered into this arrangement no doubt to assist their daughter and son in law by providing security for a business venture. But there is nothing to indicate that it was improvident to do so or that they were not in a position to make an informed choice as to their participation albeit that the nature of the relationship may have influenced their participation. However, in the absence of some head of relief recognised by the law I am not able to relieve them of the consequences of their actions.

55. There will be judgment for the plaintiff. The defendants' cross-claim is dismissed. Unless the parties wish to be heard, I would order that the defendants pay the plaintiff's costs. The plaintiff has leave to bring in minutes of order to give effect to these findings.

56.

I certify that the preceding fifty-two (52) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Gray.

Associate:

Date: 2 August 2002

Counsel for the plaintiff: Mr R Crowe

Solicitor for the plaintiff: Minter Ellison

Counsel for the defendants: Mr R Lucas

Solicitor for the defendants: Colquhoun Murphy

Date of hearing: 20 December 2001

Date of judgment: 2 August 2002