Supreme Court New South Wales Medium Neutral Citation: Bonanno v Finamore [2021] NSWSC 1558 Hearing dates: 29 March to 1 April 2021; 6 and 7 April 2021; final submissions received 7 July 2021 Decision date: 01 December 2021 Jurisdiction: Equity Before: Robb J Decision: The defendants have established their case to have the transfer provisions in the deed set aside. See pars [89], [105], [144], [161], [187], [190], [217], [234], [235], [237], [349], [384]-[388]. The parties are required to confer and agree short minutes of order to give effect to these reasons for judgment and to provide draft short minutes of order to my Associate. Catchwords: CONTRACTS — Termination — Breach of term — Where the plaintiff sought enforcement of a deed — Where the defendants argued that there were additional oral terms that operated in conjunction with the deed — Where the defendants argued that the plaintiff seriously breached an additional oral term and that the plaintiff had repudiated the deed — Where the defendants claimed that they terminated the deed in response to the plaintiff's breach or in acceptance of the plaintiff's repudiation — Where the defendants argued that they had effectively communicated termination of the deed — Where the Court found that the defendants had not effectively communicated termination of the deed — Where the Court held that deed had not been terminated EQUITY — Unconscionable conduct — Special disability or disadvantage — Where the defendants argued that a deed should be set aside in its entirety because it was procured by the plaintiff taking unconscientious advantage of special disadvantages suffered by the defendants — Where the Court found that the defendants did suffer from some special disadvantages — Where the Court found that the plaintiff was not in a powerful bargaining position when the deed was entered into — Where the Court held that the conduct of the plaintiff in entering into the deed was not sufficiently unconscientious to justify the Court setting the deed aside MORTGAGES AND SECURITIES — Mortgages — Whether a deed recorded a transaction that was in substance a mortgage — Where the plaintiff argued that the transaction was not a mortgage but rather a loan document with an added facility similar to an option — Where on its face the deed was an amalgam of a loan secured by an option granted to the plaintiff to call for a transfer of a one third interest in property, plus a collateral right to receive one third of the net price of the property on sale — Where the Court found that the transaction was in substance a mortgage — Where the Court held that the obligation to transfer the one third interest in property was a collateral advantage MORTGAGES AND SECURITIES — Mortgages — Mortgage contracts — Clogs on equity of redemption — Where the plaintiff and defendants executed a deed which would give the plaintiff a one third interest in property in consideration of the plaintiff lending the defendants money — Where the deed contained a term that allowed the plaintiff to compel the transfer of the one third interest by way of notice — Where the deed did not provide for the defendants being able to repay the plaintiff the loan without the sale of the property — Where the plaintiff brought proceedings to enforce the transfer provisions in the deed — Where the defendants resisted the claim on several grounds including on the basis that the transfer provisions were a clog on the equity of redemption — Where the Court found that the transfer provisions were a clog on the equity of redemption — Where the Court held that the transfer provisions were void Legislation Cited: Conveyancing Act 1919 (NSW) Real Property Act 1900 (NSW) Supreme Court Act 1970 (NSW) Cases Cited: Amcor Ltd v Barnes [2016] VSC 707 Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; [2019] HCA 18 Baker v Biddle (1923) 33 CLR 188 Biggs v Hoddinott (1898) 2 Ch 307 Bradley v Carritt [1903] AC 253 Charmelyn Enterprises Pty Ltd v Klonis (1980) 2 BPR 9527 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 Epic Feast Pty Ltd v Mawson KLM Holdings Pty Ltd (in liq) (1998) 71 SASR 161 Gurfinkel v Bentley Pty Ltd (1966) 116 CLR 98 Kreglinger (G & C) v New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25 Lift Capital Partners Pty Ltd (In Liq) v Merrill Lynch International (2019) 73 NSWLR 404; [2009] NSWSC 7 Lisle v Reeve [1902] 1 Ch 53 Noakes v Rice [1902] AC 24 Re Funds in Court; Application of Mango Credit Pty Ltd [2016] NSWSC 199 Re Matcove Pty Ltd [2020] NSWSC 625 Sam Management Services (Aust) Pty Ltd v Bank of Western Australia [2009] NSWCA 320 Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] AC 323 Santley v Wilde [1899] 1 Ch 747 Sun North Investments Pty Ltd (as Trustee of Sun Development Trust) v Dale [2014] 1 Qd R 369; [2013] QSC 44 Thomas v Silvia; Re Modular Design Group Pty Ltd v CDG (Canberra) Pty Ltd (1994) 35 NSWLR 96 Vernon v Bethell (1762) 2 Eden 110; (1762) 28 ER 838 Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194 Wily v Endeavour Health Care Services Pty Ltd (No 5) [2003] NSWSC 616 Wily v Endeavour Health Care Services Pty Ltd [2003] NSWCA 321 Texts Cited: Heydon, J D, M J Leeming and P G Turner, Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) Tyler, E L G, P W Young and C E Croft, Fisher & Lightwood's Law of Mortgage (3rd ed. Aust, 2013, LexisNexis Butterworths) Category: Principal judgment Parties: Salvatore Antonio Bonanno (plaintiff) Nicola Finamore (first defendant) Weisen Zhou (second defendant) Representation: Counsel: G Foster (plaintiff) D A Woods (first and second defendant) Solicitors: Phillip A Wilkins & Associates (plaintiff) LegalVision (first and second defendant) File Number(s): 2015/228434 Judgment 1. The plaintiff in these proceedings is Mr Salvatore Antonio Bonanno. Mr Bonanno commenced these proceedings by summons filed on 5 August 2015 and pleaded his claim in a statement of claim filed on 9 October 2015. 2. The active defendants are Mr Nicola Finamore and Ms Weisen Zhou, who are the first and second defendants respectively. There was a third defendant against whom Mr Bonanno's case has not proceeded. I will refer to Mr Finamore and Ms Zhou as the defendants. Mr Finamore and Ms Zhou filed a further amended defence on 25 November 2019. They also filed a further amended statement of cross claim on that date. 3. Mr Bonanno filed an amended reply and a defence to the further amended statement of cross claim on 24 and 23 December 2019 respectively. 4. These proceedings primarily concern a property at Rosebery (the property) which is jointly owned by the defendants and at all material times has been operated as a boarding house. Mr Bonanno and the defendants executed a deed on 25 February 2011. The deed had unusual characteristics in that it provided for Mr Bonanno to make an advance of $130,000 to the defendants and contained a term that gave Mr Bonanno a right to require the defendants to transfer a one third interest in the property to Mr Bonanno. Mr Bonanno advanced the $130,000 but the defendants have declined to transfer the one third interest in the property to Mr Bonanno. By these proceedings, Mr Bonanno seeks to enforce the deed in accordance with its terms. The defendants have resisted Mr Bonanno's claim, primarily on grounds that they terminated the deed for breach by Mr Bonanno. The defendants have also argued that the deed should be set aside in its entirety because it was procured by Mr Bonanno taking unconscientious advantage of special disadvantages suffered by the defendants, that the deed is in substance a mortgage and Mr Bonanno has not proved that he is entitled to exercise his security rights; and finally that the term requiring the defendants to transfer the one third interest in the property is an invalid clog on the defendants' equity of redemption. Course of proceedings 1. As noted, the proceedings were commenced on 5 August 2015. They were listed in the Real Property List. The proceedings were listed on two occasions for hearing but each time the hearing was vacated. In each case it had been estimated by the parties that the hearing would take three days. Darke J vacated the hearing that commenced on 18 September 2017, it appears primarily because the defendants were not able to proceed as their legal representatives had ceased to act. On 21 November 2019, Rein J vacated a three-day hearing fixed to begin on 2 December 2019, on the ground that the parties had informed him that the hearing could not be completed in three days. The proceedings were then removed from the Real Property List. 2. The proceedings were fixed to be heard by me over six days commencing on 29 March 2021. The hearing did not finish in the allotted six days. That was so, notwithstanding that the parties during the course of the hearing were able to reduce the number of issues in contest by filing an agreed statement of facts, to which I will refer below. That had the result that it was not necessary for the parties to tender expert accounting evidence that had been filed. Other evidence that had been tendered also ceased to be relevant. 3. Although the Court had some limited time to receive oral submissions by the parties, it was necessary to make directions for the provision of final written submissions, which was an exercise that was not completed until 7 July 2021. 4. These circumstances have had collective consequences. First, I have found it necessary to engage in an analysis of the pleadings in a level of detail that would not ordinarily be necessary to ensure that I have identified the issues, and made the necessary adjustments for the abandonment of issues and the agreements as to facts. As the whole of the evidence was tendered before issues were abandoned and facts agreed, a considerable part of the evidence ceased to be relevant but remained before the Court. Consequently, I have had to place exceptional reliance upon the parties' final written submissions to identify the evidence still relied upon by the parties. Finally, the detailed cross examination of the parties on issues that ceased to be relevant and the delay between the end of the hearing and the receipt of final submissions have impeded the Court's ability to make sound judgments about the credibility of the witnesses. This last factor has not been of great significance, because this is one of those cases where the Court judges that the only safe course is to rely primarily on the objective evidence and the probabilities that logically arise from that evidence. Relief claimed in statement of claim 1. Paraphrasing and simplifying the prayers for relief in the statement of claim, Mr Bonanno seeks the following: 1. a declaration that the defendants hold a one third share of the property on trust for Mr Bonanno (prayer 1); 2. an order that within 28 days the parties do all things necessary to sell the property through a real estate agent (prayer 3); 3. if the property is not sold within two months of the date of listing, an order that the parties do all things necessary to list the property for auction (prayer 4); 4. an order that within 28 days the proceeds of sale on settlement be dealt with as follows (prayer 5): 1. payment of $130,000 to Mr Bonanno; 2. repayment of any mortgage owing to National Australia Bank Ltd (NAB); 3. payment of all the costs and commissions of sale; 4. payment of one third of the balance of the sale proceeds to Mr Bonanno; 5. payment to Mr Bonanno of one third of the amounts received by the defendants as rents for the property since 25 February 2011, less one third of certain specified costs associated with the property and amounts of rent paid to Mr Bonanno, less amounts previously paid by Mr Bonanno for costs; 6. payment of the balance to the defendants equally; 1. alternatively, an order that Mr Bonanno's solicitor be appointed as trustee for sale (prayer 6); 2. alternatively, an order that within 28 days the defendants pay to Mr Bonanno $130,000 plus one third of the value of the property as determined by the Court less the sum of $130,000 and the amount of the debt owed to NAB (prayer 7); 3. an order that the defendants account to Mr Bonanno for profits, including all revenues and rents less expenses and outgoings in respect of the property from 25 February 2011 to date (prayer 8); 4. an order that the defendants pay to Mr Bonanno the sum equivalent of the amount referred to in prayer 5(e) above (prayer 9); and 5. alternatively, damages or equitable compensation as assessed (prayer 10). 1. National Australia Bank Ltd is not a party. There can be no basis for the Court to order that $130,000 be repaid to Mr Bonanno before the debt owed by the defendants to NAB is repaid. If the property is sold, NAB will not be required to deliver a discharge of mortgage until the debt due to it is repaid first. 2. Mr Bonanno seeks orders to enable him to receive the money that he claims under the deed in three ways; namely, by the Court ordering the defendants to sell the property, or alternatively by appointing Mr Bonanno's solicitor as trustee for sale, or by ordering the defendants effectively to buy out Mr Bonanno on the same terms as if the property had been sold, with the Court determining the value of the property. Mr Bonanno did not explain how the Court could make the first and third of these orders. It appears that if any order could be made, it would be an order for the appointment of a trustee for sale under s 66G of the Conveyancing Act 1919 (NSW), if Mr Bonanno establishes that he has an equitable one third interest in the property. 3. It will be convenient to note at this point that, as will be explained below, during the hearing, the parties agreed that the amount payable by the defendants to Mr Bonanno under the relief summarised in [9(4)(e) and (8)] above is $75,000, assuming Mr Bonanno establishes an entitlement to that relief. A consequence of the agreement is that Mr Bonanno no longer needs an order for an accounting as summarised in [9(7)] above. Additionally, if Mr Bonanno succeeds in proving an entitlement to be paid the $75,000, it will not be necessary for the Court to consider the alternative claim for damages or equitable compensation referred to in [9(9)] above. Statement of claim and further amended defence 1. It will be convenient to set out the material parts of Mr Bonanno's pleading followed by the defendants' responses to those parts in their further amended defence. 2. Mr Bonanno pleaded in par 4 that, in about April 2010, Ms Zhou requested Mr Bonanno to lend the defendants $100,000 to repay NAB in consideration of Ms Zhou entering into a partnership with Mr Bonanno (the first agreement) under which he would receive a 50% interest in the property, together with 50% of the net rents, such net rents being exclusive of mortgage payments to NAB. Those payments would remain the responsibility of Ms Zhou: par 4. Mr Bonanno alleged that Ms Zhou represented that the rooms in the property rented for a total of $1,200 to $1,500 per week. 3. The defendants responded by admitting that, in February 2010, Ms Zhou engaged in discussions about the property with Mr Bonanno. They admitted that Ms Zhou requested financial assistance from Mr Bonanno in relation to the NAB mortgage, and that Mr Bonanno and Ms Zhou discussed entering into a partnership in respect of the boarding house at the property. The defendants referred to their further amended cross claim and said that Ms Zhou was entitled to an order setting aside the first agreement entered into on 29 April 2010. They denied that Ms Zhou made the alleged representation concerning the rent received in respect of the property. See pars 4 to 6 of the further amended defence. 4. Mr Bonanno then alleged that, on or about 29 April 2010, Mr Bonanno and Ms Zhou entered into an agreement pursuant to which, in about May 2010, Mr Bonanno loaned Ms Zhou $30,000, called the first payment: par 5. 5. In par 7 of the further amended defence, the defendants admitted that Mr Bonanno and Ms Zhou entered into the first agreement and said that payments of $20,000 and $10,000 were received. They said that Ms Zhou was entitled to an order setting aside the first agreement. 6. In par 6, Mr Bonanno alleged that, notwithstanding the first payment, Mr Finamore refused to release his share of the property, and so no portion of the property was transferred to Mr Bonanno, nor was the first payment repaid to him. 7. The defendants admitted, in par 8 of the further amended defence, that no portion of the property was transferred to Mr Bonanno but said that Mr Finamore was not obliged to release any share of the property to Mr Bonanno. 8. Mr Bonanno alleged that, in about November 2010, Ms Zhou advised him that the outstanding amount owed to NAB was in the order of $130,000, and offered Mr Bonanno a one third share in the property on the condition that he loaned such additional money that, when added to the money already loaned, would total $130,000: par 7. 9. The defendants denied this allegation in par 9 of the further amended defence. 10. Mr Bonanno alleged in par 8 that, on about 25 February 2011, Mr Bonanno and the defendants executed a written agreement (the second agreement), which included terms that in substance were as follows: 1. moneys already paid by Mr Bonanno to the defendants were acknowledged; 2. Mr Bonanno covenanted to lend the defendants further money which, when added to the money already loaned, would total $130,000, within seven days, in consideration of which the defendants agreed to transfer one third of their interest in the property to Mr Bonanno within seven days of a request by Mr Bonanno to do so; 3. the defendants agreed to be solely responsible for the NAB loan repayments; 4. Mr Bonanno would be responsible for one third of all outgoings associated with the property including rates, repairs and maintenance; 5. Mr Bonanno would be entitled to one third of the rental income from the property; 6. upon execution of the agreement, the defendants would be responsible for two thirds of all outgoings associated with the property, in addition to being solely responsible for the NAB mortgage repayments; 7. in the event the property was sold, Mr Bonanno was entitled to receive $130,000 plus one third of the 'remaining net proceeds of sale' as defined. 1. The defendants admitted, in par 10 of the further amended defence, that the parties executed a written agreement, known as the Deed of Transfer of One Third Interest on Property, on 25 February 2011 (the deed). They said that they are entitled to an order setting aside the deed. They admitted that the deed contained the terms pleaded in par 8(b)(ii), (iii), (iv) and (v) of the statement of claim – see the terms summarised above at [22(3) to (6)]. 2. Further, the defendants denied in par 10(c) of their further amended defence that the deed contained all the terms agreed to by the parties and alleged that there were additional terms (which the defendants also called the second agreement) as follows: 1. Mr Bonanno would be responsible for one third of all outgoings associated with the property including but not limited to rates, repairs and maintenance; 2. Mr Bonanno would be responsible for one third of all repairs and maintenance of the property or would regularly assist with the repairs and maintenance of the property; and 3. Mr Bonanno would share in the responsibilities of operating and maintaining the boarding house at the property. 1. It should be noted, in order to minimise confusion, that a consequence of the defendants admitting that they executed the deed, but alleging that there were the additional terms agreed that are set out immediately above, is that the defendants' pleadings refer to the deed and the second agreement in ways that sometimes overlap but are sometimes distinct. Mr Bonanno pleaded the first agreement (29 April 2010) and the second agreement (25 February 2011). The defendants admitted that there was a first agreement but alleged that, on 25 February 2011, a deed was entered into between the parties. The deed did not, they alleged, contain all of the terms. What the defendants called the second agreement was the aggregate effect of the deed and the oral terms. 2. The issue of whether the effect of the second agreement was only to make Mr Bonanno a lender to the defendants, or whether he was in addition required to participate equally with the defendants in the operation of the boarding house, is a crucial issue in these proceedings. 3. The defendants further alleged that Mr Bonanno was estopped from denying that the second agreement contained these oral terms, by reason of the circumstances alleged in par 20 of the further amended defence. 4. Mr Bonanno alleged in par 9 that he paid the defendants an additional $105,514 (the second payment). 5. In par 11 of the further amended defence, the defendants accepted that they received a total of $130,000 from Mr Bonanno under the first and second agreements. 6. In par 10, Mr Bonanno alleged that the property was at all material times capable of being, and had been, rented for $1,200 to $1,500 per week, such that he should have received in the order of at least $400 to $500 per week. 7. The defendants denied this allegation in par 12 of the further amended defence. 8. Mr Bonanno alleged that the parties executed a transfer of the property in accordance with the written agreement: par 11. 9. In par 13 of the further amended defence, the defendants admitted this allegation, but said that the defendants were entitled to an order for the transfer to be cancelled or destroyed. 10. Mr Bonanno alleged in par 12 that the defendants have been responsible for collecting the rents and paying Mr Bonanno his share. He said that the defendants have breached the second agreement by failing to pay Mr Bonanno his one third share of the net rents. 11. The defendants responded to this allegation in par 14 of the further amended defence by denying that the second agreement contained a term making them responsible for collecting rents from the tenants and paying the net rents to Mr Bonanno. 12. On 21 November 2014, Mr Bonanno requested the defendants to transfer to him a one third share in the property, but the defendants have failed to do so: pars 14 and 15. 13. The defendants admitted this allegation in pars 16 and 17 of the further amended defence, but added that by that time the second agreement had already come to an end, as the defendants had elected to terminate the second agreement by reason of the repudiation by Mr Bonanno, or serious breach of his obligations under the terms summarised at [24] above. 14. The defendants then pleaded a number of separate defences to the whole of Mr Bonanno's statement of claim. 15. First, in par 19, the defendants pleaded that, if they breached the second agreement, Mr Bonanno had failed to mitigate his loss. The defendants alleged that Mr Bonanno ought reasonably to have arranged with NAB, as the holder of the certificate of title, to cause the transfer to be registered. Secondly, Mr Bonanno failed to contribute to the work, expenses, responsibilities, repairs and maintenance associated with the property and the boarding house to sustain and increase the rental income. Thirdly, Mr Bonanno could have accessed the online St George Bank account in order to regularly reconcile the rental income receipts and expenses for the property and the boarding house. 16. I am not sure of the fate of this failure to mitigate defence. I think that a consequence of the parties' agreement that Mr Bonanno is entitled to be paid $75,000, if he establishes that the defendants have failed to pay him what he is due under the second agreement, is that there is now no longer room for a claim that he did not mitigate his loss. I have not noticed a reference to failure to mitigate in the defendants' final submissions. 17. Secondly, in par 20, the defendants alleged that Mr Bonanno is estopped from insisting on his legal rights under the second agreement. That estoppel is alleged to have arisen out of an assumption made by the defendants that it was a term of the second agreement that Mr Bonanno would be responsible for one third of all repairs and maintenance of the property, and that he would share in the responsibilities of operating and maintaining the boarding house at the property, and that he would own and operate the boarding house together with the defendants as equal and contributing partners. 18. As I will explain below, the defendants abandoned this estoppel claim in their final written submissions. 19. Finally, the defendants pleaded in par 21 of the further amended defence that, if Mr Bonanno was entitled to receive any part of the proceeds of sale of the property, the defendants were entitled to set off the proportion of the one third of all outgoings and expenses incurred in respect of the property that Mr Bonanno has not paid. 20. As I understand it, the defendants have not attempted to quantify the amount of any set off. I think that a consequence of the parties' agreeing to the $75,000 being payable by the defendants, if Mr Bonanno upholds the validity of the second agreement, is that any set off has been taken into account in the determination of that amount. Amended reply 1. Mr Bonanno responded to the defendants' further amended defence in his amended reply in substance as follows: 1. he was unable to mitigate his loss by assisting in the operation of the boarding house because the defendants threatened and were aggressive to him and did not give him access to any documents; 2. he denied that he was obliged by the deed or the second agreement to share in the responsibilities of operating and maintaining the boarding house at the property; 3. he denied that it was reasonable for the defendants to assume that he would share in the responsibilities of operating and maintaining the boarding house at the property, having regard to the terms of the deed; and 4. he said that he contributed to the operation and maintenance of the boarding house at the property on a minimal basis and advised the defendants that he was not experienced in these matters and could not do so on any regular basis. 1. Although I will explain my reasons more fully below, I record my understanding that issues (1), (3) and (4) in Mr Bonanno's reply no longer arise. Issue (2) remains relevant and is one of the central issues in the proceedings. Relief claimed in further amended cross claim 1. In their further amended cross claim the defendants sought relief that may be summarised as follows: 1. an order setting aside the first agreement dated 29 April 2010 (prayer 1); 2. an order setting aside the deed dated 25 February 2011 (prayer 2); 3. an order that the defendants pay Mr Bonanno $57,360.75, being the $130,000 paid to them by Mr Bonanno less $72,639.25 paid by them to Mr Bonanno from the proceeds of the operation of the boarding house (prayer 3); 4. an order that all signed transfers of a one third share of the property be destroyed (prayer 4); 5. a declaration that the defendants do not hold a one third share of the title to the property on trust for Mr Bonanno (prayer 5); 6. an order that Mr Bonanno withdraw a caveat that he had lodged against the title to the property (prayer 6); 7. damages or equitable compensation, or alternatively an order that Mr Bonanno pay the defendants $29,169 (prayers 7 to 9). 1. At the hearing, the defendants withdrew their claim for the order set out above in (1) that the first agreement be set aside. However, their counsel explained, at T 269.3, that they maintained a claim that they had terminated the first agreement on the ground that breaches of that agreement by Mr Bonanno constituted a repudiation of the agreement. Alternatively, on the proper construction of the deed and the second agreement, their effect was to replace the first agreement. 2. The defendants' counsel explained in oral submissions, at T 262.12, that the defendants' claim for damages in prayer 7 is for the consequences of the failure by Mr Bonanno to pay the defendants $130,000 immediately, as required by the first agreement. Prayer 8 is for breach of the second agreement, if it is not set aside by the Court. 3. Counsel also explained, at T 262.35, that the defendants' position that Mr Bonanno does not have an interest in the property as a one third owner is not only based on their claim for an order that the second agreement be set aside, but is also based on the argument that the second agreement should be characterised as a loan made upon security over the property, and not as an agreement for the sale of a one third interest in the property. The defendants submitted that, once the $130,000 loan has been repaid, the defendants will have an 'equity of redemption'. In essence, the defendants' position was that the second agreement was in substance a mortgage and that the term giving Mr Bonanno a one third interest in the property was an unfair and unenforceable collateral advantage or clog on the equity of redemption. 4. The defendants submitted that, even if the second agreement created a secured loan, Mr Bonanno is not entitled to an order for sale, as no demand for repayment has been made, and the second agreement does not give Mr Bonanno a power of sale. Grounds pleaded in further amended cross claim 1. I will now explain the principal grounds pleaded in the further amended cross claim supporting the claims for relief summarised above. It will not be necessary to refer in detail to Mr Bonanno's defence to the further amended cross claim, as that defence largely denied or put the defendants to proof of their allegations. 2. It is not necessary to refer to the allegations in pars 1C to 6A of the further amended cross claim, as they relate to the prayer for an order setting aside the first agreement which has now been abandoned. 3. In the further amended cross claim, the defendants pleaded a number of grounds to support their claim that the deed (or the second agreement) should be set aside. I will focus only on the paragraphs that set out the principal grounds for this relief. 4. First, in par 7C, the defendants pleaded that each of them was at a special disadvantage to Mr Bonanno when they entered into the deed. The particulars of the special disadvantage were stated as follows: [Mr Finamore's] disadvantage was: i he was in financial distress: the [defendants] were still in default under their loan facilities with the Bank and the Mortgage, he was having difficulties in paying the monthly loan repayments to the Bank and the outgoings of the boarding house, his plastic recycling business had failed, the [defendants] could not afford to repay [Mr Bonanno] the $30,000 he had paid in respect of the First Agreement; ii health difficulties: diagnosis and surgical removal of a large benign tumour in his leg and post-surgery recovery; iii his de-facto relationship with [Ms Zhou] had broken down; iv the property was run-down and required repairs and improvements; v the responsibilities of running and maintaining the boarding house were time-consuming; vi stress, emotional and anxiety difficulties caused by the medical issues, relationship breakdown and financial difficulties described above; vii language and communication difficulties: he had a stutter and below average reading and comprehension skills. [Ms Zhou's] disadvantage was: viii she was in financial distress: the [defendants] were still in default under their loan facilities with the Bank and the Mortgage, she was having difficulties in paying the monthly loan repayments to the Bank and the expenses of the boarding house; the [defendants] could not afford to repay [Mr Bonanno] the $30,000 he had paid in respect of the First Agreement; ix her de-facto relationship with [Mr Finamore] had broken down; x the property was run-down and required repairs and improvements; xi the responsibilities of running and maintaining the boarding house were time-consuming; xii she did not have the skills or experience to complete the routine repairs and maintenance required at the property; xiii she felt physically intimidated by [Mr Bonanno]; and xiv English language difficulties: she had had no formal education in English and experienced difficulties in understanding and expressing herself in English (both in written form and in conversation). 1. The defendants also alleged, in par 7F, that Mr Bonanno knew that the defendants, prior to entry into the deed, believed that Mr Bonanno was agreeing to become an equal contributing partner with them in respect of the boarding house at the property. They alleged that he knew that belief was erroneous, but he did nothing to disavow the defendants of their belief. 2. Paragraph 7H pleads that Mr Bonanno made representations to one or both of the defendants, before the deed was entered into, that he would be an equal contributing one third partner in the boarding house; that he would contribute his time, labour and money towards running, maintaining and improving the boarding house and property; that he would pay one third of the outgoings; that he was willing and able to carry out minor repairs and maintenance to the property; and that, by his silence, his contributions towards the operation of the boarding house and property in the period of April 2010 to 25 February 2011 would continue. 3. The defendants alleged, in pars 7I to 7K, that the representations were made by Mr Bonanno with the intent of inducing them to enter into the deed. The defendants alleged that they entered into the deed in reliance on the representations, and that, contrary to the representations, following entry into the deed, Mr Bonanno made no material contribution of his time, labour or money towards running, maintaining or improving the boarding house or the property; he did not pay one third of the outgoings; he ceased carrying out minor repairs and maintenance; and he denied that he had any obligation to assist in the running and maintenance of the boarding house and the property. 4. Paragraph 7L contains an allegation that, by reason of all of the matters previously pleaded in relation to the second agreement, the defendants are entitled to orders setting aside the deed, for all transfers to be cancelled and destroyed, and for the return of the $72,639.25 that they had paid to Mr Bonanno. 5. In pars 7M to 17, the defendants alleged that they had terminated the first and second agreements for breach or repudiation by Mr Bonanno. Alternatively, the first agreement was terminated by the parties entering into the second agreement. 6. The defendants alleged that Mr Bonanno breached or repudiated the first agreement by failing immediately to pay $130,000 by way of a bank cheque in favour of NAB, and instead only paid $30,000. 7. The defendants also alleged that, on 25 February 2011, the parties entered into an agreement whereby Mr Bonanno would pay the defendants $130,000 to be granted a one third interest in the boarding house partnership and the property. They alleged that this second agreement was constituted by the deed and the terms that have been summarised above at [24]. In essence, the defendants' claim was that it was part of the second agreement that the parties would conduct the operation of the boarding house on the property as a partnership, in which Mr Bonanno would be an equal and active participant with the defendants. The defendants alleged that Mr Bonanno repudiated the second agreement by failing to perform his obligations, and that the defendants accepted the repudiation and terminated that agreement. 8. In par 17A, the defendants made a claim for damages for breach of the second agreement by Mr Bonanno. Those damages comprised unpaid outgoings, payments made by the defendants to Mr Bonanno, additional bank charges and interest paid as a result of cash flow shortages caused by Mr Bonanno's failure to pay his share of outgoings, together with the value of extra labour expended by the defendants by reason of the failure of Mr Bonanno to contribute to the operation of the boarding house and the property. 9. Finally, in par 17E, the defendants pleaded an equitable estoppel claim against Mr Bonanno. The essence of this claim was that, if the second agreement did not contain the terms summarised at [24] above, Mr Bonanno induced the defendants into assuming that the agreement did contain those terms, and that he was at all material times aware that the agreement did not contain those terms although the defendants assumed that it did. The defendants claimed that Mr Bonanno is estopped from denying that the second agreement contained the terms alleged. 10. In final oral submissions, counsel for the defendants explained at T 263.3 that, even if the Court does not accept that the second agreement should be set aside in full because it was procured by unconscionable conduct on the part of Mr Bonanno, the formula contained in the second agreement for calculating the amount payable to Mr Bonanno on the sale of the property should separately be set aside on the basis that its inclusion in the second agreement was unconscientious, and had the effect of a collateral advantage or clog on the equity of redemption. Agreed facts and related orders 1. During the hearing, the parties came to an agreement that obviated the need for them to read their expert evidence concerning the accounting issues that had been raised. On 31 March 2021, the third day of the hearing, the Court made the following orders: 1. By consent makes orders in terms of the short minutes of order signed by Robb J and dated today's date. 2. Notes that the counsel for the defendants has explained the effect of those orders as will be recorded on the transcript. … Short minutes of order 1 There be no order as to costs in relation to the expert reports of Wendy Thai and Brett Goodyear, it being the case that the parties will pay their own costs relating to those reports. The Court notes: 2 The parties have consented to the above order as part of their agreement to the attached Agreed Facts. 3 The Agreed Facts contained in paragraph 2 of the attached document is agreed on the basis that it would follow that the defendants would not pursue the relief sought in paragraph 9 of the Further Amended Cross Claim (moneys had and received claim). 4 The Agreed Facts contained in paragraph 2 of the attached document is without prejudice to the defendants' claims for: moneys had and received in relation to amounts they paid to the plaintiff after the date the agreement dated 25 February 2011 was terminated (if applicable); or damages (unrelated to outgoings associated with the property). Agreed Facts In accordance with s 191 of the Evidence Act 1995 (NSW): 1 If the Court determines that the plaintiff is entitled to a 1/3 share of the net income of the [boarding house at the property] up to the date of the hearing (or beyond), the parties agree that the amount of that share that remains unpaid is the sum of $75,000. 2 If the Court determines that: a the first defendant and second defendant validly terminated the agreement dated 25 February 2011 prior to 21 November 2014; and b the plaintiff is entitled to a 1/3 share of the net income of the boarding house at the Property up to the date of termination only, the amount of that 1/3 share of the net income up to the date of termination that has not been paid is $7,000. 1. The explanation by counsel for the defendants referred to in Note 2 (excluding comments made by the Court) is as follows: T 108.27-T 109.26 WOODS: I can give a rough outline, and as you notice, it's in the event of a scenario. So paragraph 1 of the agreed facts is really my learned friend's main contract claim, if the contract isn't [should read: is] on foot, and he has an entitlement still to a third of the net income from the property. That's the amount that remains unpaid. Paragraph 2 is more for the defendant's case, our claim that the contract has come to an end, and the third of the net income that the plaintiff had accrued or was entitled to up to the date of termination, that would be the amount that represents what is outstanding. It might not be apparent now, but there were payments made after the defendants purported to terminate the agreement, on a different basis, just like unaccounted, like an interest payment for the moneys that they had borrowed. And our claim in the cross-claim is that that's moneys paid by mistake after the date of termination. And there's a claim therefore, a restitution claim for that money to be paid back. That would fall away in the event of paragraph 1, but paragraph 2, in the event the agreement was terminated, the defendants can still pursue that claim for the amount that they paid after the agreement. That's covered in the notation to the short minutes of order. … ... Just in relation to the contract claims. We've considered some other claims in the defendants' case of seeking to set aside the agreements and the parties restored to their original position, so in that event this agreed fact doesn't kick in. And there's a claim for damages for breach of the contract in the further amended statement of claim as well. And to the extent the defendants prove such damage, that would continue. HIS HONOUR: Yes. What about the handwritten paragraph 3? The agreed fact contained in paragraph 2 of the agreed facts, is agreed on the basis that it would follow that the defendants would not pursue the relief sought in paragraph 9 of the further amended cross-claim, which is a claim for moneys having received. WOODS: That would mean that the characterisation of those payments that were made from 2014 through to 2015 by the defendants to the plaintiff are categorised as a share of the rental income. So the claim that moneys were paid by mistake and need to be paid back falls away. HIS HONOUR: All right, thank you. WOODS: The effect, if the orders are made, well, the agreed facts have been tendered, is that the expert reports, the accounting reports of Wendy Thai and Brett Goodyear would not be tendered at the hearing. They wouldn't obviously then be required to give evidence. And there's also the property valuer, Miguel Hermiz, his reports will be tendered as evidence, but he won't be required for cross-examination, based on this agreement. 1. The effect of this agreement between the parties to limit the matters in issue was that a substantial part of the evidence ceased to require consideration by the Court. It has also had the subsidiary effect of making it difficult to identify the evidence that remained relevant at the conclusion of the six-day hearing. Abandonment of defences by defendants 1. In par 17 of her final written submissions dated 20 May 2021, the defendants' counsel stated: … the defendants do not press their claims for: a) setting aside the first agreement by reason of unconscientious conduct (Cross Claim at [3]-[6A]); b) equitable estoppel in its Defence or Cross Claim; or c) rescission of the second agreement on the alternative basis of innocent misrepresentation (Cross Claim at [7H] to [7K]). 1. The defendants did not explicitly seek a declaration that the terms of the second agreement that require them to transfer a one third interest in the property to Mr Bonanno were invalid, even if the balance of the second agreement was not, on the ground that the second agreement was in substance a mortgage, and the requirement for an absolute transfer of the one third interest was an invalid collateral advantage. 2. The defendants made a submission, based upon the second agreement being in substance a mortgage, in pars 122 to 132 of their final written submissions. 3. Mr Bonanno appears to have responded to the defendants' submissions made on the basis that the second agreement was in substance a mortgage at pages 26 to 30 of his submissions in reply. Issues for determination 1. It will be appropriate for me now to set out my understanding of the real issues that need to be determined in this judgment. The ultimate issue is the enforceability of the second agreement. In relation to that agreement: 1. The parties agree that, if the second agreement is valid, Mr Bonanno is entitled to an order that he be paid $75,000, being the unpaid amount of his one third share of the net rents from the operation of the boarding house. 2. The defendants claim that they terminated the second agreement for breach by Mr Bonanno, before he exercised his right to call for the transfer of a one third interest in the property to him. It will be necessary to decide whether the second agreement contained the terms relied upon by the defendants, and, if so, whether they validly terminated the second agreement at the time alleged. 3. The defendants also claim that, in any event, the second agreement should be set aside from the date of its commencement on the ground that they each suffered from a number of special disadvantages, and the conduct of Mr Bonanno, in procuring the defendants to enter into the second agreement, was unconscionable or unconscientious in equity. 4. Mr Bonanno has not sought an order for specific performance of the second agreement, but instead has sought a declaration that the defendants hold a one third interest in the property on trust for Mr Bonanno. Mr Bonanno will only be entitled to the declaration if he proves that an order for specific performance of the second agreement should now be made in his favour. That is the only source of his equitable interest in the property. 5. Just as Mr Bonanno has not sought an order for specific performance of the second agreement, the defendants have not raised the equitable defences that are available to such a claim. That may be because, even if the Court refused an order for specific performance, that would leave the defendants liable to an action for damages at common law for breach of the second agreement, if the Court declined to set it aside. The defendants resist this outcome by claiming that the second agreement is in substance a mortgage, and the obligation to transfer the one third interest in the property to Mr Bonanno is an invalid collateral advantage in equity. They claim that equity will not permit the enforcement of the collateral advantage by an action at common law, so that Mr Bonanno is not entitled to damages for breach of the second agreement. If the defendants succeed in their claim that the obligation to transfer is an invalid collateral advantage, that will obviate the need for the Court to consider separately whether an order for specific performance should be declined. If Equity will not permit the enforcement of a common law obligation, it plainly will not order that the obligation be performed. 6. In reliance upon his claimed equitable interest in the property, Mr Bonanno seeks an order for the appointment of a trustee for sale (or an order that would have the same practical effect), as well as an order that the net proceeds of sale be disbursed in accordance with the terms of the second agreement. This approach to the relief claimed by Mr Bonanno omits the step of causing the one third interest in the property actually to be transferred to Mr Bonanno. That may be a sensible practical course to take, but sight should not be lost of the fact that the consequence will be that Mr Bonanno's rights will be determined as if the second agreement had been specifically performed. That means that the defendants' claim that the second agreement gives Mr Bonanno an invalid collateral benefit, because it is in substance an agreement to lend on the security of a charge over the property, must be determined on the same basis as if the defendants had actually transferred the one third interest in the property to Mr Bonanno. 7. The final issue requires the classification of the second agreement, in respect of whether it is in substance a mortgage, and if so whether the obligation on the defendants to transfer a one third interest in the property to Mr Bonanno is a collateral advantage to the mortgage that is invalid in equity. As will be seen, this issue involves a difficult question of principle, as there is a divergence in opinion between first instance judges in this country concerning the principles that govern the issue. Credibility of witnesses 1. This is a convenient point to record the conclusions that I have reached concerning the credibility of the witnesses. 2. As Mr Bonanno is effectively suing to enforce the deed, credit is not a significant issue for his case. However, credit is potentially a significant matter in the assessment of the defences and cross claims raised by the defendants. 3. The conclusion that I have reached in relation to the reliability of the oral evidence given by all three parties is that, while they generally attempted to give candid evidence in cross-examination based upon their recollection of events, they were not impressive witnesses, and for varying reasons did not cause me to be confident that I could rely upon their uncorroborated evidence. Nor could I confidently select which witness to believe in circumstances where the evidence of two witnesses was incompatible. The sense I got was that each witness responded to questions from their own perspective, and that their answers were filtered, most likely subconsciously, through the prism of their long involvement in these proceedings and their perceptions of their own interests. 4. That is not to say that I have concluded that any of the witnesses were dishonest. It is more that none of the three witnesses responded with the immediacy and apparent candour that is usually necessary for a judge to act upon the oral evidence of a witness where that evidence is not supported by documentary evidence or the objective circumstances. 5. Mr Bonanno was not always a responsive witness and tended to say what he wanted to say. Ms Zhou had to contend with the usual problems involved in giving her evidence through an interpreter. Mr Finamore, who I am satisfied did his best to answer questions, was seriously impeded by a quite exceptional stutter. 6. It must also be acknowledged that most of the significant events relevant to the proceedings occurred a decade ago and none have been recorded in contemporary documents. Even the accounting records prepared by Ms Zhou were created in an unprofessional manner, which led to confusion (thankfully obviated by the agreement as to facts referred to above). 7. I have made judgments as to the facts that should be found based upon the broad testimonial evidence of the witnesses that have not given rise to serious contention, the documentary evidence, and the inferences that should be drawn from an objective consideration of the established circumstances. The first agreement 1. It will be convenient to begin the determination of the issues that remain in this case by setting out the terms of the first agreement. I will then explain the residual significance of the first agreement. 2. The first agreement is a deed dated 29 April 2010 between Ms Zhou and Mr Bonanno. It materially provided as follows: RECITALS A. Zhou and her de facto partner Nicola Joseph Finamore ("Nicola" hereafter) are the registered proprietors as joint tenants of [the property] which is valued at $750,000.00 approximately (called "the Property" hereafter). B. The property is currently subject to a mortgage to National Australia Bank Limited (called "the Mortgage" hereafter) and other encumbrances (including but not limited to business & personal loans secured by the Property) in the sum of $700,000.00 approximately. C. The Property can be used and is currently registered as a boarding house. There are currently 6 tenants in the Property with a rental income $1,200 per week approximately. D. Zhou has separated from Nicola late last year and is currently in the process of negotiating with Nicola a financial settlement of their de facto relationship of more than 20 years, with respect to which she intends to and believes that she is entitled to claim to be the sole proprietor of the Property. E. Since around the time of the separation, Zhou has been solely responsible for and has been experiencing difficulty with making payments of the Mortgage and other loan repayments and running expenses of the Property as Nicola has not made any contribution. There has been approximately $130,000.00 of mortgage and loan repayments currently in arrears. Zhou and Nicola have been served legal notice in respect to their default in mortgage and loan repayments. F. [Bonanno] has been a business associate and a family friend of Zhou and Nicola for more than 3 years. He is reasonably aware of and has certain knowledge about Zhou's financial difficulties caused by the breakdown of the relationship between Zhou and Nicola. G. At the request of Zhou, [Bonanno] has agreed to advance a loan in the sum of $130,000.00 to Zhou to assist her in making repayments of the Mortgage and loans in respect of the Property currently outstanding and overdue according to terms and conditions agreed herein. H. The parties wish to enter this deed to record their intentions and terms of agreements in respect of their respective interest in the Property. OPERATIVE PROVISIONS NOW THIS DEED WITNESSES that in pursuance of the premises and in order to give effect to the agreement so reached the parties do mutually covenant each with the other as follows: … 3. Upon execution of the agreement, [Bonanno] shall immediately provide Zhou with a bank cheque in favour of National Australia Bank Limited in a sum of $130,000.00. 4. Subject to Clause 3 above, it is agreed that Zhou shall: (a) deposit the said bank cheque into the mortgage account of the Property with National Australia Bank Limited and provide [Bonanno] with evidence of such deposit. (b) duly observe all her obligations pursuant to the Mortgage and do all things necessary to prevent or avoid any default which may result (sic) a Mortgagee Sale of the Property, (c) acknowledge and irrevocably consent that [Bonanno] is entitled at his absolute discretion to lodge a caveat over the Property at any time as from the date of this agreement. (d) do all such things and/or take such steps necessary, including but not limited to commencing legal proceedings, to finalize a financial settlement with Nicola in respect of her de fact to (sic) relationship (sic) Nicola as soon as possible and (e) endeavour to procure and cause all right, interest, and title of the Property to be transferred to her name only, in any event, shall promptly inform [Bonanno] as to the progress of her financial settlement and relevant issues relating to the Property. (f) shall not cause or permit any person to acquire any further interest in the Property and shall not incur any debt or monetary obligation (actual or contingent) to a holder, other than those (sic) are existing and/or have been disclosed to [Bonanno], of a security interest over the Property without [Bonanno's] express and written consent. (g) shall indemnify [Bonanno] against any claim, encumbrances, debts, tax, bills, expenses and all other liabilities relating to the property incurred prior to the date this agreement, 5. Further to Clause 4 above, it is agreed that as from the date of this agreement (a) Both parties shall immediately set up a joint account with a financial institution of [Bonanno's] choice. (b) Zhou must deposit all rental payments collected from the boarding tenants of the Property into the said joint account and use all monies in the account for repayments of the Mortgage and other payments which are directly related to the Property only and shall not use such money for any other purposes without [Bonanno's] written consent. (c) Subject to subclause (b) above, Zhou and [Bonanno] shall make equal contribution towards and be jointly and severally responsible for all payments other than repayments of the Mortgage (including but not limited to facility bills, rates, tax, maintenance and repairs and all other running expenses) in respect of the Property. (d) Zhou shall keep all relevant accounting information, receipts, documentation and records in respect of the Property and make such available for inspection by both parties at all times. 6. Further to Sub-Clause 4 (e). above, it is agreed that: (a) in the event that Zhou becomes the sole registered proprietor of the Property after her financial settlement with Nicola is finalized, Zhou shall promptly do all such acts and things necessary to transfer 50% of all her right, interest and title to [Bonanno] at such time when she receives written notice from [Bonanno]. (b) In the event and when it will have become apparent that Zhou is unable to procure/obtain the full ownership or to become the sole proprietor of the Property by any reason, either party may rescind this agreement by serving upon the other party a three (3) months written notice, provided that Zhou shall repay [Bonanno] on or before the last day of the notice period: i The Principal sum of the loan being $130,000.00 and ii Interest on the principal sum as from the date (sic) this agreement to the date (sic) repayment, which shall be calculated at the rate of 2% plus standard variable rate of the Mortgagee (NAB) and iii All other payments and/or contribution made by [Bonanno] towards or in respect of the Property and iv All reasonable expenses (including legal costs) incurred in respect of or relating to this agreement, provided such expenses shall not exceed $3,000.00. 7. Subject to Clause 3 above, to the extent that (sic) is not prohibited by law or any orders of the court, as from the date of this deed, Zhou shall duly and promptly inform or notify, and shall not make any decision without giving prior written notice upon [Bonanno], as to all matters or issues relating to the Property (including but not limited to sale, transfer, assignment, refinance, discharge of mortgage, lease, and renovation). 8. [Bonanno] expressly acknowledges and declares that (a) he has actually obtained (or has been afforded adequate opportunity but has decided not to obtain) independent legal and financial advice in respect to terms of this agreement and (b) he has conducted and satisfied himself as to the result of necessary searches and enquiries in respect of the Property prior to entering this agreement and (c) he does not rely upon any warranty or representation made by Zhou or any person on behalf of Zhou other than such as are expressly provided herein and relies entirely upon his own searches, enquiries and relevant advice obtained in respect of the Property to enter this agreement. … 11. Both parties acknowledge that the terms contained in this agreement are the entirety of the deed and that this agreement is intended to be legally binding and enforceable from the date of execution, and that any variation of this agreement can only be made in writing and executed by both parties. … 1. The first agreement contained separate written acknowledgements by Ms Zhou and Mr Bonanno that: prior to execution of the agreement… I have obtained/been afforded adequate opportunity to seek but have declined to obtain independent legal advice in relation to: The effect of the agreement on the rights of the parties; The advantages and disadvantages, at the time that the advice was provided, to the party of making the agreement 1. As I have explained above, Mr Bonanno has only pleaded the terms of the first agreement as background for his claims based upon the deed made between all three parties on 25 February 2011. 2. The defendants no longer seek an order setting aside the first agreement, but they maintain a claim that they terminated the first agreement on the basis that Mr Bonanno repudiated the first agreement, or alternatively that he committed a breach of it that was of a seriousness that justified the defendants in terminating the agreement. The defendants sought damages. They also claim that the first agreement was superseded by the second agreement. 3. As Mr Bonanno accepted that the first agreement had been superseded by the second agreement, and, as the defendants' alternative position was the same, the case has been conducted on the basis that the only agreement between the parties that could be effective is the deed that they executed on 25 February 2011. 4. Consequently, the defendants' maintenance of their claim based upon the first agreement is only relevant to their claim for damages for breach of that agreement. 5. In par 87(m) of the defendants' final written submissions, they accept that the evidence of monetary loss as a result of Mr Bonanno's alleged breach of the first agreement is limited to the $300 enforcement costs charged by NAB for failure to comply with a demand for repayment served on the defendants dated 1 April 2010. The Supreme Court of New South Wales is not required to deliver complex reasons to determine a claim made by a party for damages of $300. 6. In any event, I do not accept that the defendants have established that they validly terminated the first agreement, or that Mr Bonanno is liable to Ms Zhou for damages of $300. 7. There is no evidence of any act by Ms Zhou, before the parties entered into the deed on 25 February 2011, that is capable of operating as a termination of the first agreement for breach by Mr Bonanno. 8. It is true that Mr Bonanno appears to have breached clause 3 of the first agreement, because he did not provide Ms Zhou with a bank cheque in favour of NAB for $130,000 immediately upon execution of the agreement. Mr Bonanno only provided Ms Zhou with the amount of $30,000 sometime after the first agreement was made. Ms Zhou said in par 64 of her 22 August 2016 affidavit that Mr Bonanno made additional payments, so that, by the date of the deed, he had paid a total of $83,597.46, leaving $46,402.54 outstanding. 9. Clause 4(d) of the first agreement obliged Ms Zhou to take all steps necessary, including by commencing legal proceedings, to finalise a financial settlement with Mr Finamore as soon as possible. 10. Further, clause 4(e) required Ms Zhou to endeavour to procure the property to be transferred to her name only. 11. The property was in the joint name of the defendants. The first agreement recited at D that Ms Zhou had separated from Mr Finamore the previous year, and was currently in the process of negotiating a final settlement of their de facto relationship "with respect to which she intends to and believes that she is entitled to claim to be the sole proprietor of the Property". 12. On the evidence, Mr Finamore declined to transfer his interest in the property to Ms Zhou. The evidence does not appear to bear out Ms Zhou's claim that she was currently in the process of negotiating a financial settlement with Mr Finamore. While the evidence is not clear, it appears that the defendants did not communicate with each other until approximately December 2010, while Mr Finamore was recuperating after an operation that he had for the removal of what proved to be a benign tumour, but caused Mr Finamore to fear that he might have cancer: (first Zhou affidavit at [67]-[68]). The point of this observation is that it is not clear, on the evidence, that Ms Zhou complied with her obligation under the first agreement to endeavour to procure that Mr Finamore transfer his interest in the property to her, so that she could, in performance of clause 6(a), transfer 50% of the title to the property to Mr Bonanno. Consequently, Ms Zhou was probably in breach of the first agreement herself, and so disabled from enforcing against Mr Bonanno a promise made in the expectation that Ms Zhou would put herself in the position where she could transfer a 50% interest in the property to Mr Bonanno. 13. Even if the first agreement no longer remains the source of any legal rights for Mr Bonanno or Ms Zhou, in a number of important respects it is significant to the context in which the parties entered into the deed made on 25 February 2011. Those matters are: 1. Recital A establishes that Mr Bonanno and Ms Zhou understood that the property was worth approximately $750,000. 2. Mr Bonanno must have learned from Recital B that the property was subject to a mortgage to NAB, and other encumbrances secured by the property in the sum of $700,000, and that the defendants only had a small equity in the property. 3. Recital D informed Mr Bonanno that the defendants had separated and were in the process of negotiating a financial settlement to their de facto relationship of more than 20 years. 4. Recitals E, F and G establish that Mr Bonanno was aware that Ms Zhou was experiencing difficulty with making payments towards the mortgage and other loan repayments and running expenses of the property. Ms Zhou was in arrears of mortgage and loan repayments in the amount of $130,000, and the defendants had been served with a default notice in respect of mortgage and loan repayments. The breakdown of the relationship between the defendants had caused Ms Zhou financial difficulties. 5. Recital G recorded that Mr Bonanno had agreed to advance a loan in the sum of $130,000 to Ms Zhou. That provides evidence that the $30,000 that was in fact advanced was in the nature of a loan. That will be relevant to the issue of whether the payment made by Mr Bonanno under the deed made on 25 February 2011 should be characterised as a loan, rather than a payment for the transfer of an interest in the property. 6. It is also relevant to the issue of whether the second agreement should be set aside because Mr Bonanno took unconscientious advantage of special disadvantages suffered by the defendants that, by the time the deed was made, Mr Bonanno was effectively exposed to having made an unsecured loan of $83,597.46 to Ms Zhou. 1. The first agreement does not contain any express terms that would create a partnership between Mr Bonanno and Ms Zhou in the operation of the boarding house, after the property became owned in equal shares by Mr Bonanno and Ms Zhou. There is no reference to an intention to create a partnership in the recitals. Clause 5 required that a joint account be set up in the names of Mr Bonanno and Ms Zhou. Ms Zhou was required to deposit all rental payments into the account and use those monies for repayment of the mortgage and other payments directly related to the property. Ms Zhou could not use that money for any other purpose without Mr Bonanno's written consent. Mr Bonanno and Ms Zhou were obliged to make equal contributions towards and be jointly and severally responsible for all payments other than repayments of the mortgage. It may well have been implied in the first agreement that Mr Bonanno was to be a silent partner in the operation of the boarding house. 2. However, as noted above, Mr Bonanno pleaded in his statement of claim that Ms Zhou asked him to lend her money in consideration of her entering into a partnership with Mr Bonanno, and the defendants agreed that Mr Bonanno and Ms Zhou discussed entering into a partnership. Caveat lodged by Mr Bonanno 1. On 4 June 2010, Mr Bonanno lodged a caveat against the title to the property. The nature of the estate or interest in the property, as stated in the caveat, was: "private loan to Weisen Zhou for mortgage repayments of the property and unpaid costs for renovation work on the property provided by the caveator". The facts relied upon were: "The caveator provided a loan in a sum of $30,000.00 to Weisen Zhou, one of the proprietors of the property and has performed renovation work on the property valued (sic) about $10,000.00 at the proprietor's request but has not been paid." 2. This is further evidence that the payments made under the first agreement were loans. 3. Although clause 4(c) of the first agreement constituted a consent by Ms Zhou to Mr Bonanno lodging a caveat over the title to the property, that consent could not bind Mr Finamore as he was not a party to the agreement. 4. In any event, clause 4(c) could only reasonably be construed as a consent to Mr Bonanno lodging a caveat to protect the rights granted to him by Ms Zhou under the first agreement, to the extent that the first agreement may have vested an estate or interest in the property in Mr Bonanno. While the issue is far from clear, it may be that the first agreement created some enforceable right in Mr Bonanno to a share of Ms Zhou's interest in the property. Such an entitlement would be debatable on a number of grounds, including that Mr Bonanno did not provide Ms Zhou with the $130,000 cheque to NAB forthwith as required by clause 3. 5. While it is arguable that the first agreement created some form of equitable proprietary right to which Mr Bonanno was entitled in Ms Zhou's interest in the property, that right was not in the nature of a mortgage or charge. Mr Bonanno was required to pay $130,000 off the NAB mortgage. Ms Zhou was required to take the steps that were necessary to cause Mr Finamore to transfer his interest in the property to Ms Zhou. If she succeeded, Ms Zhou was required to transfer a 50% interest in the property to Mr Bonanno. If Ms Zhou failed to obtain the transfer from Mr Finamore, Mr Bonanno would become entitled to rescind the first agreement by giving three months' notice, and Ms Zhou would be required to repay the $130,000 plus interest, as well as the other payments set out in clause 6(b). The first agreement did not give Mr Bonanno a security interest in the property. 6. Further, the mere fact that Mr Bonanno may have performed renovation work on the property at the request of one of the joint owners would not give Mr Bonanno an estate or interest in the property capable of being supported by a caveat. 7. Hence, the defendants are entitled to an order that Mr Bonanno withdraw the caveat that he lodged against the title to the property on 4 June 2010. The second agreement 1. The deed called Deed of Transfer of One Third Interest on Property made on 25 February 2011 is expressed to be between the defendants as transferors and Mr Bonanno as transferee. It recites that the transferors are the registered owners of the property, which is subject to a mortgage to NAB. It then recites: 3. Upon the request of the transferors, the transferee has agreed to advance a sum of $130,000.00 to the transferors and part of this money had (sic) already (sic) given to the transferors in or about May 2010. 4. The transferors agreed to transfer one third of their title and interest of (sic) the property to the transferee… 1. The relevant substantive terms of the deed are the following: 2. (a) In consideration of the transferee paying a sum of one hundred and thirty thousand dollars ($130,000.00) ("the consideration") to the transferors, the transferors will transfer one third of their interest and title of (sic) the property to the transferee. (b) The transferee covenants with the transferors that he will pay to the transferors so much of the sum of $130,000.00 as shall remain unpaid within 7 days from the date of this Deed. 3. The transferors will do all acts and sign all necessary documents to transfer the interest and title of the property to the transferee within seven day (sic) upon the request of the transferee. 4. After this Deed is executed, the transferee will be responsible for one third of all outgoings associated with the property including but not limited to Council Rates, Water Rates and all repairs and maintenance of the property and will be entitled to one third of the income from the rental of the property. 5. After this Deed is executed, the transferors will be responsible for two third (sic) of all outgoings associated with the property including but not limited to Council Rates, Water Rates and all repairs and maintenance of the property and will be entitled to two third (sic) of the income from the rental of the property. 6. The parties agree that the transferors will be solely responsible to the NAB (sic) mortgage repayments. 7. In the event that the property is sold, the parties agree to divide the proceeds of sale as follows: i. The transferee will be entitled to take $130,000 plus one third of the remaining net proceeds of sale; ii. The transferors will be entitled to two third (sic) of the remaining net proceeds of sale. For the purpose of this clause, the expression of "remaining net proceeds of sale" means the sale price minus payment of mortgage and associated costs, minus legal costs, minus $130,000 and all costs in relation to the sale of the property, e.g. commission to real estate agent and etc. Involvement of Mr Alan Ng, solicitor 1. The deed has been signed by the parties, whose signatures were witnessed by the solicitor who prepared the deed, Mr Alan Ng. 2. On 25 February 2011, Mr Ng wrote a letter to Mr Bonanno in which he stated: "We refer to the above and confirm that we have (sic) upon your instruction to prepare the Deed and we merely assist you to prepare the Deed to reflect what has been agreed among you and Nicola Finamore & Weisen Zhou and we do not represent any of you". 3. The defendants submitted that, as this letter was written to Mr Bonanno and there was no evidence that a similar letter was written to the defendants, the Court should infer that Mr Bonanno retained Mr Ng. I consider that is an inference that should be drawn. 4. Mr Ng's letter is a clear statement that his only involvement was to document, in the form of the deed, the agreement as he understood it to have been reached between the parties. The evidence shows that Mr Bonanno and Ms Zhou initially attended upon Mr Ng for the purpose of his drafting the deed and witnessing their signatures on the document. Mr Ng was apparently chosen because he was able to speak Chinese and so could communicate with Ms Zhou. Mr Finamore met Mr Ng later on the same day and signed the deed with Mr Ng as witness. 5. As Mr Ng clearly stated that he did not represent any of the parties, the Court should infer that, even though Mr Ng may have engaged in discussions with Mr Bonanno and Ms Zhou, in order to ascertain the substance of their agreement, he did not feel that he was under a professional duty to give them full advice, or act in their separate interests in relation to the terms of the deed. It seems to be clear from the fact that Mr Ng felt the need to write the letter that Mr Ng had a professional concern that he had become involved in preparing the deed, where the parties were not separately represented, and he did not consider that he had provided the separate professional services that would have been required of him if he had accepted a retainer to act for any of the individual parties to the deed for the purpose of protecting their interests. Execution of the transfer by defendants 1. On the same day that they executed the deed, the defendants executed a transfer of a one third share in the property for a consideration of $130,000. The signatures of the parties were witnessed by Mr Ng. 2. This transfer has never been registered. As noted above, the defendants seek an order that the transfer be cancelled. 3. The evidence is silent on why the transfer was executed by the defendants, given that clause 3 of the deed required the defendants to transfer a one third interest in the property to Mr Bonanno within seven days of a request by Mr Bonanno that they do so. It is unclear whether Mr Bonanno had made a request on the day the deed was executed pursuant to clause 3. The transfer was an annexure to Mr Bonanno's first affidavit. I infer that the certificate of title for the property was in the possession of NAB, so Mr Bonanno would have required the cooperation of NAB in order to register the transfer. 4. No party made any submission concerning the significance of the transfer, including as to its relevance to the issue of whether or not the second agreement was in substance a mortgage. Questions as to construction of the second agreement 1. As I have noted above, by his prayers for relief in these proceedings, Mr Bonanno seeks orders to enforce the deed in accordance with its terms. On Mr Bonanno's case, the second agreement is the deed and no more. In substance, Mr Bonanno seeks an order for the sale of the property and the repayment to him of the $130,000, plus one third of the net proceeds of sale after repayment of the NAB mortgage. 2. The following questions as to the construction and effect of the second agreement are important to the determination of the dispute between the parties. The first is whether, on the proper construction of the deed, or by some ancillary agreement, Mr Bonanno was obliged to participate in the operation, repair and maintenance of the boarding house, as if he were an active partner of the defendants. The existence of that obligation is the foundation of the defendants' case that they terminated the second agreement on the ground of breach by Mr Bonanno before he exercised his right in clause 3 of the deed to require the defendants to transfer a one third interest in the property to Mr Bonanno. 3. The second question is whether the deed, in substance, consisted of a loan on the security of the property and accordingly whether, in the circumstances, the term requiring the defendants to transfer a one third interest in the property to Mr Bonanno is invalid on the equitable principles that prevent a mortgagee enforcing a collateral advantage against the mortgagor in some circumstances. 4. Although these questions depend upon the construction of the wording of the deed applying conventional principles of construction, it will be necessary to consider the relevant history of the negotiations between the parties. That is because the defendants have submitted that the parties' dealings form part of the substratum of facts known to them when they agreed to the terms of the deed and are relevant to its proper construction. 5. Further, parol evidence is admissible for the purpose of proving the real nature of the transaction recorded in the deed, as to whether it should be treated as in substance creating a loan on the security of the property: Kreglinger (G & C) v New Patagonia Meat and Cold Storage Company Ltd [1914] AC 25 (Kreglinger) at 37 and 47; Gurfinkel v Bentley Pty Ltd (1966) 116 CLR 98 at 108, 112 and 114. History of the negotiations 1. I will deal first with the issue of whether Mr Bonanno was required to take an active role in the operation, maintenance and repair of the boarding house on the property. 2. The evidence of Mr Bonanno and Ms Zhou is primarily relevant to this question. As I have explained, the defendants were temporarily separated, and Mr Finamore was dealing with the operation to remove the tumour from his leg and the necessary recuperation from the operation. He did not take part in the operation of the boarding house for a period and he did not participate in the negotiation of the terms of the deed. He was also not present at the conference attended by Mr Bonanno and Ms Zhou at which Mr Ng drafted the deed. 3. It seems to be uncontroversial that the parties met each other in about mid-2009, when the defendants either brought a towbar to the workshop operated by Mr Bonanno for repair or bought a new towbar from him. The parties developed a friendship. 4. Ms Zhou gave evidence of the circumstances in which the first and the second agreements were made in her 22 August 2016 affidavit. Mr Bonanno had already given evidence on this subject in his 30 July 2015 affidavit that was filed in support of his summons. That affidavit was relatively cursory, as it was prepared in support of a case based upon the enforcement of the deed. Mr Bonanno replied to Ms Zhou's evidence in his affidavit of 26 September 2016. However, that affidavit was prepared in an unconventional form in that, similarly to a pleaded defence, it identified a particular paragraph in Ms Zhou's affidavit and stated whether Mr Bonanno admitted, did not admit or denied Ms Zhou's evidence. Responses were added that were sometimes cursory and in the form of a comment. Consequently, much of the evidence in response given by Mr Bonanno in relation to significant issues was not in the form of a statement of Mr Bonanno's recollection of the particular event. 5. Ms Zhou gave detailed evidence concerning the work involved in operating the boarding house. It is much more onerous than the work required by an owner of a residential property who leases the property to a long-term tenant. It is necessary to advertise rooms, to carefully select boarders, to obtain bonds, to collect the rent regularly, to provide room keys and change locks when boarders do not return keys, to provide basic services such as toilet paper, dishwashing liquid, sanitary and cleaning products, to provide furniture and to maintain and repair the premises. 6. Because of Mr Finamore's illness and the break in the de facto relationship between the defendants, during 2010 most of the work in managing the boarding house fell upon Ms Zhou. 7. There was also some evidence that Mr Finamore operated a plastic recycling business that was not a financial success. 8. Ms Zhou gave evidence of a discussion in late 2009 between the parties in Mr Bonanno's workshop, in which Mr Bonanno explained that he was involved in divorce proceedings with his wife and that he had hidden "$100,000 under my mattress". Ms Zhou said that she responded to this information and a conversation occurred that included the following: I said: That cash under the mattress could earn you some good interest. I then said: We owe the bank, we need about $130,000 to pay the bank. How about you lend me that money and I give you very good return. Bonanno said: What security do you have? I said: I have a boarding house. What do you think? … Bonanno said: I have a property in Botany, similar. I do all the maintenance myself. I can look after maintenance or repair, no problem. Nicola said: That's good, we need help. 1. Mr Bonanno denied that this conversation took place. He categorically denied that he said that he had $100,000 under the mattress. There was never any conversation linking his family law case and the venture with the two defendants. Mr Bonanno said that he was approached by Ms Zhou alone. 2. Ms Zhou said that, in or around March 2010, she showed Mr Bonanno around the property and explained how it was run. She said that a conversation occurred as follows: I said: What do you think? Bonanno said: It's good. I said: What about lending me the money? … Bonanno said: Here we need to repair, that we need to replace. I can do all those. I do all the maintenance and repair in Botany. Why pay other people, I can do all those. I said: That's good. 1. Mr Bonanno accepted that he inspected the boarding house with Ms Zhou. He said that the boarding house looked run down. He did not admit the conversation deposed to by Ms Zhou but did accept that he said: "I'm a handyman". 2. As noted above, the first agreement was made on 29 April 2010. The first agreement did not contain any express terms imposing a positive obligation on Mr Bonanno to take an active part in the operation, repair and maintenance of the boarding house. However, Mr Bonanno pleaded, and the defendants accepted, that Mr Bonanno and Ms Zhou discussed entering into a partnership together for the operation of the boarding house. That would be consistent with the term that required Ms Zhou to transfer a 50% interest in the property to Mr Bonanno if she could acquire that interest from Mr Finamore. 3. Ms Zhou gave evidence that, after the date of the first agreement, Mr Bonanno visited the property on about five occasions to perform some minor repairs or maintenance. On all other occasions, repairs and maintenance work were performed by Ms Zhou and Mr Finamore, and on rare occasions by a hired professional. 4. Mr Bonanno responded to this evidence by saying: 42… I say that until I started to carry out the repairs there was no evidence of any regular maintenance being done. I even erected a shed at the rear of the premises that became the office of the boarding house, by doing so what had until then been a tool shed was able to be converted into a Granny flat. I provided the labour and the incentive for this to be done, I was reimbursed for the cost of the material. On the (sic) average during this period I attended the boarding house about every 2 weeks and sometimes each week to carry out maintenance. Nicola was not on the scene during this period 1. It was, therefore, Mr Bonanno's evidence that, in the time between the two agreements, he visited the property more often and did even more repair and maintenance work than Ms Zhou claimed that he did. 2. Ms Zhou gave evidence that, after Mr Bonanno lodged the caveat against the title to the property, she had a conversation with him to the following effect: I said: You need to help with work because too much work, and a lot of bills. If you say you have one third of the property, you have to do the work. Bonanno said: Don't worry, I'm not worried about the one third title, all I care about is the rent money. 1. Mr Bonanno simply denied that this conversation took place. 2. Mr Bonanno admitted Ms Zhou's evidence that, in the period up to the signing of the deed, Mr Bonanno paid to Ms Zhou the total sum of $83,597.46. 3. Ms Zhou gave the following evidence concerning the circumstances leading up to the parties entering into the deed on 25 February 2011: 71. In or around late December 2010 or early January 2011 I had a conversation with Bonanno with words to the following effect: I said: I still have a problem with the bank, you haven't paid me all of it yet and I can't find any other finance. You didn't pay, so the first contract is nothing. How about we keep it as we discussed when we first started talking, the three of us work together and look after the place together. Bonanno said: Okay, but we'll need a new contract. I said: Ok, we'll do it like we did at the start with three people. Bonanno said: What I'm worried is that even if I put this money in, the bank still sells this house, how can I get my money out? I said: No, the bank will not sell after you pay. How about this, to make you feel safe, if after you pay this money the bank still sells, you get all your $130,000 out first and then after paying all the expense, anything left, you still get another one third. 72. Subsequently, we had another conversation with words to the following effect: I said: The three of us will do the repairs and maintenance and get people in. We try this again, take care of the place and get it in order. 73. Bonanno said: Yes, we'll make a lot of money. We can even build two story and double up our income. 74. In or around December 2010 or January 2011, I attended his workshop to talk further about the agreement. Bonanno and I had a conversation to the following effect: I said: So how about the rest of the $130,000. Bonanno said: Better I make a loan so I can deposit the rest of the cash into a loan. How about we go to see my banker. I said: Ok. 1. Mr Bonanno denied the evidence given by Ms Zhou in pars 72 to 74. However, Mr Bonanno's response to Ms Zhou's par 71 was (omitting a sentence that was rejected, as it consisted of a comment by Mr Bonanno as to his subjective reason for agreeing to the proposal): There was a conversation with the Second defendant at some stage along the lines suggested by her. 1. As Mr Bonanno had full opportunity to respond to Ms Zhou's evidence in detail, I take this response to be an acceptance of the substance of the evidence given by Ms Zhou in par 71 of her affidavit. 2. Mr Bonanno therefore accepted in his evidence that, before the deed was entered into, he took an active part to some degree in the operation of the boarding house and did work in relation to its repair and maintenance. Ms Zhou will have entered into the deed (and through her, Mr Finamore) on the basis of her experience that Mr Bonanno had, to some degree, complied with her requests for assistance in that regard. 3. As Mr Bonanno accepted that a conversation took place between him and Ms Zhou "along the lines" of what Ms Zhou deposed to in par 71 of her affidavit referred to above, the Court is justified in finding that Ms Zhou (and through her, Mr Finamore) entered into the deed on the following basis. First, that the arrangement would be that the three parties would work together and look after the boarding house. Secondly, Mr Bonanno would pay to the defendants the balance of the $130,000 promised to be paid under the first agreement, to enable the defendants to meet outstanding obligations to NAB in circumstances where Mr Bonanno was the only available source of finance. Thirdly, the objective of the arrangement was to give Mr Bonanno confidence that he would get his money back, which is consistent with the understanding that the money paid by Mr Bonanno would be a loan. Finally, the agreement that Mr Bonanno would be entitled to receive a further one third of the net proceeds of sale, if the property was sold by NAB, was to comfort Mr Bonanno that he would be able to get his money back. 4. Although, as I have said, I do not feel able, in any specific way, to prefer the evidence of one witness over the evidence given by another concerning the detail of the conversations between them, I do accept that Mr Bonanno made statements to Ms Zhou that led her to believe that Mr Bonanno would make substantial contributions to the operation of the boarding house, including in respect of its day-to-day management, repair and maintenance, and would take steps to improve its financial return. 5. I note Mr Bonanno's submission that there was no positive evidence that Mr Bonanno was the only available source of finance, but I am satisfied that the evidence justifies a finding that the defendants were unlikely to have been able to raise alternative finance from conventional lending sources. 6. The parties then entered into the deed on 25 February 2011. Materially, Ms Zhou gave the following evidence of her recollection of what was said by Mr Ng during the conference: 78. Bonanno, the solicitor, and I had a conversation in the solicitor's office with words to the following effect: Solicitor said: Let me summarize, you are getting the balance of the $130,000 and then he gets one third share of the rent, but he will pay one third of all the outgoings. I said: But what about maintenance and work and repairs and all that? Solicitor said: Yes, I've put in maintenance and repairs and you see how I write including but not limited to, that means it's all included. Bonanno said: Yes, no problem, I will do all that, I'm good at the maintenance and repairs. 1. In his affidavit in response, Mr Bonanno admitted that Mr Ng made the first statement attributed to him, concerning Mr Bonanno getting one third of the rent and paying one third of all outgoings. He denied the balance, and in particular, that Mr Bonanno said anything to the effect that he would have anything to do with maintenance. 2. It will now be appropriate to turn to the issue of the proper construction of the deed (or the second agreement, if it involves anything more than the deed) with respect to whether Mr Bonanno became bound by a positive obligation to operate, repair and maintain the boarding house business on the property equally with the defendants. Principles of construction 1. In Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35], French CJ, Hayne, Crennan and Kiefel JJ said as to the proper approach of the Court to the construction of a commercial contract (footnotes omitted): Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating". As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties … intended to produce a commercial result". A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience". 1. The significance to the process of construing contracts of extrinsic evidence, particularly evidence of negotiations between the parties, was comprehensively dealt with by Mason J (with whom Stephen and Wilson JJ agreed) in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 at 347-348 in the following way (footnotes omitted): The broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument (Goss v Lord Nugent). Although the traditional expositions of the rule did not in terms deny resort to extrinsic evidence for the purpose of interpreting the written instrument, it has often been regarded as prohibiting the use of extrinsic evidence for this purpose. No doubt this was due to the theory which came to prevail in English legal thinking in the first half of this century that the words of a contract are ordinarily to be given their plain and ordinary meaning. Recourse to extrinsic evidence is then superfluous. At best it confirms what has been definitely established by other means; at worst it tends ineffectively to modify what has been so established. On the other hand, it has frequently been acknowledged that there is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning — see, for example, the remarks of Knox C.J. in Life Insurance Co. of Australia Ltd v Phillips. This has led to a recognition that evidence of surrounding circumstances is admissible in aid of the construction of a contract. So Lord Wilberforce in L. Schuler A.G. v Wickman Machine Tool Sales Ltd was able to state the broad thrust of the rule in this way: The general rule is that extrinsic evidence is not admissible for the construction of a written contract; the parties' intentions must be ascertained, on legal principles of construction, from the words they have used. It is one and the same principle which excludes evidence of statements, or actions, during negotiations, at the time of the contract, or subsequent to the contract, any of which to the lay mind might at first sight seem to be proper to receive. … The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification. Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract. 1. It is not necessary in this case to delve deeply into the later authorities that have explored the issues considered by Mason J. Contractual obligations of Mr Bonanno 1. The defendants dealt with the proper construction of the second agreement in pars 137 to 147 of their final written submissions in connection with the alleged repudiation of the agreement. It appears that the defendants rely primarily on the terms of clause 4 of the deed. By that term, Mr Bonanno was "responsible for one third of all outgoings associated with the property including but not limited to Council Rates, Water Rates and all repairs and maintenance of the property". The defendants submitted in par 141 that, on the proper construction of clause 4, having regard to the language used, the surrounding circumstances known to the parties and the objects to be secured by the agreement, being responsible for one third of all outgoings and repairs and maintenance "required the plaintiff to actively contribute to the payment of outgoings and the carrying out of repairs and maintenance". In essence, as I understand par 142 of the defendants' submissions, they say that, while the word "outgoings" may have a monetary connotation, the words "repairs and maintenance" do not. This, according to the defendants, supports the conclusion that Mr Bonanno had "responsibility for a one third of all repairs and maintenance including carrying out such repairs and maintenance". The defendants also submitted that "the phrase 'responsible for', consistent with its ordinary meaning, connotes an active, primary role or involvement in respect of outgoings and repairs and maintenance, rather than being reliant on others". They also submitted that the expression "one third" meant that Mr Bonanno was required to be equally involved with the defendants. 2. The defendants do not appear to assert that there was a separate oral agreement that Mr Bonanno would participate equally in the operation of the boarding house. Rather, in par 143, they submit that Mr Bonanno's actual conduct in having physically contributed from time to time towards some repairs and maintenance of the property under the first agreement, and having informed the defendants that he intended to assist and spend money to improve the property if the second agreement was signed, and Mr Bonanno being aware that the operation of the boarding house required more effort than the leasing out of residential property, was part of the "surrounding circumstances known to the parties relevant to clause 4" of the deed. The defendants' submission, therefore, was that the wording of clause 4 should be construed having regard to these matters known to the parties at the time the deed was made. 3. Finally, the defendants submitted in par 144 that, in addition to the loan provided by Mr Bonanno, "the object to be secured by the second agreement, included providing the defendants with assistance with the responsibilities and expenses of the boarding house and Property". 4. I do not accept the defendants' submissions concerning the proper construction of clause 4 of the deed. 5. The expression "will be responsible" is used in clauses 4 and 5 of the deed and the expression "will be solely responsible" is used in clause 6. By clauses 4 and 5, Mr Bonanno and the defendants agreed to be responsible for one third or two thirds of "all outgoings… and all repairs and maintenance". By clause 6, the defendants were to be solely responsible for the mortgage repayments. In my view, it is reasonably clear that, in respect of the outgoings and the mortgage repayments, the clauses obliged the relevant parties to pay the stated proportions of a particular cost. I consider that the same is true in relation to the repairs and maintenance of the property under clauses 4 and 5. That is so for a number of reasons. First, although the parties may have been physically able to personally effect some repairs and maintenance, there is no reason to conclude that any of them were capable of conducting all of the repairs and maintenance personally. They were simply not qualified to do so. Secondly, there was no practical mechanism to ascertain which party was personally responsible for carrying out particular repairs and maintenance, if that work had to be done personally. It would not have been practicable in respect of any individual task, for the parties each to perform an equal one third of the task. If individual parties were expected to personally perform individually one third of the total repair and maintenance tasks, there was no mechanism for valuing the individual tasks or determining when a particular party had personally performed his or her obligation. The construction of clause 4 proposed by the defendants would be impractical, given that only some of the repair and maintenance tasks could reasonably be performed personally by the parties, and others would need to be performed by qualified workmen at a cost. In essence, the construction of clause 4 proposed by the defendants is unworkable. The better construction of clause 4 is that it required Mr Bonanno to meet one third of the outgoings and the cost of repairs and maintenance. That obligation could be paid out of his one third share of the income, but if the cost exceeded the income, Mr Bonanno would be responsible for payment of the difference. 6. In any event, clause 4 of the deed only deals with outgoings, repairs and maintenance. Even if it should be construed as obliging Mr Bonanno personally to perform an equal one third of the repairs and maintenance that he was capable of undertaking, the clause says nothing at all about Mr Bonanno engaging in any other aspects of the operation of the boarding house business. 7. In summary, I do not accept that the wording of clause 4 of the deed, even accepting the context in which it was made, is reasonably capable of imposing upon Mr Bonanno a positive obligation to take an equal part with the defendants in the operation of the boarding house and its repair and maintenance. 8. As the deed did not contain the term alleged by the defendants, they could not have terminated the deed on the basis that Mr Bonanno breached that term. I will consider below the defendants' claim that they terminated the deed, assuming that it did contain the term relied upon by the defendants, contrary to the view that I have just explained. 9. The position has been reached in these reasons that, while the deed did not contain a term that obliged Mr Bonanno to participate in the operation of the boarding house business as if he was a partner of the defendants, Ms Zhou on behalf of the defendants had a reasonable expectation that the deed would contain such a term. The deed was drafted at a single conference attended by Mr Bonanno and Ms Zhou, by a solicitor retained by Mr Bonanno. As explained above, that solicitor, Mr Ng, has gone out of his way to explain by letter that he disclaimed any responsibility for acting for or advising the parties to the deed. The consequence is that the provisions of the deed are inconsistent with the defendants' reasonable expectation. 10. As will be seen, there is no evidence that the defendants received an adequate explanation as to how the deed would operate, given that it did not contain any terms governing the entitlement of the defendants to repay the $130,000 owed by them, there was no provision governing the circumstances in which the parties could require the property to be sold, and the deed contained terms that were partly consistent with the creation of a loan on the security of the property and partly consistent with an absolute transfer of a one third interest in the property. Claim for breach by Mr Bonanno of the second agreement 1. As I have explained above, the defendants have claimed that Mr Bonanno had a contractual obligation to play an active role in the operation of the boarding house that extended beyond his obligation to meet one third of the expenses. The defendants claimed that this obligation arose on the proper construction of the deed. They claimed that Mr Bonanno breached the agreement concerning his participation in the operation of the boarding house soon after the deed was entered into on 25 February 2011. 2. It follows from my finding that the deed does not contain the term asserted by the defendants, explained above, that this aspect of their defence must fail. 3. However, I will consider the remaining issues relevant to this defence against the possibility that I am wrong in the construction of the deed that I have preferred. 4. As I understand it, the defendants claim that they are entitled to an order that Mr Bonanno pay them damages for this breach. The damages are said to arise out of the fact that the defendants were not able to operate the boarding house as efficiently as they otherwise would have done with the assistance of Mr Bonanno, including in respect of the making of repairs to the property. However, on the evidence as I understand it, the defendants have not been able to quantify any loss that they have suffered. The agreed facts that are recorded above do not include an agreement concerning the quantum of this claim. 5. The defendants submitted, in par 155 of their final written submissions, that the assessment of the damages payable by Mr Bonanno for this loss is contained at Court Book 393-413 and is in the sum of $60,000. The defendants asserted that no challenge was made to that evidence by Mr Bonanno. 6. The defendants did not explain how the documents at these pages of the Court Book establish a loss of $60,000 caused by Mr Bonanno's failure to take an active part in the operation of the boarding house. The documents referred to in the defendants' submissions are in Annexure B to Ms Zhou's 12 July 2019 affidavit, and are explained in par 15 as being "spreadsheets showing the expenses in relation to the boarding house between 2011 and 2018, including amounts spent on advertising". This evidence appears to be in part a response to an expert accounting report of Wendy Thai that was not tendered into evidence as a result of the parties coming to an agreement concerning the statement of agreed facts. 7. The documents consist of a series of schedules of expenses and comments that do not appear to have been prepared in a professional manner. The documents appear to be directed towards proving the overall costs of operating the boarding house. I have attempted to understand the documents, but I have been unable to do so. I have not been able to work out how the figure of $60,000 was calculated. 8. The defendants have not established the amount of any damage that they have suffered as a result of Mr Bonanno's alleged breach of agreement by failing to participate equally with the defendants in the operation of the boarding house. 9. This brings me to what I understand was the real purpose of the defendants in alleging that Mr Bonanno was bound by this agreement and that he failed to perform it. The defendants' objective arises out of the terms of clause 3 of the deed, which obliged the defendants to transfer one third of their interest in the property to Mr Bonanno "within seven day (sic) upon the request of the transferee". Mr Bonanno did not make the request until 21 November 2014, when Mr Bonanno's solicitors wrote a letter to each of Mr Finamore and Ms Zhou giving formal notice that Mr Bonanno wished the one third share to be transferred to him by 1 December 2014. The defendants claimed that, even if the deed otherwise remained valid and enforceable, they were not obliged to comply with this notice because they had terminated the second agreement for breach by Mr Bonanno before the notice was given. The breach relied upon by the defendants was the failure by him to participate equally in the operation of the boarding house. 10. The defendants' argument proceeded on the basis that Mr Bonanno only had a conditional right to require a one third interest in the property to be transferred to him, and that he would lose that right if the second agreement was terminated before he gave the notice required by clause 3. The defendants did not argue that Mr Bonanno would lose his interest in the property if the defendants effectively terminated the second agreement for breach after Mr Bonanno had given the notice. 11. For the defendants to succeed in this claim, it would be necessary for them to prove that the second agreement included the term relied upon, that Mr Bonanno had breached that term in a manner that permitted termination of the second agreement by the defendants, and that the defendants had actually terminated the agreement before 21 November 2014. 12. I am not satisfied that the defendants have proved, as a matter of fact, that Mr Bonanno failed to pay his share of the outgoings as required by clause 4 of the deed. Ms Zhou gave some obscure evidence on this subject. As I understand it, Ms Zhou said that she initially paid to Mr Bonanno one third of all gross rents in the expectation that he would separately pay one third of all outgoings. Eventually, she realised that this arrangement was not working, and she commenced to pay Mr Bonanno net amounts. Although the issue is most unclear, as Ms Zhou in fact continued to collect the rents and manage the finances of the boarding house, it was probably an implied term of the deed that she would do the necessary calculations and pay Mr Bonanno his net share of the rents, or alternatively claim from him one third of any excess of outgoings over rents on a running basis. If there is any evidence capable of establishing that Mr Bonanno failed to pay amounts due under the deed, it was not explained to me in submissions. I am unable to make a finding that Mr Bonanno breached clause 4 of the deed, or that any such breach was sufficiently serious to justify termination of the deed by the defendants. 13. Even if the construction of clause 4 of the deed that I have preferred is wrong, it does not follow that any breach by Mr Bonanno entitled the defendants to terminate the second agreement in a manner that absolved them from the need to transfer a third interest in the property to Mr Bonanno. 14. Even if a breach of the second agreement by Mr Bonanno gave the defendants a right to terminate that agreement, the agreement could only be terminated by the defendants giving to Mr Bonanno notice of an act of termination. 15. Ms Zhou replied to Mr Bonanno's solicitors' 21 November 2014 letter requiring a transfer of the one third interest to Mr Bonanno by letter dated 27 November 2014 written by her personally. That letter formally purported to terminate the second agreement. 16. As this letter of termination was sent by Ms Zhou after Mr Bonanno had served the notice required by clause 3, it was, on the defendants' argument, too late to terminate Mr Bonanno's right to have the one third interest in the property transferred to him. 17. The defendants also alleged in the particulars to par 15 of their further amended cross claim that the defendants accepted the alleged repudiation of the second agreement in a manner that: "was communicated by ceasing to pay the Cross Defendant the equivalent of one-third of the rental income of the property and not making payments to the Cross Defendant described as "rent" or "rental" from 14 August 2013". 18. Without being given leave to do so, the defendants broadened the basis of their claim that they had terminated the second agreement before 21 November 2014 in par 148 of their final written submissions. The defendants submitted that their termination of the second agreement was communicated to Mr Bonanno in four ways. 19. The first was that the defendants ceased paying Mr Bonanno a share of the rental income, but instead paid him a set amount. Secondly, the defendants said they ceased sending Mr Bonanno spreadsheets showing calculations of rent and expenses after 29 June 2013. Thirdly, they relied on an email sent by Ms Zhou to Mr Bonanno on 3 July 2013 that said (Exhibit D2): Another thing I have always wantedto (sic) say to you is: I have never ever expected to beyour (sic) friend; I do not and will not expect anything from you at all anymore, nobusiness (sic), no financial, nor anything else. However, it is not necessary tat allto (sic) be enemy either. I have always appreciated your helpwhen (sic) I had hard time. I always remember this. 1. Finally, the defendants relied on the fact that the description on the electronic funds transfers sent to Mr Bonanno changed from "pay Sal rent" to "pay Sal interest" from about 6 February 2014. 2. I do not accept that the first and second acts relied upon by the defendants could constitute a valid communication of the termination of the second agreement to Mr Bonanno. The acts are likely to have been breaches of the second agreement by the defendants and those breaches could not be effective communications of termination. 3. There was no evidence that Mr Finamore gave his authority to Ms Zhou to send her 3 July 2013 email to Mr Bonanno, and, as the defendants' interest in the second agreement was joint, neither of them could terminate that agreement without the authority of the other. 4. In any event, I do not consider that the email sufficiently and clearly informed Mr Bonanno that the defendants had terminated the second agreement. 5. As to the defendants' fourth argument which depended upon a change in the defendants' practice from 6 February 2014,a change in the description of the payments made to Mr Bonanno from "rent" to "interest" on the description in an electronic funds transfer could not be an effective termination of the second agreement. In any event, the change was not proved by Court Book 155, which was the document relied upon by the defendants. 6. The result is that the defendants' claim that they terminated the second agreement for breach by Mr Bonanno before 21 November 2014 fails as a matter of law and fact. Claim for an order setting aside the second agreement 1. The defendants maintain a claim that the Court should order that the second agreement be set aside on the ground that it was procured by Mr Bonanno taking unconscientious advantage of special disadvantages suffered by each of the defendants. 2. As the defendants sought an order that the second agreement be set aside in its entirety, they recognised that they would have to restore the status quo to before the second agreement was made. The defendants recognised this need in prayer 3 of the further amended cross claim, wherein they invited the Court to make an order that they pay to Mr Bonanno $57,360.75, being the $130,000 paid to them by Mr Bonanno, less the $72,639.25 that they asserted they had paid to Mr Bonanno from the proceeds of the operation of the boarding house. 3. Although I accept that both defendants suffered from a number of disadvantages at the time that they entered into the second agreement, I am not satisfied that Mr Bonanno took unconscientious advantage of the defendants in a way that would justify the making of an order setting aside the second agreement in its entirety. 4. I have set out the particulars of the special disadvantages claimed by the defendants in par 7C of the further amended cross claim above at [55]. It will be convenient to deal with the circumstances of Ms Zhou first. I accept that Ms Zhou was in considerable financial distress at the time of the second agreement. The circumstances in which the debts owed by the defendants to NAB and the other creditors were not fully established. However, as recited in the first agreement, it was thought that the property was worth $750,000 and the total indebtedness of the defendants was $700,000. Evidence establishes that the property was run down and required repairs and improvements. Ms Zhou did not have the skills or experience to complete the routine repairs and maintenance required at the property. 5. I also accept that the responsibilities of running and maintaining the boarding house were onerous and time-consuming. 6. Although the evidence does not permit precise findings to be made, it is probable that the boarding house was only a marginally viable commercial operation that was not capable of servicing the defendants' debts. The defendants did not have sufficient capital to conduct the boarding house business on a profitable basis. 7. At the time Ms Zhou entered into the first agreement with Mr Bonanno, she needed the $130,000 that was to be advanced under that agreement to catch up with existing overdue debt payments. When Mr Bonanno only advanced her $30,000, she was in the position where she owed that money to him, but the amount of the loan was not sufficient to enable her to catch up with her other overdue obligations. That led to NAB serving the defendants with a formal default notice on 18 May 2010, that required payment of $94,124.71 in relation to two business-related loans. It appears that the only available source of additional capital to the defendants was Mr Bonanno. 8. I also accept that Ms Zhou is not a native English speaker and has serious difficulty in communicating clearly in English. However, from hearing her evidence in cross-examination, I consider that she is an intelligent and reasonably astute businesswoman, at least at the level necessary for the operation of a boarding house business. Ms Zhou may find it difficult to communicate, but I am satisfied that she would have persevered and made her position reasonably clear to Mr Bonanno. 9. It must be remembered that the first and second agreements were prepared by Chinese speaking solicitors, who prepared the agreements in conference with Mr Bonanno and Ms Zhou. 10. On the other hand, the terms of the second agreement as made between Mr Bonanno and Ms Zhou were apparently explained to Mr Ng at a single conference. Although Ms Zhou had the opportunity to question Mr Ng in Chinese about the meaning and effect of the written wording of the draft deed, given that Mr Ng has said that he was not formally acting for her, there is a real possibility that Ms Zhou misunderstood the effect of the deed. 11. I have recorded above at [147] Ms Zhou's evidence of a conversation with Mr Ng that led her to understand that the draft deed obliged Mr Bonanno to participate actively in the operation of the boarding house. Although I do not accept that evidence as being sufficient proof that a conversation occurred in the terms related by Ms Zhou, I do accept that the circumstances created a substantial risk of misunderstanding by Ms Zhou, and the possibility that she did misunderstand is real because it is not easy to see why the defendants would have agreed to transfer one third of the title to the property to Mr Bonanno, if he was not to be required to participate equally with them in the boarding house business. 12. Ms Zhou also claimed that she was under a disadvantage for cultural reasons because, being a Chinese Australian, she believed that she had to accept whatever terms were imposed upon her as borrower by the lender. Although I accept that the Court must be sensitive to cultural limitations on the conduct of parties to proceedings before the Court, I do not accept that the defendants have established that Ms Zhou was under a serious disadvantage on this basis. That is because the defendants' argument depended upon the bare assertion of Ms Zhou in her evidence and was not independently corroborated. It was not proved to my satisfaction that Chinese people act under the claimed disadvantage in their dealings with creditors. 13. The evidence also supports a conclusion that, in the general period in which the first and second agreements were made, the long-term de facto relationship between the defendants was under severe strain. The evidence did not establish in any precise way what the true difficulty in the relationship was. It does appear that there was, in late 2010, some level of reconciliation, and there was no evidence that Ms Zhou instituted de facto relationship proceedings for any property settlement, as was contemplated by clause 4(d) of the first agreement. It is probable that the existence of the breakdown in the de facto relationship between the defendants had the effect of placing a greater burden on Ms Zhou to operate the boarding house business without adequate assistance. 14. That additional burden probably made Ms Zhou more susceptible to being attracted by the prospect that Mr Bonanno may not only have been able to inject additional capital into the boarding house business, but he may have been able to some degree to replace the efforts of Mr Finamore in carrying out physical repair and maintenance work at the property. 15. I also accept that, at the time the second agreement was entered into, Mr Finamore suffered from a number of significant disadvantages. He was under the same financial stress as was Ms Zhou as a joint debtor to NAB and as joint owner of the property, and his plastic recycling business was failing. 16. Mr Finamore was also under stress because of the difficulties in the de facto relationship with Ms Zhou. 17. I also accept that Mr Finamore suffered stress and emotional anxiety caused by the diagnosis and surgical removal of a large tumour in his leg, which proved benign but caused him great concern as to whether he was suffering from cancer. Mr Finamore endured a difficult post-surgery recovery. 18. Having observed Mr Finamore give evidence in cross-examination, I accept that Mr Finamore suffers from a very severe stutter that impedes his ability to communicate orally, and that he is below average in reading and comprehension skills. 19. Finally, it is significant that Mr Finamore was not present at the conference attended by Mr Bonanno and Ms Zhou with the solicitor, Mr Ng, at which the terms of the second agreement were conveyed to Mr Ng for the purpose of his preparing the deed, so that it could be signed by Mr Finamore and Ms Zhou and witnessed by Mr Ng. Mr Finamore attended Mr Ng's office separately. I accept Mr Finamore's evidence that, even though Mr Ng may have explained the terms of the second agreement to him, Mr Finamore did not really understand. Mr Finamore believed that he had to sign the deed because Mr Bonanno had already made loans relevant to the operation of the boarding house. 20. However, in considering the extent to which the various disadvantages suffered by the defendants made them susceptible to unconscientious conduct on the part of Mr Bonanno, it is necessary also to give proper weight to the situation of Mr Bonanno. 21. First, the evidence does not justify a finding that Mr Bonanno was in a financial position that gave him a natural opportunity to take unconscientious advantage of the defendants. The defendants gave evidence that Mr Bonanno operated a business supplying and repairing towbars for vehicles. Ms Zhou gave evidence that Mr Bonanno operated a boarding house business himself. She said that Mr Bonanno told her that he was engaged in family law proceedings with his ex-wife, and that he had retained $100,000 "under the mattress" that he was in a position to invest. Although Mr Bonanno denied the truth of this evidence, it remains the fact that there was no evidence that Mr Bonanno had sufficient wealth to give him overwhelming bargaining power in his dealings with the defendants. 22. It was Ms Zhou's evidence that she had initiated the proposal that Mr Bonanno make a loan to the defendants to enable them to pay existing debts for which they were already in default. Ms Zhou negotiated the terms of both agreements with Mr Bonanno and did not suggest that she was not in a position to reject terms that she thought were not in the interests of the defendants. 23. Ms Zhou even said, in par 71 of her 22 August 2016 affidavit (set out above at [140]), that she suggested to Mr Bonanno that, if he made the $130,000 loan, "you still get another one third". 24. It should also be remembered that Mr Bonanno had already advanced Ms Zhou $83,597.46 under the first agreement, and that advance was unsecured. Mr Bonanno was not in fact in a powerful bargaining position when he entered into the deed. 25. The defendants relied primarily on the decision of the High Court in Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1; [2019] HCA 18 (Kobelt) in support of their claim for an order setting aside the second agreement in its entirety. That case was concerned with the proper interpretation and application of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth), which raised considerations that are not entirely analogous to the case raised by the defendants, which depends upon the application of general equitable principles. I consider that the principles that must be applied are as stated by the learned editors of Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (5th ed, 2015, LexisNexis Butterworths) at [16–010] (footnotes omitted): The jurisdiction is a branch of the general equitable jurisdiction in fraud. It is raised 'whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands'… It will be seen that the essence of these situations is (a) parties who meet on unequal terms, (b) the stronger party takes advantage of this, (c) to obtain a beneficial bargain. When this is shown by the weaker party, the onus will pass to the stronger party to show that the conduct was fair, just and reasonable… Mason J in Amadio's case was at pains to emphasise that the mere circumstance that there was some difference in the bargaining power of the parties was not enough; 'the disabling condition or circumstance [must be] one which seriously affects the ability of the innocent party to make a judgment as to his own best interests'… Those decisions also confirmed that what was required was a precise examination of all of the salient facts, rather than seeking to place the case into any particular category… 1. It is not necessary for the purpose of determining this aspect of the defendants' claim to analyse in detail the observations made by the Justices in Kobelt concerning the quality of conduct necessary for it to be characterised as unconscionable, or to examine the possible differences in meaning of that concept in equity or in particular statutory proscriptions. It will be sufficient to note the reference by Kiefel CJ and Bell J at [15] to the requirement that "the other party must also unconscientiously take advantage of that special disadvantage" with this conduct having "variously been described as requiring victimisation, unconscientious conduct or exploitation". At [91] and [92], Gageler J regretted having previously suggested that 'moral obloquy' was required, but his Honour added: What I meant to convey by the reference was that conduct proscribed by the section as unconscionable is conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience. To that view of the statutory standard I adhere. 1. Referring to the ordinary meaning of "unconscionable", Keane J said at [118]: "… In its ordinary meaning, the term 'unconscionable' requires an element of exploitation. The term imports the 'high level of moral obloquy' associated with the victimisation of the vulnerable…" 2. Nettle and Gordon JJ made the following observations concerning the equitable doctrine of unconscionable conduct (footnotes omitted): 145 The equitable doctrine of unconscionable conduct "looks to the conduct of the stronger party in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so". The "abiding rationale" of the doctrine is to "ensure that it is fair, just and reasonable for the stronger party to retain the benefit of the impugned transaction".. 146 Relief under the doctrine of unconscionable conduct requires that the innocent party was subject to a special disadvantage in dealing with the other party when the transaction was entered into, "which seriously affect[ed] the ability of the innocent party to make a judgment as to [their] own best interests"; and that the other party unconscientiously took advantage of that special disadvantage. The existence of those circumstances at the time of the transaction is what "affect[s] the conscience" of the stronger party and renders the enforcement of the transaction, or the taking of the benefit, "unconscientious" or "unconscionable". … 148 A party will have unconscientiously taken advantage of an innocent party when the former knew or ought to have known of the existence and effect of the special disadvantage; or, put another way, when the special disadvantage was sufficiently evident at the time of the transaction to make it unconscientious to procure or accept the assent of the innocent party. 149 Unconscionable conduct does not require a finding of dishonesty. However, it is not merely concerned with what is "fair" or "just". Unconscionable conduct can include the passive acceptance of a benefit in unconscionable circumstances. And unconscionable conduct can be found even where the innocent party is a willing participant, the question is how that willingness or intention to participate was produced. 1. At [282], Edelman J said in respect of the equitable doctrine of unconscionable conduct: "…Moreover, there had to be a 'taking of advantage' of that special disadvantage. Although that taking of advantage did not, and does not, require that the victim suffer any 'loss or detriment', it required much more than mere unreasonableness, being variously described in Australia as requiring 'victimisation' or 'exploitation'… With some exceptions in application, these various epithets established a high bar for the vitiation of transactions in twentieth century equity on the ground of unconscionable conduct." 2. Viewed in the light of this guidance by the members of the High Court, I do not regard the conduct of Mr Bonanno in entering into the deed as being sufficiently unconscientious to justify the Court in making an order that the deed in its entirety be set aside. People who may suffer from unusual disadvantages are entitled to engage in commerce. Cases will arise, such as the present, where all parties labour under some level of disadvantage, and the Court should not be too ready to put their contracts at risk. The Court must be astute to discern the level of unconscientious conduct by one party that the authorities require, before it makes an order that avoids the parties' bargain and requires them to reinstate the status quo. In my judgment, the defendants have not established that Mr Bonanno's conduct in entering into the deed demonstrates a level of victimisation or exploitation that would justify the order sought by the defendants. Essential nature of transactions recorded in the deed 1. I will now examine the terms of the deed that are relevant to the question of whether it was in substance a loan supported by security over the property, or whether it was in reality an agreement for an absolute transfer of a one third interest in the ownership of the property to Mr Bonanno. 2. This question must be answered having regard to the terms of the deed, all of the circumstances in which the deed was entered into, and the relevant communications between the parties, as the answer depends upon the real intention of the parties: see Kreglinger and Gurfinkel. 3. Recital 3 of the deed refers to a request by the defendants to "advance a sum of $130,000". However, the defendants and Mr Bonanno are referred to as the "transferors" and the "transferee" respectively. Recital 4 refers to an agreement by the defendants "to transfer one third" of the property to Mr Bonanno. 4. Clauses 2 and 3 of the deed clearly speak in terms of one third of the interest in the property being transferred to Mr Bonanno, in consideration of his paying the $130,000. 5. Under clause 4, as I have construed it above, Mr Bonanno was responsible for one third of all outgoings and he was entitled to receive one third of the income from the rental of the property. That entitlement does not equate to a right to receive interest on an advance in the conventional sense. While the term fell short of obliging Mr Bonanno to engage equally with the defendants in the operation of the boarding house business, his entitlement was to receive one third of the net profit from the boarding house business, and exposed him to the risk of bearing one third of any losses. 6. Clause 7 entitles Mr Bonanno, in the event that the property is sold, to be repaid the $130,000 "plus one third of the remaining net proceeds of sale". Thus, if the property was sold, Mr Bonanno would be entitled to the return in full of the $130,000 that he had advanced, plus one third of the net proceeds of sale of the property. The first of these entitlements would result in a repayment of the advance. 7. Clause 6 obliged the defendants to pay all NAB mortgage repayments, while the definition of "remaining net proceeds of sale" in clause 7 required the "payment of mortgage" to be deducted from the sale price. These provisions appear to have the effect that the defendants were required to pay the recurring mortgage instalments in accordance with the mortgage agreement, but the principal amount of the mortgage debt had to be deducted from the sale price, and the determination of the one third share to which Mr Bonanno was entitled could only be made after the principal had been deducted from the price. 8. If, in breach of clause 6, the defendants failed to meet all mortgage repayments, so that the secured debt increased between the date of the deed and the date of the sale of the property, then the defendants may be liable to bear that increase because of their breach of clause 6 of the deed. 9. That analysis is consistent with the formulation of prayers 5 and 7 of the statement of claim. It is also consistent with the submission made by Mr Bonanno's counsel in final oral address at T 256.38-T 257.3. 10. Taken at face value, the deed is an amalgam of a loan of $130,000 secured by the option granted to Mr Bonanno to call for a transfer of a one third interest in the property, plus a collateral right to receive one third of the net price of the property on sale. I accept that there is scope for argument as to the real effect of the deed, which does not appear to have been drafted in a way that is intended to conform to conventional property law principles. 11. However, the deed is silent as to a number of significant practical matters, that were likely to be important to the operation of the deed. The deed did not expressly deal with the circumstances in which Mr Bonanno could trigger his right to receive the money to which he was entitled under the deed. Furthermore, although the $130,000 was described as an advance, the deed did not deal with the circumstances in which the defendants could elect to repay the advance, other than in the case where the property was sold. 12. As to the first of these issues, clause 7 is activated "in the event that the property is sold". That may happen if the property was to be sold by NAB in the exercise of its powers as mortgagee. The only other mechanism that appears to be available to compel a sale is an application under s 66G of the Conveyancing Act for an order for the appointment of trustees for the sale of the property. That application would be available to each party if the deed had the effect of transferring a one third equitable interest in the property to Mr Bonanno. That is, in effect, the application that Mr Bonanno is making in the present case. 13. If the deed has the effect that Mr Bonanno has that right, he could exercise it at any time after the deed was made. That does not appear to be consistent with the defendants' objective of borrowing the $130,000 from Mr Bonanno, which was to prolong their ability to retain ownership of the property and to continue to operate the boarding house. 14. As to the second issue, the better view is that Mr Bonanno was entitled to call for repayment on demand. Otherwise there would be an indefinite loan. It would follow that the defendants had an implied right to repay the advance at any time: see Fisher & Lightwood's Law of Mortgage (3rd ed. Aust, 2013, LexisNexis Butterworths) at [32.6]. There is a question of whether, if repayment of the advance occurred before the option had been exercised, equity would treat the option as being a collateral advantage to Mr Bonanno that was an invalid clog or fetter on the equity of redemption. Further, if the one third interest in the property had already been transferred to Mr Bonanno before repayment, the question would be whether the defendants were entitled to redeem by requiring Mr Bonanno to re-transfer the interest to them. There is doubt about how these questions should be answered because the draughtsman did not appear to advert to the applicable principles of the law of mortgages. 15. Although the deed speaks in clause 2 of the $130,000 being the consideration for the transfer of the one third interest in the property, the better view is that the effect of the right being given to Mr Bonanno by clause 7 to take $130,000 from the proceeds of sale is that Mr Bonanno was entitled to be repaid the amount he advanced. That is a strong reason for treating the deed as, at least in part, creating a mortgage. 16. Further, the fact that clause 3 only required that the transfer take place within seven days of request provides some support for the conclusion that it was not the intention of the deed that Mr Bonanno would simply become an equal one third owner of the fee simple. It seems to be implicit in the terms of the deed that Mr Bonanno was not intended to be free to dispose of his one third interest in the property when he chose to do so. The only way he could realise his interest was upon sale of the property. Only then would Mr Bonanno become entitled to receive one third of the surplus after repayment of NAB, repayment of his own $130,000 and the costs of the transaction. 17. Although the terms of the deed appear idiosyncratic, I am satisfied that, in substance, the deed required Mr Bonanno to advance to the defendants the balance of the $130,000 that had not been paid under the first agreement, and then provided a security to Mr Bonanno in the nature of an equitable charge in respect of the repayment of the $130,000, plus a collateral advantage in the form of one third of the net proceeds of sale of the property. 18. This conclusion is supported by the fact that the deed places no obligation upon Mr Bonanno to provide any consideration for the transfer of the one third interest in the property that might be treated as the price for the transfer. The only consideration provided by Mr Bonanno was the making of the advance, for which he was entitled to repayment in full from the proceeds of sale of the property. I therefore conclude that the obligation to transfer is in substance collateral to the advance and the charge created by the deed. 19. This conclusion is also supported by Mr Bonanno's acceptance of par 71 of Ms Zhou's 22 August 2016 affidavit. Ms Zhou started by referring to the fact that Mr Bonanno had not paid her all of the money required by the first agreement, and that she could not "find any other finance". Mr Bonanno expressed concern that he would not be able to get his money out if the bank sold the property. The transaction suggested by Ms Zhou was intended to make Mr Bonanno "feel safe". The objective was to enable Mr Bonanno to "get all your $130,000 out first". This evidence is consistent with Mr Bonanno wanting security. It is supported by the evidence given by Ms Zhou in par 74 that Mr Bonanno referred to his making "a loan". 20. Mr Bonanno submitted, at page 27 of his final written reply submissions, that the second agreement did not create a mortgage or security: "[b]ut is in principle a loan document with an added facility akin to an option which may or may not be exercised." He submitted at page 28 that: "The entitlement to request the 1/3 interest is not predicated on any failure by the Defendants to perform obligations, but is effectively nothing more than an option exercisable by the Plaintiff to request it, which may have never been exercised". Mr Bonanno has therefore accepted that the deed involved a loan. It is true that the deed did not create a charge in the conventional sense, but it did create a collateral entitlement. If that entitlement was in the nature of an option to acquire an interest in the property, it could be exercised for no additional consideration other than the making of the advance. Validity of the transfer provisions in the deed 1. The next issue to be decided is the validity of the terms of the deed that required the defendants to transfer a one third interest in the property to Mr Bonanno. Those terms are clause 2(a), clause 3, the words "plus one third of the remaining net proceeds of sale" in clause 7(i) and the whole of clause 7(ii) (the transfer terms). 2. By way of a separate defence to their claim that the deed should be set aside ab initio because it was procured by Mr Bonanno taking unconscionable advantage of special disabilities to which the defendants were subject, the defendants also relied upon an argument that the transfer terms were a clog on their equity of redemption under the deed. As I have noted above, the thrust of the defendants' submission may not be entirely clear, as they submitted that the transfer terms constituted an unconscientious dealing, and as such a clog on the defendants' equity of redemption. The defendants' citation in their final written submissions of the decision of Lindsay J in Re Funds in Court; Application of Mango Credit Pty Ltd [2016] NSWSC 199 (Mango Credit) at [111] appears to confirm that the defendants' case is that the transfer terms constitute an invalid clog on the equity of redemption or are otherwise unconscionable. 3. Under traditional equitable principles, if a collateral advantage in a mortgage clogs the equity of redemption it will be invalid, whether or not its creation was unconscionable. Under a related principle, a collateral advantage that is unconscionable is invalid, even if it does not clog the equity of redemption. It is not entirely clear what the basis of the defendants' claim was intended to be, as the submissions of both parties on this issue were not elaborate. 4. The issue arises because I have found that the deed was in substance a mortgage and concurrently granted a collateral advantage to Mr Bonanno of an option to acquire a one third interest in the property and the net proceeds of sale of the property, after repayment of the advance of $130,000 that was made by Mr Bonanno to the defendants. 5. I will refer to the equitable principle that prohibited clogs on a mortgagor's equity of redemption in its original form as the "old doctrine", to adopt a phrase coined by Lord Lindley in Samuel v Jarrah Timber and Wood Paving Corporation Ltd [1904] AC 323 (Samuel) at 329. By reason of changes in circumstances over the years, the strictures of the old doctrine had been relaxed to a degree, and, until the advent of a recent judicial controversy, the modern version of the old doctrine was generally taken to be as stated by Lord Parker of Waddington in Kreglinger at 61 as follows: … [T]here is now no rule in equity which precludes a mortgagee, whether the mortgage be made upon the occasion of a loan or otherwise, from stipulating for any collateral advantage, provided such collateral advantage is not either (1.) unfair and unconscionable, or (2.) in the nature of a penalty clogging the equity of redemption, or (3.) inconsistent with or repugnant to the contractual and equitable right to redeem. 1. I will refer to this principle as Lord Parker's principle and the individual propositions as Propositions (1) to (3). 2. Lord Parker's principle governed the circumstances in which equity would accept the validity and permit enforcement of a collateral advantage in a mortgage. Under the old doctrine, a collateral advantage was any right given to the mortgagee under the terms of the mortgage that conferred any benefit over and above the right of the mortgagee to be repaid the principal, interest and costs under the loan. The old doctrine was developed by Equity in part to augment the usury laws that were in force in the United Kingdom to place limits on the rates of interest that lenders could exact from borrowers. 3. Lord Parker's principle is concerned with the validity of collateral advantages and not the validity of the entire loan transaction. The principle contemplates that the loan transaction may remain in effect, but a particular collateral advantage granted by the mortgage instrument may be declared invalid. Consequently, the possibility arises that a claim to set aside the whole of a loan transaction may fail, but the Court may declare that a particular collateral advantage granted to the mortgagee is invalid. 4. It is necessary to consider the judicial controversy to which reference has been made, as the resolution of the controversy may lead to a further relaxation of the old doctrine that would have the effect that the transfer terms in this case will not necessarily be invalid, but will only be so if the circumstances in which they were included in the deed involved unconscionable conduct on the part of Mr Bonanno. 5. The controversy started with observations made by Young J (as his Honour then was) in Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194 (Westfield). It will be convenient to call the adjustment to Lord Parker's principle proposed by Young J the Westfield principle. 6. Westfield was a case that involved agreements between major commercial enterprises that were negotiated at arm's length with proper legal representation. The plaintiff sued to enforce options granted by the defendants to purchase certain parcels of land. As part of the one overall transaction, but by separate agreement made on the same day as the options were granted, the plaintiff agreed to lend $11 million to the defendants on the security of mortgages over the land, with the principal to be repaid in full in ten years, or in full upon receipt from the plaintiff of the purchase price consequent upon the exercise of the options granted to the plaintiff to acquire the relevant properties within the ten year period. 7. If this transaction was subject to Lord Parker's principle, then the options would have been invalid if they were granted as collateral advantages to the mortgages. 8. Young J (at 197) noted Lord Parker's principle, but in applying a rule laid down in Samuel and Kreglinger and other authorities to the effect that Lord Parker's principle only applies to transactions that are in substance mortgages, held that the transaction was not a mortgage and that the grant of the options was not collateral to the grant of a mortgage. 9. Although not necessary to his Honour's decision, he considered the position that would have obtained if he had found that the transaction was in substance a mortgage. He concluded, at 202-3: There does not appear to be any commercial reason why, in 1992, the court should invalidate any transaction merely because a mortgagee obtains a collateral advantage or seeks to purchase a mortgage property. Quite obviously equity must intervene if there is unconscionable conduct. Again equity must intervene in the classic case where it can see that a necessitous borrower is not, truly speaking, a free borrower. In my view, in 1992, the rule only applies where the mortgagee obtains a collateral advantage which in all the circumstances is either unfair or unconscionable. It may be that the court presumes from the mere fact of a collateral advantage that the transaction is unconscionable unless there is evidence to the contrary, but the principle does not extend to invalidate automatically cases in which the mortgagee has obtained the right to purchase the whole or part of the mortgaged property in certain circumstances or has obtained a collateral advantage where the circumstances show that there has been no unfairness or unconscionable conduct. I state this because the case will probably proceed further up the judicial system. Had it been necessary to do so I would have held that this is the principle that applies in New South Wales at the present day in a court of equity. However, for reasons I have already given, the case on this point can be decided in favour of the plaintiff without entering into this area of controversy. 1. In reaching this conclusion concerning the state of the law at the time, his Honour explained, at 201-2, why he was of the view that there were no relevant decisions of the High Court or any other authority that bound him to accept that Lord Parker's principle accurately stated the current law. 2. Taken literally, Young J's observation would remove Propositions (2) and (3) from Lord Parker's principle, with the result that Proposition (1), whereby collateral advantages would only be invalid if they were unfair and unconscionable, would be the sole determinant of the validity of collateral advantages to a mortgage. His Honour specifically excluded agreements or options that would give the mortgagee a right to acquire the mortgage property from invalidity under Lord Parker's principle, unless the circumstances engaged Proposition (1). 3. Although not explicit, Young J appears to have accepted that if Proposition (1) applied, the collateral advantage, including an agreement for sale or option, could be invalid even if the balance of the transaction was not liable to be set aside. 4. In Thomas v Silvia; Re Modular Design Group Pty Ltd v CDG (Canberra) Pty Ltd (1994) 35 NSWLR 96, Santow J (as his Honour then was) referred to the extract from Westfield that is set out above, after having said (at 103): However, in contemporary jurisprudence the doctrine of clogging has been interpreted in a less formalistic, more substantive manner. This has been consonant with Equity's wider modern remedial jurisdiction, based on unconscionability. Thus equity will not intervene merely by reason of the mortgagee obtaining a collateral advantage. But it will intervene if there is unconscionable conduct, the more readily found in the case of a necessitous borrower. 1. In the Full Court of the Supreme Court of South Australia, in Epic Feast Pty Ltd v Mawson KLM Holdings Pty Ltd (in liq) (1998) 71 SASR 161, Debelle J (with the agreement of Matheson and Prior JJ) said: Other relevant decisions are noted by Young J in Westfield Holdings Ltd v Australian Capital Television Pty Ltd (1992) 32 NSWLR 194. These decisions show that a court will not simply apply the equitable principles prohibiting any attempt to clog or fetter the right of redemption and will not interfere to set aside a transaction merely because the mortgagee has an option to purchase the mortgaged property. Instead, they will examine all the relevant circumstances. They will certainly interfere where a collateral advantage has been obtained in circumstances which are unconscionable: see the discussion of Young J in Westfield Holdings (supra) at 197-203. 1. Gzell J considered these decisions in Wily v Endeavour Health Care Services Pty Ltd (No 5) [2003] NSWSC 616 (Wily) and concluded at [100]: "While the United Kingdom may be obliged to maintain the doctrine, there is no reason why, on the state of the authorities in Australia, the courts should not rid us of this vestigial rule. In my view the approach taken by Young J in Westfield should be endorsed as the law in this State." His Honour expressed this view after having conducted, at [84]-[96], a review of relevant prior authorities and concluded that a trial judge of this Court was not precluded by the doctrine of precedent from finding that the law was as expressed in Westfield. His Honour's decision was upheld on appeal in Wily v Endeavour Health Care Services Pty Ltd [2003] NSWCA 321 on the ground that his Honour was correct in deciding that the transaction was not in substance a mortgage, so that what I have called Lord Parker's principle was not relevant. Meagher JA (with whom Santow JA and Davies AJA agreed) held at [14] that "it is essential first to categorise the transaction as being either one of mortgage or one of option," and, having decided that the transaction was an option, that "any attempt to discover a clog on the equity of redemption in the present circumstances must fail": see [17]. The Court of Appeal did not comment adversely on the observations made by Gzell J approving the conclusion reached by Young J in Westfield. 2. In Lift Capital Partners Pty Ltd (In Liq) v Merrill Lynch International (2019) 73 NSWLR 404; [2009] NSWSC 7 (Lift Capital), Barrett J (as his Honour then was) considered the relevant authorities in detail and held that it was now appropriate for the courts to follow the decision of Young J in Westfield. Barrett J said: [119] It was, in my view, correct for Young J to proceed, in Westfield Holdings, on the footing that no decision of the High Court or Court of Appeal had directly adopted and applied, as part of its ratio decidendi, the unconditional and unqualified approaches to clogs on the equity of redemption favoured by the House of Lords in the early 20th century, or, more particularly, Pts (2) and (3) of Lord Parker's statement in Kreglinger in which unconscionability plays no part. There was no authority binding on his Honour that precluded his adopting an approach that regarded unconscionability as an essential element of the imposition against which equity will relieve. Nor, I think, did such discussion of the matter as there had been in the High Court judgments qualify as "seriously considered dicta of a majority of" the High Court, to adopt the description made relevant by Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [134]. … [124] The eighteenth century cases exhibit a concern, based on unconscionability, about the power exerted by a lender — particularly a "crafty" lender — over the "distressed" borrower who is "necessitous" and not "free"; and about the vulnerability of such a borrower to submit to any term the lender proposes. There are clear overtones of the need to protect the economically weak from the economically powerful, so that, while rules of more general application in due course developed from the early cases, it would be consistent with the originating principles to limit those rules by reference to the motivating considerations. As the Court of Appeal of Singapore said in Citicorp Investment Bank (Singapore) Ltd v Wee Ah Kee [1997] 2 SLR 759: The doctrine was therefore developed to protect such necessitous borrowers from oppressive agreements. [125] In G & C Kreglinger, Viscount Haldane LC expressed the view (at 43) that judges "should proceed cautiously" and "bear in mind the real reasons which have led Courts of Equity to insist on the free right to redeem and the limits within which the purpose of the rule ought to confine its scope". This followed a discussion of the development of equitable jurisdiction to relieve against forfeiture upon failure in due payment by a mortgagor, so that the mortgagee should not then have both the land and the debt. His Lordship then said (at 36), in a passage reflecting the reasoning in the eighteenth cases I have quoted: It was, in ordinary cases, only where there was conduct which the Court of Chancery regarded as unconscientious that it interfered with freedom of contract. The lending of money, on mortgage or otherwise, was looked on with suspicion, and the Court was on the alert to discover want of conscience in the terms imposed by lenders. [Barrett J then discussed decisions of the High Court that explained the significance of unconscientious and unconscionable conduct in equity in respect of the denial of, the enforcement of or the setting aside of transactions]. [130] Unconscionability does not roam at large. In his article "Giving Content to General Concepts" (2005) 29 Melbourne University Law Review 218, J Dietrich said: The notion of unconscionability only comes into play (in equity, at least) by reference to the specific requirements and operative criteria of individual doctrines informed by that notion. Unconscionability, then, has developed 'in its many guises'. The concept, therefore, only comes into play when the operative criteria of the specific doctrine have 'filtered out' most fact situations. In other words, the question of whether someone's conduct is unconscionable is asked only after certain specific requirements have been met. (Citations omitted) [131] In a case of the present kind, therefore, the first step is to discover whether the particular contract is one attracting the attention of equity at a prima facie level by reference to the established suspicion or sensitivity about fettering a mortgagor's right to redeem. If it is, a further question must be addressed: is it necessary, in order to prevent unconscientious behaviour, to preclude reliance by the mortgagee on that contract? [Barrett J then discussed the writings of academic authors concerning the significance of unconscientious or unconscionable conduct in the context of the treatment of clogs on the equity of redemption]. [134] Unconscionability has been recognised elsewhere in the common law world as the essential basis of equity's willingness to strike down clogs on the equity of redemption. In Ganga Dhar v Shankar Lal (1958) 45 AIR 770 at 774, the Supreme Court of India said, after quoting from the speech of Viscount Haldane LC in Kreglinger: The reason then justifying the Court's power to relieve a mortgagor from the effects of his bargain is its want of conscience. Putting it in more familiar language the Court's jurisdiction to relieve a mortgagor from his bargain depends on whether it was obtained by taking advantage of any difficulty or embarrassment that he might have been in when he borrowed the moneys on the mortgage. Was the mortgagor oppressed? Was he imposed upon? If he was then he may be entitled to relief. [135] That approach was confirmed by the Supreme Court of India in both Pomal Kanji Govindji v Vrajlal Karsandas Purohit (1989) 76 AIR 436 and Shrivdev Singh v Sucha Singh [2000] AIR (1st Supp) 1935. [136] I accept that questions about fettering the equity of redemption should be approached generally in the manner indicated by Young J in the Westfield Holdings case, approved by other judges of this court at first instance in Re Modular Design Group Pty Ltd and Wily v Endeavour Healthcare Services Pty Ltd (No 5) and noted without adverse comment by the Full Court of the Supreme Court of South Australia in Epic Feast Pty Ltd v Mawson KLM Holdings Pty Ltd. It cannot be said today that a contractual provision freely assented to by a mortgagor is void or unenforceable just because it allows the mortgagee to acquire the mortgaged property or to resist that mortgagor's attempt to redeem. The susceptibility of such a provision to equitable intervention is, however, well established. In a given case, equity will prevent reliance on the provision by the mortgagee if that reliance is unconscientious because of some factor associated with the formation of the contract or something distinct from mere changed circumstances or supervening event operative at the time of reliance. [137] In determining whether reliance is unconscientious, regard must be had to the nature of the bargain, the circumstances in which it was made and the circumstances in which the mortgagee seeks to assert the mortgagor's promise to defeat the right to redeem. 1. In Sam Management Services (Aust) Pty Ltd v Bank of Western Australia [2009] NSWCA 320, the Court of Appeal (Hodgson and Young JJA and Sackville AJA agreeing) held that a refusal by the bank to allow the plaintiff to partially refinance its loan facilities, in circumstances where the bank required the plaintiff's expired loan facilities to be refinanced, but instead required a complete refinancing, was not a clog on the equity of redemption. Without elaboration, Hodgson JA said at [60]: [60] Such a submission could possibly succeed only if it could be found to be unconscionable or unconscientious for the Bank to refuse release of some of its security in return for payment of the expired facilities, thereby giving SMS the possibility of redemption of its security only by repaying the whole of the facility. In my opinion, in the light of the previous discussion, no error is shown in the primary judge's view that the Bank's requirements were not unconscionable or unconscientious; and in those circumstances the claim based on an alleged clog on the equity of redemption could not succeed. 1. In Mango Credit at [102]-[105], Lindsay J referred with apparent approval to this line of authority, and to Barrett J in Lift Capital having "published comprehensive reasons for limiting the operation of the rule to cases in which a finding of unconscionability can be made". However, his Honour observed at [106]: "There remains room for debate about the rationale, nature and scope of any rule governing a mortgagor's right to redeem mortgaged property and principles governing equitable intervention to vindicate that right…" 2. In none of the decisions considered above were the observations made concerning the current application of Lord Parker's principle necessary steps in the reasoning that led to the courts' decision. They provide, however, persuasive reasons for the adjustment of the principle to meet contemporary circumstances. 3. Henry J applied Lord Parker's principle in Sun North Investments Pty Ltd (as Trustee of Sun Development Trust) v Dale [2014] 1 Qd R 369; [2013] QSC 44 (Sun North Investments) at [74]-[87] in the following terms (footnotes omitted): [74] It is an essential feature of every mortgage that the mortgagor has a right to discharge the mortgage in payment of the debt or performance of the obligation for which security was given. That right, the "right of redemption" or the "right to redeem", can arise contractually, so long as the mortgagor is not in default. But even if the mortgagor does not repay a loan in time and thus loses the contractual right to redeem, there exists an equitable right to redeem. The equity of redemption may be enforced, notwithstanding a failure to redeem by the repayment date, until the point in time when the mortgagee's power of sale has been exercised or a court has made an order for foreclosure. [75] The principle that a mortgage cannot at the time of the mortgage transaction in any way fetter or lessen redemption has been characterised as a special application of a more general power to relieve against penalties and to mould them into mere securities. It was the severity or hardship inherent in forfeiture of a security far exceeding the quantum of the repayment to be secured which, from an early date, attracted the intervention of equity to relieve against what was virtually a penalty. … [78] The principle is thus founded upon the unconscionability inherent in the transaction otherwise allowing the lender to exercise rights amounting to a penalty or forfeiture. It is the nature of the transaction, if allowed, which is unconscionable. [79] The principle has been held to apply to "a fair bargain between men of business without any trace or suspicion of oppression, surprise or circumvention" and has been held to apply where the parties are legally represented. It is unnecessary to demonstrate fraud, accident, mistake, surprise or other unconscionable conduct on the part of the person against whom the relief is sought. [80] In Kreglinger v New Patagonia Meat and Cold Storage Company Ltd Lord Haldane distinguished the principle from the rule as to collateral advantages, which he explained had been eased by the repeal of the usury laws and by the recognition of modern varieties of commercial bargaining: It is no longer true that, as was said in Jennings v Ward, 'a man shall not have interest for his money and a collateral advantage besides for the loan of it.' Unless such a bargain is unconscionable it is now good. But none the less the other and wider principle remains unshaken, that it is the essence of a mortgage that in the eye of a Court of Equity it should be a mere security for money, and that no bargain can be validly made which will prevent the mortgagor from redeeming on payment of what is due, including principal, interest, and costs. He may stipulate that he will not pay off his debt, and so redeem the mortgage, for a fixed period. But whenever a right to redeem arises out of the doctrine of equity, he is precluded from fettering it. This principle has become an integral part of our system of jurisprudence and must be faithfully adhered to. … [83] The application of the principle cannot be avoided by the mortgage transaction also including a contract which would prevent the redemption of the mortgagor's interest in the property. As Lord Lindley explained in Samuel v Jarrah Timber and Wood Paving Corporation: The doctrine 'Once a mortgage always a mortgage' means that no contract between a mortgagor and a mortgagee made at the time of the mortgage and as part of the mortgage transaction, or, in other words, as one of the terms of the loan, can be valid if it prevents the mortgagor from getting back his property on paying off what is due on his security. Any bargain which has that effect is invalid, and is inconsistent with the transaction being a mortgage. [84] An option to purchase given as part and parcel of a mortgage transaction is such a contract. In Samuel's Case the House of Lords unanimously concluded that an option to purchase given as part of a mortgage transaction is inconsistent with the mortgagor's equity of redemption. [85] The rationale behind the principle extending to a right or option to purchase the property arises from the prospect that if a mortgagee exercises the option and acquires title it will cease to be open to the mortgagor to redeem his interest in the property and the option to purchase will, if exercised, cancel out the equity of redemption. That penal consequence and its repugnancy to the equitable right and potentially to contractual rights was said by Lord Parker in Kreglinger's Case to afford: … a possible and reasonable explanation of the rule referred to in some of the authorities, to the effect that a mortgagee cannot as a term of the mortgage enter into a contract to purchase, or stipulate for an option to purchase, any part of or interest in the mortgaged premises. [86] Since Kreglinger's Case courts have continued to rule options to purchase unenforceable where they are granted as part of a mortgage transaction. [87] Here, if the option to purchase was made as part of the mortgage transaction, an application of the rule against fettering the equity of redemption compels the conclusion that the option was void because it was given as part of a lending transaction and had the effect of purporting to extinguish the plaintiff's equity of redemption. 1. In Sun North Investments, Henry J, at [116], declined to follow the Westfield principle. His Honour set out the conclusion stated by Young J in Westfield at 202 and by Barrett J in Lift Capital at [136]-[137], at [103] and [104] of his reasons, and noted, at [105], that the statements of principle by both judges, and of the other courts who had approved of that reasoning, were obiter dicta. Then, Henry J explained why he favoured the traditional approach (footnotes omitted): [109] The Westfield approach does not give proper weight to the explanation underlying the traditional approach. As discussed above, it is the unconscientious nature of the transaction in clogging the equity of redemption and allowing the lender to exercise rights amounting to penalty or forfeiture that lies at the heart of equity's refusal to enforce legal rights that take away an equity of redemption. [110] In Shiloh Spinners v Harding Lord Wilberforce reiterated that where the object of a transaction and the insertion of the right to forfeit is "essentially to secure the payment of money, equity has been willing to relieve on terms that the payment is made with interest, if appropriate, and also costs". [111] In Stern v McArthur, Deane and Dawson JJ also emphasised the significance of the unconscientious nature of the transaction as the foundation for equity's intervention: One situation in which equity has traditionally granted relief is where provision for forfeiture has been made to secure the payment of money and the party in default seek relief upon the basis of payment of the amount owing together with the appropriate compensation. In that situation the object of the provision is achieved and it would be unconscientious for the other party to seek to take advantage of the forfeiture. An obvious application of this principle (although it may have emerged separately) is the equity of redemption in the case of a mortgage. There, no proof of fraud, mistake, accident or surprise is required to establish the equity because the very nature of the transaction is such that the court, acting upon conscience, will grant relief. (emphasis added) Westfield approach involves a departure from established law [112] The failure of the Westfield approach to give determinative weight to the inherently unconscientious nature of the transaction as an automatic foundation for intervention involves a departure from established law, particularly the decisions in Samuel v Jarrah Timber and Kreglinger's Case. [113] While decisions of the House of Lords may be persuasive but not binding on Australian courts, decisions of the Privy Council given in the period in which appeals lay from Australia to the Privy Council are ordinarily regarded as binding on all Australian courts below the High Court in the absence of a conflicting High Court decision. Fairclough v Swan Brewery Co upheld the traditional approach of the House of Lords in the Privy Council and has not been overruled by the High Court. [114] The traditional approach has been followed in seriously considered dicta of the majority of the High Court, including in Baker v Biddle and Toohey v Gunther. Further, in a series of subsequent cases, individual members of the High Court have apparently accepted the English cases, though not in a way essential to their decision. Given the long established authority on which the traditional approach is based, and its support in the seriously considered dicta of the High Court it should be followed by courts below the High Court. [115] In Queensland, cases such as Baker v Biddle (at first instance) and Team Dynamik provide further support for the following of the traditional principle. [116] In all of the circumstances, I decline to follow the Westfield approach. 1. In Re Matcove Pty Ltd [2020] NSWSC 625, Black J at [66]-[74] canvassed the authorities, including Westfield, Lift Capital and Sun North Investments, and observed without elaboration, at [77]: "… To the extent that difference may matter, I would follow the approach in Westfield Holdings and Lift Capital Partners, for the reasons expressed by Young J and Barrett J respectively in those decisions." 2. Finally, in Amcor Ltd v Barnes [2016] VSC 707, Sloss J noted the difference of opinion between the judges of this Court and Henry J but observed, at [1254], that it was unnecessary for her Honour to resolve any divergence of opinion in the cases. 3. Henry J squarely upheld the application of Lord Parker's Proposition (3), which has the consequence that an option to purchase granted by a transaction that is in substance a mortgage is invalid, even in cases where the option is fair and freely agreed between competent parties who have negotiated at arm's length. 4. Before I state my own conclusions concerning the proper resolution of this judicial controversy, I will note a number of considerations that have a bearing on the determination of the proper approach to adopt. 5. First, the judges who have preferred the Westfield approach have obviously been influenced by the fact that generally, in the cases before them, the option to purchase was fair and was freely negotiated by competent parties at arm's length. The essential reason for the conclusion reached was a view that, in modern commercial circumstances, there is no good reason why parties to a transaction should not be able to combine a loan on mortgage with an option granted to the mortgagee to purchase the subject property, in cases where the grant of the mortgage does not involve unconscionable conduct on the part of the mortgagee. Furthermore, the automatic invalidation of the option would create unfairness if the option was part of the consideration provided by the mortgagor for the loan. 6. Secondly, it is clearly established that there is no impediment to a mortgagee acquiring the mortgagor's equity of redemption, provided only that the agreement to sell or the grant of the option is not contained in the mortgage transaction: see Lisle v Reeve [1902] 1 Ch 53 per Vaughan Williams LJ at 71 and Cozens-Hardy LJ at 75. The point is tellingly made by the Earl of Halsbury LC in Samuel (at 325), where his Lordship said: My Lords, I regret that the state of the authorities leaves me no alternative other than to affirm the judgment of Kekewich J. and the Court of Appeal. A perfectly fair bargain made between two parties to it, each of whom was quite sensible of what they were doing, is not to be performed because at the same time a mortgage arrangement was made between them. If a day had intervened between the two parts of the arrangement, the part of the bargain which the appellant claims to be performed would have been perfectly good and capable of being enforced; but a line of authorities going back for more than a century has decided that such an arrangement as that which was here arrived at is contrary to a principle of equity, the sense or reason of which I am not able to appreciate, and very reluctantly I am compelled to acquiesce in the judgments appealed from. 1. The rule that a freely negotiated, fair and equitable sale or option made or granted as part of the mortgage is always invalid even though it would be valid if separately made the next day tends to prove that there is no longer substantive reason for invalidity in the former case, and that that invalidity is no more than a formal result of the general principle that, when a transaction is found to be a mortgage, it is always a mortgage and can only be a mortgage. 2. In Sun North Investments, Henry J (at [112]) criticised the Westfield principle on the grounds that it failed "to give determinative weight to the inherently unconscientious nature of the transaction as an automatic foundation for intervention" and involved a departure from established law, particularly the decisions in Samuel and Kreglinger. With respect, as will be seen from the analysis of Kreglinger that will be undertaken below, Lord Parker's Proposition (3) has not explicitly been founded on the suggestion that all transactions that engage that proposition are considered to be inherently unconscionable. 3. The English authorities tend to discuss the historical reasons for the old doctrine, but rarely attempt to explain why the old doctrine should continue to be given effect, other than, to take the example of Lord Lindley in Samuel (at 329) to say that the old doctrine "is too well settled to be open to controversy". However, Lord Macnaghten may have thrown some light on the issue in the same case, where his Lordship said (at 326–7): ... But, in my opinion, the question here depends rather upon the rule that a mortgagee is not allowed at the time of the loan to enter into a contract for the purchase of the mortgaged property. This latter rule, I think, is founded on sentiment rather than on principle. It seems to have had its origin in the desire of the Court of Chancery to protect embarrassed landowners from imposition and oppression. And it was invented, I should suppose, in order to obviate the necessity of inquiry and investigation in cases where suspicion may be probable and proof difficult. I gather from some general observations made by Lord Hardwicke in Mellor v. Lees that he would have been disposed to confine the rule to cases in which the Court finds or suspects "a design to wrest the estate fraudulently out of the hands of the mortgagor," and to cases of "common mortgage" — that is, as I understand it, mortgage of land by deed. It will be observed that in the later case of Toomes v. Conset, which is often referred to for a statement of the rule, his Lordship speaks only of "a deed of mortgage"; an instrument which perhaps rather lends itself to imposition — for no one, I am sure, by the light of nature ever understood an English mortgage of real estate. … This doctrine, described by Lord Henley as an established rule nearly 150 years ago, has never, so far as I can discover, been departed from since or questioned in any reported case. It is, I believe, universally accepted by text-writers of authority. Speaking for myself, I should not be sorry if your Lordships could see your way to modify it so as to prevent its being used as a means of evading a fair bargain come to between persons dealing at arms' length and negotiating on equal terms. The directors of a trading company in search of financial assistance are certainly in a very different position from that of an impecunious landowner in the toils of a crafty money-lender. At the same time I quite feel the difficulty of interfering with any rule that has prevailed so long, and I am not prepared to differ from the conclusion at which the Court of Appeal has arrived. 1. His Lordship appears to have suggested that the rule that sales made, or options granted, as part of the mortgage transaction were necessarily invalid, even if not unconscionable, arose because of the possibility of landowners being embarrassed by the publicity and practical difficulty involved in establishing that they had succumbed to unconscionable conduct by a lender. 2. The exhortation made by the Lord Chancellor in Kreglinger (at 38) that "it is inconsistent with the objects for which they were established that these rules should crystallize into technical language so rigid that the letter can defeat the underlying spirit and purpose" and that "[t]heir application must correspond with the practical necessities of the time" may have justified the adjustment to the old doctrine that was accepted in Kreglinger. As such, having justified a change to meet commercial circumstances current in 1913, it logically supports further adjustment to meet present circumstances. 3. There are, however, several reasons why trial judges should be circumspect about making further changes to the old doctrine in the form of Lord Parker's principle. 4. First, although it may appear to contemporary lawyers, from their knowledge and understanding of current commercial practices, that the need for the continuing operation of the old doctrine is less than in earlier times, that may be because commercial practice has accommodated the old doctrine so that the reason for the apparent lack of need of the old doctrine is in fact its success. The obvious continuing presence of sharp and unscrupulous lenders calls for caution in dismantling the old doctrine. 5. Secondly, although I am prepared to follow the reasoning in Westfield, Wily and Lift Capital, in holding that trial judges of this Court are not required by binding authority to apply Lord Parker's principle without modification, I think it must be acknowledged that at least in Baker v Biddle (1923) 33 CLR 188, the members of the High Court accepted in principle the continued application of the old doctrine as explained in Samuel. That is the application that is relevant to the facts of the present case. Although it may be true, as Barrett J suggested in Lift Capital at [119], that the judgments in Baker v Biddle do not qualify as "seriously considered dicta of a majority of the High Court", on a fair reading of the judgments, the Justices did not undertake a serious consideration of the application of the old doctrine because they proceeded on the basis that it was obvious and self-evident that the doctrine, as explained in Samuel, would have applied, if the power of attorney granted by the defendant to the plaintiff that empowered the plaintiff to call for an assignment of the lease to himself had not expired before the lease was granted and the mortgage executed. 6. Knox CJ said at 194 that, if the view taken by the trial judge that the power to call for an assignment of the lease subsisted during the continuation of the mortgage had been correct, it was not disputed that: "the action must fail because the option to purchase, extending over the whole period of the lease irrespective of the fact of redemption, would be inconsistent with or repugnant to the right of redemption vested in the mortgagor." At 195, the Chief Justice repeated his observation: "But even if it could be treated as remaining in force I think it is clear that it was given as security for the repayment of the amount agreed to be advanced, and in this view the option would be obnoxious to the rule which invalidates provisions inconsistent with or repugnant to the right to redeem." 7. It will be important to note that the Chief Justice's observations were made on the basis that the power of attorney that had the effect of an option to purchase "was given as security for the repayment of the amount agreed to be advanced". The Chief Justice's observation suggests that it may be significant to the application of the old doctrine that the agreement to sell or the option is granted as part of the security for the loan. 8. Isaacs J stated the following alternative basis for dismissing the appeal at 197-8 (footnote omitted): Looking at the substance, I should, were I called on definitely to decide this point, say that the documents were in substance all parts of one transaction based on the same negotiation, and the same consideration from the appellant, and dealing with the same subject matter of purchase. But however the position is regarded, whether the power of attorney and covenant of 23rd September be assumed to be the first step in a connected series of events or an original and independent bargain, it cannot, at least on a fair review of the actual circumstances of the case and the terms of the instruments, be read as collateral in the sense that it can stand consistently with due effect being given to the later instruments. The mortgage of land provides in the 7th clause as follows:—"That I" (that is, the respondent) "shall be at liberty at any time to discharge the whole of my liability to the said mortgagee" (that is, the appellant) "under this security." The bill of sale provides that if the moneys owing are duly paid "then and in such case the mortgaged property shall upon the request and at the cost of the mortgagor be reassigned to the mortgagor." The stipulation relied on, if valid, gives to the mortgagee an option at any time to insist that the property shall be absolutely transferred to him at the stipulated price. If, on the one hand, we are to regard the documents as connected though partly overlapping instruments intended, as the appellant asserts, to confer on him whatever contractual rights can be found in his favour in any of them, then the stipulation relied on cannot be supported either at law or in equity. In Kreglinger's Case Lord Parker says: "A condition that the mortgagee is to have such an option" (that is, an option of purchasing the mortgaged property) "for a period which begins before the time for the exercise of the equitable right" (that is, the mortgagor's equitable right to redeem) "has arrived, or which reserves to the mortgagee any interest in the property after the exercise of the contractual right, is inconsistent not only with the equity but with the contractual right itself, and might, I think, be held invalid for repugnancy even in a Court of law." On the other hand, if we regard the instruments as distinct and separable, then it equally follows from the same reasoning that the parties, settling in October their contractual relations respecting the property, have settled those relations on a basis and on terms inconsistent with the arrangement originally arrived at. And the later contracts must prevail. I need not consider other possible inconsistencies. 1. Starke J, at 198, agreed with Isaacs J by saying: "My brother Isaacs has shown that the decision would have been correct if the facts were as assumed." 2. Caution is therefore warranted in the exercise of making further adjustments to the old doctrine than what has been reflected in Lord Parker's principle. That is because, if the Westfield principle is accepted as stating the modern law, Propositions (2) and (3) will be abandoned, and only Proposition (1) will remain in their stead. No collateral advantage to the mortgagee contained in a mortgage will be invalid if it is not unconscionable. This change would represent a large step for a single trial judge, as the mortgagor's equity of redemption, which is one of Equity's enduring creations, is, I think, embedded in Proposition (3). Any right granted to the mortgagee to resist a discharge of the mortgage by re-conveyance or termination of a statutory charge, or indeed any right that leaves an interest in the property in the mortgagee, will be a collateral advantage that ordinarily would be subject to Proposition (3). 3. The consideration of whether Propositions (2) and (3) of Lord Parker's principle should be accepted as having continuing operation requires an investigation of the true meaning of those propositions. That calls for a closer examination of the speeches made by their Lordships in Kreglinger. 4. As stated in the headnote to the report: By an agreement dated 24 August 1910, a firm of brokers agreed to lend to a company carrying on the business of meat preservers a sum of £10,000 at 6 per cent. If the interest was punctually paid the loan was not to be called in until 30 September 1915, but the company might pay off the loan at any time on giving one calendar month's notice. The loan was secured by a floating charge on the undertaking of the company. The agreement provided that for a period of five years from the date thereof the company should not sell sheep skins to any person other than the lenders so long as the latter were willing to buy at the best price offered by any other person and that the company should pay to the lenders a commission on all sheep skins sold by the company to any other person. The loan having been paid off by the company in January 1913, in accordance with the agreement, the lenders claimed to exercise their option of pre-emption notwithstanding the payment off of the loan. 5. The issue to be determined by the House of Lords was whether the firm of brokers could enforce the covenant given by the company after it had repaid the loan and the floating charge was discharged. The collateral advantage did not involve the floating chargee retaining any interest in the property of the borrower per se, but it was a covenant that would outlast the discharge of the floating charge to sell the borrower's products to the chargee and to pay the chargee certain commissions. 6. Viscount Haldane LC and Lord Parker delivered separate considered speeches. The Earl of Halsbury, Lord Atkinson and Lord Mersey agreed with both of their Lordships' speeches. 7. It will be convenient to begin with an analysis of the speech made by Lord Parker, as it is his Lordship's principle that has been accepted by later courts. 8. His Lordship began by observing (at 46) that the company had admitted that the contract was fair and reasonable and that it had already enjoyed full advantage of the contract. 9. Lord Parker then noted (at 47) that a legal mortgage generally took the form of a conveyance with a proviso for reconveyance on the payment of money by a specified date, but that in order to determine whether or not a transaction was a mortgage, equity has always looked to the real intention of the parties, to be gathered from the terms of the particular instrument, all of the circumstances of the transaction, and parole evidence in cases where the real intention was in doubt. His Lordship said: "Only if according to the real intention of the parties the property was to be held as a pledge or security for the payment of the money, and as such to be restored to the mortgagor when the money was paid, was the conveyance considered to be a mortgage." The proposition that a mortgage required that the parties intend that the property be restored to the mortgagor when the money is repaid is important to his Lordship's reasoning. 10. Lord Parker then set out (at 48) an explanation of his Proposition (2) in the following terms: Now if, as was not infrequently the case, such a legal mortgage as above described contained a further stipulation that if default were made in payment of the money secured on the date specified the mortgagor should not exercise his equitable right to redeem, or should only exercise it as to part of the mortgaged property, or on payment of some additional sum or performance of some additional condition, such stipulation was always regarded in equity as a penal clause against which relief would be given. This is the principle underlying the rule against fetters or clogs on the equity of redemption. The rule may be stated thus: The equity which arises on failure to exercise the contractual right cannot be fettered or clogged by any stipulation contained in the mortgage or entered into as part of the mortgage transaction… 1. Lord Parker gave an example (at 50) of a transaction falling within Proposition (2), where the mortgagee is given a right to acquire the property as a term of the mortgage. Hs Lordship said: "A condition to the effect that if the contractual right [to redeem the property] is not exercised by the time specified the mortgagee shall have an option of purchasing the mortgaged property may properly be regarded as a penal clause. It is repugnant only to the equity and not to the contractual right." 2. Proposition (2) was intended by his Lordship to apply to mortgage terms that gave the mortgagee a collateral advantage to be exercised upon the failure of the mortgagor to comply with the terms of the mortgage, which were held to be invalid on the ground that they were a penalty in a sense that remains relevant to current equitable principles. 3. The present case probably does not engage Proposition (2), as Mr Bonanno's right to give a notice requiring the defendants to transfer one third of their interest in the property to Mr Bonanno could be exercised at any time, and did not depend upon the defendants having failed to comply with any term of the deed. If that is right, these reasons are not required to deal with the continuing validity of Proposition (2). 4. To the extent that the Westfield principle may suggest that Proposition (1) requiring unconscionability on the part of the mortgagee should supplant Proposition (2), it may be doubted whether it is appropriate to vary Proposition (2) in any way that would interfere with the application of the modern doctrine of penalties. The replacement of Proposition (2) by a principle of invalidity based upon the unconscionable nature of the collateral advantage would appear to cut across the doctrinal basis of the modern law of penalties as established in Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205; [2012] HCA 30 at [10]. 5. Lord Parker explained the meaning of his Proposition (3) in the following way (at 50): … There are, however, repugnant conditions which cannot be regarded as mere penalties intended to deter the exercise of the equitable right which arises when the time for the exercise of the contractual right has gone by, but which are repugnant to the contractual right itself… But a condition that the mortgagee is to have such an option for a period which begins before the time for the exercise of the equitable right has arrived, or which reserves to the mortgagee any interest in the property after the exercise of the contractual right, is inconsistent not only with the equity but with the contractual right itself, and might, I think, be held invalid for repugnancy even in a Court of law. This consideration affords a possible and reasonable explanation of the rule referred to in some of the authorities, to the effect that a mortgagee cannot as a term of the mortgage enter into a contract to purchase, or stipulate for an option to purchase, any part of or interest in the mortgaged premises. Suppose the following simple case, namely, a conveyance by way of mortgage with a proviso for reconveyance if the mortgagor pay to the mortgagee 500l. and interest at the end of six months, and then a further stipulation that the mortgagee should have an option of purchasing the property for another six months. If the mortgagor pays the moneys secured by the specified date the mortgagee comes under a contractual liability to reconvey, and if he does reconvey he reconveys his whole interest in the mortgaged property, thus destroying his option. The option, therefore, is inconsistent with and repugnant to the proviso for reconveyance, which embodies the terms of the contractual right to redeem. It may, therefore, be rejected. It is also inconsistent with and repugnant to the equity of redemption, which arises on failure to exercise the contractual right to redeem. It is, therefore, though not strictly a penalty, sometimes referred to as a clog on this equity… 1. Although Lord Parker explained his principle in the context of a consideration of the conventional common law mortgage, his Lordship made it clear (at 51-2) that the inconsistency between the covenant granting the collateral advantage and the essential nature of the mortgage that made the covenant repugnant was not limited to cases where there was an express proviso for redemption, but extended to mortgages without such a proviso and even to "mere equitable charges". As to the latter, his Lordship said (at 52): All that I have said hitherto as to the equitable considerations affecting legal mortgages in the usual form applies equally to conveyances of equitable interests where there is an express proviso for redemption. The only difference in this case is that there is no legal estate to become absolute on failure to exercise the contractual right, though there is a contract for reconveyance for breach of which an action might lie at law. It applies also, but with some important qualifications, to mere equitable charges. In the case of a mortgagor merely charging a property with payment to the mortgagee of a sum of money not only does the mortgagee take no interest at law in the property charged, but there is no contract for reconveyance at all. The right to redeem is from the very outset a right in equity only, and it is merely the right to have the property freed from the charge on payment of the moneys charged thereon. If the charge is for payment of a specified sum on a specified day, payment on that day will set the property free, and if the day passes without payment there will still be an equity to have the property so freed notwithstanding any provision in the nature of a penalty, such penal provision being a clog on the equity. The difference between transactions by way of equitable charge and transactions by way of conveyance with a proviso for reconveyance is chiefly important when, for the purpose of determining whether a particular stipulation ought or ought not to be rejected for inconsistency or repugnancy, the nature of the transaction between the parties has to be investigated. 1. As the floating charge that was the security being considered by his Lordship only operated in equity and did not contain an explicit proviso for redemption, his observations concerning the application of his principle to equitable securities applied to the case being decided. 2. It is significant to the present case, which involves an option granted to Mr Bonanno to acquire a one third interest in the property, that Lord Parker explained his Proposition (3) in a way that had the effect that, provided the deed should be categorised as a mortgage or charge, the option will be invalid if the proposition is applied. 3. In explaining why that is so, Lord Parker did not say that equity regarded the option as necessarily unjust or unconscionable, irrespective of the actual circumstances in which it was granted. His Lordship's explanation depended upon a particular analysis of the legal effect of the transaction. If the mortgagor pays the money secured by the mortgage by the specified date, the mortgagee comes under a contractual liability to reconvey the property. If the mortgagee does reconvey the property "he reconveys his whole interest in the mortgaged property, thus destroying his option." That is the reason why the option is inconsistent with and repugnant to the proviso for reconveyance "which embodies the terms of the contractual right to redeem". His Lordship said that the option "is also inconsistent with and repugnant to the equity of redemption, which arises on failure to exercise the contractual right to redeem." 4. Thus, the option is not a penalty, but it is a clog on the equity of redemption. 5. This explanation lies at the heart of Lord Parker's Proposition (3) in so far as it applies where a term of the mortgage grants the mortgagee an option to acquire an interest in the property. It is based on the notion that, whether the right to redeem is contractual or dependent upon Equity's insistence that all true mortgages are redeemable, the collateral right to acquire the property is inconsistent with the contractual or equitable rights and so is repugnant and void. 6. To the modern legal mind, Lord Parker's explanation that the reconveyance of the property by the mortgagor to the mortgagee will necessarily take effect as a transfer of the whole of the mortgagee's interest in the property, and so necessarily destroy the option, is not readily apparent, but may depend upon the notion that the mortgagee's contractual option merges in the reconveyance. Absent the doctrine of merger, a modern lawyer may be comfortable with the notion that the mortgage and the option could coexist, and that the option survives the redemption of the mortgage. 7. In relation to the application of Proposition (3) to collateral advantages more generally than to options to acquire the property, the following distinction made by Lord Parker (at 52-3) concerning when the proposition applies is crucial to his Lordship's decision: I have pointed out that in mortgages in common form an option to purchase is inconsistent with and repugnant to the proviso for reconveyance on payment of the money secured. But is there any such repugnancy or inconsistency in the following case? A. agrees to give B. an option for one year to purchase a property for 10,000l. In consideration of such option B. agrees to lend, and does lend, A. 1000l. to be charged on the property without interest, and be repayable at the expiration or earlier exercise of the option. I cannot myself see that there is any inconsistency or repugnancy between the provisions of this perfectly simple and straightforward transaction. It would have been very different if A. had conveyed the property to B. with a proviso that on payment of the 1000l. there should be a reconveyance, and the deed had then provided for the year's option. Here the option would be inconsistent with, and would in fact have been destroyed by, the reconveyance. 1. Lord Parker refers to the case where the real nature of the transaction is an option to purchase and the consideration for the grant of the option is the making of a loan secured by a mortgage of the property. Proposition (3) does not apply, as the transaction is not in substance a mortgage. Lord Parker distinguishes that transaction from one in which there is a conventional common law mortgage by conveyance of the property to the mortgagee with a proviso for reconveyance on repayment of the loan, and in which the mortgage deed granted an option to purchase the property. 2. In my view, the significance of this suggested basis for determining whether a collateral advantage is necessarily invalid by operation of Proposition (3), and when it is not, should continue to be retained as part of the current law is dependent upon whether the basis of the distinction is a real one, and whether it is fair and practicable for courts to apply. The question is, when is a transaction a contract of sale or option with a collateral mortgage, and when is it a mortgage with a collateral sale or option? If that dichotomy is illusory, or if discriminating between the two possibilities cannot fairly or reliably be done, then the realistic course is to make the validity of the collateral advantage in either case dependent upon whether its creation was unconscionable. 3. Lord Parker then explained (at 55-6) that, in cases where the collateral advantage did not involve a penalty, the repeal of the last of the usury laws in 1854 had removed the basis in equitable principle for prohibiting mortgages from granting a collateral advantage to the mortgagee. His Lordship said, apparently as the source of his Proposition (1): The last of the usury laws was repealed in 1854, and thenceforward there was, in my opinion, no intelligible reason why mortgages to secure loans should be on any different footing from other mortgages. In particular, there was no reason why the old rule against a mortgagee being able to stipulate for a collateral advantage should be maintained in any form or with any modification. Borrowers of money were fully protected from oppression by the pains always taken by the Court of Chancery to see that the bargain between borrower and lender was not unconscionable. Unfortunately, at the time when the last of the usury laws was repealed, the origin of the rule appears to have been more or less forgotten, and the cases decided since such repeal exhibit an extraordinary diversity of judicial opinion on the subject. It is little wonder that, with the existence in the authorities of so many contradictory theories, persons desiring to repudiate a fair and reasonable bargain have attempted to obtain the assistance of the Court in that behalf… 1. Presumably, this observation was meant to convey that the grant of a collateral advantage that did not engage Propositions (2) and (3) would only be invalid if it was unconscionable. 2. Lord Parker made a significant observation (at 59), in his consideration of one of the earlier authorities, as to how the Court should determine whether the transaction was in reality a mortgage. The issue depended entirely on the intention of the parties. His Lordship said: …There was also a provision that the mortgagor should always thereafter, as shareholder, use his best endeavours to secure that the mortgagee or his firm should have the sale of the company's teas and in the event of such teas being sold otherwise than through the mortgagee or his firm the mortgagor was to pay the mortgagee a commission. It was as to this latter clause that the difficulty arose. Was it or was it not operative after redemption? The real question, in my opinion, was whether it was inconsistent with or repugnant to the contractual right of the mortgagee to have his property restored unfettered if he paid the money secured with interest as provided in the agreement, and the consequent equitable right to have the property so restored if he paid this money with interest and costs at any time… 1. His Lordship seems to be saying that the classification of the transaction as being in substance a mortgage depends upon a finding that the parties intended that, upon payment of the money, the mortgagor would regain the property free of the collateral advantage created by the mortgage. There is a question as to whether this attempt by his Lordship to find a strict logical basis for determining whether the transaction is in substance a mortgage is conceptually valid. Lord Parker added on this issue (at 60): If once you come to the conclusion that the parties intended that the property should be reconveyed on payment off of the moneys secured any provision which would prevent this must be rejected as inconsistent with and repugnant to the true intention. But, on the other hand, if you once come to the conclusion that this was not the real intention of the parties, then the transaction is not one of mortgage at all… 1. Taken literally, this observation opens a pathway to the Court being able to uphold an option that is granted at the same time as the mortgage. If the true intention of the parties is that the mortgagor will in fact regain the property upon payment of the sum due, free of all restrictions imposed by the mortgage, then a term granting the mortgagee a right to acquire the property will in fact be repugnant. However, if the true intention is that some collateral advantage granted to the mortgagee will survive repayment, then the transaction is not one of a mortgage at all. While this suggestion is a tantalising possibility for fashioning a basis for the Westfield principle to coexist with Lord Parker's principle, the true meaning of Lord Parker's observation is elusive. In reality, it is likely to be the case that the transaction gives rise to a mortgage and an option at the same time. Furthermore, Proposition (3) applies when there is no contractual right to a reconveyance, and the mortgagor is entitled to enforce an equity of redemption. There is no occasion to consider the real intention of the parties where the mortgagor's right arises automatically in equity. 2. His Lordship then (at 60-1) stated his principle in the terms set out in the headnote to the report, and which have been generally accepted as a statement of the principle established by the case. 3. Lord Parker stated the basis of his decision that the Court should order the company to honour its covenant to supply skins to the brokers after the redemption of the mortgage and to pay the agreed commissions by saying (at 61-2): I doubt whether, even before the repeal of the usury laws, this perfectly fair and businesslike transaction would have been considered a mortgage within any equitable rule or maxim relating to mortgages. The only possible way of deciding whether a transaction is a mortgage within any such rule or maxim is by reference to the intention of the parties. It never was intended by the parties that if the defendant company exercised their right to pay off the loan they should get rid of the option. The option was not in the nature of a penalty, nor was it nor could it ever become inconsistent with or repugnant to any other part of the real bargain within any such rule or maxim. The same is true of the commission payable on the sale of skins as to which the option was not exercised. Under these circumstances it seems to me that the bargain must stand and that the plaintiffs are entitled to the relief they claim. 1. Again, the need for Lord Parker to reason around the insistence of the old doctrine that once a mortgage, always a mortgage and only a mortgage, appears to have caused his Lordship to posit a distinction whereby, the transaction having granted both a mortgage and an option to the mortgagee, that transaction is only to be treated as a real mortgage when the true intention of the parties is that the option will cease if the mortgage debt is repaid. This does not appear to be a real or practical distinction. Most likely, the real intention of the parties in fact will be that they have created a mortgage and an option, each of which is intended to operate according to its terms. It is likely to be rare that the parties to a commercial agreement provide for the grant of an option that is only intended to be valid until the debt is repaid. 2. It is important to note, however, that his Lordship approved the decision of the House of the Lords in Samuel, which held that an option to purchase debenture stock contained in a mortgage over the stock was invalid. Lord Parker said (at 60) that the option was inconsistent with both the contractual and equitable right of redemption and was clearly invalid. His Lordship said that "it is an established rule that a mortgagee can never provide at the time of making the loan for any event in which the equity of redemption shall be discharged and the conveyance become absolute." 3. This statement of principle illuminates the fact that Lord Parker's conclusion that the old doctrine should be relaxed related to collateral advantages that did not involve the mortgagee having a right to acquire the property the subject of the mortgage. 4. To the mind of a modern lawyer, it might be thought that both a contractual right to redeem and the equity of redemption would be satisfied by a reconveyance of the property. However, the old doctrine went much further, because the usury laws prohibited a lender from achieving any collateral advantage from the mortgage over and above the right to be repaid the principal, interest and costs. Consequently, any covenant in the mortgage that gave the mortgagee some additional commercial benefit was invalid. The mortgagor was not only entitled to reconveyance of the property but was also entitled to recover the property free from any covenant in the mortgage that restricted the mortgagor's use of the property in any manner that did not exist before the mortgage. Some examples of the application of this aspect of the old doctrine should be noted, as those cases formed the context in which the House of Lords decided Kreglinger. 5. In Santley v Wilde [1899] 1 Ch 747, Byrne J decided that an agreement by the mortgagor to pay the mortgagee a proportion of net profits of a theatre the subject of the mortgage for a fixed period was a clog on the equity of redemption for the period after the premature repayment of the mortgage debt and so invalid for that period. In Noakes v Rice [1902] AC 24, the House of Lords held that a covenant in a mortgage by the mortgagor to purchase malt liquor from the mortgagee during the term of the mortgage, even if the debt was repaid early, was a clog on the equity of redemption. As Lord Davey put it at 33: "The meaning of that is that the mortgagee shall not make any stipulation which will prevent a mortgagor, who has paid principal, interest, and costs, from getting back his mortgaged property in the condition in which he parted with it" (emphasis added). In Bradley v Carritt [1903] AC 253, the House of Lords decided that an agreement by a mortgagor in a mortgage of shares held in a tea company to use his best endeavours to cause the tea company to give the mortgagee an exclusive right to sell the company's tea was illegal after repayment of the debt. 6. By way of contrast, in Biggs v Hoddinott (1898) 2 Ch 307, the Court of Appeal upheld a covenant in a mortgage over a hotel whereby the mortgagor covenanted to deal exclusively with the mortgagee for all beer and malt liquor sold on the mortgaged premises during the term of the mortgage, on the ground that the covenant was a reasonable one, which did not in any way clog the equity of redemption or give the mortgagee any undue advantage, as it was only to subsist during the term of the mortgage. 7. The essence of Lord Parker's decision was that the prohibition under the old doctrine of collateral advantages in the nature of some ongoing commercial obligation of the mortgagor to the mortgagee, which did not preclude the mortgagor from recovering title to the property itself, arose only out of equity's augmentation of the usury laws. When those laws were repealed, the basis for the prohibition disappeared. 8. If that is a correct explanation of Lord Parker's decision, it is not clear why his Lordship thought it necessary to base his reasoning on the issue of whether the transaction ought to be classified as a sale or option with a collateral mortgage, rather than a mortgage with a collateral sale or option. I have not found any other authority that supports the principle that a transaction will only fall within the latter class if the real intention of the parties is that the option to the mortgagee will subsist only up until the redemption of the mortgage. 9. It will be appropriate also to analyse the speech of Viscount Haldane LC. That speech appears to have been given less prominence in later authorities than the speech of Lord Parker. Although, as I have noted above, the other three Lords agreed wholeheartedly with both speeches, it is arguable that the Lord Chancellor reached the same conclusion as did Lord Parker on a different basis of principle. 10. The Lord Chancellor (at 36-7) explained his view of the operation of the equitable principle in terms that a single principle could be expressed in three ways. First, the general principle was "that if the transaction was once found to be a mortgage, it must be treated as always remaining a mortgage and nothing but a mortgage". The application of the principle depended upon "the substance of the transaction" and "did not apply to cases which were only apparently or technically within it but were in reality something more than cases of mortgage". 11. A different application of "the paramount doctrine", put in the form of a second rule, was originally "that a mortgagee should not stipulate for a collateral advantage which would make his remuneration for the loan exceed a proper rate of interest". This was an expression by the Lord Chancellor of the rule in its original form during the long period when the Legislature placed restrictions in the form of the usury laws on the rate of interest which could legally be exacted. The Lord Chancellor explained that "equity went beyond the limits of the statutes which limited the interest, and was ready to interfere with any usurious stipulation in a mortgage". The Lord Chancellor then stated (at 37) the then current form of the second rule as follows, given the repeal of the usury statutes: … That policy has now changed, and the Acts which limited the rate of interest have been repealed. The result is that a collateral advantage may now be stipulated for by the mortgagee provided that he has not acted unfairly or oppressively, and provided that the bargain does not conflict with the third form of the principle. 1. The third form of the principle was that (at 37): … a mortgage… cannot be made irredeemable, and that any stipulation which restricts or clogs the equity of redemption is void… It is simply an assertion in a different way of the principle that once a mortgage always a mortgage and nothing else. 1. The Lord Chancellor then observed (at 38) that the rule as to collateral advantages has been "modified by the repeal of the usury laws and by the recognition of modern varieties of commercial bargaining". His Lordship explained Biggs v Hoddinott (at 38) by saying: "The decision proceeded on the ground that a mortgagee may stipulate for a collateral advantage at the time and as a term of the advance, provided, first, that no unfairness is shewn, and, secondly, that the right to redeem is not thereby clogged." The lender may now stipulate for a collateral advantage in addition to interest on the loan unless "such a bargain is unconscionable". 2. His Lordship continued (at 38) by saying: … But none the less the other and wider principle remains unshaken, that it is the essence of a mortgage that in the eye of a Court of Equity it should be a mere security for money, and that no bargain can be validly made which will prevent the mortgagor from redeeming on payment of what is due, including principal, interest, and costs. 1. The Lord Chancellor described this principle as "an integral part of our system of jurisprudence and must be faithfully adhered to." 2. The Lord Chancellor's speech suggested that any advantage stipulated in the mortgage agreement to be enjoyed by the lender in addition to the repayment of principal, interest and costs was a collateral one, but that such an advantage was now valid if not unconscionable, provided that it did not prevent the mortgagor from redeeming on payment of what was due at the agreed time for repayment. 3. The Lord Chancellor then (at 38) began to address the question of "whether the right to redeem has been interfered with" in the case before him. That was "a question which is primarily one of fact" and required the identification of what "was the true character of the transaction". The Court is required to determine the issue as follows (at 39): … Did the appellants make a bargain such that the right to redeem was cut down, or did they simply stipulate for a collateral undertaking, outside and clear of the mortgage, which would give them an exclusive option of purchase of the sheepskins of the respondents? The question is in my opinion not whether the two contracts were made at the same moment and evidenced by the same instrument, but whether they were in substance a single and undivided contract or two distinct contracts. Putting aside for the moment considerations turning on the character of the floating charge, such an option no doubt affects the freedom of the respondents in carrying on their business even after the mortgage has been paid off. But so might other arrangements which would be plainly collateral, an agreement, for example, to take permanently into the firm a new partner as a condition of obtaining fresh capital in the form of a loan. The question is one not of form but of substance, and it can be answered in each case only by looking at all the circumstances, and not by mere reliance on some abstract principle, or upon the dicta which have fallen obiter from judges in other and different cases… 1. The Lord Chancellor said (at 41) that the equitable principle that excluded the ability of a mortgagee to fetter the right of redemption applied as much to floating charges as to any other mortgage. However, his Lordship said it was material that a floating charge permits the assets to be dealt with freely by the mortgagor until the charge becomes enforceable. 2. The Lord Chancellor then said (at 41-2): If there had been no mortgage such a contract as the one in question would have been an ordinary incident in such a business. We are considering the simple question of what is the effect on the right to redeem of having inserted into the formal instrument signed when the money was borrowed an ordinary commercial contract for the sale of skins extending over a period. It appears that it was the intention of the parties that the grant of the security should not affect the power to enter into such a contract, either with strangers or with the appellants, and if so I am unable to see how the equity of redemption is affected. No doubt it is the fact that on redemption the respondents will not get back their business as free from obligation as it was before the date of the security. But that may well be because outside the security and consistently with its terms there was a contemporaneous but collateral contract, contained in the same document as constituted the security, but in substance independent of it. If it was the intention of the parties, as I think it was, to enter into this contract as a condition of the respondents getting their advance, I know no reason either in morals or in equity which ought to prevent this intention from being left to have its effect. What was to be capable of redemption was an undertaking which was deliberately left to be freely changed in its details by ordinary business transactions with which the mortgage was not to interfere. Had the charge not been a floating one it might have been more difficult to give effect to this intention. 1. To this point it seems to have been important to his Lordship's reasoning that the floating charge did not interfere with the company's right to sell its stock in trade before the floating charge crystallised. Consequently, a covenant included in the mortgage document that obliged the company to sell its stock to the lender did not interfere with the company's ownership of its stock, in the sense that the company was left free to decide to whom to sell its stock, so there was no reason why it should not exercise that right by agreeing in the mortgage document to sell its stock to the lender. That appears to follow from his Lordship's statement that: "[w]hat was to be capable of redemption was an undertaking which was deliberately left to be freely changed in its details by ordinary business transactions with which the mortgage was not to interfere". 2. The Lord Chancellor raised a possible difficulty, being if the charge had been a fixed one, because of the need to explain the earlier decision of the House of Lords in Noakes v Rice. In that case the House of Lords, as noted above, held that a term in a mortgage of a hotel requiring the mortgagor to buy the beer of the mortgagee after redemption of the mortgage was invalid "as being, not merely a collateral agreement, but in truth a restriction on the right to get back the security free from the terms of the mortgage", as the Lord Chancellor described it. His Lordship appears to have distinguished the decision (at 42) on the ground that it was a "mortgage of a specific property". 3. In response to the majority decision of the House of Lords in Bradley v Carritt, which reached a similar conclusion, the Lord Chancellor said that the House of Lords was not bound to follow all the dicta in the judgments, and concluded (at 42): It is binding on your Lordships in any case in which the transaction is really of the same kind, although it does not follow that all the dicta in the judgments of those of your Lordships' House who were in a majority must be taken as of binding authority. And it certainly cannot, in my opinion, be taken as authoritatively laying down that the mere circumstance that after redemption the property redeemed may not, as the result of some bargain made at the time of the mortgage, be in the same condition as it was before that time, is conclusive against the validity of that bargain. To render it invalid the bargain must, when its substance is examined, turn out to have formed part of the terms of the mortgage and to have really cut down a true right of redemption… The true view is, I think, that judges ought in this kind of jurisdiction to proceed cautiously, and to bear in mind the real reasons which have led Courts of Equity to insist on the free right to redeem and the limits within which the purpose of the rule ought to confine its scope… 1. The Lord Chancellor was required to distinguish the earlier decisions of the House of Lords because those decisions were binding. 2. In summary, the Lord Chancellor held that collateral advantages to the lender that were stipulated in the same transaction as the mortgage (that is, advantages in excess of repayment of the principal and payment of interest and costs) were no longer to be considered invalid if the mortgagee has not "acted unfairly or oppressively", "no unfairness is shewn" and the bargain is not "unconscionable", provided always that the mortgage "cannot be made irredeemable". However, the Lord Chancellor appears to have distinguished Noakes v Rice by reasoning that the option of pre-emption in the case before him did not clog the equity of redemption because of a failure to return the property to the mortgagor free of all covenants in the mortgage, because the mortgage was a floating charge and not fixed over the mortgagor's property, so that it authorised the mortgagor, in the ordinary course of business, to choose to whom to sell its stock in trade. Consequently, the mortgagor could choose to sell to the mortgagee. 3. That appears to be a very limited adjustment to the old doctrine. Although the Lord Chancellor clearly recognised that a mortgage instrument could contain two quite different transactions, his Lordship did not appear to decide the case on the basis that the option of pre-emption was a separate transaction standing outside the mortgage, as Lord Parker did. Rather, the Lord Chancellor treated the option of pre-emption as a collateral advantage to the mortgage, but found a reason based on the nature of a floating charge for holding that the option did not clog the equity of redemption. 4. The Lord Chancellor explained (at 35) the historical reasons for the development of the old doctrine in terms that will assist in deciding whether the change suggested in Westfield should be adopted. His Lordship said: The reason for which a Court of Equity will set aside the legal title of a mortgagee and compel him to reconvey the land on being paid principal, interest, and costs is a very old one. It appears to owe its origin to the influence of the Church in the Courts of the early Chancellors. As early as the Council of Lateran in 1179, we find, according to Matthew Paris (Historia Major, 1684 ed. at pp. 114–115), that famous assembly of ecclesiastics condemning usurers and laying down that when a creditor had been paid his debt he should restore his pledge. It was therefore not surprising that the Court of Chancery should at an early date have begun to exercise jurisdiction in personam over mortgagees. This jurisdiction was merely a special application of a more general power to relieve against penalties and to mould them into mere securities. The case of the common law mortgage of land was indeed a gross one. The land was conveyed to the creditor upon the condition that if the money he had advanced to the feoffor was repaid on a date and at a place named, the fee simple should revest in the latter, but that if the condition was not strictly and literally fulfilled he should lose the land for ever. What made the hardship on the debtor a glaring one was that the debt still remained unpaid and could be recovered from the feoffor notwithstanding that he had actually forfeited the land to his mortgagee. Equity, therefore, at an early date began to relieve against what was virtually a penalty by compelling the creditor to use his legal title as a mere security. 1. As appears from the speeches in Kreglinger that have been analysed above, the repeal of the usury laws in 1854 provided a basis for Equity to permit collateral advantages of a commercial nature contained in mortgages, provided that they were not exacted in an unconscionable way. However, that part of the old doctrine that was a response to the characteristics of English common law mortgages, and which led to the maxim 'once a mortgage, always a mortgage and nothing but a mortgage', was not substantially an augmentation of the usury laws, but was designed to protect the ability of the mortgagor to redeem the property on payment of the debt. 2. This aspect of the old doctrine had led Lord Henley LC (later the Earl of Northington) in Vernon v Bethell (1762) 2 Eden 110; (1762) 28 ER 838 at 839 to say: This court, as a court of conscience, is very jealous of persons taking securities for a loan, and converting such securities into purchases. And therefore I take it to be an established rule, that a mortgagee can never provide at the time of making the loan for any event or condition on which the equity of redemption shall be discharged, and the conveyance absolute. And there is great reason and justice in this rule, for necessitous men are not, truly speaking, free men, but, to answer a present exigency, will submit to any terms that the crafty may impose upon them. 1. It is this judgment upon which Lord Macnaghten relied in Samuel (at 326-7) to accept, with regret, that an option to purchase cannot be granted by a mortgage. 2. Just as the usury laws have long since ceased to have effect, substantial changes have occurred in respect of the legal operation of mortgages and of commercial practices, which justify a conclusion that the attributes of English common law mortgages no longer justify the application of the old doctrine to the same extent as in the past. Of particular significance is the fact that, under the Torrens system, mortgages have been transformed into statutory charges that do not involve a conveyance of the property to the mortgagee or the need for a reconveyance. The registration of a discharge takes effect as a removal of the charge from the title. The mortgagee can only gain title following default through a successful application for an order for foreclosure. That said, a review of Part 7 of the Conveyancing Act 1919 (NSW) and Division 3 of Part 7 of the Real Property Act 1900 (NSW) concerning mortgages shows that statutory intervention has been piecemeal and assumes the continued underlying operation of the common law and equitable principles governing mortgages. Consequently, care must be exercised in dismantling the effect of Lord Parker's Proposition (3). 3. The judges who decided Westfield and the cases that have followed it have reasoned that legal and commercial changes have occurred that call for a revision of Lord Parker's Proposition (3). I accept that conclusion but consider that it should be given a carefully calibrated effect. 4. I do not accept that Lord Parker's Proposition (3) should be replaced solely by his Proposition (1), at least by means of judgments at first instance. I have already explained why I do not think that the circumstances of the present case justify any interference with Proposition (2). The change that I consider is justified involves a significant but focused adjustment of the nature of the transactions that will engage Proposition (3), and a removal of those transactions so that they fall within the operation of Proposition (1). In essence, that change would be to permit the parties to include in the one transaction both a mortgage and an option to purchase, where the option gives the mortgagee a right to require the mortgagor to enter into a contract to sell the property to the mortgagee for a proper price that is in an appropriate way referable to its value. There should no longer be any absolute exclusion of the right of parties to a mortgage, at the same time as the mortgage is granted, to freely enter into an option to sell the property on just terms. What the law permits the parties to do a day after the mortgage is granted, should be permitted to be done at the same time as the mortgage. 5. This change would have the effect of adding to the commercial collateral advantages that were upheld in Kreglinger an advantage, created by the free decision of the mortgagor, to sell the property for a real price considered by the mortgagor to be adequate. It would reverse the currently untenable presumption that all mortgagors are "necessitous men" liable to "submit to any terms that the crafty may impose upon them". The change would return to mortgagors their right to decide how to deal with their property without the imposition of a rule, to use Lord Macnaghten's words in Samuel, that is "founded on sentiment rather than on principle". It would accord with what I think is the modern lawyer's conception that repugnancy to the terms of an agreement should depend on what the agreement actually is, and that an agreement to reconvey (where still relevant) does not have some inviolable significance so that any genuine, contrary agreement between the parties is necessarily repugnant. 6. While, if this change were adopted, it would be easier to apply the new principle when the interest payable on the loan and the price payable for the transfer were separately identified in the transaction documents, I do not suggest that this separate identification is essential. It should usually be possible for the Court to determine whether the mortgagor is entitled to receive a real price for the transfer of the property. 7. However, I would otherwise uphold the continuing operation of Lord Parker's Proposition (3). To the extent that it depends upon Proposition (3), the general body of equitable principles upholding the mortgagor's equity of redemption would not be affected. In essence, the collateral advantage of the mortgagee under a freely agreed sale or option for a genuine price would be distinguished from a term of the mortgage under which the mortgagee could acquire title to the property without paying a separate price. The latter collateral advantage would still engage Lord Parker's Proposition (3). 8. As I understand the reasoning in the Westfield line of cases, this more limited change would achieve the intended purpose, without going to the length and inviting the possible unintended consequences that may follow from removing Lord Parker's Propositions (2) and (3) in their entirety. 9. On this view of the continuing operation of Lord Parker's Proposition (3), the transfer provisions are invalid, because they constitute a collateral advantage created by a mortgage whereby the mortgagor is obliged to transfer the title to part of the mortgaged property without any consideration additional to the making of the loan. Unconscionability 1. Against the possibility that I am wrong in these conclusions, and the Court should only declare the transfer provisions to be invalid if their inclusion in the deed or their reinforcement would be unconscionable, I will now consider that question. 2. It will first be appropriate to address the question of the nature of the conduct of the mortgagee in obtaining the collateral advantage that may justify a finding in equity that it will be unconscionable to permit the mortgagee to enforce the advantage. 3. A review of the decided cases demonstrates that judges have used many different expressions to describe the nature of the conduct that will cause the collateral advantage to be invalid. 4. In Noakes v Rice, Lord Davey at 33 used the expressions "oppressive and unconscionable" and "no unfair advantage". In Lisle v Reeve, Romer LJ at 73 used the expression "unconscionable or unfair". In Kreglinger, the Lord Chancellor at 36 used the term "oppressive", at 37 the term "unfairly or oppressively", and at 38 his Lordship referred to "no unfairness". At 55, Lord Parker referred to the need for the mortgagor to be "protected from oppression", and referred to "the pains always taken by the Court of Chancery to see that the bargain between borrower and lender was not unconscionable". The first time Lord Parker formulated his Proposition (1) at 56 he used the term "unconscionable", and the second time he did so, at 61, he used the expression "unfair and unconscionable". In Westfield, at 202-3, Young J variously used the expressions "unfair or unconscionable", "unconscionable" and "no unfairness or unconscionable conduct". 5. The expressions "oppressive", "unconscionable" and "unfair" are capable of having subtly different meanings. 6. The question was addressed by the New South Wales Court of Appeal in Charmelyn Enterprises Pty Ltd v Klonis (1980) 2 BPR 9527, where Reynolds JA said (at 9535-6), with the agreement of Glass JA: The three grounds upon which courts of Equity would hold stipulations for collateral advantages invalid were identified in that case and the only one submitted to be in point in this case is that the stipulation is unfair and unconscionable as found in this mortgage. In Multiservice Bookbinding Ltd v Marden [1979] 1 Ch 84, Browne-Wilkinson J reviewed the authorities which throw light on the test to be met before equity will intervene under this heading. He concluded that something more must be shown than that the provision called in question was unreasonable. He came to the following conclusion (at 110): In my judgment a bargain cannot be unfair and unconscionable unless one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his conscience. I respectfully adopt that view… This has only to be stated to indicate that the terms of the mortgage fall far short of demonstrating by themselves that the contract is so unconscionable or oppressive that it ought not to be enforced in a court of equity… 1. Mahoney JA spoke in terms of the conduct being "unreasonable" but added (at 9542): "I have to this point used the term 'unreasonable' in its ordinary sense. It may be that, as a test of the validity of such a requirement, it should be given a stricter meaning, such as 'unconscionable and oppressive': compare the Multiservice case, above, at 107–110; Halsbury's Laws of England (4th ed) vol 32, para 590. However, for present purposes, I do not think it necessary to determine this question." 2. Therefore, mere unreasonableness of a collateral advantage will not be sufficient to establish that its inclusion in the mortgage was unconscionable, although the unreasonableness of the collateral advantage will be a relevant factor. 3. The proposition that a collateral advantage should not be enforced if it is so unconscionable or oppressive that it ought not to be enforced in a court of Equity tends to beg the question. Some assistance is gained from Reynolds JA's reasoning that the parties were represented by solicitors and had received appropriate advice, that they were not overborne and that they were sui juris. 4. Furthermore, in Westfield, Young J referred to the classic case where the Court can see that a necessitous borrower is not, truly speaking, a free borrower. In Lift Capital, Barrett J referred to the principle of protecting the distressed borrower who was necessitous and not free at [124]. 5. It is not advisable for a Court to classify the conduct that will be considered to be unconscionable, as that will always depend upon the facts of the particular case, but I think that it is proper, having regard to these authorities, to note that, in determining whether the inclusion of a collateral advantage in a mortgage is unconscionable and so invalid, the Court is entitled to have regard to the common experience that parties who would otherwise be competent and without any special disadvantage may be rendered highly susceptible if they find themselves in necessitous circumstances that will only be alleviated by access to borrowed money. 6. I will now explain why, if as a matter of law, it is necessary for me to do so, I would find that the inclusion in the deed of the transfer terms should be held to be unconscionable. 7. It will be appropriate first to refer to a number of preliminary matters concerning the evidence. 8. As noted above, recital A to the first agreement made on 29 April 2010 recorded that the property had an approximate value of $750,000. 9. When the defendants' counsel explained to the Court the effect of the statement of agreed facts, she advised that the joint valuation expert's reports would be tendered, but there would be no cross examination. It will be convenient at this point to record the opinions expressed by the valuer, Mr Michel Hermiz. In his initial report, Mr Hermiz valued the property as at 2010 at $810,000, and as at 12 May 2020 at $1,460,000. In his second report, Mr Hermiz valued the property as at 12 March 2021 at $1,600,000. 10. Recital B to the first agreement recorded that the defendants were indebted to NAB and had a total debt of approximately $700,000. 11. Of the $130,000 paid by Mr Bonanno, only $81,402.54 was paid to NAB as an amount of $48,597.46 was paid to a company called Ausnik IT Holdings (T 53). 12. Mr Bonanno put an argument, at page 16 of his final written submissions in reply, that as the property was valued at $810,000 as at 2010, the net equity in the property after $81,402.54 had been paid off the $700,000 apparently secured on the property would have been in the order of $191,402. If $130,000 is deducted from that amount, the remainder is only $61,402. 13. Mr Bonanno's argument was that the terms of the deed that gave him an interest in the property and its proceeds of sale were only worth in the order of $20,000 to Mr Bonanno at the date the deed was made. 14. Even though the evidence concerning the indebtedness of the defendants at the date of the deed is sparse, and insufficient to enable the Court to determine the effect of the deed on the capacity of the defendants to continue to service the NAB mortgage and any other indebtedness of the defendants, I accept that there is some strength in this argument put by Mr Bonanno. 15. Mr Bonanno submitted, at page 21 of his final written reply submissions, that there were periods in which the defendants received rents for four weekly periods of between $5,000 and $6,000 and that, as the mortgage payments were in the order of $2,000 per fortnight: "It is clear that the rents could cover the mortgage repayments. The expenses would in nearly all cases also be covered". 16. Mr Bonanno submitted, at page 24 of his final written reply submissions, that as his entitlement upon the sale of the property after repayment of all loans was no greater than $20,000: "The property was no golden goose". 17. However, on the whole of the evidence, I am satisfied that the defendants were, at the time they entered into the deed, extremely distressed borrowers, who depended upon the profits of the boarding house, and had no other realistic way of raising money to cover substantial existing defaults on their mortgage, as well as other debts, than to borrow the $130,000 from Mr Bonanno. That money was to be used substantially for catch up debt payments. The borrowing of the money only permitted the defendants to stave off action by NAB to enforce its mortgage, and did not provide the defendants with additional capital for the purpose of improving the boarding house or increasing its profitability in order to improve the defendants' ability to service their debts in the future. 18. While it is true that, at the date of the deed, the value of the collateral advantage granted to Mr Bonanno over and above his right to be repaid the $130,000 may only have been in the order of $20,000, he became entitled to one third of any increase in the net market value of the property at any time in the future when he was able to cause the sale of the property. 19. Further, Ms Zhou, while reasonably astute, was not commercially sophisticated and was unable at the time the deed was entered into to comprehend spoken English in a technical legal context. 20. Mr Bonanno did not suggest that the defendants receive independent legal advice from a lawyer instructed by the defendants who understood the need to fully advise the defendants concerning the effect of the deed and the extent to which it was in their interests to enter into the deed. 21. The deed contained no term that entitled the defendants to repay the advance made by Mr Bonanno without having to sell the property first. 22. The deed did not provide a mechanism for determining when the property should be sold, if there was not unanimous agreement between the parties as to when that should happen. 23. The defendants were not advised that the terms contained in the deed would, if the transfer was valid, give Mr Bonanno a right to apply to the Court to appoint a trustee for the sale of the property at any time. If that was the legal result, that would have been entirely inconsistent with the commercial purpose of the defendants in entering into the deed. Alternatively, if there was some implied limitation on the right of Mr Bonanno to apply at any time for the appointment of a trustee for sale, the absence of any term that provided clearly for the timing of the sale of the property would likely embroil the defendants in contentious litigation. 24. The deed gave Mr Bonanno a right to be repaid the whole of his $130,000 advance in priority to the defendants out of the net proceeds of sale of the property, together with one third of the net rents of the boarding house, when the defendants had contributed capital valued at $750,000, and the defendants were to be solely responsible for the repayment of the NAB mortgage out of their remaining two thirds share in the net rents from the boarding house. Although the $130,000 that Mr Bonanno advanced to the defendant would enable them to pay an amount to NAB in response to the default notices, some of that money would go to pay outstanding interest and costs, and would not reduce the outstanding principal by the full amount of the payment. The overall principal indebtedness of the defendants would have increased, but they would be required to service the remaining amount due to NAB out of two thirds of the net profit from the operation of the boarding house. 25. The deed granted to Mr Bonanno an option to require the transfer to him of a one third interest in the property without any consideration in addition to the advance of $130,000 for which he was entitled to be repaid in full. 26. The defendants agreed to transfer the one third interest in the property to Mr Bonanno in the expectation, induced by comments made by Mr Bonanno in discussions with Ms Zhou, that the deed would oblige Mr Bonanno to contribute actively to the management, repair and maintenance of the boarding house and the improvement of the business, and Mr Bonanno did not ensure that the deed contained a term to that effect. 27. This is the primary reason why I consider that the inclusion of the transfer terms in the deed was unconscionable. It would have been a natural commercial step for the defendants to take to agree to transfer one third of the interest in the property to Mr Bonanno if he was to be liable under the deed to contribute equally to the maintenance, repair and operation of the boarding house. In that case, Mr Bonanno would in effect have become a partner of the defendants and he could reasonably have expected to become a one third owner of the property. I am satisfied that the defendants acted in the expectation that the deed would achieve that result, but for the reasons that I have explained above it did not. Moreover, Mr Bonanno did not in fact provide the benefits that the defendants expected in return for his entitlement under the deed to become a one third owner of the property. 28. In reality, the deed created the legal result that Mr Bonanno became a mortgagee of the property entitled to repayment of the $130,000 plus a one third share of the net profits from the operation of the boarding house, plus a one third interest in the property and its net market price on sale, without any obligation upon Mr Bonanno to contribute equally with the defendants in the operation of the boarding house. 29. Consequently, if the validity of the transfer terms depends upon whether or not their inclusion in the deed was unconscionable, I would find that the transfer terms are invalid. Relief 1. I will require the parties to confer and agree short minutes of order to give effect to these reasons for judgment and to provide draft short minutes of order to my Associate. 2. As to the submissions made on behalf of the defendants to the effect that Mr Bonanno is not entitled to any relief under the deed, because he has not complied with any formal requirements imposed upon mortgagees, such as the service of notices on the defendants, I do not consider that those submissions provide an impediment to the Court making all orders that may be necessary to finally resolve all legal controversies between the parties. The Court has found that the deed has had the effect of creating a charge over the property in favour of Mr Bonanno to secure repayment to him of the $130,000 and any other money that may be owed to Mr Bonanno under the terms of the deed. Section 63 of the Supreme Court Act 1970 (NSW) requires the Court to grant all such remedies as any party may appear to be entitled to so that, as far as possible, all matters in controversy between the parties may be completely and finally determined by the orders that are to be made. 3. I am not aware that the Court was provided with any evidence at the hearing as to the outstanding amount of the debt owed by the defendants to NAB, or whether the defendants have been complying with the term of the deed that required them to make all periodical payments required by their mortgage. Consequently, the Court has no means of determining the orders that must be made to give effect to these reasons, and in particular whether or not it will be necessary for the property to be sold so that Mr Bonanno may be paid the amount that is due to him. 4. It will also be necessary for the parties to address the issue of costs which may now be an exceedingly difficult and complex question given the history of these proceedings and the findings made by the Court in these reasons. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 01 December 2021