PAGE and ANOR v COMMONWEALTH BANK OF AUSTRALIA SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, PRIESTLEY and MEAGHER JJA 6 October 1995, 6 October 1995 [1995] NSWCA 350 EQUITY — UNCONSCIONABILITY — mortgage granted over home to bank — whether unconscientious for bank to enforce security — no error in conclusion that not unconscionable. EQUITY — UNCONSCIONABILITY The appellants gave a mortgage over their home to secure a borrowing from a bank by a company in which they had a one-third interest. The business of the company failed. The reasons for that failure were not examined in any detail. It was argued that it was unconscientious for the bank to enforce its security. The trial judge rejected that contention — HELD — No error had been shown. Gleeson CJ This is an appeal from a decision of Giles J in the Commercial Division of the court. His Honour's decision was given on 15 November 1994. Although the case for the appellant has been argued forcefully and clearly by Mr Lawler, I have formed a clear view that the appeal must fail and there is no reason to delay the giving of the reasons for that conclusion. In giving those reasons, however, I will not attempt either to repeat or to summarise the reasoning of Giles J. It will be assumed that this court's reasons for judgment will be available to be read together with his Honour's reasons and, for my part, I intend to refer only to so much of the relevant facts and legal principles as is necessary to deal with the arguments that have been advanced in this court on behalf of the appellants. The appellants, in the course of a business transaction in which they had a personal financial interest, entered into certain contractual arrangements with the Commonwealth Bank of Australia. In particular, they gave a mortgage over their home for the purpose of securing a loan by the bank to a company named Rosehall Pty Ltd and they undertook certain personal financial obligations concerning the repayment to the bank of the indebtedness of Rosehall. The business venture failed and Rosehall ended up owing the bank a substantial amount of approximately $400,000. The bank took proceedings against various interested parties, including the appellants, Mr and Mrs Page, and at first instance the bank obtained a judgment against the appellants in an amount of $394,748, and an order that the appellants give to the bank possession of the land which was the subject of the mortgage. It was the contention of the appellants, both at first instance and on appeal, that the bank should not be permitted to enforce the contracts into which the appellants and the bank entered. In short, it was argued that it is unconscionable for the bank to seek to enforce its rights under those contracts. In that connection it should be observed that there was no finding at first instance, nor was there any evidence to support a finding, of any dishonest or discreditable conduct on the part of the bank, or on the part of any person for whose conduct the bank should be held responsible. 2 UNREPORTED JUDGMENTS After making a careful analysis of the facts of the case, and considering those facts in the light of the relevant legal principles, Giles J concluded that there was no reason in equity or good conscience why the bank should not enforce its contractual rights against the appellants. With that conclusion I agree. The mortgage given by the appellants over their home was to secure a loan by the bank to Rosehall Pty Ltd. At the time of the loan, there were six issued shares in the capital of Rosehall. In identifying the shareholders, I should mention that by convention at first instance and on this appeal two persons involved in the transaction have been referred to by their Christian names. This is not out of any disrespect to those persons, nor does it reflect any casual approach to the litigation by anybody involved. It has simply been convenient to refer to these persons as David and Peter. David is David John McGlynn, who is a son of an old friend of the appellants, Mr and Mrs Page, and Peter is Peter Leslie Page, who is the son of the appellants. Of the six issued shares in the capital of Rosehall one was held by David, one was held by David's wife, one was held by Peter, one was held by Peter's wife, one was held by the appellant, Mr Leslie Page, and one was held by his wife, the appellant, Mrs Page. It is common ground that under the articles of association of Rosehall, the shareholders in the company were entitled to participate equally in the profits and in the assets of the company in a distribution on a winding-up. Mr and Mrs Page, who were in their sixties, were both living in retirement. The house over which they gave the mortgage was their only substantial asset. The business transaction into which they entered together with Peter and David and their respective wives, may be summarised as follows. Rosehall raised a loan from the bank for the purpose of acquiring a hotel business, including the leasehold of the premises on which the business was conducted. In addition to the capital raised by way of loan from the bank, the three groups of shareholders in Rosehall each agreed to put up $40,000 by way of loan to Rosehall. Mr and Mrs Page had on an earlier occasion given a mortgage over their house to secure a borrowing by Peter and David in connection with another hotel. That hotel was at Blayney. The Blayney hotel had apparently been successful, but had been sold. A decision was made to purchase another hotel, and the one that was ultimately selected was the Murray River Hotel at Wodonga. Once again Peter and David asked Mr and Mrs Page to give a mortgage over their home to secure the finance necessary for this purchase. After some discussion and consideration of the venture, Mr and Mrs Page agreed in principle, but stipulated that on this occasion they would require a one-third equity interest in the venture. That stipulation was accepted by Peter and David and the acquisition proceeded on that basis. Rosehall was acquired as a shelf company and the shareholding was arranged as set out above. In due course, Rosehall acquired the leasehold of the hotel and the business. There was a solicitor acting for Rosehall in that transaction, but Mr and Mrs Page did not have any separate legal advice. In order to enable it to acquire the business, Rosehall borrowed from the Commonwealth Bank an amount of $300,000 as a fully drawn loan and an additional amount by way of overdraft. The bank's securities included a mortgage over the home of Mr and Mrs Page. In arranging the execution of the mortgage documents the bank sent a letter to Mr and Mrs Page, which contained the following statement: URJ PAGE and ANOR v COMMONWEALTH BANK OF AUSTRALIA (Gleeson CJ) 3 "Prior to signing the document you should satisfy yourself that you understand the full nature and effect of your liabilities to the bank and obtain appropriate advice, legal or otherwise, if you are at all uncertain of your position". There is no doubt that Mr Page received that letter, although Mrs Page said that she did not. By that presumably she meant that her husband did not show it to her. The instrument of mortgage was subsequently returned to the bank, signed by Mr and Mrs Page. Their signatures were witnessed by an accountant, Mr McGlynn, who was the father of David. Giles J made the following finding: "Tt follows that there was no evidence of what occurred when Mr and Mrs Page signed the mortgage, but it should be said at once that there was no evidence from them that they did not appreciate that what they signed was a mortgage of the Ryde property or did not understand what a mortgage was, nor was it submitted that I should so find." The evidence showed that, prior to the acquisition of the hotel, there was discussion between Mr and Mrs Page and Peter and David about the prospects of the hotel business. Some time before the completion of the purchase of the hotel business, David gave Mr Page a lengthy document, covering some seven pages, headed "Explanations". As Giles J said, it appears to have been intended as a careful description of the venture for the benefit of Mr and Mrs Page. There is no suggestion that in his outline of the prospects of the venture David acted dishonestly or in any way misrepresented his own personal beliefs as to the future of the venture, and as to what was involved in terms of business risk for Mr and Mrs Page. It is perfectly obvious that all of the four parties principally involved, that is to say, Mr and Mrs Page and Peter and David, genuinely believed that the purchase was financially advantageous, and that the prospects of success of the hotel were good. The most serious allegation that is made against any of the parties involved in this transaction is that David McGlynn innocently, but recklessly, misrepresented to Mr and Mrs Page that there was no significant or substantial risk to them arising out of their participation in the venture. In that connection, Giles J made the following observations, which appear to me, with respect, to be in point. The reason for this sorry litigation is that the hotel business ultimately failed. Peter and David and Mr and Mrs Page made an erroneous assessment of the prospects of success of the venture. There was, however, no substantial attempt made at the hearing to investigate the reasons for the failure of the hotel business or to relate those reasons, whatever they might have been, to any particular aspect of the information or advice given to Mr and Mrs Page by David prior to the purchase of the business. The most that was done in that respect at first instance, and on this appeal, was to point to certain internal bank documents in which officers of the bank made comments upon the bank's view of the prospects of success of the business, and to seek to draw inferences or conclusions from that as to what might have gone wrong with this business decision. David was not called as a witness in the case and Peter gave only relatively brief evidence. Giles J was not prepared to conclude that there was any material misrepresentation made by David, even of an innocent character, of such a kind as would, for example, as between David and Mr and Mrs Page, have entitled Mr and Mrs Page to get out of their contractual arrangements insofar as they involved David. No successful challenge has been made to that finding on this appeal. 4 UNREPORTED JUDGMENTS The argument for the appellants was put mainly upon the basis of the principles discussed in Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, although reliance was additionally placed upon Akins v National Australia Bank (1994) 34 NSWLR 155 and Barclays Bank PLC v O'Brien [1993] QB 109. It appears to me to be unnecessary for the purpose of disposing of this appeal to go into any detailed discussion of those authorities. They are considered at some length in the reasons for judgment of Giles J. In my view, as was submitted by the respondent in its written submissions, there is no factual foundation for the application of the principles upon which the appellants seek to rely. The case, as put by the appellants, may be summarised as follows. The purchase by Rosehall of the hotel business, and the giving by Mr and Mrs Page of a mortgage to secure the loan raised for that purpose, was essentially risky. Mr and Mrs Page did not appreciate or, at least, did not adequately appreciate the risk. The bank never explained it to them and David painted a picture much rosier than the prospects of the hotel warranted. Mr and Mrs Page, it is said, were suffering from a special disadvantage or special disability. Counsel for the appellants, when asked to particularise that disadvantage or disability, said there were three aspects of it. They were as follows. First, Mr and Mrs Page lacked assistance and explanation in circumstances where assistance and explanation were necessary. Second, Mr and Mrs Page were PeoPle in their late sixties. Third, Mr and Mrs Page lacked business expertise. Counsel acknowledged that the bank had neither knowledge nor notice, actual or constructive, of the third of those aspects of disability. He submitted that the bank had actual knowledge of the second aspect, but for my part I would not regard being aged in one's late sixties as either a special disability or a special disadvantage. The primary aspect upon which reliance was placed was the lack of assistance and explanation in circumstances where assistance and explanation were necessary. Of this it was said the bank had constructive notice. It is convenient at this stage to reflect upon what the bank knew about that matter. The bank had no direct dealings with Mr or Mrs Page. We know as an objective fact that Mr Page had some views of his own upon the prospects of success of this hotel business and we know that Mr and Mrs Page received a lengthy explanation which contained the views of David McGlynn as to the prospects of success of the business. There was nothing in the evidence to indicate what the bank knew or should have known about the nature and extent of the advice and assistance that Mr and Mrs Page were receiving in relation to this transaction. As was noted earlier, the bank wrote them a letter suggesting that they should get independent advice, but for all that the bank knew Mr and Mrs Page had received extensive advice, and given careful and detailed consideration to the prospects of success of the hotel to be acquired. There is, in my view, no basis for concluding that the bank was affected by constructive notice that Mr and Mrs Page lacked assistance and explanation in circumstances where assistance and explanation were necessary. It was pointed out by reference to the evidence of one of the bank officers involved, and by reference to internal bank documents, that the bank appreciated that this was a risky transaction. Of course it was a risky transaction. Commercial transactions usually are risky. Profit is the corollary of risk, and the reason why people who engage in business ventures are rewarded by way of profit is for the URJ PAGE and ANOR v COMMONWEALTH BANK OF AUSTRALIA (Gleeson CJ) 5 taking of a risk. However, counsel for the appellant has pointed out correctly that so far as Mr and Mrs Page were concerned, this was a transaction to which they were committing virtually the entirety of their assets and from their point of view the risk of the transaction was greater than it would have been, for example, for other parties to it. Even so, Giles J was not prepared to conclude, and I for my part would not be either, that there was any special disadvantage or disability in the present case, or that the bank was on constructive notice of any such disadvantage or disability. Giles J made the following findings, which have not been successfully challenged. Reference has already been made to the fact that he said that there was no evidence that Mr and Mrs Page did not appreciate the nature of the instrument of mortgage that they were signing. He found that David gave to Mr Page the document headed "Explanation", and that David intended it to be a careful description of the venture for the benefit of Mr and Mrs Page. As I have already said, there is no suggestion of dishonesty on the part of David. His Honour made the following findings: "In 1990 Peter was aged about 36 and David was aged about 33. The bank knew no more than that Mr and Mrs Page were the parents of Peter. In fact, they were then aged 64 and 67. Their counsel described Peter as middle-aged, something with which he may not have agreed, but whether the bank knew his age or simply acted on his appearance, I see no reason to conclude that it should have thought Mr and Mrs Page were so ill-educated, aged or otherwise susceptible that there was in the nature of the relationship a substantial risk that in procuring their mortgage Peter would commit a legal or equitable wrong entitling them to set aside the transaction. On the contrary, the bank knew that Mr and Mrs Page had provided a mortgage of the Ryde property for the purchase of the lease of the Blayney hotel and that that transaction had been successful. It sent the S33 letter plainly directing Mr and Mrs Page's attention to an understanding of what they were doing and the taking of advice, and received the mortgage witnessed by someone known to Mr Aldis. Subject to the question of misrepresentation, in fact there had not been any relevantly wrongful conduct towards Mr and Mrs Page on the part of Peter or David in the past or on this transaction. Mr Page had taken part in the search for a new hotel and although they were not highly educated, Mr and Mrs Page were astute enough to seek, for perfectly understandable reasons, an interest in the hotel. As [have said, there was no suggestion that they lack an understanding of the mortgage they gave. Mr Page had a good enough understanding of the financial statements to extract material figures in October 1990". His Honour dealt with a series of alleged misrepresentations said to have been made primarily by David to Mr and Mrs Page before the purchase of the hotel was completed and the mortgage took effect. Having carefully considered each alleged misrepresentation, his Honour rejected the suggestion that there was such a misrepresentation. He said: "Tt may be accepted that it was conveyed to Mr and Mrs Page by the particular statements indicated, and more generally by matters such as the aspiration to have the Ryde property released after twelve months, that the transaction was such that a mortgage of the Ryde property would not expose them to significant risk". 6 UNREPORTED JUDGMENTS However, having examined the detail of the argument put in support of the proposition that that involved a relevant misrepresentation, his Honour concluded that it did not. In particular, his Honour pointed to the scanty evidence that existed as to the reason for the failure of the hotel, and the connection between such failure and any of the matters that had been discussed between Peter, David and Mr and Mrs Page. His Honour concluded: "T do not think that the arguments put on behalf of Mr and Mrs Page establishes that any of the representations concerning the risk involved in the venture was a misrepresentation; certainly not in the sense of a statement of fact or forecast known by Peter or David to be incorrect and not even as a statement of fact or forecast which on a proper appreciation of the position should have been seen to be incorrect. That the hotel may have been initially unprofitable does not establish misrepresentation, but as I have already indicated, it may be that by the end of 1990 a level of trading had been achieved of the same order as that understood prior to the purchase. Still less does the fact that the hotel failed establish misrepresentation. There was no legal or equitable wrong practised by Peter or David by way of misrepresentation entitling Mr and Mrs Page to be relieved from the giving of the mortgage and, accordingly, nothing of which the bank could relevantly have constructive notice for the purpose of (certain) principles". His Honour rejected the submission that Mr and Mrs Page were in a position of special disadvantage, or that the bank took unfair or unconscientious advantage of any opportunity thereby created. In my view, on the facts as found by Giles J, which have not been successfully challenged on this appeal, there was no basis for the application in favour of the appellants of principles relating to the subject of unconscionability which might entitle the appellants to avoid the enforcement by the bank of the contracts into which the appellants entered. In my view, the appeal should be dismissed with costs. Priestley JA I agree with the Chief Justice and have nothing to add. Meagher JA I agree with the Chief Justice. Gleeson CJ: The order of the court is as I have proposed. Appeal dismissed with costs. COUNSEL: APPELLANT: MJ Lawler RESPONDENT: MA Pembroke, T Davie SOLICITORS: APPELLANT: Walsh James RESPONDENT: Corrs Chambers Westgarth