ZELL vy COMMONWEALTH BANK OF AUSTRALIA SUPREME COURT OF NEW SOUTH WALES — COURT OF APPEAL SHELLER JA 29 September 1997 [1997] NSWCA 356 Sheller JA. This is an application by Colin Martin Zell and Jennifer Anne Zell that orders made by Sperling J on 17 February 1997 be stayed until the hearing of the claimant's application for special leave to appeal to the High Court of Australia, and if such leave is granted, until the determination of the appeal by the High Court or until further order. This application follows the dismissal of an appeal by Mr and Mrs Zell and another appellant to this Court from Sperling J's decision. That appeal was dismissed on 10 September 1997. The appellant's appeal challenged the trial Judge's refusal to set aside certain contracts and mortgages said to be unjust within the meaning of the ContractsReview Act 1980 and unconscionable. In the language of his judgment in the Court of Appeal, the President, with whose reasons Handley and Stein JJA agreed, said that if Sperling J's orders remain undisturbed, all of the Zell family's pastoral and farming properties at Gilgandra will be sold up by the respondent bank, the Commonwealth Bank of Australia, in exercise of its mortgage rights. In broad terms, the contest on the appeal related to an additional loan made by the bank to the Zells in 1985 and a restructuring of their loan arrangements in 1989. At the present time, the total debt owed to the Commonwealth Bank is of the order of $2 million, carrying a daily rate of interest of $810. The assets available to meet this debt, which are liable to be sold, consist of three properties of a combined value of $886,000, of which one, called 'Gowan Brae' is the family home. The test I have to apply in deciding whether or not a stay should be granted as asked is most recently set out in the judgment of Kirby P in Bryant v Commonwealth Bank of Australia (1996) 70 ALJR 306, particularly at 308 and 309. One matter to be considered is the applicant's prospects of success ingaining special leave. In that respect, Kirby P remarked, after referring to the decision of this Court in Alexander v Cambridge Credit Corp Limited, that: In the High Court, the old rule of stringency continues largely to be maintained, with particular force where no grant of special leave to appeal has yet been secured. There are obvious reasons for a measure of greater stringency at this point. Ordinarily, the case will have proceeded through at least two tiers of the judicial process. The would-be appellant's arguments will have been rejected by the court whose orders are the subject of the special leave application. Only a relatively small proportion of the applications for special leave succeed. His Honour also referred to a number of decisions of Justices of the High Court where that court has emphasised that the jurisdiction to grant a stay is exercised only in very exceptional circumstances. His Honour quoted from the decision of Brennan J in Jennings Construction Limited v Burgundy Royale Investments Pty Limited [No 1] (1986) 161 CLR 681 where his Honour said at 685: 2 UNREPORTED JUDGMENTS In exercising the extraordinary jurisdiction to stay, the following factors are material to the exercise of this Court's discretion. In each case when the Court is satisfied a stay is required to preserve the subject matter of the litigation, it is relevant to consider: first, whether there is a substantial prospect that special leave to appeal will be granted; [I can pass over the second matter referred to by his Honour because that does not apply in this case.] ....thirdly, whether the grant of a stay will cause loss to the respondent; and fourthly, where the balance of convenience lies. In the Court of Appeal the President said that the primary attack upon Sperling J's judgment came from Mrs Zell. Her counsel had submitted that she was under a special disability and that the bank failed to bring home to her that the acquisition of one of the properties in 1985 effectively put it beyond thefamily's capacities to service its borrowings. Mrs Zell complained that the bank's practice of dealing almost exclusively with her husband meant that she was kept in the dark about the true risks, and that the bank took advantage of her ignorance. It was put, apparently, to the court, and has been repeated in this Court, that the bank should have recognised that the acquisition of that property was not viable. The case at trial attacked both an acquisition in 1984 and the 1985 acquisition, treating them together as the effective cause of the financial downfall which followed. Again, the President said later in the judgment: The real challenge in the appeal was mounted by Mrs Zell who sought (forensically) to distance herself from her husband That approach is one that has been taken on this application. In particular, reference was made to the trial Judge's assessment of Mrs Zell. His Honour held that her incomplete knowledge of the family's farming business was due to the fact that she left that to Mr Zell. He concluded that, in so doing: she conformed with the mores of her generation, particularly in the rural community. At 28 in his judgment the President dealt with what was described as the disposition of the principal issues at trial and on appeal. His Honour said: Having found the relevant facts, the trial judge considered whether the two transactions were unjust in the light of the principles stated in Smith v Elders Rural Finance Ltd (1994)NSW ConvR 55-727 (Bryson J) and, on appeal, Elders Rural Finance Ltd v Smith (1996) 41 NSWLR 296. It was not these principles, but their application, that were in issue on the appeal. As the judge recognised, there were significant differences between the facts in Elders and those in the present case. Each case involved an underlying transaction, with attendant loan arrangements, which was found to have been objectively not viable. Nevertheless Elders was distinguishable from the present case, so the judge held, because the Zells were not financially unsophisticated in the way and to the extent that was found in Elders. Nor did Sperling J find that the lending institution had a better awareness than the borrower of the financial implications of the transaction; nor that there were collateral advantages to the lender of the kind that existed in Elders. His Honour considered the relevant items of the check-list offered in s 9(1) of the Act in determining whether a contract is unjust. In the appellants" favour he recognised that there was inequality of bargaining power; that the loan was (objectively) impossible to comply with; that there was a substantial difference in the economic circumstances of the parties; that the Zells did not seek independent advice from their solicitors or accountants in relation to the relevant contracts; and that there was inequality of risk undertaken by the parties. URJ ZELL v COMMONWEALTH BANK OF AUSTRALIA (Sheller JA) 3 On the other side of the equation his Honour noted the importance, in a general sense, of bargains being implemented and, if necessary, enforced; the fact that the Zells knew and understood the fundamental elements in the arrangements, both as to their legal and practical effect; the absence of undue influence, unfair pressure or unfair tactics exerted or used against the Zells; and the superior capacity of Mr Zell to estimate future income and farm-related expenditure. As to Mrs Zell, the judge recognised that she did not have her husband's experience and farming expertise, sufficient to fit her to make the same kind of forward assessment as her husband. He addressed her lack of involvement in the negotiations leading up to the 1985 transaction, holding that Mrs Zell had an incomplete knowledge of the family's farming business, leaving that to her husband. In that regard "she conformed with the mores of her generation, particularly in the rural community". His Honour found that Mrs Zell was later unaware of the family's deepening financial difficulties and of the true extent of those difficulties until they had reached very grave proportions. Nevertheless this lack ofawareness was "a function of her role". There was, he held, no question of Mr Zell or the Bank having kept information from Mrs Zell against her will, or of having overborne her or kept her from participating in the arrangements made from time to time. "She did not want to know more than she was told, or if she did, she did not say so. And she did know, substantially, what liabilities were undertaken from time to time and what securities were provided." Having regard to the foregoing considerations his Honour held that he was not satisfied that the contracts relating to the "Bundally" purchase were unjust. There was no specific finding referable to the principles in Amadio's Case, because the parties were content at trial to rely upon their statutory rights in connection with the 1985 transaction. In approving the 1985 transaction, the Bank adopted and shared Mr Zell's optimism as to the borrower's capacity to repay. That optimism was fully justified if the Bank was entitled to rely solely upon the estimates of forward income and expenditure provided by Mr Zell. In dealing with the trial judge's assessment of Mr Zell, I have already drawn attention to presently incontestable findings that show that Mr Zell provided the relevant figures and that it was the Bank that relied upon Mr Zell, and not the converse, as to their accuracy. As regards 1989 financial reorganisation, the judge acknowledged that the transaction proceeded on a grossly incorrect assumption that the business had a reasonable prospect of surviving with its current level of debt. Nevertheless he declined to find that the contractual arrangements were unjust. His reasons were, first the finding that the Bank had (through its officers) honestly shared Mr Zell's optimism. The second, and principal factor, was the role of Mr Zell. Although Mr Zell's estimates were, the judge held, substantially at variance with past performance, Mr Zell defended his approach when taxed by the Bank officers. "What Mr Zell in fact chose to do was to see if he could tough it out in the hope that somehow things might come good. To do that he had to convince the Bank to continue to support him. Support meant meeting the Bank's terms, which involved the re-organisation of the borrowing arrangements and providing additional security. It also meant that he had to persuade the Bank that the business could service the new borrowing regime. That he did, but only by providing an estimate of future income and expenditure that was, in both respects, very substantially more optimistic than past performance, as he was aware, and by persuading the Bank that it was achievable. 4 UNREPORTED JUDGMENTS In this, Mr Zell took an enormous risk." In making that decision, Mr Zell was not significantly influenced by eulogistic observations coming from the Bank. Rather, he must have appreciated that the Bank's assessment of viability was dependent on his forward estimates in relation to farm-related items of income and expenditure. Sperling J held that the Bank was entitled to take the commercial position that, if the Zells needed additional accommodation in order to carry on as they were going (as they obviously did), that had to be on the Bank's terms, including absorption of arrears in a new arrangement and additional security. Applying these findings to the s 9 check-list, it was held that the contracts relating to the financial reorganisation were not unjust in any respect in the circumstances relating to such contracts at the time they were made. In Younan v Beneficial Finance Corporation Ltd (Court of Appeal, unreported 21 November 1994) Mahoney JA (with whose reasons Sheller and Powell JJA agreed) said (at p 11): "There are amongst others, four things which may be said about the power given by the Act and the scheme of the operation of it. First, the test for determining whether the power exists and whether it should be exercised in the particular case is a normative for test ("unjust in the circumstances relating to the contract at the time it was made" and "considers it just to do so": cf s 7(1)). Second, the Act indicates various factors or classes of factors which are to be taken into account in "deciding whether a contract or a portion of a contract is unjust ... ": s 9(1). Third, the test laid down by the Act involves a high rather than a low standard. And, fourth, the decision of the court that the power exists and that it should be exercised is ofits nature a discretionary decision and accordingly an appellate court should not set it aside except by reference to the principles illustrated by or derived from cases such as House v R (1936) 55 CLR 499." Later (at p 12) his Honour noted that the factors addressed in s 9 of the Act include public interest factors, factors dealing with the burden of contract, factors derived from blame, factors going to the freedom of the parties in entering into the contract, and bargaining factors. The enumeration does not purport to be exclusive. A decision to exercise the power given by the Act involves two stages: a decision that the contract or a portion of it was "unjust"; and a decision that, this being so, it is "just" to do one or more of the things referred to in s 7(1). The approach adopted by Sperling J involves no departure from these principles. In a judgment that is not said to involve any significant error of fact or failure to have regard to any significant fact, his Honour was faced with the need to balance a range of competing factors, some of which tended in favour of the exercise of the statutory discretion, others of which looked in the opposite direction. In my view this Court would be contravening the proper limits of appellate review were it to hold that the discretion miscarried in relation to the 1985 or the 1989 transaction. There is nothing wrong in itself with a lender seeking additional security in return for committing itself from refraining from calling in an already overdue debt. This in essence is what happened in 1988 and 1989. I wish to add a few remarks referable to the separate case of Mrs Zell that was pressed in the appeal. This was a marriage in which husband and wife treated their assets and income as common funds. They undertook financial and other burdens, and the risks associated with them, in the context of a mutually supportive marriage where each had regard for the interests of the other and of their three growing sons. Each partner relied upon the assistance and judgment URJ ZELL v COMMONWEALTH BANK OF AUSTRALIA (Sheller JA) 5 of the other, supplemented at times by the assistance of the family accountant. Mr Zell held the labouring oar with respect to the business affairs of the family, while Mrs Zell held the labouring oar with respect to the equally vital and taxing issues associated with what some dismissively describe as "home duties". Neither partner was held to have relied upon advice by the Bank to enter into the critical transactions. It is true that, in the case of Mrs Zell, she was influenced by thebelief that the Bank was expressing an "expert" opinion that the loans were viable. But this belief had no foundation in fact, nor was the Bank responsible for having engendered it. Mrs Zell understood the legal nature of the contracts she was entering into. She was also aware of the sums of money involved in the borrowings. She was a co-signatory of cheques. On at least one occasion (September 1986) she called at the Bank to arrange loan repayments. To the (significant) extent that she was content to follow the lead of her husband, this was because she thought that this was in her own and her sons interests, as it had apparently proved to be in the past. There was no exercise of undue influence, or any improper or unfair pressure proceeding from Mr Zell to Mrs Zell, or from the Bank to Mrs Zell. This was not a case where a wife encumbered the matrimonial home to secure a business venture in which her husband alone had an interest. Rather, it was one in which Mr and Mrs Zell were equally committed as to both risk and anticipated profit at each step in the expansion of what was truly a "family business". They had the vision that their three sons would become joint participants and ultimate successors of the Zell family holdings which, from 1978 onwards were increasingly channelled through Puku, the family discretionary trust. Mrs Zell knew about the various acquisitions and doubtlessly discussed aspects of them with her husband and sons. The trial judge gave proper regard to the findings indicative of Mrs Zell's distinctive position vis a vis that of her husband. He also considered the justice of the contracts both from the perspective of Mr and Mrs Zell, and of the Bank. This too was a proper approach. It is also relevant to the calculus of determining whether there was "unjustness" in the contracts and whether it was "just" to do anything about it, to observe that the relief sought on the appeal by Mrs Zell referable to the 1989 transaction was an order relieving her interest in "Mount Pleasant" of the mortgage created in 1989. It is far from clear that this would provide any effective relief, assuming that either or both of the 1985 or 1989 contracts were relevantly unjust. This is because the release of Mrs Zell's interest in "Mount Pleasant" from the burden of the final indebtedness would still leave her exposed to personal liability under her guarantee of Puku's indebtedness. Such indebtednesswould almost certainly result in the attachment of her interest in "Mount Pleasant" through the processes of execution, if not bankruptcy. There is no basis on the facts for an independent attack on the judgment based on Amadio. Mrs Zell was in no position of special disability vis a vis her husband, nor was the Bank on notice of any conflict of interest (none in fact existed) between Mr and Mrs Zell. The Bank was entitled to deal with Mr Zell as the agent for both parties given that they chose him to represent them in most of the pre-contractual negotiations.' Mr Street SC, who appeared for the applicant, drew my attention in particular to the first two grounds of the application for special leave to appeal which was filed in the High Court on 19 September 1997. The first of those was that the Court of Appeal erred in law by taking into account that Mrs Zell conformed with 6 UNREPORTED JUDGMENTS the mores of her generation of women in determining whether the contracts in 1985 and 1989 were unjust under the Contracts Review Act 1980. The second was that the said Court erred in law by taking into account the knowledge and conduct of Mr Zell in determining whether the contracts entered into in 1985 and 1989 were unjust under the Contracts Review Act 1980. In short, the error in determining whether or not at law the contract was unjust was said to be attributing Mr Zell's knowledge to Mrs Zell. The application was supported by affidavits of Mr and Mrs Zell, which I have read. They outline that one of the properties "Gowan Brae' has been the family home since 1962 and would be likely to deteriorate if they are forced to vacate it. Mrs Zell described in detail her contribution to the household, to the farm, to her family and to the community. She also described the feared fate of a number ofanimals who lived on the farm, including ostriches, which are run as part of the farming exercise. She described a number of personal concerns about a garden which was dedicated to her late son and to the effect upon the health of her two surviving sons. Mr Zell has farmed all his life. He described in some detail various types of weed and other damage which he fears may befall the properties if he vacates them. He referred in detail to matters of fire control, watering and fences. He also referred to his own health which for some years has obviously not been good. I have paid careful attention to these affidavits and also the supporting affidavit of the claimant's solicitor, Mr Quigley. Mr Street informs me that his clients are prepared to accept as a condition of a stay that they continue to pay the bank, as they have paid under an earlier stay order made by this Court pending the hearing of the appeal, a quarterly amount of $13,000. The next payment is due on 7 October 1997. Mr Street informs me the money is available to pay that amount. Undertakings are given on behalf of the claimant that the payments in accordance with such a condition would be made pending the hearing of the special leave application which, on the evidence, appears to be likely to be dealtwith in either February or March 1988. He also offers undertakings on behalf of the claimants to prosecute the special leave application with due diligence. Mr Street submits that this is not a case in which the application for special leave could be said to be foredoomed to failure. He submits that a refusal of a stay would result in the distraction of the subject matter of the appeal. Ihave given careful thought to this application and, firstly, and in particular to, the question whether or not I consider there is a substantial prospect that special leave to appeal will be granted. I accept that the word 'substantial' in that context is in accordance with its ordinary meaning, but I think I have to take into account that in this sort of case, for reasons that are outlined by Kirby P, a stay will only be granted in very exceptional circumstances. I am not satisfied that there is a substantial prospect that special leave to appeal will be granted in this case. It is not my task to review in detail the grounds of appeal. As Kirby P remarked, on a stay application of this sort inevitably the view a judge takes of it tends to be one of impression. However, it seems to me that in substance this appeal turns upon questions of fact and the exercise by the trial judge of a discretion. All members of the Court who sat on this appeal were satisfied that his Honour had exercised his discretion in a proper manner. The findings of fact that hisHonour made about Mrs Zell and about her knowledge and her relationship with her husband are not challenged. Indeed, Mr Street effectively limits himself to the argument which I sought to summarise, namely, that Mr Zell's knowledge URJ ZELL v COMMONWEALTH BANK OF AUSTRALIA (Sheller JA) 7 was attributed to Mrs Zell. However, I am not persuaded that there is a substantial prospect that special leave would be granted on this ground. I should add that the sort of relief likely to be granted if Mrs Zell succeeded in obtaining leave and then succeeded on her appeal in the High Court is such that I do not think it can rightly be said that the subject of the appeal is destroyed by refusing the stay. It is true, as Mr Forster SC, who appeared for the bank, conceded, that the three properties will be sold, but it seems to me that at the end of the day, even if Mrs Zell were entirely successful in her application to the High Court and on her appeal, any relief she obtained would still be quite consistent with the properties having to be sold. In all the circumstances, in my opinion, this application should be dismissed. The claimants are to pay the costs of the application. Orders accordingly.