COMMONWEALTH DEVELOPMENT BANK OF AUST LTD v CHILD [1999] NSWSC 1295

New South Wales Supreme Court CITATION : COMMONWEALTH DEVELOPMENT BANK OF AUST LTD v CHILD [1999] NSWSC 1295 CURRENT JURISDICTION : Civil FILE NUMBER(S) : 13547/96 HEARING DATE(S) : 11/11/98, 16/11/98, 18/11/98, 19/1/98, 20/11/98, 14/12/98 JUDGMENT DATE : 14 December 1998

PARTIES : Commonwealth Development Bank of Australia Limited (Plaintiff) James David Child (Defendant) JUDGMENT OF : Adams J at 1

COUNSEL : Mr M Walton SC (Plaintiff) Mr C J Leggat (Defendant/Cross-claimant)) SOLICITORS : Abbott Tout (Plaintiff) Webster O'Halloran & Associates (Defendant/Cross-Claimant)) CATCHWORDS : Action for possession; mortgage; unconscionability; Contracts Review Act 1980; Trade Practices Act; non est factum; relief granted in part subject to condition Trade Practices Act ACTS CITED : Contracts Review Act 1980 Real Property Act Petelin v Cullin (1975) 132 CLR at 359-60 CASES CITED : West v AGC (Advances) Limited (1986) 5 NSWLR 610 Beneficial Finance Corp v Karavas (1991) 23 NSWLR 256 National Australia Bank Limited v Sampson (No 2) (reported 9 September 1991, NSWSC, Young J) DECISION : See paras 52 & 53

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION ADAMS J

MONDAY 14 DECEMBER 1998 13547/96 COMMONWEALTH DEVELOPMENT BANK OF AUSTRALIA LIMITED v JAMES DAVID CHILD JUDGMENT

1 HIS HONOUR: On 21 August 1996 the Commonwealth Development Bank of Australia Limited (CDB) commenced proceedings against James David Child to recover moneys due pursuant to a loan agreement dated 13 March 1985 secured by mortgages registered over properties known as Bennetts and Sneaths situated in the northern part of New South Wales. In addition to judgment for the outstanding debt plus interest the plaintiff sought orders for possession of the mortgaged properties and leave to issue a Writ of Possession in respect of them. By Defence and Cross-Claim filed on 21 November 1996 Mr. Child, in essence, claimed that the agreement between him and the plaintiff was that, to secure the loan ($159,000) he would give the Bank a mortgage over Bennetts and another property called Ewandon which he proposed to purchase with those funds and that Sneaths was on no account to be mortgaged to the Bank in respect of this transaction. Mr Child claimed that, in procuring his signature to the mortgages, CDB had acted negligently in not informing him that Ewandon was not being mortgaged but that Sneaths was, and in failing at all events to inform him that the mortgages secured all moneys owing rather than only the principal sum. Mr Child also claimed that the plaintiff, sometime after the execution of the two mortgages, represented to him that all three properties, Ewandon, Bennetts and Sneaths, were encumbered and were unable to be used to secure further financing which he needed in order to obtain funds to feed his cattle during severe drought. Accordingly, Mr Child cross-claimed for the loss of two hundred head of cattle in 1986 and 1987, other cattle undersold because he was unable to feed them, presumably also relating to those years and more cattle lost by starvation in 1991. Amongst other defences CDB pleaded the Statute of Limitations in respect of the common law claims that arose in 1986 and 1987 and, so far as the 1991 claim was concerned (which was characterised under the common law as negligent misrepresentation and, under the Trade Practices Act as resulting from false or misleading representations) in respect of the claim arising under s82 of the Trade Practices Act, the limitation period expressed in s82(3). The limitations defences were raised late and I granted leave for the cross-defendant to amend its defence to the cross-claim for reasons set out in a separate judgment. In his defence, Mr Child pleaded non est factum so far as the mortgage over Sneaths was concerned and claimed that CBD was estopped "from denying that the security for the purchase of Ewandon provided to the plaintiff was the Bennetts mortgage and a mortgage over Ewandon and that the Sneaths' property was unencumbered". Since Ewandon was never mortgaged and the CDB's action did not seek to enforce any mortgage in respect of Ewandon, this claim is somewhat oddly cast. However, I will return to this problem at a later stage. Mr Child also claimed that he was entitled to rescission of the Sneaths mortgage or otherwise a declaration that is in equity harsh and unconscionable for the CDB to rely upon either the Sneaths mortgage or the Bennetts mortgage in the circumstances. Additionally, Mr Child claimed that the Bank should release both the Sneaths and the Bennetts mortgages in whole or in part under s7 of the Contracts Review Act 1980. 2 Mr Child, who is 65 years old, was born on his parents' farm at Kangaroo Creek near Grafton and was raised on this property. He had little formal education, having attended a school at Kangaroo Creek in 1945 for about 12 months and then for a further period from 1946 to 1948 he attended primary school. When he left primary school in about June 1948 he did not return to formal schooling. He says, "I sort of learnt to read and write but cannot really read properly and I cannot spell properly, but I can write in a basic manner". Several letters of his to the Bank have been tendered which indicate a basic grasp of literacy skills which would have been adequate for most ordinary purposes. However, I accept that Mr Child would have the greatest difficulty in reading and understanding any complicated legal document and certainly the agreements for loan and mortgages which he signed. I am less confident that, had he in fact looked at the title particulars in the application for finance and mortgages, he would not have appreciated that they referred to Bennetts and Sneaths. 3 Except for some brief interludes, Mr Child has farmed and raised cattle all his life. In July 1951 he bought a 169.8 hectare property known as Sneaths at Kangaroo Creek, using funds supplied from his own resources, by his brother John and by the Bank of Australasia Limited (as it was then) which took a mortgage over the property. Mr Child said that from about 1968 he had significant personal problems with a neighbour who lived on the property adjoining Sneaths, eventually feeling bound to sell it in February 1968. That same month, Mr Child bought a portion of the Bennetts property, which he financed in part with a mortgage back from the vendor. In 1973, he purchased the second portion of Bennetts using funds obtained from the ANZ Bank (ANZ) also secured by a mortgage. In early 1976 he learnt that his former neighbour had left his property and that Sneaths was for sale. He repurchased it in September 1976, partly from his own funds and partly by borrowing from ANZ, giving a mortgage in return. From 1980 to 1983, a severe drought hit the district, affecting Sneaths, Bennetts and Mr Child's parents' property. In 1981 Mr Child sought money for drought assistance and executed a second mortgage to the Rural Bank of New South Wales (as it then was) over Bennetts and Sneaths. He said, however, that he believed that he was merely giving a mortgage over Bennetts, and that ANZ still had its mortgage over Sneaths. A little later, Mr Child says that he sought further funds from ANZ but the bank manager declined assistance and later refused to honour one of his cheques. He says that in December 1982 he arranged some refinancing elsewhere and obtained a cheque which he used to pay out ANZ. Mr Child said that he did not think that he needed to discharge the mortgages because he did not then owe any money and, in effect, they had simply lapsed. 4 Mr Child says that in about early 1984 he approached the then manager of ANZ, Mr Brian Rawle, and informed him that he was considering purchasing another property with a Mr Warren Newcombe and wanted to check that he had paid out the mortgages over Sneaths and Bennetts. Mr Child claims that Mr Rawle told him that there was nothing owing and that all the mortgages had been paid out. Mr Rawle denies that he made the statement attributed to him. He said that at that time it was not true that there was nothing owing by Mr Child to ANZ, nor was it true that his mortgages had been paid out. He says that when he arrived at the South Grafton Branch in May 1983, Mr Child had a number of accounts with ANZ including an overdraft account, a fully-drawn advance and a personal loan, and that during the whole of the time whilst he was manager of the South Grafton branch, Mr Child had facilities with ANZ which remained unpaid. These were all secured by mortgages. A diary note of January 1985 shows debts to ANZ of about $18,000 with Mr Child seeking to borrow a further $9,000 pending cattle sales in June. In February 1985, Mr Child is recorded as having attended at ANZ in response to a request by Mr Rawle. The notes show further extentions of credit from time to time. I consider that it was most unlikely that Mr Rawle would have said that which Mr Child attributes to him and, in this respect, I prefer Mr Rawle as the more reliable witness. Whatever might be the present state of Mr Child's recollection (and I think that it is likely to be very much affected by wishful thinking) I have no doubt that, at the time, he knew that his mortgages were securing the credit which he had obtained from ANZ. 5 In early 1984, I am inclined to think about March, Mr Newcombe and Mr Child decided to purchase a property called Glencoe, which was for sale at $200,000. Mr Child sought 100% finance from ANZ but was told by Mr Rawle, quite correctly, that the Bank would not provide such finance and suggested that CDB might be able to do so. Mr Child claimed that he asked Mr Rawle how this could be done and was told by him, in effect at least, "We are agents for the Development Bank, all the banks are. We can do all the running around for you and this will save you doing it and we can look after your interests and ensure they don't put it over you". 6 Before going further, it is convenient to mention that CDB provided finance for rural purposes where, for example, a borrower who wished to purchase rural property was unable to obtain finance from his or her own bank. Such a refusal was a condition for consideration of a loan application. There was no commercial arrangement or relationship between CDB and the borrower's bank. So far as ANZ was concerned, it had blank application forms together with a "prospectus", briefly setting out the charter of CDB, which it passed on to its customers. It was expected that CDB would correspond directly with the customer. 7 Mr Rawle denied saying to Mr Child the words attributed to him in the second sentence of the conversation which I have set out above. Again, the logic of the relationship suggests that Mr Rawle would be most unlikely to undertake any responsibility in respect of the transaction whether on behalf of CDB or on Mr Child's behalf. Again, I consider that Mr Rawle's evidence is more likely to be true and even though Mr Child may well, at the present time, be labouring under the misapprehension that Mr Rawle undertook to assist him in connection with his application, his recollection of the conversation is quite wrong. Mr Child was, in fact, interviewed by Mr Hardy, the District Rural Officer of CDB at Lismore. No material financial information seems to have come from ANZ. In the result, finance was approved by CDB in 1984, but Mr Child and Mr Newcombe decided not to go ahead with the purchase. An internal report of Mr Hardy of 10 April 1984 shows that Mr Child had, at that date, outstanding debts to ANZ of $11,500. 8 In late 1984, Mr Child and Mr Newcombe proposed purchasing a property known as Ewandon at Glen Innes. Mr Child says that in January 1985 he spoke to Mr Rawle ANZ to inform him that he was purchasing a portion of Ewandon and Mr Newcombe the remaining portion and seeking finance for his purchase or to introduce him again to the CDB. He claims that Mr Rawle asked him what he was offering and that he replied words to the effect, "Ewandon and Bennetts; no way is Sneaths to be mortgaged." Mr Child says that Mr Rawle responded that ANZ could not help but said, "We will try the Commonwealth Development Bank again", restating that ANZ were "agents for the Development Bank" but proposing "ANZ can look after your interests to make sure the other party plays it straight, we can save you a lot of money in solicitor's fees". Mr Child claims that he said words to the effect, "That's OK but on no account is Sneaths to be involved. If something unforeseen happens I have a little bit of country to fall back on". 9 I interpolate here that part of Mr Child's case is that he did not understand that a mortgage gave the right to the mortgagee to obtain payment of the debt secured by the mortgage by exercising a power of sale over the mortgaged property if necessary. I do not intend to set out here all the evidence that Mr Child gave about this issue. It is sufficient to say that he was driven to concede, and I have no doubt that it is the fact, that he was well aware at all material times that a mortgage gives to the mortgagee such a power of sale. The state of his knowledge is reflected not only by the terms of his own affidavit but also by the reason that he gave for not mortgaging Sneaths. Mr Rawle accepts that Mr Child informed him that he and Mr Newcombe were looking at purchasing Ewandon although Mr Child told him that the purchase price for his portion was $220,000. He also agrees that Mr Child sought finance from ANZ. However, Mr Rawle says that he told Mr Child that the bank would not consider 100% finance of a purchase and suggested that Mr Child might try CDB. He denied any discussion of security and any statement by Mr Child that he did not wish to mortgage Sneaths. Having carefully considered the objective circumstances as well as the evidence given on this point by Mr Child and Mr Rawle, I have no doubt that Mr Rawle's account is the more reliable. 10 It is, I think, important to note that at this stage it is clear that Mr Child was represented by Mr Ray Burridge of the firm McGuren & Burridge, solicitors, of Grafton. The application for loan was filled in by Mr Burridge on the instructions of Mr Child and forwarded by him with supporting documents to CDB on 31 January 1985. There is no sign that ANZ was involved in any of this and, indeed, Mr Burridge's evidenced is to the opposite effect. In his evidence, Mr Child suggested, as I understood him, that Mr Rawle had written some detail or other on the application for loan. However, this is quite mistaken. He had nothing to do with it, with the possible exception of giving the blank form to either Mr Child or to Mr Burridge. Mr Child's affidavit implies or, at least, suggests that the application form was filled out otherwise than by Mr Burridge, presumably by someone from ANZ or leaves open this possibility. However, it is clear that this is not so. Mr Burridge says that he had a conversation with Mr Child to the effect that Mr Child would offer as security for the loan Bennetts and the property proposed to be purchased namely, Ewandon. These, indeed, are the properties specified in the appropriate column in the application. It is to my mind significant that Mr Burridge does not suggest that Mr Child made the additional point that on no account was Sneaths to be mortgaged. In one sense this seems to be a little odd because, as Mr Child well knew, Sneaths was already mortgaged to ANZ although, no doubt, he still had a substantial equity in it. It may well be that Mr Child had it clear in his own mind that he did not wish to further encumber Sneaths (although I am somewhat sceptical about this) but there was no reason for him to inform Mr Rawle of this fact and he does not assert (and Mr Burridge at all events gives no support) that he told his solicitor. However, the undoubted fact is that the application for loan proposed Bennetts and Ewandon as the relevant security for the loan. Amongst the documents sent by Messrs McGuren & Burridge to CDB was a statement of Mr Child's assets and liabilities which gives the title references to Bennetts and Sneaths. It is interesting to observe that in his report of 10 April 1984 Mr Hardy, who had spoken to Mr Child only on the telephone, described him as "a real 'bushie'" and commented, "ANZ say he is honest and vague. I find this to be so during my phone interview". In February 1985, Mr Hardy commented - "Applicant is a bachelor and phone discussions have indicated that he is a difficult man to interview possibly because he is a real 'bushie type' and may not know. One thing seems sure, he knows how to manipulate his cattle activities to avoid paying tax."