State Bank v Sullivan [1999] NSWSC 596

New South Wales Supreme Court CITATION : State Bank v Sullivan [1999] NSWSC 596 CURRENT JURISDICTION : Civil FILE NUMBER(S) : 012770/94 HEARING DATE(S) : 09/02/99-12/02/99-15/02/99-19/02/99 JUDGMENT DATE : 14 July 1999

PARTIES : State Bank of New South Wales v Donald Charles Sullivan JUDGMENT OF : James J

M Walton SC - Plaintiff COUNSEL : P Biscoe QC/I Pike - 1st Defendant C Birch 2nd & 3rd Cross-Defendants Abbott Tout - Plaintiff SOLICITORS : John C Dobson - 1st Defendant Phillips Fox - 2nd & 3rd Cross-Defendants CATCHWORDS : Contracts Review Act - proper law of contract guarantors - duty of disclosure of creditor to intending guarantor - unconscionable transactions - solicitor and client - extent of solicitor's obligation outside retainer - certificate of witness by solicitor - duty of solicitor to credit provider ACTS CITED : Contracts Review Act DECISION : Making of final orders deferred

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

JAMES J

Wednesday 14 July 1999

12770/94 - STATE BANK OF NEW SOUTH WALES LIMITED v SULLIVAN & ORS

JUDGMENT 1 HIS HONOUR: The plaintiff, the State Bank of New South Wales Limited ("the Bank") brought these proceedings, claiming judgment for an amount alleged to be due under a mortgage dated 16 November 1990 from the defendant, Donald Charles Sullivan ("Mr Sullivan") to the Bank ("the mortgage") of land situated in Queensland known as 23 Foxhill Court, Carrara, and being the land comprised in Queensland Certificate of Title Vol.7176 Folio 175 ("the land") and for judgment for possession of the land. In his defence and cross-claim, as originally filed, Mr Sullivan alleged that the contract consisting of the mortgage was unjust in the circumstances relating to it at the time it was made within the meaning of the Contracts Review Act 1980 (NSW) ("the Contracts Review Act"). No reply or defence to Mr Sullivan's cross-claim was filed by the Bank at any time before the commencement of the hearing of the proceedings. On the first day of the hearing, or only shortly before, the Bank's legal advisers raised for the first time with Mr Sullivan's legal advisers the possibility that the Contracts Review Act did not apply to the mortgage, it being a mortgage of land situated in Queensland which had been registered in Queensland. I decided that the Bank should be permitted to contend that the Contracts Review Act did not apply to the mortgage but indicated that the pleadings should be amended. 2 Subsequently, Mr Sullivan's defence and cross-claim were amended so as to include:- 3 (i) A defence that it was a term of the mortgage or of the arrangement leading to the execution of the mortgage that there would be a collateral equitable mortgage from a company named Nobsa Holdings Pty Limited ("Nobsa") in favour of the Bank but that no such equitable mortgage from Nobsa had been executed and that consequently Mr Sullivan was relieved of all liability to the Bank. 4 (ii) A cross-claim that the mortgage was entered into in circumstances that were unconscionable under the general law or s51AB (formerly s52A) of the Trade Practices Act (Commonwealth). 5 A reply and a defence to the amended cross-claim were filed by the Bank, in which the Bank alleged that the Contracts Review Act did not apply to the mortgage and in which the Bank disputed the defences and claims made by Mr Sullivan. A reply to the defence to the amended cross-claim was filed on behalf of Mr Sullivan, in which it was alleged that the Bank was estopped from alleging that the Contracts Review Act did not apply to the mortgage. 6 Apart from the pleadings between the Bank and Mr Sullivan, each of the Bank and Mr Sullivan brought a cross-claim against Mr Peter Urquhart McKenzie Williams ("Mr Williams"), on the basis that Mr Williams had been Mr Sullivan's solicitor when Mr Sullivan entered into the mortgage. In its cross-claim the Bank alleged that Mr Williams had owed a duty to his client Mr Sullivan, that Mr Williams knew or ought to have known that the Bank would be relying upon him to properly carry out his duty to Mr Sullivan and that accordingly Mr Williams owed a duty to the Bank to act carefully in carrying out his duty as Mr Sullivan's solicitor and that if the allegations made by Mr Sullivan in his cross-claim against the Bank were true, Mr Williams had breached that duty. A defence to this cross claim was filed on behalf of Mr Williams, in which Mr Williams disputed most of the allegations made in the cross-claim and alleged that the Bank had been guilty of contributory negligence. 7 In his cross-claim Mr Sullivan alleged that Mr Williams had owed him a duty of care, which had been breached. A defence to this cross-claim was filed on behalf of Mr Williams, in which Mr Williams disputed most of the allegations made in Mr Sullivan's cross-claim and alleged that Mr Sullivan had been guilty of contributory negligence. 8 The actual course of the pleadings between the various parties was somewhat more complicated than I have indicated but the above summary substantially reflects what happened. 9 The following facts, taken mainly from Mr Sullivan's principal affidavit of 11 August 1997, are uncontroversial. 10 Mr Sullivan was born on 28 January 1923 at Lambton near Newcastle. He left school at the age of fourteen years. After leaving school he worked for a number of years as a sheet metal worker. In the mid 1950's he became employed by the Australian Labor Party as a State organiser and remained in this employment until 1977. He worked for the New South Wales Department of Industrial Relations between 1977 and January 1989, when he retired. Since then he has been a pensioner. 11 At some time in the 1970's Mr Sullivan formed a relationship with a woman named Marjory Kelly. Mr Sullivan and Mrs Kelly never married, although while they were in a relationship Mrs Kelly used the name "Sullivan". When she gave evidence at the hearing, Mrs Kelly used her maiden name, Marjory Craig. It will be convenient to refer to her as either "Mrs Kelly" or "Marjory Craig". The relationship between Mr Sullivan and Mrs Kelly ended at some time after Mr Sullivan had entered into the mortgage and no later than some time in 1991. 12 Mrs Kelly had a son, Craig Kelly, who was born in about 1957. In about 1985 Craig Kelly became the part-owner of a restaurant at Gymea known as "The Cascades Restaurant" ("the restaurant"). The other part-owner was a Mr Ahmet. The business of the restaurant was actually carried on by the company Nobsa, in which Craig Kelly and Mr Ahmet held shares. From about 1987 Nobsa conducted its banking with the Bank. 13 At some time in the 1980's Mr Sullivan, at the request of Craig Kelly, gave a guarantee to the Bank of a loan made by the Bank. Mr Sullivan's liability under the guarantee was limited to a fixed amount. The guarantee was in force for only a limited time and was then released by the Bank. 14 In 1988 Mr Sullivan and Mrs Kelly bought the land in Foxhill Court, Carrara as tenants in common. A house was built on the land. During the building of the house Mr Sullivan purchased Mrs Kelly's share in the land. Mrs Kelly lent the purchase money she received to her son Craig Kelly. From October 1989 Mr Sullivan and Mrs Kelly lived in the house which had been built on the land. After the breakdown of the relationship between Mr Sullivan and Mrs Kelly, Mr Sullivan continued to live in the house and he has continued living in the house up until the present. 15 After they commenced living in Queensland Mr Sullivan and Mrs Kelly from time to time visited Craig Kelly, staying at Craig Kelly's house at Gymea. While they were in Sydney, Mr Sullivan and Mrs Kelly helped out at the restaurant. The work done by Mr Sullivan consisted of general kitchen duties, delivering advertising leaflets and doing some banking for Nobsa. While he was at the restaurant, Mr Sullivan met the cross-defendant Mr Williams of Messrs Gray & Perkins, who was the solicitor for Craig Kelly and Nobsa and also met Mr Weidenhofer of Messrs Rost & Kitchener, who was the accountant for Craig Kelly and Nobsa. 16 Nobsa had a current account with the Bank which was overdrawn and a leasing account. The indebtedness of Nobsa to the Bank was secured by a mortgage over Craig Kelly's property at Gymea and a mortgage over Mr Ahmet's property at Kirrawee. 17 At some time in the second half of 1990 Mr Sullivan was informed by Craig Kelly that Mr Ahmet wished to leave the business of the restaurant and that Craig Kelly wished to acquire Mr Ahmet's interest in the business and that if Mr Ahmet was to leave the business on the basis that the mortgage over his property to the Bank was discharged, the Bank would require some other security to be substituted for the mortgage of Mr Ahmet's property. Craig Kelly suggested to Mr Sullivan that he should give a mortgage over the land in Queensland, to take the place of the mortgage over Mr Ahmet's property. Later in this judgment I will examine in more detail some of the evidence about the conversations between Mr Sullivan and Craig Kelly. Some of this evidence is contentious. Mr Sullivan did agree to give a mortgage over the land and the Bank consented to releasing the security from Mr Ahmet, on the basis that a mortgage of the land from Mr Sullivan would be substituted for the security from Mr Ahmet. 18 On 14 November 1990 Mr Sullivan, Craig Kelly and Mrs Kelly went to Mr Williams' office, where they had a meeting with Mr Williams. At the meeting Mr Sullivan signed the mortgage on which the Bank is suing, together with a number of other documents. What was said at the meeting is contentious and I will examine evidence about the meeting in more detail later in this judgment. 19 On 16 November 1990 Mr Ahmet transferred his shares in Nobsa to Mrs Kelly. The mortgage which had been signed by Mr Sullivan on 14 November 1990 was dated as of 16 November 1990. On 19 March 1991 the mortgage was registered at the Queensland Land Titles Office. 20 By notice dated 20 March 1991 the Bank gave notice to Mr Sullivan that default had occurred under the mortgage and unless the amount of $312,633.99 due under the mortgage was paid, the Bank would exercise its powers under the mortgage. 21 In 1991 it was proposed by Craig Kelly that the indebtedness of Nobsa to the Bank be re-financed by a loan from another financier but Mr Sullivan, after taking advice from his present solicitor Mr Dobson, declined to sign the re-financing documents. 22 Nobsa defaulted under both the overdraft account and the leasing account. On 19 October 1993 an order was made for the winding up of Nobsa. On 22 November 1993 Craig Kelly was made bankrupt. The present proceedings were commenced by the Bank against Mr Sullivan in 1994. 23 In Mr Sullivan's principal affidavit he gave further evidence, which is controversial, even though most of it was not directly contradicted by any affidavit evidence from either the Bank or Mr Williams. 24 In par15 of his affidavit Mr Sullivan said that when Craig Kelly approached him about giving a security over the land in Queensland, Craig Kelly said, "my house will be sold by January or February and I will not need your property's security any longer. It will be like the other one, you will be released after a couple of months". Mr Sullivan asserted that he agreed to put up his property as security, on the basis that it would be released within three months. 25 Mr Sullivan's account of what happened at the meeting in Mr Williams' office is set out in par19 of his affidavit, which was in the following terms:- "I recollect being ushered into Williams' office by his secretary with Craig Kelly and Marjorie. We all took a seat and then Craig Kelly said to Peter Williams words to the effect: 'Well you know my parents' to which Peter Williams replied 'Yes'. Peter Williams then said words to the effect: 'You have agreed to mortgage your house at Carrara so as to release Jimmy Ahmet's house at Kirrawee. You understand what this is all about'. I said 'I think so. Why doesn't Craig give me something to protect my interest?' Marjorie said 'Well it is all in the family'. I said 'Alright'. Peter Williams then proceeded to have me sign a number of documents. The documents were in a bundle. Williams removed the documents one at a time, the documents that I was to sign. He placed his finger on the portion of the particular document where I was to sign and I signed or initialled the relevant parts. After I had signed and initialled all the documents I saw Craig and Marjorie sign and initial a number of documents. A stamp was then put on some of the documents. Williams then said words to the effect 'Thank you'. A number of pleasantries were exchanged and we all left." 26 Paragraph 20 of Mr Sullivan's affidavit was in the following terms. "At the meeting referred to in paragraph 19 I was not provided with copies of any of the documents I signed either before or after the meeting. I understood that my property was to be used as security for only three months. Mr Williams did not explain to me, at any stage, that I was guaranteeing a debt owed by the company Nobsa Holdings Pty Limited nor any of the financial difficulties that that company was experiencing. I was not asked by Peter Williams whether I understood the nature and effect of the documents. I was not asked by Peter Williams whether I had compared my obligations and responsibilities to the bank with those of any other person named in the document and as to whether I had considered the consequences to me should there be any default in those obligations and responsibilities. I was not asked whether I was signing the documents voluntarily". 27 Mr Sullivan said that in 1991 he received a letter from solicitors acting for the Bank, demanding payment of a substantial sum of money. About a week later there was a meeting between Mr Sullivan, Craig Kelly, Mrs Kelly, Mr Williams and Mr Weidenhofer. Mr Sullivan alleged that Mr Williams said, "I doubt if they can do anything about this. They should have sent you to another solicitor as they knew I was Craig's solicitor and not yours". 28 In his affidavit Mr Sullivan said that he had not been aware that the restaurant business was in financial difficulties, until he had received the letter of demand from the Bank's solicitors in March 1991. He asserted that if he had been informed that Nobsa owed the Bank the sum of $270,000, then he would not have entered into a mortgage. 29 An affidavit was filed on behalf of the Bank by Mr Gilbert Thomas Lyons, a former officer of the Bank. 30 In his affidavit Mr Lyons said that in 1990 he was the relieving manager at the Sutherland Branch of the Bank for approximately one month. Mr Lyons annexed to his affidavit a copy of a Bank document headed "Application for Advance/Review", which was a communication from the Sutherland Branch to the Regional Manager, Metropolitan South Region, seeking approval of the proposal in the application and a copy of a further Bank document headed "Supplement to Application for Advance/Review". The application was prepared and signed by Mr Lyons and was dated 14 September 1990. The purpose of the application was stated to be "a review of accounts and substitution of security (for Cascades Restaurant)". The application included a statement of the financial position of Nobsa, showing a deficiency in shareholders' funds of $158,081. 31 Paragraph 19 of the application included the following:- "It is now realised that business cannot support both Ahmet and Kelly. The proposal is that Ahmet withdraws as director of Nobsa Holdings Pty Limited to be replaced by Kelly's mother, Mrs MM Sullivan. Ahmet's security property would be released and replaced by an unencumbered property at Carrara (Gold Coast) QLD owned by Kelly's step-father, DC Kelly who has been fully appraised of situation if default should occur. * * *