Liu v Adamson [2003] NSWSC 74

Reported Decision : (2003) DFC 95-271 (2004) NSW ConvR 56-074

New South Wales Supreme Court

CITATION : Liu v Adamson [2003] NSWSC 74 HEARING DATE(S) : 29, 30 August and 4, 10, 11, 15 October 2002 JUDGMENT DATE : 21 February 2003 JURISDICTION: 3376/00 JUDGMENT OF : Master Macready at 1 DECISION : Paragraph 77

CATCHWORDS : Guarantee and Indemnity - action against Surety - de facto partners - costs agreement containing a guarantee and agreement for a mortgage on her home given by de facto wife - whether de facto wife entitled to the protection of special equity principle in Yerkey v Jones and Garcia v National Australia Bank Ltd. - Held de facto wife was entitled but as she was not a volunteer relief was refused. - Contracts Review Act 1980 (NSW), ss 6(2) and 9. - Held that guarantee and mortgage should be set aside. PARTIES : Adelene Liu v Christopher Michael Adamson FILE NUMBER(S) : SC 3376/2000 COUNSEL : Ms. T. Bartush-Peek for plaintiff Mr R.D. Marshall for defendant on 10 and 11 Oct 2002 SOLICITORS : Cameron & Myers for plaintiff Paclaw Solicitors for defendant

- 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

Master Macready

Friday 21 February 2003

3376/2000 Adelene Mary Liu v Christopher Michael Adamson JUDGMENT 1 Master: The plaintiff brings these proceedings to set aside a costs agreement and a mortgage that she entered into with the first defendant. One of the other parties to the costs agreement and mortgage was her de facto partner, Peter James Miller. The plaintiff's claim is based upon the principles in Garcia v National Australia Bank Ltd (1998) 194 CLR 395, the fiduciary arrangement between her and the defendant and also upon the Contracts Review Act (1980) NSW. She did not seek to pursue her claim in the statement of claim that the costs agreement was contrary to the Legal Profession Act 1987. The matter came before me when I was an Acting Judge and I have continued to deal with it under s 37(3A) of the Supreme Court Act. Background history. 2 The plaintiff was born in Rabaul New Guinea. She worked as a bookkeeper for Hong Kong Island Shipping for some three years before she commenced a de facto relationship with her partner Mr Miller in 1984. That relationship has continued to the present day and they have five children aged between 7 and 15 years. For many years Mr Miller was employed in the information technology industry. In late 1997 or early 1998 he changed his occupation and became involved in a restaurant and nightclub business in Darlinghurst. 3 In the early part of 1998 Mr Miller changed his solicitor and engaged Mr Adamson the first defendant as his solicitor. Mr Adamson trades under the name of Paclaw Court Lawyers and that firm is named as the second defendant. In the first half of 1998 Mr Miller the plaintiff and a number of companies involved in the restaurant business entered into a costs agreement with the first defendant. That agreement was dated 13 March 1998 although there is some dispute on the evidence as to precisely when it was executed. According to Mr Miller the first defendant back-dated the agreement. 4 The costs agreement contained a guarantee by Mr Miller and the plaintiff of the liabilities of various companies to the first defendant for costs which they might incur with him. The costs agreement also contained provisions for the granting of security by the plaintiff and Mr Miller over their home at 45 Eton Road Lindfield in order to secure the guarantee that they gave under the costs agreement. 5 At the end of December 1998 there were discussions between Mr Miller and Mr Adamson about the execution of the mortgage pursuant to the costs agreement. It is apparent that Mr Adamson had been engaged on matters to do with the various companies involved in the restaurant and nightclub businesses throughout the year and indeed had been paid a retainer on account of costs amounting to $5,000 per month. 6 A mortgage was executed by the plaintiff and Mr Miller in December 1998. It was re-executed shortly thereafter as it was not properly witnessed and it was stamped in January 1999. Later that month it was registered and on the 22nd February 2000 Mr Miller entered into voluntary bankruptcy. 7 In due course Mr Miller's trustee in bankruptcy arranged the sale of the property. The sale was completed in late July or early August 2000 and very substantial secured creditors were paid out from the proceeds. In addition payment was made in respect of the amount claimed by Mr Adamson under his mortgage in the sum of $178,000. As there was no objection from the trustee in Mr Miller's bankruptcy one half of this amount was paid to Mr Adamson and the other half retained in a trust account pending the resolution of the present dispute. 8 The plaintiff admits signing the costs agreement although she cannot recall the circumstances in which it was executed. She also says that she executed the mortgage but that it was not explained to her at the time of execution. She found out several days later when she asked her partner what she had signed and he said that it was a mortgage. 9 There is a substantial dispute between the parties as to the circumstances surrounding the execution of both the costs agreement and the mortgage. The legal basis of the plaintiff's claims 10 After the first days hearing the plaintiff amended the claim to include a claim under the Contracts Review Act. I will deal with each claim in turn. The claim under unconscionability principles 11 In Yerkey v Jones (1940) 63 CLR 649 at 684 to 686 Dixon J distinguished between situations where there had been an actual exercise of undue influence during which the wife does understand what she is doing and those where the wife does not understand the effect of the document or the nature of the transaction. It was in respect of the second of these principles that the plaintiff seeks to proceed. 12 In the decision of the majority in Garcia v National Australia Bank Ltd (1998) 194 CLR 395 the relevant circumstances to be considered were stated in the following terms at 408: "It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her." 13 There is a fundamental difficulty which presents itself with the plaintiff's claim in reliance upon these principles. That is that the relationship between the plaintiff and Mr Miller was not that of husband and wife. They were de facto partners having been in the relationship for some 18 years and having five children as a result of the relationship. 14 It was made abundantly clear in Garcia that the decision was only in respect of persons in a relationship of husband and wife in a situation where the wife had been prevailed upon to give a guarantee. In State Bank of New South Wales v Hibbert and Groom v Hibbert (2000) NSW SC 628 Bryson J held that the principles should not be extended to where the parties lived in a de facto relationship. His conclusions on the matter appear in paragraphs 58 to 60 of his judgment in the following terms: 58 The question whether a proposed guarantor is the wife of a proposed borrower is readily ascertainable; people usually behave responsibly in handling information like that. Their Honours in Garcia contemplated at 404 para [22] the possibility that the principles applied in Yerkey v. Jones would find application to other relationships, observed that that was not a question which fell for decision and said "The resolution of questions arising in the context of other relationships may well require consideration of other issues. Thus to take one example, if cohabitation is taken as a criterion, what should a lender know or seek to find out about the nature of the relationship between the parties? But those issues did not arise and were not debated on the hearing of this appeal."