Supreme Court New South Wales Medium Neutral Citation: Williams v Commonwealth Bank of Australia [2013] NSWSC 335 Hearing dates: 25, 26, 27 & 28 March 2013 Decision date: 03 April 2013 Jurisdiction: Equity Division Before: Pembroke J Decision: Summons dismissed Catchwords: CONTRACTS - third party mortgage and guarantee - elderly father provides assistance to son - no unconscionability - contract not 'unjust' for purposes of Contracts Review Act, 1980 Legislation Cited: Contracts Review Act, 1980 Cases Cited: Baird v RHG Mortgage Corporation Ltd [2012] NSWCA 387 Burt v ANZ Banking Group Ltd (1994) ATPR (Digest) 46-123 Davey v Challenger Managed Investments Ltd [2003] NSWCA 172 Elders Rural Finance v Smith (1996) 41 NSWLR 296 Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 Thomas v SMP [2010] NSWSC 822 Watson v Foxman (1995) 49 NSWLR West v AGC (Advances) Ltd (1986) 5 NSWLR 610 Category: Principal judgment Parties: Ioan Noel Williams - plaintiff Commonwealth Bank of Australia - first defendant Ronald Hunter Sales - second defendant Richard Williams - third defendant Representation: Counsel: T A Alexis SC with D M Mitchell - for the plaintiff P Jammy - for the first defendant D Lloyd - for the second and third defendants Solicitors: Cole & Butler - for the plaintiff HWL Ebsworth Lawyers - for the first defendant Webb & Boland Lawyers - for the second and third defendants File Number(s): 2012/304410 Judgment Introduction 1This is an unusual case. The plaintiff, who is an elderly grazier and is the father of the third defendant, Richard Williams, seeks an order setting aside the guarantee and mortgage which he gave to the first defendant (the bank). He gave the guarantee and mortgage in 2007 to support bank facilities provided to his son for the purchase and conduct of the business of a stock and station agency in Moree. 2There has been no default by Richard Williams under his arrangements with the bank; no demand by the bank; no claim for possession of the plaintiff's property; and no suggestion that he has failed to perform any obligation owed by him under the guarantee and mortgage. Further, the evidence suggests that the business of the stock and station agency conducted by Richard Williams is trading profitably and successfully. Further still, the plaintiff said that he provided the guarantee and mortgage because he had confidence in his son, adding that he continued to have confidence in him. Although they were litigious antagonists, both father and son exhibited noticeable respect towards each other when giving evidence. 3Although it is not necessary for me to know or decide the underlying reason for this litigation, it may represent an attempt to improve the actual or contingent financial position of some or all of the plaintiff's other three children especially, perhaps, the eldest son, Tim. That is because the sole asset of the plaintiff is the grazing property known as Cwmteg. Its agreed value is $3.3 million. The limit of the plaintiff's guarantee is $2,061,417. The presence of the bank's mortgage on the title to the property is effectively preventing the plaintiff from undertaking any estate planning or property realisation and distribution for the benefit of the other three children. He can only transfer Cwmteg subject to the encumbrance securing the indebtedness of his youngest son, Richard Williams. And this is not practicable for Richard Williams is currently unable to provide or procure alternative security. 4The plaintiff is now 81 years of age. He has a stick and a hearing aid but there was no evidence of any incapacity, infirmity, frailty or feebleness of mind at the time of the guarantee in 2007 or its extension in 2009. None was relied upon. In fact, I formed the view that he was a proud and independent-minded man who was confident in his own decisions. He may possibly be stubborn but I do not think he is stupid. In 2007-2009 he did not fit readily into the category of a person who was unable to look after his own interests. Age is not, by itself, a disabling condition, unless it is also accompanied by some other factor: Baird v RHG Mortgage Corporation Ltd [2012] NSWCA 387 at [216]; Davey v Challenger Managed Investments Ltd [2003] NSWCA 172 at [24]. The Witnesses 5I will deal with the detail of the evidence of the witnesses later but I should make some initial observations about the three principal witnesses. Richard Williams was honest, straightforward, frank and direct. He gave his evidence with a refreshing candour, devoid of any attempt to tailor it to advance his own case or to rebut his father's case. Where it was appropriate to make concessions, he did so without reservation. I formed the view that he was decent and that he would not have intentionally misled his father. In relation to his requirement for a guarantee from his father to assist him in his business, he adopted a "take it or leave it" approach. 6Mrs Shearer was also impressive. She had no connection with the parties and no motive to be other than honest. She was independent, frank and trying to help. She was also careful and thoughtful in the way she gave her evidence. I am satisfied that in 2007 she performed her tasks as a bank officer in the same careful and thoughtful way. I was fortunate to have the benefit of her evidence and the bank was probably fortunate to have her as an employee in 2007. I accept her evidence without hesitation. 7I am afraid that I found the plaintiff's evidence unreliable. His oral evidence bore little resemblance to the tale told in his principal affidavit, which exhibited all the features of unreliability that I described in Thomas v SMP [2010] NSWSC 822 at [26] - [28]. It was little more than an exercise in legal drafting which concealed rather than revealed the truth. In one material respect, however, there was a correspondence between the evidence that the plaintiff gave in the witness box and the content of his principal affidavit. In both he asserted that he did not know the amount of the indebtedness that the guarantee and mortgage secured. I reject that evidence. I do not think that the plaintiff was telling the truth. That is not to say that he intended to be dishonest. It is more likely that he had convinced himself or been persuaded or encouraged by others to believe in its correctness. In many cases, the fallibility of memory increases over time when litigation intervenes, perceptions of self-interest intrude and where the pressure of expectation from relatives makes itself felt - consciously or subconsciously: See Watson v Foxman (1995) 49 NSWLR 315 at 319. Findings of Fact 8My primary findings of fact are as follows. A critical meeting took place at the premises of the local mechanic, David Denyer on 28 June 2007. It was attended by the plaintiff and Richard Williams, and by Mr Hollis and Mrs Shearer from the bank. At the meeting the plaintiff was given copies of the guarantee and mortgage documents and the documents relating to the obligation of Richard as principal debtor. Mrs Shearer provided the bank's letter of offer to Richard Williams and to the plaintiff as part of these documents. 9Mr Hollis and Mrs Shearer, but primarily Mrs Shearer, read and explained to the plaintiff all of the material terms of the mortgage and guarantee. The extent of the debtor's principal liability and of the plaintiff's security were explained to him. He was advised that he should or could get independent legal advice. He was also advised that he need not sign the documents there and then but could instead take them away for further consideration. He indicated that he did not require independent legal advice and that he wished to sign the documents immediately. It was made clear to the plaintiff that if his son did not pay his debts the plaintiff would have to pay and Cwmteg may be sold to satisfy that debt. 10The plaintiff wanted to assist his son. He had no compunction about doing so notwithstanding the relatively high maximum liability which his guarantee was required to secure. He well understood the nature of the business of a stock and station agency and the cattle business. He understood the need for a substantial overdraft limit to enable the business to finance the stock purchases of customers and that the size of the overdraft limit reflected the size of the turnover of the business. 11He assumed that the debit balance on the overdraft would fluctuate and that it would not necessarily always be at or near its limit. But there were also other factors that influenced his decision. He was comfortable because he had confidence in his son - 'a good bit of faith in him' to use his words. In addition, he knew that his son was a good 'stock man' and that additional security would be available through stock mortgages over the cattle financed by the business, as well as from insurance against default by debtors. These considerations made him 'more comfortable'. The plaintiff's confidence appears to have been well founded. There was no hint in the evidence that there has been any financial difficulty in the conduct of Richard's business or its bank facilities. The Amount 12I am satisfied that at the meeting on 28 June 2007, the plaintiff read and was informed about the maximum amount that his proposed guarantee and mortgage would secure. The amount of $1,750,000 clearly appeared in the letter of offer dated 21 June, a copy of which was shown and provided to him. It was repeated in a separate letter to the plaintiff dated 28 June 2007 and was highlighted by the accompanying words 'Maximum Liability'. That letter was provided to him at the meeting. In addition, the amount appeared twice on the front page of the deed of guarantee which the plaintiff signed at the meeting. Once again, the amount was highlighted by the capitalised words in bold 'MAXIMUM AMOUNT'. 13I also accept Mrs Shearer's evidence that she specifically read the amount to the plaintiff in the course of taking him through the guarantee document. And I accept the evidence of Richard Williams that before the meeting, when he informed his father that he had an opportunity to purchase the stock and station agency, he explained to him that he needed 'a guarantee for approximately $1.7 million'. 14The difficulty in accepting the plaintiff's denials of knowledge of the amount secured by his guarantee is compounded when one considers the further document that he signed on 23 March 2009. It is a simple document of one page containing two acknowledgements. It is headed in bold 'Consent and acknowledgement to extension of guarantee'. The first acknowledgement states, just above his signature, 'My maximum liability under my guarantee will be $2,061,417'. I am afraid the probabilities all point resoundedly in the one direction. They satisfy me that the plaintiff knew the maximum amount which he chose to secure by his guarantee and mortgage. The Term 15There were two components to the bank's facility of $1,750,000: an overdraft facility for $1.5 million and a fifteen year loan for $250,000. In the nature of things, the overdraft was of indefinite duration but subject to periodic reviews and payable on demand. I am satisfied that the plaintiff knew and understood these features of the facility which the bank made available to his son and which he was being requested to guarantee and secure. The letter of offer dated 21 June 2007 set out this information clearly and starkly. It was signed by Mr Hollis who attended the meeting with Mrs Shearer. As I have said, a copy of the letter of offer was provided to the plaintiff at the meeting together with a package of documents. Mrs Shearer had the letter of offer and gave a copy to the plaintiff. She observed him reading it and said that she recalled 'going through [with him] the exact facilities that he was guaranteeing.' Mrs Shearer was reliable and truthful and her evidence accords with the probabilities. 16I am satisfied that the plaintiff understood the term of his son's facilities when he agreed to secure them by providing a guarantee and mortgage. In particular, he understood the indefinite and fluctuating nature of an overdraft facility. He knew he was putting his farm on the line in case a debt [owing to Richard by one of his customers] went bad. But he had confidence in his son's ability. And he knew the business that Richard was purchasing. He was comfortable, and he felt more comfortable because of the additional security that would be provided by stock mortgages and insurance against bad debts. 17When asked whether he knew that the guarantee and mortgage would have to stay in place as long as Richard was running the business, the plaintiff responded by saying 'Well, as long as he wanted it.' He added 'I had hoped to only stand him up until he got on his feet himself' but immediately conceded that he assumed that the guarantee and the mortgage would have to stay in place for 'a substantial period of time'. 18I do not accept the plaintiff's subsequent evidence that he thought that he was only guaranteeing Richard for a certain limited time. He may have hoped that Richard's business would prosper and that he could do without his guarantee and would be in a position to replace it at a future date, but they were matters in the future - which he put off. For the present he knew what his commitment was. Independent Legal Advice 19On 20 June 2007, a week before signing the guarantee, the plaintiff attended at the office of his solicitor. He had a meeting with Ms Legg, a conveyancing clerk. She made a note of the advice that she gave the plaintiff when he told her that he had 'guaranteed Richard's loan'. He knew that the security for his guarantee was his farm property. He seemed to think that it would be sufficient if the bank sighted the title deeds but Ms Legg informed him that: ... told him I assumed if the bank wanted the title deeds, they were going to take a mortgage over them as security for the loan and if anything happened and that Richard couldn't pay the loan, he would have to and if he couldn't, the bank could sell the land. 20Revealingly, he said in relation to part of his land known as Lot 11 'If something happened to me surely they would work it out between them.' Ms Legg emphasised the importance of these words by putting them in quotations in her note of the meeting. The context was a question from Ms Legg to the plaintiff about whether or not Lot 11 should already have been transferred to his eldest son, Tim. His attitude was to leave it to his children to sort it out after his death. This is the nub of the problem. 21At the meeting on 28 June 2007, Mrs Shearer knew the importance of a putative guarantor in the plaintiff's position having an opportunity to obtain independent legal advice. She spoke to the highlighted bullet points on the deed of guarantee; she told the plaintiff that he could or should obtain independent legal advice on the effect of the guarantee; that he need not sign the guarantee; and that if he wished he could refuse to sign the guarantee. 22I do not accept the submission that her advice was perfunctory or merely a process without any actual or intended persuasive effect. Mrs Shearer took her duties seriously and the plaintiff understood her. But despite her advice, there was in my view, no realistic prospect in June 2007 that the plaintiff would reconsider his decision to support his youngest son; no realistic prospect that he would not provide the guarantee and mortgage that were necessary for the purchase and conduct of the stock and station agency. The plaintiff had a firm view that he wanted to help his son. He was not for turning - not in 2007. Understanding and Appreciation 23I am satisfied that in June 2007 when he signed the guarantee and mortgage, and in March 2009 when he consented to the increase of his maximum liability under the guarantee, the plaintiff understood the nature and the effect of his guarantee and mortgage. He understood the liability to which he was exposed and the risk of sale of his farm in the event of his son's default. He did not regard that risk as high because of his confidence in his son and the availability of a first line of protection through stock mortgages and debt insurance. But he knew what he was doing - in the sense that he knew his liability, he knew the risk and he understood the legal effect of the documents he was signing. 24What the plaintiff did not do was to think through the longer-term consequences of his decision. At that stage he had not turned his mind to his own inevitable mortality and he had not begun to consider the need for any estate planning. He was a blunt and practical man who lived in the present. From his perspective, the present position was that his eldest son was carrying on the farm, his two daughters were independent and established in life and his youngest son needed assistance to get started in the stock and station business. To the extent, if any, that the plaintiff turned his mind to the future, his attitude was typified by his remark to Ms Legg on 20 June, "If something happens to me surely they (the four children) would work it out between them." 25There is a material difference between, on the one hand, understanding the nature and the legal effect of the guarantee and mortgage, and on the other hand, giving attention to the longer term domestic and personal consequences of such a transaction. The plaintiff chose to ignore the latter. In one sense, this may have been a 'blunder' having regard to his paternal and moral responsibilities to each of his children: Elders Rural Finance v Smith (1996) 41 NSWLR 296 at 302. But I would not necessarily characterise it so. 26Family dynamics are sometimes unfathomable and the relationship between an elderly father and a son in need of assistance is sometimes special. I do not think that anything would have stopped the plaintiff helping his son to acquire the stock and station agency business. It is true, however, that commencing from August 2009, when the plaintiff's solicitor, Mr Butler, began to actively canvass with him the desirability of undertaking some appropriate estate planning, the plaintiff exhibited signs of concern at the practical effect of what he had done. By this stage the pressure of expectation from his other three children had probably begun to make itself felt. His main concern became the need to ascertain the current level of indebtedness under the overdraft facility, and hence the extent of the encumbrance on Cwmteg. 27A negotiation took place. Richard said that, if he could not continue to have the benefit of the mortgage over the whole of the farm, he would like to receive a sufficient share of the property to enable him to offer it as an alternative security to the bank. He said he would need at least four to five months to arrange a new mortgage. For his part, the plaintiff said he would be prepared to give him two years. All of this is consistent with the analysis I endeavoured to explain in the preceding paragraph. 28In fact, the first suggestion that the guarantee and mortgage were susceptible to legal challenge did not come until 16 August 2012. In my opinion, the plaintiff always understood the nature and legal effect of the guarantee and mortgage that he gave in 2007 and extended in 2009. He was given an opportunity to obtain independent legal advice. But he would not have been dissuaded from proceeding with his guarantee and mortgage even if he had taken the opportunity. He did not wish to address the longer-term consequences. He knew there were a number of variables, including his anticipation that the debt level of the stock and station agency might fluctuate. He may well have hoped in due course that his guarantee might be released or replaced. And he ultimately believed that, if necessary, his children could sort it out. Necessity for Fault 29What is missing in this account of the facts is any material fault on the part of the bank or any pressure, misrepresentation or undue influence by Richard Williams. Neither the conduct of the bank nor that of Richard Williams deprived the plaintiff of any real or informed choice. He was not rushed, cajoled or overborne. And the bank did not act unfairly or otherwise than in good faith towards him. The following statement by McHugh J in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 621 is apposite: If a defendant has not been engaged in conduct depriving the claimant of a real or informed choice to enter into a contract and the terms of the contract are reasonable as between the parties, I do not see how that contract can be considered unjust simply because it was not in the interest of the claimant to make the contract or because she had no independent advice. The late Professor Peden who was largely responsible for the drafting of the Act has said that in accordance with his recommendation: ... the Act does not include the term 'unfair' since this might have been interpreted to include situations in which, although the contract favours one party, there has been no abuse of power or unfair conduct on his part': Macquarie University Continuing Education Program, 'Contracts Review Act, 1980 - in practice' at 17. 30It should be noted that in Perpetual Trustee Company Ltd v Khoshaba [2006] NSWCA 41 at [72] - [73], there was some 'softening' of that statement by McHugh JA, but not in a way that makes any difference on the facts of this case. ` 31Neither the terms of the guarantee nor those of the mortgage were in themselves unjust or unreasonable, notwithstanding the indefinite duration of the overdraft facility and the fifteen year term of the $250,000 loan. They were necessary for the legitimate protection of the bank. The duration of the plaintiff's contingent liability did not become unjust or unreasonable simply because the plaintiff was 76 years old when he agreed to it. It is not by itself irrational to burden your [future] deceased estate with an encumbrance in order to support one of your children. Benevolence in life and sometimes extravagance, may well lead to debt in death. It is a choice people sometimes make. 32There were admittedly two respects in which Mrs Shearer and Mr Hollis did not follow to the letter the bank's Code of Banking Practice. But if those failures had not occurred the outcome, in my view, would not have been any different. Contrary to clause 28.4(d)(v) of the Code, the bank did not provide to the plaintiff any financial accounts or statement of financial position given to them by the debtor for the purposes of the facility. However, the plaintiff made it quite clear that he had no desire to look into his son's personal financial position. He had confidence in his ability and he believed that the business being acquired was a good one. In any event, what mattered was not the personal balance sheet of Richard Williams and his wife, but the cash flow from the business that he was acquiring. It was substantial and would have only generated more confidence. 33The other matter was clause 28.6(b). It required the bank to ensure that the plaintiff signed the guarantee in the absence of the debtor "where we attend the signing of the guarantee". This was not done. As I have said however, there was not the least coercion on the plaintiff. Richard Williams was respectful of his father's choice and adopted a "take it or leave it" approach. If this requirement had been complied with, the outcome would not have differed. Legal Principle 34My findings of fact lead to the conclusion that the plaintiff has not established any case based on unconscionability or pursuant to the Contracts Review Act. It is not enough that he was simply elderly at the time he gave his guarantee and mortgage. Nor is it enough that he obtained no personal benefit from the transaction other than the moral satisfaction to be derived from the gift of paternal benevolence to his youngest son. Bryson J once said: Giving a guarantee to a bank to support credit extended to a close relative is a common transaction in the enjoyment of economic liberty, and many people would be greatly disadvantaged if they were not left in their liberty to employ the credit flowing from owning property for the benefit of themselves or of others. See Burt v ANZ Banking Group Ltd (1994) ATPR (Digest) 46-123 at 53,597. 35Nor is it enough that the plaintiff chose not to address the longer term consequences of his decision on any future estate planning that he might have been expected to undertake. That he did not do so was not the bank's fault. The responsibility of bank officers like Mrs Shearer and Mr Hollis do not require them to investigate the guarantor's motives; the existence of other children and his relationship towards them; or the possible wider effect of the transaction on the guarantor's personal, moral or financial obligations. Bank officers cannot be expected to go into those matters unless, perhaps, clearly put on notice. 36It is ordinarily sufficient if the bank officer ensures that the guarantor understands the particular nature of the transaction to which he has agreed and comprehends its legal effect. The bank officer must also ensure that the guarantor understands that it is desirable to obtain independent legal advice, and must provide him with the opportunity of doing so. In this case, Mrs Shearer and Mr Hollis satisfied those minimum requirements. They were not put on notice of any frailty, infirmity or feebleness on the part of the plaintiff - whether of mind or body. And they had no reason to foresee that the guarantee and mortgage would necessarily create the difficulties in the plaintiff's personal affairs that it has apparently caused. 37To quote Bryson J again in Burt v ANZ at 53,598, speaking of a person who claimed that she did not read the documents: People have the right to enter into transactions in those circumstances if they choose to do so; many people do choose to do so, and unless her age is associated with some relevant infirmity, her age has nothing to do with her right to undertake obligations and does not diminish her freedom. ... In any event the nature of the guarantees and the mortgage is quite evident on their faces at the most superficial observation. Miscellaneous 38I have not overlooked myriad other features of the evidence that are too numerous or too incidental to mention. I have arrived at my assessment of what the plaintiff knew and understood after a careful assessment of all of the evidence. That includes, among many other things, the evidence of the plaintiff's past borrowings and experience with mortgages - which were only modest; the fact that he professed not to read documents - which I did not entirely accept; and the evidence of several other witnesses, including the plaintiff's son, Tim and a Mrs Corderoy - both of whom merely said that the plaintiff appeared upset at a family meeting when told that the current level of the secured debt was $1.8 million. All of this may be true but none of it detracts from the central conclusions I have reached. The position ultimately taken in the plaintiff's submissions was, if I may say so, weak and unpersuasive. It was conceded that the plaintiff knew the essential effect of a guarantee and mortgage but, it was submitted, 'the amount was not conveyed by Mrs Shearer with sufficient clarity for the plaintiff to appreciate it.' I have found otherwise. Contract Claim 39The plaintiff's contract claim may be dealt with briefly. The bank accepted that its Code of Banking Practice formed part of its contract with the plaintiff and that Clauses 28.4(d)(v) and 28.6(b) were breached. But the findings of fact that I have made lead to the conclusion that no loss was caused by those breaches. If those particular obligations of the bank had been performed, the same result would have ensued. The Time Bar 40As I have reached the view that the summons should be dismissed, I have chosen not to decide the question whether the plaintiff's claim is also time barred by reason of section 16(5) of the Contracts Review Act. This is a pure question of construction on facts that are not in dispute. If necessary, the Court of Appeal will not be handicapped if I refrain from expressing my view. And the interests of expedition will not be served if I delay the announcement of my decision in order to provide reasons relating to this additional ground on which the defendants rely. Orders 41For those reasons, I make the following orders: 1. Summons dismissed. 2. Plaintiff to pay the defendants' costs. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 12 April 2013