Roberts v State Bank of New South Wales S203/1994 [1995] HCATrans 162 (12 May 1995)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S203 of 1994

B e t w e e n -

KEVIN THOMAS ROBERTS

Applicant

and

STATE BANK OF NEW SOUTH WALES LIMITED

Respondent

Office of the Registry

Sydney No S204 of 1994

B e t w e e n -

PATRICIA ANN ROBERTS

Applicant

and

STATE BANK OF NEW SOUTH WALES LIMITED

Respondent

Applications for special leave to appeal

DEANE J

TOOHEY J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 12 MAY 1995, AT 11.56 AM

Copyright in the High Court of Australia

________________________

MR R.W. CAMERON: If it please your Honours, I appear for the applicant in both these matters. (instructed by Cradock Murray & Neumann)

MR I.G. HARRISON: If it please your Honours, I appear for the respondent in each case. (instructed by Gordon & Johnstone)

DEANE J: Yes, Mr Cameron?

MR CAMERON: May it please your Honours. The point we seek to agitate, your Honours, is actually quite short. Your Honours will be aware of how the case arose. I could indicate from the outset that nothing that I intend to say here or that I shall say is intended to challenge any of the findings. I cannot do that and I must be very careful not to attempt to and I would ask that what I say be heard in that way. Secondly, from the point of view of an overview, the pointed submission that I have to make with the utmost humility is simply that the findings made do not disentitle either Mr or Mrs Roberts from relief. In other words, I have to submit that the courts below were wrong.

The case is about the law of contracts. In fact, in this particular case we say that there ought to have been no contract in the strict sense, that it arose out of a rather common circumstance of a company enlisting the aid of its directors to provide, or to meet the lending requirements of its bankers by providing a third party mortgage over the director's individual - in this case -real property. It was not a guarantee; it was never intended to be a guarantee, it was just a security interest that was required. There was no request from the directors individually to the Bank to lend the money, as

in the case of a guarantee. There was no contact between the Bank and the directors, it was simply the case of the company enlisting the aid of its directors itself. So that there was no contract between the Bank and these directors, it was just a case of them providing the security interest over their property.

The directors agreed to the company's request. They attend and enter the banker's vault, so to speak, to execute the security document. They go as volunteers; no one can compel them to go. There is no sanction attaching to them if they do not go. It really has got nothing to do with the Bank; they either will or will not lend them money, depending upon whether the lending requirements are met.

At this stage the terms and conditions of the loan have been communicated and accepted by the company. There was nothing further to be done except to proceed to put in place the securities that the company had agreed to provide. That is really what the case is about. In this particular instance, as in many, many cases, the directors emerged from that banker's vault personally liable, not just under any ordinary contract but under a speciality contract for a period of 12 years. They have agreed to put up the security, not just for the amount of the loan that was agreed upon between the company and the Bank, but for all kinds of indebtedness under what is known or referred to as an "all moneys" mortgage, or a "dragnet" clause.

The issue, both at the trial and before the Court of Appeal, in my respectful submission, ought to have been, "How did this come about? Why ought it to have been that the directors, who just went there to give this security, emerge contractually bound in the way that they were?" The point of the case down below was that it came about because the Bank sought to impose upon these people requirements of which they gave no actual notice to the people concerned, with the productive result that there was no actual or effective consent to the contract that the courts have held them to be bound to.

TOOHEY J: Mr Cameron, looking at the grounds of appeal in the draft notice of appeal, it is not easy to discern a question of general principle that might be considered by this Court. Can you identify for us, not necessarily by reference to the grounds themselves but what is the point of principle that the Court could be asked to consider if leave were granted?

MR CAMERON: Whether, in the case of third party guarantors, in a strict sense, third party mortgages, that the provider is required to give an actual consent to any term and condition which goes beyond the actual provision of security itself.

McHUGH J: What do you mean by "an actual consent"?

MR CAMERON: Informed consent, your Honour.

McHUGH J: It is tantamount to saying that every contract of that nature is unjust for the purposes of the Act unless the details of printed clauses are specifically read or drawn to the attention of the maker of the contract.

MR CAMERON: Yes, I would go that far. These are volunteers and they had no knowledge or notice or inclination or, indeed, warning that they were about to incur these obligations. The subject of actual consent has been, I think, the topic of several decisions of the trial judges and, in some cases, the judgments in the Courts of Appeal. I have referred to those in Burke and Anor v State Bank of New South Wales. I should have indicated that I had undertaken to hand up four copies of two of the decisions on which I do seek to rely. Perhaps if I could do that now. One is the one I have just referred to, Burke and Anor and the other is the Moschi v LEP Air Services. I only want to just peripherally refer to that. So if it please the Court I will hand that up.

Perhaps if I could just take you briefly to that decision of Burke and Anor which is a decision of Justice Santow delivered on 17 October 1994 in the Equity Division of the Supreme Court of New South Wales, (1995) NSW ConvR 55-726. That involved the case of a borrower's parents who were required by the lender to provide, as a consequence of the lending requirements, a third party security which they did. It contained an "all moneys" or "dragnet" clause and later on when the loan fell due there was an increase and the original loan was rolled over. The parents were not aware of that. It was not necessary to let them know because the terms of the original mortgage were wide enough to include what had happened in 1990.

The ultimate result of that was that his Honour had held them bound to the original mortgage, of course, for which they had a knowledge and had consented to, but not the second. The way in which he did that forms the substance of my submissions here, namely, that he read the clause down. He also dealt with the actual consent part and also, I think, with Amadio. I do not think I intend to make submissions about Amadio with the application of this particular case.

If we can turn, perhaps, to page 55,616 in the right- hand column of the second last paragraph is where his Honour deals with his analysis of the various decisions. He acknowledges:

There have been several recent cases dealing with the scope and construction of an "all monies" clause of this kind.

I take it, interposing, that your Honours have seen the clause. It is in the application book at page 123. The actual contract between the company and the Bank appears at page 105 of the application book. At page 117 through to page 121 you can see there that it was for a total of $500,000. Then, on the next page, at paragraph 6, the third paragraph there, we can see that a property was to be sold, which is one of the securities I referred to in this, and then the amount of $500,000 limit was to be reduced to $275,000. We can see at page 122 a memorandum addressed from the business account officer of the Bank to the manager concerned, where it says, at line 10:

A strict condition of this approval is that under no circumstances should the account limits be exceeded.

So there was going to be a liability at that stage of $275,000 upon the receipt of the proceeds of sale. We can see at page 121 at about line 10 to 15 that the conditions of that approval were agreed to. Going back to his Honour's judgment, we see where he traces the position in the United States. I will not read that. He then, in clause 2, on the next page, says that:

2. Such clauses in Australia are, despite the broad scope of their expression, not at large in their operation. They must be -

quoting from the Chief Justice in the Court of Appeal in Graham Harry Fountain & Yvonne Clare Fountain v Bank of America National Trust & Savings Association:

"confined in their operation by reference to the context in which they appear and by reference to the commercial purpose for which they were intended to serve".

I interpose here: that what the Bank was requiring was a security interest in property.

3. But mere complexity is not enough to treat the relevant clause as ambiguous, given the intrinsic complexity of what is described.

They then go on to say, an I am reading right down the very end of that particular paragraph:

But in the end a mortgage document must be drawn in order to cope with complexities of the kind to which I have referred."

There is nothing to be included in this security agreement so far as the Bank and the third party providers were concerned. There may have been something to be included, or there could be something to be included in the case of the actual borrowers themselves.

4. However, a liberal interpretation of a widely drawn mortgage should be questioned, if it would yield absurdities. That falls short of allowing any general notion of a contra proferentem rule against the mortgagee.

Then I will not read that but then the next paragraph, 5:

5. "If there is an all monies mortgage the Bank will not be able to claim it is secured to a debt that neither party could sensibly say as at the date of the time the mortgage was taken it was contemplated should be included in the wide words."

Citing from a decision of his Honour Mr Justice Young. Then:

6. Though such a contra proferentem rule be not generally applicable, it is to be applied in the case of a guarantee, in resolving any ambiguity in favour of the guarantor.

Then his Honour went back to read the clause involved in that particular circumstance and he held that it, together with an acknowledgment also signed by the parents was, on the face of it, ambiguous.

7. "Where a contract is constituted by a printed form which is tendered by a party which has complete control over its terms, it is relevant to take such control into account -

and that was something that neither the trial judge nor the Court of Appeal did. They decided that because these people were commercially sophisticated - one was an accountant, the other one worked in an accountant's office and one had signed a mortgage previously when she bought her house - that because of that they knew what was in mortgages so therefore, in effect, whenever they signed the mortgage whatever was in them, knowledge of that would be imputed to them. That is another point I wish to come back to in a moment because I would say in law that is a wrong principle.

TOOHEY J: But you had not appeared until now to be raising any question as to the proper construction of the document. Are you raising such a question?

MR CAMERON: Yes. I am relying on the ambiguity of them to support the proposition which was raised down below before the trial judge and before the Court of Appeal that these mortgages should have been read down to coincide with the terms of the contract between the company and the Bank.

TOOHEY J: But do you mean read down as a matter of construction or read down as part of a review of the mortgage under the legislation?

MR CAMERON: Read down as part of the relief. If the relief would be as we have always submitted that the personal liability portion of it, for example, should be scrubbed entirely from it and so far as the scope of the charge itself, that should be to coincide with the actual terms of the contract. So that, in terms of the relief required, it would need to be read down . That is to answer that question.

The next clause comes to the consent part of it:

8. I thus conclude that where ambiguity is absent, such guidelines must yield to clear language expressing a contrary intention, though subject to being interpreted by reference to their context and to the commercial purposed served. Where ambiguity is present, or where the language is not wholly clear, any doubt in the case of guarantees, should be resolved, where the language permits, in favour of the guarantor and, certainly in the case of guarantees and probably more generally, so as to avoid absurdities or results which could not sensibly have been contemplated. This is particularly, though not exclusively, where dealing with printed forms given on a take it or leave it basis, often to unsophisticated laymen.

I apply now these principles to the present circumstances. Insofar as effective, in the sense of informed, consent was not given by the Burkes senior as third party mortgagors to some or all of the advances made pursuant to the 1990 transaction -

this was a roll-over and the additional amount loaned -

then, consistently with the approach of the Bank itself in seeking such consent, the relevant "all monies" clause should be construed as not covering any such advances as were not the subject of an effective consent. That leads to the question whether, and to what extent, an effective consent was given by the Burkes senior -

he then refers to the decision of the Court of Appeal in Beneficial Finance Corp v Karavas (1991) 23 NSWLR 256, at pages 278 to 279, and quoting from the judgment of his Honour Mr Justice Meagher:

"But ... I cannot accept that they would have made their properties available if it had been explained to Mr and Mrs Karavas and Mr & Mrs Stefoulis not just that the mortgages entailed the risk that Beneficial might take their properties if (the company) did not repay the advance, but that the airline business had run at a loss, was being bought from a receiver, required expert management to turn it around -

and your Honours are familiar with the duties of the Bank to reveal - - -

DEANE J: You have begun to run the lights, Mr Cameron.

MR CAMERON: I am sorry, yes. If I can just briefly then refer to the other two cases. In Petelin v Cullen at pages 359 to 360 the court there expressly reserved what they called the principle of actual informed consent as a basis of contractual obligation. I would rely upon that. That is, in the case of.....non est factum principle. In LEP Air Services, Lord Diplock there analyses the liability or the source of the obligations and liabilities and nature of the obligations of the guarantors. At pages 346 through to 349 - I will just rely on that too as well to indicate here that in this particular instance they are not guarantors. They lose a benefit of being a guarantor, a surety, they do not have it at all, and it was never doubted that the Bank's officers sat there knowing that they had not read them and did not bring to their attention the enormity of the provisions they were signing. At page 102 of the findings, I think it was of the judgment, I rely upon. This is in 203 of 1994. On page 103, line 6 to 12 - - -

DEANE J: I would hate to drive in a motor vehicle with you, Mr Cameron.

MR CAMERON: I see the red light on the other side of your Honour. I thought I had 40 minutes, actually.

DEANE J: If you made a mistake of that kind, could I suggest you wind up as quickly as you can.

MR CAMERON: If it please your Honour. The only other ones are at page 105, the next page of the Court of Appeal's judgment where you can see there at lines 4 through to 6 that they were quite happy to accept that what was being signed was in fact a mortgage contract and:

that they sought to establish that they entered into it without being aware of some of its terms.

So it did not matter so much that this happened and hence the submission, in my respectful submission, that the point was missed and that is to say, the circumstances of how they got to be signed up without actual consent was the issue and was not dealt with. It is a matter which is debated in the courts and, in my respectful submission, it is an appropriate case to attract the attention of this Court to establish the principles.

DEANE J: Thank you, Mr Cameron. The Court need not trouble you, Mr Harrison.

As Mr Cameron, who appears for the applicant, has effectively and correctly conceded, it would be inappropriate to grant special leave to appeal to this Court in these cases for the purpose of entertaining an attack upon the factual findings made by the trial judge or upon his assessment of the witnesses who gave evidence before him. On those findings of fact and that assessment, an appeal would enjoy no real prospect of ultimate success. Accordingly, the applications for special leave to appeal are refused.

It should, however, be made clear that the refusal of special leave should not be understood as suggesting that there might not, in other circumstances, be great force in Mr Cameron's submissions relating to the introduction by a lender of a "dragnet" clause in the documentation defining the liabilities of a third party guarantor in circumstances where the introduction of such a clause had not been raised in the negotiations leading up to the preparation of that documentation.

MR HARRISON: I am instructed to ask for costs, if your Honours please.

DEANE J: Mr Cameron, there is nothing you can say?

MR CAMERON: I cannot, if it please the Court.

DEANE J: The application is refused with costs.

AT 12.22 PM THE MATTER WAS CONCLUDED.