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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2008-404-1511
BETWEEN TRUSTEES EXECUTORS LIMITED
Plaintiff
AND JOSEPH LAWRENCE WOOD
TURNBULL
First Defendant
AND
JOAN TURNBULL
Second Defendant
Hearing: 7 November 2008
Counsel: R J Gordon for Plaintiff
N A Cervin for First and Second Defendants
Judgment:
1 May 2009 at 3.30 pm
SUMMARY JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by
Associate Judge Sargisson on 1 May 2009 at 3.30 pm pursuant to
Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date ..........................
Solicitors:
Buddle Findlay,
PO Box 2694, Wellington
Paul Gallagher Legal, PO Box 3, Albany
TRUSTEES EXECUTORS LIMITED V JOSEPH LAWRENCE WOOD TURNBULL AND
ANOR HC AK
CIV-2008-404-1511 1 May 2009
[1] The plaintiff, Trustees Executors Limited, is a financier. The defendants, Mr
and
Mrs Turnbull, are (respectively) self-employed and an administration officer
with Work and Income.
[2] Trustees Executors seeks
summary judgment against Mr and Mrs Turnbull
for the sum of $4,000,000 plus interest (including penalty interest), plus costs
pursuant
to their personal covenants in a loan agreement and related mortgage
security.
[3] There is no dispute that Trustees Executors
has provided documentation that
proves its entitlement to the relief it seeks on a prima facie basis: see Auckett v
Falvey 20/8/86
Eichelbaum J, HC Wellington CP 296/86. However, the Turnbulls
oppose the application for summary judgment. They accept that Trustees
Executors
should be entitled to realise the security given under the mortgage. However they
say they should not be held to account
for the amount of the loan under their
personal covenants. They rely on the ground that they have an arguable defence that
the loan
agreement is unconscionable and ought not to be enforced. Essentially, they
say they were placed in a disadvantageous position by
reason of age, the
unquestioning trust they placed in their adult son, and a lack of assistance when
assistance was plainly needed,
and that Trustees Executors is guilty of
unconscionable conduct by taking advantage of their position.
[4] The Turnbulls also
contend that the extent of Trustees Executors' knowledge
of their disabling condition requires investigation, and that this is one
of those cases
where fairness requires that the Court should exercise its discretion to decline
summary judgment to allow discovery
and interrogatories to be completed. For
reasons I will come to, it is not necessary to consider this point further.
[5] The
question I am to determine is whether the Turnbull's defence is indeed
genuinely arguable. If it is genuinely arguable, then it is
not in dispute that Trustees
Executors' claim must be determined at trial.
Background
The loan agreement
[6] On 26 October
2006 Trustees Executors (as lender) and the Turnbulls (as
borrowers) entered into a loan agreement in which Trustees Executors agreed
to
provide finance to the Turnbulls. Relevant terms included that:
a) Trustees Executors would advance $4,000,000 by
way of a loan to the
Turnbulls for a term of five years, with interest only payments during
that term;
b) Repayment of the loan in full would be made by one payment of
$4,000,000 on or by 15 December 2011;
c) The interest would be paid by one payment of $19,331.51 on 15
November 2006, followed by 60 monthly payments of $28,000 to be
paid on the
15th day of each subsequent month, with the last interest
payment due on 15 December 2011;
d) The Turnbulls
would provide to Trustees Executives, as security for
the loan, a first ranking mortgage over the property at 74-76
Upper
Queen Street, Auckland City;
e) Should an event of default under the agreement or the mortgage occur
(including a failure to make any payment when due), Trustees
Executors would be entitled to:
i) Require immediate repayment of the total balance owing of the
loan (and all other secured monies);
and
ii) Exercise its powers and rights of enforcement under the
mortgage.
The loan application
and approval
[7] It is necessary to provide some detail of the way the loan was obtained.
[8] On 18 October 2006 Mr and
Mrs Turnbull, who were at the time aged 72 and
67 and of modest means, signed a loan application requesting a $4,000,000 advance
from Trustees Executors for the stated purpose of purchasing a residential
investment property at 74-76 Upper Queen Street. They
had had no prior dealings
with Trustees Executors and no direct dealings on this occasion. A Mr Mayers of
MDM Holdings Ltd submitted
the application on their behalf. He was a close
business associate of the Turnbulls' son, Simon Turnbull, and both were valued
clients
of Trustees Executors.
[9] The loan application stated the purchase price for the Queen Street property
was $5,500,000 and was
to be funded by the Turnbulls' deposit of $300,000, their
further contribution of $1,200,000, plus the advance that they sought from
the
Trustees Executors for the balance of the purchase price of $4,000,000. The
application also provided a statement of
the Turnbulls' financial position, which
recorded their gross incomes as $30,000 and $38,000 respectively, and set out the
following
information:
a) The Queen Street property generated income of $9,180 per week
($477,360 per year).
b) In addition to the Queen Street property, the Turnbulls also owned
property at:
i)
West Coast Road with a value of $1,200,000; and
ii) 55 Cochrane Avenue with value of $755,000.
c)
The Turnbulls had other assets of:
i) $12,500 in bank deposits;
ii) $300,000 equity
in the Queen Street Property;
iii) $33,000 in vehicles; and
iv) $55,000 in tools, computers
and office equipment.
[10] The application also named and provided contact details for the Turnbull's
nominated solicitor, and
concluded with a declaration that the Turnbulls signed,
certifying the truth of the information in the application.
[11] Accompanying
the loan application were two documents. The first was a
copy of a current valuation of the Queen Street property prepared by a registered
valuer, which stated the market value for mortgage security purposes was
$5,450,000. The valuation was addressed to Trustees Executors
and records that it
was provided "solely for the use of/and is limited to Trustees Executors Ltd/Turnbull
Trust, as our client".
The second was the agreement for sale and purchase that gave
rise to the loan application, signed by Mr Turnbull as purchaser and
a company
controlled by Mr Mayer, North Star Holdings Limited, as vendor. It recorded that the
agreed purchase price was $5,500,000,
and that:
The balance of the purchase price is to be satisfied by the purchaser
transferring to the vendor all the
property at 365 West Coast Road, Glen
Eden, Auckland for the sum of $1,200,000 as part payment, as to the balance
of
purchase price the sum of $4,000,000 to be paid in cash in one lump sum
on settlement date.
[12] On 20 October 2006 Trustees Executors gave written approval
in principle to
the loan and set out the attached conditions it required in a letter addressed to Mr and
Mrs Turnbull c/- Mr Mayer.
The conditions included requirements for:
a) Certified photographic identification of the borrowers, satisfactory
credit checks, tenancy agreements confirming current rental of not
less than $477,360 per annum and
the original of the valuation; and
b) Undertakings, to be given by borrowers' signing and returning the
declaration contained within the letter. The undertakings were to the
effect that loan advance would be used for
property investment, the
proposed date of draw down for the advance would be 25 November
2006, and
the borrowers confirmed their request to Trustees Executors
to instruct their solicitor to complete the necessary
documentation.
[13] Mr Turnbull signed the declaration, although Mrs Turnbull did not. The same
day Mr Mayers returned the declaration
to Trustees Executors. The solicitor whose
name was handwritten in the declaration was the solicitor nominated in the loan
application.
[14] Trustees Executors wrote immediately to the solicitor confirming that the
application was approved. The letter of approval
requested the solicitor to prepare
the necessary security documents, attend on execution, undertake disclosure under
the Credit Contracts
and Consumer Finance Act 2003, register the documents and
account to the lender following execution.
[15] By 26 October the Turnbulls
had signed the loan agreement and initialled the
disclosure statement contained in the loan agreement, and signed the mortgage.
According
to the Turnbulls, the solicitor witnessed Mr Turnbull's signature and a
work colleague witnessed Mrs Turnbulls'. Their contention
appears to be supported
by the signatures on the documents.
[16] The solicitor returned the documents or the necessary copies
of the signed
loan agreement, disclosure statement and mortgage to Trustees Executors together
with her solicitor's certificate,
a direct debit authority, and details of an insurance
cover note that recorded the lender's interest as mortgagee.
[17] The disclosure
statement advised of the borrower's right to cancel within a
strict time limit of five working days, and the lender's rights of repossession
and to
sue for the amount due should there be a default. It also made clear that default
interest charges, plus default fees, could
be claimed at the rate of 4% per annum
above the annual interest rate prevailing at the time. The solicitor's certificate
certified
among other things that the documents had been properly signed (including
by any trustees), that she had disclosed copies in accordance
with Act to each person
to whom disclosure was required, and that she was ready to receive the funds for the
purpose of settlement.
The insurance cover note confirmed cover was provided from
AMP Insurance for the property. It named the Turnbull Trust as the insured,
and
Trustees Executors as the mortgagee. The direct debit authority was made out for a
bank account in the name of the Turnbull Trust
and provided for the automatic
payment of the monthly interest. The signatories on the authority were Simon
Turnbull and his wife,
Ms de Magalhaes, and not Mr and Mrs Turnbull.
[18] On 26 October Trustees Executors permitted the loan advance of $4,000,000
to be drawn down to enable settlement to proceed. Trustees Executors' application
fee of $20,000 was deducted as provided by the
loan agreement and the balance of
$3,980,000 was paid into the solicitor's trust account. The solicitor attended on
settlement and
registration.
[19] The solicitor's file suggests that she sent a tax invoice for her fee to the
Turnbulls at their home address,
although they do not recall ever receiving it.
Default and commencement of the claim
[20] The monthly interest payments on the loan
were due from 15 November
2006. There was an initial default on 15 February 2007 when the interest payment
due that day was dishonoured.
Trustees Executors sent a fax to Simon Turnbull,
after which the direct debit was re-activated and the default was made good.
[21]
The substantive default occurred when the interest payment due on 15
October 2007 was dishonoured. The default was not remedied
and no further
interest payments were made.
[22] On 6 December 2007 Trustees Executor's solicitors, Buddle Findlay, wrote
to
Mr and Mrs Turnbull at their address at Arkles Bay, setting out the details of the
ongoing default and the steps required address
it. The letter advised the Turnbulls to
consult with their solicitor and was copied to Ms de Magalhaes. Its contents indicate
Trustees
Executors had been communication with Mr Mayer and Ms de Magalhaes
about the default and stated:
Trustees Executors is reserving
all its rights in the meantime and it is
appreciative of the responses made by Malcolm Mayer and Monica de
Magalhaes
on your behalf providing some information on the situation and
advising attempts to improve the cash-flow from the properties
and look at
other options for repayments. What [Trustees Executors] requires is
certainty in this regard and the receipt
of the requested documentation and
the above arrangements, including putting in place direct debit authority and
the
weekly advices to ensure that [Trustees Executors] receives the full
revenue from the Property pending a restructuring and
repayment of the
loan.
[23] The letter also indicated that Mr Mayer and Ms de Magalhaes had advised
Trustees Executors
the annual rental from the Queen Street property was some
$100,000 short of the annual interest payments.
[24] The Turnbulls
did not respond or rectify the default, and the second of two
sets of Property Law Act notices were served personally on Mr & Mrs
Turnbull in
mid January 2008. The first set had already been served on them in December 2007
and went unanswered.
[25] The second
set of notices stated that the Turnbulls were required to remedy
the defaults by 25 February 2008, failing which:
a)
Trustees Executors would have the right to enter into possession of
the property and sell the property; and
b) All monies secured by the mortgage would immediately become due
and payable (to the extent that they
were not already).
[26] Again, the Turnbulls failed to comply with the notices and the deadline of 25
February 2008 came and
went without their making any payments toward the
outstanding interest arrears. On 8 March 2008 notices of demand requiring
repayment
in full of the loan (plus interest and costs) were served personally on Mr
and Mrs Turnbull. They too were not complied with. The
result was that Trustees
Executors commenced this proceeding on 13 March 2008.
The parties' positions
[27] Trustees Executors
says that there is nothing unusual about the loan advance.
It accepts that it did not have any dealings directly with Mr and Mrs
Turnbull.
However, it says the loan was a standard commercial transaction that was undertaken
in circumstances where it was satisfied
that the borrowers had adequate security, and
the means (through the income generated by the property) to finance the borrowing,
and that they otherwise met the usual lending criteria.
[28] Trustees Executors also contends that there is nothing on its file
to indicate
that the officers who dealt with the loan application were or should have been alerted
to the possibility of any disability.
Counsel pointed out the Turnbulls accept they
signed the loan application where Mr Turnbull's occupation for the past 7 years is
described as described as "Property investment and rental accommodation", and Mrs
Turnbull's as `office manager'. The application concluded with a declaration
executed by both,
certifying the truth of the information in the application. Taken at
face value, this information would have given Trustees Executors
reason to believe
the Turnbulls knew what they were doing and were not inexperienced in property or
business matters. He also submitted
that the evidence clearly shows that Trustees
Executors acted on the certificate given by the solicitor whom the Turnbulls
nominated
in their loan application to act for them. He argued his client could not
therefore have believed they were under any disability.
[29] The Turnbulls on the other hand went to some lengths in their evidence to
describe the circumstances relied on as affecting
their ability to conserve their own
interests. Their counsel made extensive submissions designed to show that Trustees
Executors
must have had some notion of their disability yet failed to take adequate
steps to ensure they had proper advice and was concerned
only to secure its
substantial arrangement fee.
[30] It is necessary to refer to the Turnbulls' evidence at some length. In doing
so
I have not taken into account draft evidence of the Turnbulls' daughter in law, which
was attached as an exhibit to a rebuttal
affidavit filed by Mrs Turnbull. The evidence
was the subject of an objection and I have decided I should ignore it.
[31] The
Turnbulls accept they signed the loan application and the loan
agreement, plus the disclosure statement and mortgage instrument.
They also accept
that Mr Turnbull signed the agreement for sale and purchase and the declaration in
the letter of 20 October, although
he claims he does not remember doing so. And
they accept that the documents nominated a particular solicitor to act for them.
However,
the Turnbulls say, essentially, that they were not property investors but
people of very modest means who were gullible parents motivated
by a desire to help
their son, whom they trusted totally and to such an extent that they did not ask
questions. They claim they did
not read any of the documents, the documents
contained a number of errors as to their personal circumstances and financial
position,
and that they lacked any meaningful understanding of the substance of the
transactions that resulted in their becoming the owners
of the Queen Street property.
Indeed, they say it was just before the hearing that they learned, through their
barrister, that they
were the owners of the property. Their evidence emphasises, in
support of their contentions, the circumstances in which the loan
was approved and
the documents signed, and that their role in was anything but active and did not
involve them in any meaningful
way. They say they had no contact at all with
Trustees Executors and that it was their son, Simon Turnbull and his associate, Mr
Mayer, who had the dealings with the lender. They say they now believe the whole
of the loan approval process was marred by procedural
impropriety, and can only
assume that they were used as bare trustees for their son in the purchase and loan
transactions.
[32]
In Mrs Turnbull's case, she deposes she thought that her son and his wife
wanted to buy the Queen Street property, and that her
son wanted some help
guaranteeing some money that he was borrowing. She claims as she trusted him
totally she simply did what she
was asked without paying too much attention to what
it was he wanted her to sign. She emphasises in relation to the loan documents
that
she did not receive any advice, legal or otherwise, and that her son simply brought
the relevant papers to her at her work and
she signed them, and then he took them
away without providing a copy. She says she had no idea that when she signed the
documents
it meant that she and her husband wanted to borrow $4,000,000
themselves and although she understood significant money was involved
she always
assumed it was advanced to her son. She acknowledges allowing her son to access
the file where she kept her and her husband's bank statements and that she may have
given her driver's licence to her son, but she did not remember doing so. The
inference is she did not know these documents were
to be used by Mr Mayer to
support the loan application. In her evidence she also emphasises that she did not
speak to or receive
any information from Trustee Executors, and she never saw or
was advised to see a solicitor about the papers. She never saw the agreement
for sale
and purchase for the property either and did not know what the purchase price was,
and she never saw the letter of 20 October.
She also says that she and her husband
never received any money or other benefit or advantage from the loan advance. She
stressed
she is 67 and her husband 72, and they were always in the position where
they could not take on obligations attaching to a loan of
the kind involved here. They
had no means of paying the loan advance and could never have met any interest
payments, as they had
no assets and no expectation that they would come into any
money. She deposed there was no way that "we would ever be able to pay
back a
loan of that much. I thought I was just signing something to support Simon." And
she denied that she was an office manager,
as stated in the loan application. She says
she is an administration manager on a modest salary.
[33] Mr Turnbull's evidence
about the circumstances in which he signed the
agreement for sale and purchase, the loan agreement, and the security documents,
reiterates
the general theme of Mrs Turnbull's evidence and raises a similar lack of
understanding and advice. A key difference is that he acknowledges
that he had a
meeting with the solicitor who was nominated to act for them in the loan agreement.
He also acknowledges that he signed
the loan agreement and the mortgage at the
meeting. However, he deposes that the meeting came about not at his instigation but
his
son's, who took him "to a meeting at a solicitor's office" where he signed the
loan agreement and the mortgage "in the presence of
a female solicitor". He
disavows that the solicitor was his or his wife's solicitor. He claims that he did not
read each document
and the solicitor did not take him through any of the detail
before he signed it. The meeting was brief and lasted about 10 minutes.
He deposes
that no one, including the solicitor, asked him about his financial position or the
purchase of the property, and he claims
he was not told that he was supposedly
borrowing $3.9 million. As for the agreement for sale and purchase although he
admits it was
his signature on the agreement he claims he can not specifically recall
signing it. And he says, somewhat inconsistently, that his
son just asked him to sign
it and initial the pages. He claims:
I did not realise I was buying a piece of property I did
not receive any legal
advice before signing the agreement.
[34] With respect to the loan application and the declaration
in the letter of 20
October Mr Turnbull accepts it was his signature on them, however he claims he
does not remember them. Like his
wife he disputes some of the contents of the loan
documents, including a handwritten note in his declaration naming their solicitor,
and a statement in the loan application that he and his wife had owned a property on
West Coast Road. He said that he thought his
son might have owned the property.
This is in contrast to Mrs Turnbull who says the property was "actually owned by
the Turnbull
Trust". She also acknowledges that "Simon, Larry and I are all
Trustees of the Trust", although distances herself by claiming that
the trust
was"something which our son set up in 2002".
[35] With the odd exception, the Turnbulls also claim to have no knowledge
of
any correspondence that was addressed to them before or after the property was
purchased. By way of example they say:
a) That if they did get the letter of 6 December 2007, which was
addressed to their home address, it is likely that Mr Turnbull took it,
without reading it, to Simon Turnbull's office and gave it to Simon
and his wife. They say the letter had Ms
de Magalhaes' name on it, so
they would have just assumed it was something to do with Simon and
his
wife, and they would not have thought it was anything to do with
them;
b) They did not get the solicitor's
invoice of 25 November 2006 that
purports to be rendered in respect of attendances carried out on their
instructions and attendances on them when they signed of loan
documents;
c) They did not get a
letter Trustees Executors claims to have sent to
them on 20 September 2007, advising of an increase in the interest
rate. The latter was addressed to PO Box 65364, Mairangi Bay. They
claim not to have a box number
and they do not know whose box
number it is. This compares with statements in the schedule to the
solicitor's certificate, and the loan agreement, that the postal address
of the borrower is PO Box 65364, Newton,
Auckland.
[36] Mr and Mrs Turnbull recall receiving from the solicitor a letter enclosing a
trust cheque for the balance "in
your trust ledger from the purchase of 74 Upper
Queen Street and a copy of your trust account ledger". Mr Turnbull deposes:
We have no idea why the solicitor had sent us a cheque for $326.34. I took
the letter and cheque to Monica. We never banked
the cheque.
[37] There is correspondence that indicates Ms de Magdalhaes subsequently
instructed the solicitor to stop payment
on the cheque and that a new cheque was
issued to her in the name of the Turnbull Trust.
[38] In similar vein, Mrs Turnbull said
when the proceedings were served on her
and Mr Turnbull they gave the papers "to Monica (Simon's wife)" because it was
"their business".
She contends they did this because they never had any involvement
in the property other than maintenance work that Mr Turnbull did
from time to time,
and that they did not hear anything until a matter of days before the hearing. She
says, in effect that it was
not till then that it became clear to her proceedings were
indeed her husband's and her "business". That occurred when their daughter
in law,
who by this time was no longer with their son, took them to see her lawyer, and he
arranged for them to see their present
counsel. Only then were they advised that the
Queen Street property was in their names and Mrs Turnbull learned about the
valuation
done for the Turnbull Trust. She also claims not to have known before
then of the direct debit authority signed on behalf of the
Turnbull Trust by her son
and his wife.
Principles relating to summary judgment
[39] Rule 136 in so far as it is relevant reads:
136 Judgment where there is no defence...
(1) The Court may give judgment against a defendant if the plaintiff
satisfies the Court that the defendant has no defence to a claim in the
statement of claim or to a
particular part of any such claim.
[40] The principles applying to a plaintiff's summary judgment application are
well established.
They were summarised by the Court of Appeal in Jowada Holdings
Ltd v Cullen Investments Ltd (CA 248/02, 5 June 2003) at [28]:
In order to obtain summary judgment under Rule 136 of the High Court
Rules a plaintiff must satisfy the Court that the
defendant has no defence to
its claim. In essence, the Court must be persuaded that on the material before
the Court
the plaintiff has established the necessary facts and legal basis for
its claim and that there is no reasonably arguable defence
available to the
defendant. Once the plaintiff has established a prima facie case, if the
defence raises questions of fact, on which the Court's decision may turn,
summary judgment will usually be inappropriate. That is particularly so if
resolution of such matters depends on the assessment
by the Court of
credibility or reliability of witnesses. On the other hand, where despite the
differences on certain
factual matters the lack of a tenable defence is plain on
the material before the Court, to the extent that the Court is sure
on the point,
summary judgment will in general be entered. That will be the case even if
legal arguments must be ruled
on to reach the decision. Once the Court has
been satisfied there is no defence Rule 136 confers discretion to refuse
summary judgment. The general purpose of the Rules however is the just,
speedy, and inexpensive determination of proceedings,
and if there are no
circumstances suggesting summary judgment might cause injustice, the
application will invariably
be granted. All these principles emerge from well
known decisions of the Court including Pemberton v Chappell [1987] NZLR
1, 304, 5; National Bank of New Zealand Ltd v Loomes (1989) 2 PRNZ 211,
214; and Sudfeldt v UDC Finance Ltd (1987) 1 PRNZ 205, 209.
[41] In Pemberton v Chappell [1987] 1 NZLR 1, Somers J explained the concept
of "no defence" as meaning the "absence of any real question to be tried". His
Honour also noted
at p3 that to defeat the application the defendant must provide
sufficient particulars to show that there is a factual or legal issue
worthy of trial.
[42] It is worth emphasising the approach, which the Court will adopt to disputes
of fact on summary judgment
applications. As Somers J stated in Pemberton at p4:
Where the defence raises questions of fact upon which the outcome of
the
case may turn it will not often be right to enter summary judgment.
[43] At the same time, the Court will take a robust
approach to summary judgment
applications: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 at 85-86 (CA). The
object of the procedure would be thwarted if spurious defences or plainly contrived
factual conflicts were permitted
to prevent judgment being obtained, especially in the
context of the structure of r 136 where the onus is on the applicant. A helpful
indicator as to where the line should be drawn is found in the judgment of Greig J in
Attorney-General v Rakiura Holdings Ltd (1986) 1 PRNZ 12 at 14:
In a matter such as this it would not be normal for a judge to attempt to
resolve any conflicts in evidence
contained in affidavits or to assess the
credibility or plausibility of averments in them. On the other hand, in the
words of Lord Diplock in Eng Mee Yong v Letchumanan [1980] AC 331, at
341E, the Judge is not bound:
"to accept uncritically, as raising a dispute of fact which calls for
further investigation, every statement on an affidavit however
equivocal, lacking in precision, inconsistent
with undisputed
contemporary documents or other statements by the same deponent,
or inherently improbable
in itself it may be."
[44] Finally, it is important to bear in mind the Court's residual discretion to refuse
summary judgment.
In Jowada, the Court explained at [30] the nature of the residual
discretion to refuse summary judgment:
Once the Court has
been satisfied that there is no defence Rule 136 confers
on it a discretion to refuse summary judgment which is of a residual
kind.
While the types of cases in which the discretion will be exercises to refuse
summary judgment cannot be exhaustively
defined, the most common
instance is where there would be an unfairness in proceeding
immediaTrustees Executorsy to
judgment, for example if the defendant were
unable to get in touch in the time available with a material witness who it
was reasonably thought might be able to provide it with material for a
defence: Bank Für Gemeinwirtschaft v City of London
Garages Ltd [1971] 1
All ER 541. 548 (CA). In that case Cairns LJ also said that harsh or
unconscionable behaviour of the plaintiff might require a matter
to proceed
to trial so that any judgment obtained was in the full light of publicity.
Principles relating to unconscionable
bargains
[45] The elements of the unconscionable bargain defence were recently set out by
the Court of Appeal in Gustav & Co
Ltd v Macfield Ltd [2007] BCL 668 and
approved by the Supreme Court in Gustav & Co Ltd v Macfield Ltd [2008] 2 NZLR
735.
[46] The principles of unconscionable bargains are described by Arnold J as
follows, at para [30]:
a) Equity will
intervene to relieve a party from the rigours of the
common law in respect of an unconscionable bargain.
b)
This equitable jurisdiction is not intended to relieve parties from
"hard" bargains or to save the foolish from
their foolishness. Rather,
the jurisdiction operates to protect those who enter into bargains
when
they are under a significant disability or disadvantage from
exploitation.
c) A qualifying disability
or disadvantage does not arise simply from
an inequality of bargaining power. Rather, it is a condition or
characteristic that significantly diminishes a party's ability to assess
his or her best interests. It is
an open-ended concept. Characteristics
that are likely to constitute a qualifying disability or disadvantage
are ignorance, lack of education, illness, age, mental or physical
infirmity, stress or anxiety, but other
characteristics may also qualify
depending upon the circumstances of the case.
d) If one party is under
a qualifying disability or disadvantage (the
weaker party), the focus shifts to the conduct of the other party (the
stronger party). The essential question is whether in the particular
circumstances it is unconscionable
to permit the stronger party to
take the benefit of the bargain.
e) Before a finding of unconscionability
will be made, the stronger
party must know of the weaker party's disability or disadvantage and
must
"take advantage of" that disability or disadvantage.
f) The requisite knowledge may be that of the principal or an agent,
and may be actual or constructive. Factors associated with the
substance of a transaction or the way
in which a transaction was
concluded may lead to a finding that the stronger party had
constructive
knowledge. So, in particular circumstances the stronger
party may be put on enquiry, and in the absence of such enquiry,
may be treated as if he or she knew of the disability or disadvantage.
g) "Taking advantage of" (or victimisation)
in this context
encompasses both the active extraction and the passive acceptance of
a benefit. Accordingly,
as Tipping J said in Bowkett v Action
Finance Ltd [1992] 1 NZLR 449 (HC) at 457, an unconscionable
victimisation will occur where there are:
...circumstances
which are either known or which ought to be
known to the stronger party in which he has an obligation in
equity
to say to the weaker party: no, I cannot in all good conscience
accept the
benefit of this transaction in these circumstances either at
all or unless you have full independent advice.
h) If these conditions are met, the burden falls on the stronger party to
show that the transaction was
a fair and reasonable one and should
therefore be upheld.
[47] To the same effect, it was held by the Privy Council
in O'Connor v Hart
[1985] 1 NZLR 159 in relation to `unconscionable bargains' that a contract can only
be set aside under this principle
when the `stronger' party has been found guilty of
`unconscionable conduct'. Unconscionable conduct was set out to include matters
such as equitable fraud, victimisation, taking advantage and over-reaching. Lord
Brightman said:
An unconscionable bargain
...would be a bargain of improvident character
made by a poor or ignorant person acting without legal advice, which cannot
be shown to be a fair and reasonable transaction. "Fraud" in its equitable
context does not mean, or is not confined
to, deceit, "it means an
unconscientious use of the power arising out of the circumstances and
conditions of the contraction
parties': Earl of Aylesford v Morris (1897) 8
Ch App 489, 490. It is victimisation, which can consist either of the active
extortion of a benefit or the passive acceptance of a benefit in
unconscionable circumstances.
[48] A transaction
may be unfair, unreasonable, and unjust from the viewpoint of
the person under the disability, notwithstanding that adequate consideration
may
have moved from the stronger party. An obvious instance of circumstances in which
that may be so is the case where the benefit
of the consideration does not move to the
party under the disability, but moves to some third party involved in the transaction.
As for instance where a husband procures a wife's guarantee for an advance used by
the husband. There is however no reason to limit
the principle to female spouses: see
Commercial Bank of Australia v Amadio [1983] HCA 14; (1983) 151 CLR 447 at 475, which was
cited with approval in Bowkett.
Discussion
Is there an arguable case for the defence of unconscionable bargain?
[49] I come then to the question whether there is an arguable defence based on
unconscionable bargain.
[50] The answer turns
essentially on whether it is arguable that:
a) The Turnbulls were a party in a position weaker than Trustees
Executors and were under a disability of circumstances;
b) Trustees Executors had actual or constructive knowledge
of their
disability and took advantage of it;
c) The transaction was not fair and reasonable from the
viewpoint of
persons suffering, as they were, from such a disability of
circumstances.
[51] It is
common ground that for present purposes the Turnbulls need only show
that each of their arguments is tenable in order to show they
have raised an arguable
defence. I consider each of the arguments in turn.
Is it arguable that the defendants were under a qualifying
disability?
[52] The answer is `yes', albeit by a fine margin. My reasons follow.
[53] The circumstances giving rise to the
Turnbulls' disability were said to
include:
i) Their advanced ages (67 and 72 respectively), and their
modest means;
ii) Their parental desire to assist their son and their unquestioning
trust in him and his abilities as a property investor;
iii) Their effectively being bare trustees
for their son who divorced
himself from the risks of the contractual arrangements but was
the controlling force behind them;
iv) Their having no practical ability to meet interest payments or
indeed any other payment they might become exposed to
under the contractual arrangements,
and their total inability to
offer any security in their own right (excepting any security
available in the Upper Queen Street property);
v) Their insufficient understanding of the nature of the
entire
transaction and the risks involved, and their inability to
recognise the need
to obtain independent advice in respect of
the contractual arrangements;
vi) The total
lack of any actual assistance or explanation (legal or
otherwise) where, by any objective standard, assistance
or
explanation was necessary. Mrs Turnbull never saw a solicitor
and Mr Turnbull claims
not to have received any advice from
his son's solicitor who did little more for him than witness his
signature.
[54] Despite such alleged circumstances, I have serious reservations the Turnbulls
were in fact under
a qualifying disability. Their evidence is far from free of internal
contradiction and in parts seems disingenuous. Certainly at
first glance it is difficult
not to be sceptical. It seems doubtful that the Turnbulls could have been unaware of
the importance
of reading legal documents to which they put their signatures. Mrs
Turnbull's age was no impediment to her undertaking full time
employment. The
nature of her employment, as an administration officer at Work and Income,
irrespective of what it involved exactly,
would suggest that she could be expected to
be alert to the importance of not signing legal documents without reading them or
obtaining
independent advice as to her obligations under them. It also seems unlikely
that she would not have pointed out the need for caution
to her husband if indeed he
was not a property investor and he were not already alert to the need. There are also
indications that
both had some involvement in a property-owning trust that could
point to them having prior experience in business and property matters. And there is
the solicitor's signed certificate that disclosure
was properly made to the Turnbulls,
which would ordinarily be sufficient to protect the lender from any suggestion that
the borrowers
were under an actionable disability.
[55] On the other hand, Mrs Turnbull says that her role at Work and Income was a
relatively
minor one and not at a high managerial level and that the trust was
something that her son had organised. And even though she admitted
she and her
husband were trustees of the Turnbull Trust, she persists strongly with the claim that
neither she nor her husband, who
claimed only to carry out maintenance tasks for
their son, understood much about the trust or their son's business. The professed
motivation of both was to help their son, and so they went along with whatever he
proposed without understanding or questioning his
proposals. Indeed, the picture that
both the Turnbulls painted was of an ordinary, even simple couple of advanced age,
of modest
means and limited day to day expenditure, who are inexperienced in
business matters, and who placed their complete, indeed blind
and unquestioning,
faith in their son.
[56] Age and blinding naivety possibly did play a major part in their placing
complete
trust in their son, who does appear to have been the controlling arm in the
transaction, and who may have exercised very considerable
influence over them.
Whether or not this was the situation is something I am sceptical of, but, in the
context of the present summary
proceeding, it is not something I can safely rule out.
Certainly, it would be one possible explanation why people in such circumstances
would act so imprudently as to become involved in the borrowing of such magnitude
(some millions of dollars).
[57] Furthermore,
while it may prove to be the case at trial that the Turnbulls did
indeed have their own independent advice that overcame any disability
they may
have been suffering from, I cannot presently rule out their contentions to the
contrary. I cannot rule out the possibility
that Mrs Turnbull never saw the solicitor,
or the possibility that the solicitor was in reality acting for their son and failed to
give Mr Turnbull any advice or truly independent advice.
[58] In these circumstances there is a tenable argument that I cannot
rule out on
the evidence as it satnds, that the Turnbulls were under a disability of the kind that
they claim.
Is it arguable that
Trustees Executors had the requisite knowledge of disability?
[59] Again the answer is "yes".
[60] At the hearing counsel
for the Turnbulls recognised they could not show on
the affidavit evidence that Trustees Executors had actual knowledge of the all
of the
circumstances said to give rise to their purported disability. However she argued, in
effect, that various factors tend to
show that Trustees Executors had such knowledge
or should have been alerted to the need for enquiry, but if there were any doubt
in
this regard, discovery and interrogatories should be allowed before summary
judgment might be granted. Those factors included
:
a) The sheer magnitude of the borrowing relative to the knowledge
Trustees Executors clearly had about
the Turnbulls' personal
circumstances. The loan application showed that they had modest
salaries and
needed to control their limited day to day expenditure.
The bank statements that Mr Mayer submitted showed their savings
were minimal and even less than the modest savings noted in the loan
application. It was therefore readily
apparent that they would have no
means of funding the very substantial interest costs should the rental
income from the Queen Street property fall short of the interest costs
for any reason. It is difficult in the circumstances
to imagine Trustees
Executors would ordinarily have treated them as credible or prudent
borrowers;
b) The Turnbulls
had no practical involvement in the negotiations
relating to the loan advance and Trustees Executors did not have a
single meeting with the Turnbulls to ally concerns a prudent lender
would almost certainly have had,
in the case of borrowers in the
Turnbulls' position. There was a total failure to make direct enquiry
of the Turnbulls as to their financial circumstances or management
abilities. All of Trustees Executors dealings were
in fact with the
Turnbulls' son and Mr Mayer, whom Trustees Executors
acknowledges were among
its valued customers and known to be
close business associates;
c) In the case of Mr Mayer, the loan application form, valuation
report
and agreement for sale and purchase were all submitted by him.
Trustees Executors sent details of the loan offer
not to them but "c/o"
Mr Mayer, and it was Mr Mayer who forwarded their bank statement
details to Trustees Executors. Moreover,
Mr Mayer, although
purporting to be their broker for the purpose of the loan application,
had an obvious conflict because
he was the director of the vendor of
the Queen Street property, whose own purchase had been financed by
Trustees Executors;
d) In the case of their son, page one of the Trustees Executors' copy of
the loan application had their son's name and phone
number hand-
written on it and circled under the heading of "contact details". In
addition, it was their son and his wife
who gave the automatic
payment authority for the interest. These circumstances should have
been a signal that he was the
real borrower and advancing his own
interests and not acting as manages of theirs. There was no reason for
Trustees Executors
to assume he was their manager. They did not
hold him out to be their manager. Significantly, their son was the
person
to whom Trustees Executors also looked when the interest was
in default;
e) Documents on Trustees Executors' file including
the automatic
payment authority and the valuation suggest it thought the buyer of
the Queen Street property was not the
Turnbulls personally but a trust;
f) The loan application nominated, as the Turnbulls' solicitor, a person
who was their
son's solicitor. Trustees Executors must have known
her to be his solicitor from its prior dealings, and in the circumstances
it could not assume that they would receive advice that was free of
conflict;
g) This entire situation suggests
Trustees Executors knew or should have
known that the Turnbulls' son together with Mr Mayer were the
drivers of the whole transaction, acting in their own interests and for
their own reasons. It also should have raised
alarm bells that Mr and
Mrs Turnbulls' were being used as bare trustees for others and their
interests
were not the interests being served.
[61] In the face of some if not all of these factors, I accept that the argument for
Trustees
Executors is not free of difficulty. I am unable to accept at face value the
contention that there was nothing unusual about the
application. I find most unusual
that persons of modest means and advanced age, coming to the end of their working
lives, would engage
in commercial transactions involving the borrowing of millions
of dollars. It seems unlikely they would do so unless blinded by a
reckless lack of
judgment or suffering from some genuine disability. It seems wholly unlikely that
the Turnbulls themselves would
have fitted any profile normally expected of the
kinds of persons who borrow that sort of money. And it seems unlikely that a
responsible
lender would not be concerned to go beyond the application to ensure
they knew what they were doing and could service the borrowing. Significantly,
there is no
suggestion that Trustees Executors had previous dealings with the
Turnbulls that might have provided some basis to conclude that
despite their age and
modest means, they were active investors with a proven track record and in control
of what they were doing.
[62] What Trustees Executors did know should have raised real questions about
the prudence of the Turnbulls' investment and borrowing
activities. It knew that that
they were of advanced age as their dates of birth were recorded on the loan
application. Later, certified
copies of the Turnbulls' licences (which contain their
dates of birth) were also provided to Trustees Executors at its request. Trustees
Executors also knew of their modest incomes and savings, and that they would lack
the means to pay interest in the event there should
be a shortfall in rent recovered
from the property. Arguably, that knowledge ought to have signalled the Turnbulls
were borrowers
that needed independent assistance and advice before embarking on
such a massive loan commitment, notwithstanding the value of the
property being
acquired appeared sufficient to provide security, and the rental income sufficient to
fund the interest at current
levels.
[63] It is also arguable that Simon Turnbull's active involvement in the loan
negotiations and automatic payment arrangements
should have alerted Trustees
Executors to the possibility that the Turnbulls were very much under his influence,
that they themselves
lacked any real business acumen and needed assistance. Further
more, their son's own history as a valued client, which was in contrast
to the
Turnbulls' own personal circumstances and recent introduction to Trustees
Executors, must have raised questions in the latter's
corporate mind about his
influence, and whose interests he was really looking after. Trustees Executors also
cannot have been unaware
that Mr Mayer appeared to be in a position of conflict.
[64] In these circumstances I cannot dismiss the Turnbulls' contention
Trustees
Executors should have been alerted to the possibility that they were persons under a
disability, and that its dealings were
in reality with Simon Turnbull and Mr Mayer
advancing their own interests, rather than those of Mr and Mrs Turnbull. In reaching
this view I do not overlook the emphasis that counsel placed on the fact that Trustees
Executors was entitled to conclude that the
Turnbulls had or appeared to have
independent legal advice. However, that is a submission I cannot safely accept in the
context of
the present hearing when there are indications that the solicitor in question
was Simon Turnbull's solicitor. Given his status as
a valued client it is a fair
inference that Trustees Executors knew the solicitor to be his solicitor, and in any
event the Turnbulls'
known circumstances called for Trustees Executors to take care
that they did have independent advice.
[65] The reason why Trustees
Executors would choose to proceed in the face of
the Turnbulls' situation is not readily apparent, but it does seem that it was Simon
Turnbull who lent credibility to the loan transaction and that Trustees Executors
knew he was the controlling force behind it.
[66] The net result is that I am satisfied that there are a number of factors that
collectively should have sounded alarm bells,
and that raise a tenable foundation for
the requisite actual or constructive knowledge of disability.
[67] I am reinforced in
the view I have taken, by the steps Trustees Executors took
in respect of the initial default. Trustees Executors' reaction was to
contact Simon
Turnbull and not the Turnbulls. After that contact, his direct debit authority was re-
activated, and it was he who
made good the missed interest payment before falling
into arrears once more. It was only after he fell into arrears again that Trustees
Executors wrote directly to the Turnbulls.
Is it arguable that Trustees Executors took advantage of the Turnbulls' disability?
[68] For reasons
that I will come to the answer to this question is also "yes".
[69] Implicit in taking advantage is that the lender has obtained
an advantage and
that the advantage is unfair. Factors that are typically involved in "taking advantage
of " (or victimisation) in
this context include inadequacy of consideration and
procedural impropriety, such as unfair pressure being applied to obtain the
other's
consent. A further factor is the absence of independent advice: Burrows, Finn &
Todd, Law of Contract in New Zealand (3rd
ed 2007) at 371. Tipping J said in
Bowkett v Action Finance [1992] 1 NZLR 449 at 461:
It is the cumulative weight of all relevant points which is important. For example,
the inadequacy of consideration
may be so startling as to justify a presumption of
procedural impropriety and the more startling the inadequacy the less substantial
the
disability may need to be.
[70] It is not in dispute that Trustees Executors obtained advantages from the loan
agreement
and the related mortgage, but nor is it suggested that all of the advantages
were unfair. Indeed, counsel for the Turnbulls recognised
that the advantages were
all of a kind that a commercial lender could expect of a commercial borrower. It was
no surprise that she
raised no complaint about Trustees Executors' right as
mortgagee to take possession of and sell the Queen Street property. The principal
basis on which Trustees Executors was said to have taken unfair advantage of the
Turnbull's alleged disability centred on their personal
covenants, and Trustees
Executors' right to look to them for repayment of the loan monies and any shortfall
once the security has
been realised. Their case as to unfairness was essentially that :
a) Trustees Executors facilitated a major purchase
in their names and
extracted from them personal covenants that they had no possible
means of meeting
if called upon. It also obtained a substantial fee
from the transaction out of the loan monies debited to them;
b) It did so in circumstances where, having actual or constructive
knowledge of their disability, it
knew or should have known they
needed assistance and should have advised or required them to obtain
legal advice that was independent of their son;
c) Instead, Trustees Executors was not only content to deal with
their
son and his associate, Mr Mayer, to the exclusion of themselves, but it
failed to advise them
to get legal advice independent of their son. In
addition, it appointed the son's solicitor to act for it for disclosure
purposes, when it should have known that was not appropriate;
d) Trustees Executors must or should
have known that the real
beneficiary was their son, and that they themselves derived no benefit
from
the loan advance.
[71] Counsel for the Turnbulls also argued that Trustees Executors' entire
dealings have the appearance of
being clothed with "generally active procedural
impropriety". She submitted that this is a case where the Court should exercise its
discretion not to enter summary judgment without the defendants having the benefit
of discovery and possibly interrogatories, so
that the whole position can be
investigated.
[72] I accept that I cannot rule out the possibility of procedural impropriety in
circumstances were it appears that all the dealings were with the son and his
associate, Mr Mayer, and that it was apparently the
son's solicitor who was supposed
to give independent legal advice. If the advice was as deficient as the Turnbulls
maintain, then,
arguably Trustees Executors must bear the risk of that.
[73] I do not overlook that ordinarily any failure to advise or any
negligent advice
on the part of the borrower's solicitor cannot be imputed to the lender by the mere
fact that the lender has instructed
the borrower's solicitor to arrange execution the
appropriate loan documentation. The solicitor is only the lender's agent in respect
of
the execution of the relevant documentation, not the giving of advice: National
Westminster Bank plc v Beaton (1998) 30 HLR 99.
The Court said at page 108:
...the mere fact that the solicitors were asked to give that advice to the wife does not
constitute them as agents. They were acting as agents for the bank in other respects
but in respect of giving the
advice the duty was owed to the wife and the agency was
between the wife and the solicitor in that respect.
[74] The difference here however
is the suggestion of impropriety by Trustees
Executors, because it allegedly knew or had constructive knowledge that the solicitor
was not independent of the son who, advancing his own interests, exposed his
parents to major risk. Therefore Trustees Executors
is arguably fixed with
constructive notice of the alleged lack of or deficiency in the solicitor's advice.
Conclusion
[75]
This case may be nothing more than one of foolish and indulgent parents who
went into a transaction with their eyes open to the
risks. Whether that is right, or
whether this is a case of a lender taking unfair advantage of naive borrowers of
advanced age, very
much under the influence of their son and lacking any means to
assess adequately the risks of what they were getting into, is something
I cannot
determine. While I incline to the view that the first scenario is the correct one, that is
something that should be decided
at trial.
Result
[76] The result is:
a) I am satisfied there is an arguable basis for the defence of
unconscionability;
b) It is unnecessary to go on and consider the question whether this in
one of those unusual cases where the court should exercise its
discretion to decline to enter summary judgement for
procedural
reasons (in this case to allow discovery and or interrogatories);
c) The application for summary
judgment is declined. The plaintiff's
case is to proceed in the normal way to trial;
d) Costs are reserved
in accordance with the Court of Appeal's decision
in NZI v Philpott [1990] 2 NZLR 403.
[77] The Registrar is directed
to allocate an initial telephone conference with a
view to directions being made to deal with all relevant matters under schedule
5 to
the High Court Rules. Memoranda are to be filed and served at least 2 working days
before the conference.
___________________________
Associate Judge
Sargisson
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