ANZ Banking Group Ltd v Alirezai [2004] QCA 6

SUPREME COURT OF QUEENSLAND CITATION: ANZ Banking Group Ltd v Alirezai; Alirezai v ANZ Banking Group Ltd & Anor [2004] QCA 6 PARTIES: AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522) (plaintiff /first respondent) v MOSHEN ALIREZAI (defendant/appellant) MOSHEN ALIREZAI (plaintiff by counterclaim/appellant) v AUSTRALIAN AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522) (first defendant by counterclaim/first respondent) MALCOLM JACKSON (second defendant by counterclaim/second respondent) FILE NO/S: Appeal No 6247 of 2002 SC No 1049 of 1997 DIVISION: Court of Appeal PROCEEDING: General Civil Appeal ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 6 February 2004 DELIVERED AT: Brisbane HEARING DATE: 20 May 2003 JUDGES: McMurdo P, Jerrard JA and Wilson J Separate reasons for judgment of each member of the Court, McMurdo P and Wilson J concurring as to the order made, Jerrard JA dissenting ORDER: Appeal dismissed with costs CATCHWORDS: EQUITY – GENERAL PRINCIPLES – UNDUE INFLUENCE AND DURESS – PRESUMPTION FROM RELATIONSHIP OF PARTIES – unconscionable dealing – whether bank should have been put on inquiry that intended surety may be in situation of special disadvantage – whether bank deemed to have notice of special disadvantage where relationship between surety and debtor is non-commercial – whether principles in Garcia v National Australia Bank Ltd and Royal Bank of Scotland v Etridge (No 2) limited to marriage or marriage-like relationships -- 1 of 34 -- 2 EQUITY – GENERAL PRINCIPLES – UNDUE INFLUENCE AND DURESS – OTHER PRESUMPTIONS OF UNDUE INFLUENCE – ABSENCE OF INDEPENDENT ADVICE – unconscionable dealing – where mortgage by third party to secure company debts – where solicitor providing advice and intended surety unaware of financial dealings between bank and debtor – whether certificate of independent legal advice sufficient to rebut presumption of unfairness in situations of special disadvantage – whether bank has duty to disclose true financial position of borrower and bank where proposed surety otherwise unable to make judgment as to their own best interests Barclays Bank v O’Brien [1994] 1 AC 180, considered Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447, applied Garcia v National Australia Bank Ltd (1998) 194 CLR 395, applied Kranz & Anor v National Australia Bank Ltd [2003] VSCA 92; No 5060 of 1994, 25 July 2003, discussed Royal Bank of Scotland v Etridge (No 2) [2001] 4 All ER 449, discussed Yerkey v Jones (1939) 63 CLR 649, considered COUNSEL: T J Bradley for the appellant A M Daubney SC, with J A Rosengren, for the respondents SOLICITORS: Lynch & Company for the appellant Blake Dawson Waldron for the respondents [1] McMURDO P: Mr Moshan Alirezai ("the appellant") signed a bill of mortgage over his property at Lot 2, Mount Rascal Road, Toowoomba, on 13 December 1991 in favour of the ANZ Banking Group Limited, the first respondent, ("ANZ"). The appellant signed a second bill of mortgage in favour of ANZ over another property at Lot 6, Mount Rascal Road, Toowoomba, on 6 August 1993. The bills of mortgage were third party mortgages securing the indebtedness of Sarlak Enterprises Pty Ltd ("the Sarlak company") to ANZ. The Sarlak company was completely owned and controlled by the appellant's friend, Mr Joseph Sarlak. The Sarlak company defaulted in its obligations to ANZ, which then issued proceedings against the appellant to recover possession of both properties. ANZ obtained summary judgment. [2] The appellant successfully appealed from ANZ's summary judgment for possession of Lot 6. ANZ subsequently sold Lot 2 under its powers of sale conferred upon it by the mortgage over Lot 2 and prosecuted its claim as to Lot 6 in the Supreme Court. [3] The appellant defended the proceedings and counter-claimed that the mortgage over both Lots 2 and 6 should be set aside as a breach of s 52 Trade Practices Act 1974 (Cth), fraudulent misrepresentation, unconscionable dealing, breach of fiduciary -- 2 of 34 -- 3 duty and undue influence. Alternatively, the appellant counter-claimed that Lot 2 was sold at a gross undervalue and ANZ was in breach of its duty of sale under s 85 Property Law Act 1974 (Qld); that Mr Sarlak was ANZ's agent for the purpose of procuring the appellant to execute mortgages over Lots 2 and 6 and for the purpose of explaining the mortgages and underlying transactions and that as Mr Sarlak had procured the execution of both mortgages by fraud, ANZ was not entitled in equity to rely upon the bills of mortgage. ANZ denied the appellant's contentions and further claimed that, in any case, the appellant was estopped from seeking any relief concerning Lot 2 because he did not appeal from ANZ’s successful summary judgment order: Port of Melbourne Authority v Anshun Pty Ltd.1 [4] The learned primary judge in a detailed and careful judgment, rejected the appellant's numerous contentions, accepted ANZ's claim, ordered that ANZ recover possession of Lot 6 and dismissed the appellant's counter-claim. [5] The appellant appeals from those orders. He sought leave to amend his initial succinct ground of appeal by adding a further 23 grounds in an amended notice of appeal but at the commencement of the appeal hearing, Mr Bradley on behalf of the appellant sought and was granted leave to amend the notice of appeal to argue four grounds of appeal. [6] He contends that the learned primary judge erred, first, in finding that the solicitor, Mr Kennedy, who gave independent legal advice to the appellant before the appellant entered into the mortgages of both Lots 2 and 6, had sufficient information to give the appellant that advice; second, in limiting the scope of the rule concerning unconscionability to marriage or a marriage-like relationship; third, in finding that ANZ did not know that the appellant's relationship with Mr Sarlak was of a type requiring it to be put on inquiry that the appellant may be in a situation of special disadvantage; and, finally, in finding ANZ was entitled to rely upon the certificate of independent advice. [7] It is convenient to state the salient factual matrix before returning to these grounds of appeal. The relevant facts (a) The appellant's evidence [8] The appellant was born in Iran in 1945; he grew up there and completed three years at high school. His first language was Persian (Farsi) and he also learned English and Arabic. On leaving school, he lived with his parents and set up a transport business carrying fruit and vegetables from the countryside to Tehran. After selling that business, he was employed by the Iranian government in Isfahan as a semitrailer driver in an iron smelter. He next went into partnership with a man importing German electrical goods and selling them to retailers. He then worked as a school bus driver; he sold that business for a profit. In the course of his small business career in Iran he did not borrow from a bank or other financial institutions but received financial assistance from his parents and grandparents. He later met up with a business acquaintance, a helicopter engineer interested in emigrating from Iran. He came with this man to Sydney on a tourist visa in 1973 and obtained employment with GMH on the assembly line at Pagewood, Sydney, where he worked for about three years. When the appellant arrived in Australia he was 1 (1981) 147 CLR 589. -- 3 of 34 -- 4 unable to communicate in English but established a savings account with the Commonwealth Bank. He returned to Iran in 1976 and used his savings to establish a women's clothing factory. The political revolution in Iran interrupted regular power supply and he closed his business to return to Australia just before Easter 1978. He obtained a full-time job as a contract cleaner at the Sydney Opera House. He was unable to maintain contract cleaning work because of back pain. His next employment as a bus driver in Sydney was also too onerous. [9] He purchased a house at Toongabbie in late 1978 and on the advice of his solicitor he borrowed money from the Commonwealth Bank to finance the purchase. He repaid that loan in five or six years and did not borrow from a bank again. [10] In 1983 he married and moved from Toongabbie to Toowoomba where he bought a 40 acre block which he subdivided. He ran cattle on the Toowoomba property and has lived in that area since. [11] He met and became friendly with Mr Sarlak, a fellow Iranian, in about 1982. They communicated in Persian. Mr Sarlak lived in Albury and they sometimes visited each other. [12] In the late 1980s the appellant separated from his wife and Mr Sarlak gave him support and advice. As part of the property settlement following his divorce, the appellant was required to pay his former wife $50,000 so that he could keep his Toowoomba land, the subject of this appeal. Mr Sarlak and Mr Sarlak’s brother loaned him this money and he felt very grateful towards Mr Sarlak for this loan. He felt not only under a commercial obligation to repay the money but also under a moral obligation to Mr Sarlak because of the favour given by a friend. He is a Muslim and lives his life by Islamic beliefs which include helping other Muslims in financial need; in Iran, if people help you and you do not return the favour when they are in need, you are not an honourable man. He repaid the $50,000 debt when Mr Sarlak needed the money about 12 months later, together with a further $3,000, by borrowing the money from another friend, Mr Carter. [13] The appellant remained friendly with Mr Sarlak and spoke to him fortnightly. He understood that Mr Sarlak was a very successful builder. In late 1990 or 1991, Mr Sarlak was importing tallow from Iran and needed a guarantee to satisfy the company selling him the tallow. Mr Sarlak asked the appellant to put up the deeds of his land as guarantee. The appellant immediately agreed. When Mr Sarlak sent him the documents he took them to his solicitor, Mr Kennedy of Hede Byrne. The appellant told him that he wanted to guarantee Mr Sarlak's tallow company and showed him the documents. Mr Kennedy told him they concerned a bill of mortgage and said he would study the papers. That night the appellant spoke to Mr Sarlak by telephone. Mr Sarlak said that the bill of mortgage was "the only way they do it". He returned to consult with Mr Kennedy on 13 December 1991. He did not further discuss the documents with Mr Kennedy; nor did they discuss Mr Sarlak's financial position or whether he owed money to the bank. The appellant did not read the documents. He signed the bill of mortgage over Lot 2 in Mr Kennedy's presence on 13 December 1991. He was not proficient in written English at that time. [14] When Mr Sarlak telephoned him that evening, the appellant said that he had signed the papers and the solicitor would forward them to Mr Sarlak. -- 4 of 34 -- 5 [15] The appellant remained in telephone contact with Mr Sarlak but they did not talk again about the bill of mortgage and guarantee. A few months later the appellant asked Mr Sarlak what had happened to his property deed and Mr Sarlak said, "It's sitting there." He did not mention ANZ. [16] In early 1993, the appellant travelled to Albury to holiday with Mr Sarlak. Mr Sarlak said the tallow business was profitable and the appellant should become involved. The appellant said he had no money but he had two deeds against which they could borrow to go into business together. In about March or April 1993, Mr Sarlak proposed that before he went to Iran on business they should put in place arrangements for their joint tallow export enterprise. The appellant agreed. His Lot 6 deed was with Mr Carter who did not wish to become involved in the business. In early August, Mr Sarlak asked the appellant to pick up some documents from the ANZ Bank, Toowoomba, take them to his solicitor, and "get it signed same as before and send it back". He also asked the appellant to have the two properties valued. The appellant complied with these requests and sent the valuations to Mr Sarlak. [17] On 6 April 1993, the appellant saw Mr Kennedy for about 20 minutes. They spoke about his friendship with Mr Sarlak and the appellant's religion and customs. He told Mr Kennedy that he trusted Mr Sarlak. Mr Kennedy said that the relationship was "extremely unusual" and "you're lucky you've got a friend like that or he is lucky he's got a friend like you". He signed the document in Mr Kennedy's presence. There was no discussion as to how wealthy Mr Sarlak was, his debts, how much he or the Sarlak company owed the bank, or the extent of his assets or securities. Mr Kennedy did not read any documents to him. He understood the effect of the documents he had signed was that he and Mr Sarlak were jointly borrowing money from ANZ for their tallow business. Communications with Mr Kennedy were always in English, whilst his communications with Mr Sarlak were in Persian. [18] Mr Sarlak said that the bank wanted to change their arrangements to an overdraft but the appellant declined on more than one occasion because he had nothing to do with Mr Sarlak's other business. A few weeks later Mr Sarlak told him that the tallow had been sent but not yet paid for. They remained in contact. In February 1995, the appellant received correspondence from ANZ which he could not understand and he asked Mr Sarlak about it. [19] In March 1995, the appellant was admitted to a Sydney hospital for a back operation; he was hospitalised for 67 days. He received a letter from ANZ in the last week of June but did nothing with it. On the advice of a friend, he wrote to ANZ requesting the return of his deeds and was shocked to learn they were held by ANZ as a bill of mortgage. (b) Mr Sarlak’s evidence [20] Mr Sarlak gave evidence supporting the appellant as to the nature of their relationship. Mr Sarlak successfully conducted a civil construction business in Albury over a number of years and his banker was ANZ. He began exporting tallow to Iran. He told Mr Jackson from ANZ, Albury, that the tallow supplier, Peerless Holdings Pty Ltd ("Peerless"), needed a guarantee for $150,000. Mr Jackson said ANZ would need a guarantee and security before advancing that amount. He told Mr Jackson he had a friend whom he had helped in the past and -- 5 of 34 -- 6 who would now help him. He approached the appellant who agreed to assist and passed this information on to Mr Jackson. When the appellant sent him the title deed to Lot 2, he sent it to ANZ on 3 December 1991, stating: “We wish to use this property to secure a Bank Guarantee of $150,000 made to Peerless Holdings of Melbourne to secure 2500 MT of tallow for our January shipment. The bank guarantee will remain in place until full payment of the goods has been made to Peerless." [21] Mr Jackson told him the appellant would need to take the documents to his solicitor and obtain a letter of independent advice. Mr Jackson did not ask him to explain the mortgage to the appellant; he did not need to as the appellant was seeing a lawyer. [22] In about 30 June 1992 Peerless returned the guarantee for $150,000 to ANZ and that facility was cancelled. The mortgage over Lot 2 remained as security for the Sarlak company's other debts. [23] During 1992, the appellant expressed interest in becoming involved in the tallow export business. Mr Sarlak had successfully sent one small shipment on which he made a 30 per cent profit, a second shipment was about to be exported and a third shipment was planned with a view to establishing a long term permanent business. Because of the appellant’s interest in the business, the appellant arranged for the title deed for Lot 6 to be sent from Mr Carter to Mr Sarlak who gave it to Mr Jackson at ANZ. Mr Jackson requested more valuations and the appellant arranged this. Mr Jackson often communicated his requests to the appellant about the documents ANZ required through Mr Sarlak because, as Mr Sarlak explained to Mr Jackson, the appellant did not have a good understanding of English. The appellant returned the documents required by Mr Jackson to Mr Sarlak and he passed them on to ANZ. [24] In the end this tallow shipment did not proceed because of changed regulations in Iran. He told the appellant this in late 1993. The appellant enquired about his title deeds and he told him they were "sitting there". He did not tell the appellant that the security held by ANZ in support of the Sarlak company's overdraft was the appellant's land. [25] On 13 April 1994 Mr Jackson asked him to have the appellant sign and return an acknowledgement of understanding that Lots 2 and 6 were securing a $600,000 overdraft and a $100,000 fully drawn advance in respect of the Sarlak company. The appellant refused to sign this acknowledgement because the joint tallow export business was not proceeding. [26] The appellant contacted him about a similar letter from ANZ sent to him directly in February 1995. He then learnt the appellant was hospitalised. He asked a mutual friend to write to Mr Jackson explaining the appellant's serious health problems which prohibited him from signing the acknowledgement. (c) Mr Jackson’s evidence [27] Mr Jackson, the manager of ANZ at Albury, had worked for ANZ since 1971 and as a manager since 1983. He met Mr Sarlak in 1990. In late 1991, Mr Sarlak approached him to raise a bank guarantee in favour of Peerless for $150,000 which would be utilised to purchase tallow for export to Iran. To support the indemnity -- 6 of 34 -- 7 guarantee, ANZ required some additional security and Mr Sarlak said he had a friend who would be able to offer land as security. He described this friend as "a long term friend that he had done a favour for in the past and the security would be available". At some stage he understood this friend was of Iranian descent. He did not recall being told that the appellant had any difficulty with English. The Sarlak company banking facilities at that time were about $250,000, basically by way of an overdraft. He advised Mr Sarlak that the security required was a third party mortgage with a letter of independent advice. Mr Sarlak offered on a number of occasions to have the documents executed and returned. This was quicker than using ANZ's internal system. Mr Sarlak initially offered Lot 2 only as security for the guarantee but Mr Jackson explained that Lot 2 would be used as security for all the Sarlak debts. Mr Sarlak offered to pass on this information to the appellant and he assumed he did. [28] In 1993, Mr Sarlak wanted an increase in loan facilities to accommodate a bill not negotiated under credit facility (BNNUC) of $350,000 and Mr Jackson advised him that he would need additional security to achieve this. Mr Sarlak offered further security from the appellant, this time Lot 6. Mr Sarlak delivered the title deed for Lot 6 and again offered to be the courier for the necessary execution and return of the documents, including a letter of independent advice. He told Mr Sarlak that valuations for both lots were required. He explained to Mr Sarlak that the title deeds for Lots 2 and 6 were being used as security for not only the guarantee but for all the Sarlak company's debts. Mr Sarlak said that was satisfactory and he assumed it was also satisfactory for the appellant. [29] He had a sound relationship with Mr Sarlak during this period and trusted and relied on the information he supplied. Mr Jackson agreed that his training instructions included advice to be guarded about information given by a borrower about a third party and not to communicate with the third party through the borrower. He was, however, comfortable with Mr Sarlak's involvement in this transaction. [30] ANZ did not give information to the appellant or his solicitor concerning the financial affairs of the Sarlak company or Mr Sarlak. [31] The bank facilities would not have been extended to Mr Sarlak and the Sarlak Company until ANZ was aware that the necessary certificates had been signed by the appellant's solicitor, even if the certificates had not physically reached the Albury branch. (d) The evidence of Mr Kennedy, the solicitor [32] Mr Kennedy was a solicitor with Hede Byrne, Toowoomba, when he acted for the appellant. Because of the passage of time, his recollection of the events was limited but he refreshed his memory from his contemporaneous file notes. He recalled the appellant, who invited him to his home; they discussed how Iranians do things differently to Australians. He had concerns about the appellant's documents and he recorded those concerns. He advised the appellant against giving any security on behalf of Mr Sarlak. They communicated in English without difficulty; it was not at all necessary to obtain an interpreter and there was nothing to alert or concern him in this respect. His file note indicated that neither he nor the appellant saw Mr Sarlak's application for loan approval. -- 7 of 34 -- 8 [33] Mr Kennedy advised the appellant on 13 December 1991, both orally and in writing signed by the appellant and witnessed by Mr Kennedy, in these terms: "… my solicitors, Messrs Hede & Byrne have advised me strongly not to sign the Bill of Mortgage granting security to my friend, Joe Sarlak. I am aware the security is in respect of the company, Sarlak Enterprises Pty Ltd, and not Joe Sarlak. My solicitors have informed me the Bill of Mortgage document in its present form imposes a potential liability on me which extends to any obligations Sarlak Enterprises Pty Ltd owes to the Bank both presently and at any time in the future. My solicitors have informed me that following conversations with the Bank that the Bank is in agreement to add an additional clause to the document in an attempt to limit my liability to an amount not exceeding the value of the property the subject of the Bill of Mortgage. I am informed by my solicitors that they are not absolutely certain that the clause will limit my liability. However despite the misgivings of my solicitors I do intend to execute the Bill of Mortgage." [34] After discussing the matter with Mr Jackson, ANZ agreed to limit the appellant's liability to the total value of the mortgaged property and a clause to this effect was added to the all moneys mortgage. [35] On 6 August 1993 Mr Kennedy witnessed the appellant's signature on the second mortgage document. Mr Kennedy's diary notes of 6 August 1993 indicated that, despite Mr Kennedy's expressed reservations about the transaction, the appellant intended to mortgage this second property, Lot 6, just as he mortgaged Lot 2. The appellant informed him of his great faith in Mr Sarlak's character. Mr Kennedy explained that if something happened to Mr Sarlak's business, then the appellant may well lose not only the land which he previously offered as security but also the house property which was the subject of the present mortgage. Mr Kennedy informed the appellant that his liability under the mortgage of Lot 6 would be limited, like the mortgage of Lot 2, to liability to the proceeds of sale of each mortgaged property. The appellant confirmed he understood this and was happy to sign the documents in the knowledge that if Mr Sarlak or any associated entity went into bankruptcy or liquidation he may ultimately lose Lots 2 and 6 and his house situated on that land. [36] On both occasions, Mr Kennedy certified that he was not acting for ANZ or the Sarlak company and that he had independently advised the appellant about the registered mortgage and that, after having made all enquiries which he believed necessary and proper, he considered that the appellant would execute the documents freely, voluntarily and with full knowledge and understanding of their contents and the circumstances under which he was undertaking the liabilities contained in them. The relevant legal principles -- 8 of 34 -- 9 [37] Guarantees are not contracts of the utmost good faith automatically requiring the creditor's full disclosure of all material facts.2 The general rule is that a bank is not obliged to disclose to a surety matters affecting the credit of the customer whose debt is to be guaranteed. Even if a company is in grave financial difficulties, consistently exceeding its overdraft limit with its cheques dishonoured, a creditor is not ordinarily required to disclose these facts to the surety: Gibbs CJ, Commercial Bank of Australia Ltd v Amadio.3 Gibbs CJ recognised, however, a limited duty on a banker to disclose facts to a surety:4 "It would be commercially unreal to suggest that a bank has a duty to reveal to a surety all the facts within its knowledge which relate to the transactions and financial position of a customer in any case where those transactions are out of the ordinary. The obligation is to reveal anything in the transaction between the banker and the customer which has the effect that the position of the customer is different from that which the surety would naturally expect, particularly if it affects the nature or degree of the surety's responsibility."5 [38] If the creditor knows or would reasonably believe the surety to be acting upon a particular assumption of fact and knows that the assumption is unfounded, the creditor’s failure to disclose the truth may amount to a representation that the assumption is well founded: Union Bank of Australia Ltd v Puddy.6 [39] Equitable principles may give relief when the inequality of a relationship between two people gives one a measure of influence or ascendancy over the other of which the dominant person takes unfair advantage and abuses that influence. In Garcia v National Australia Bank Limited,7 the High Court held that it was there unconscionable for a creditor to enforce a guarantee against the wife, who did not understand the effect of her guarantee and made no gain from the transaction being guaranteed, if the creditor did not explain or have explained the effect of the guarantee. In Royal Bank of Scotland v Etridge (No 2),8 an unequal relationship existed between the borrower, (the husband), and the surety, (the wife, who mortgaged the matrimonial home), giving the borrower a measure of influence or ascendancy over the surety. Lord Nicholls there emphasised that the question is whether one party has reposed sufficient trust and confidence in that other to invoke such a relationship leaving one party's trust and confidence in the other to be taken advantage of and abused.9 I do not understand Garcia to necessarily limit appropriate equitable relief to marriage or marriage-like relationships, which involve what is sometimes referred to as sexually transmitted debt.10 What was important in Garcia was that the marriage relationship itself put the bank on notice that there was a relationship of trust and confidence between the debtor and the surety so that it was unconscionable for the bank to enforce the surety without 2 Yerkey and Jones (1939) 63 CLR 649; Goodwin and National Bank of A/asia Ltd (1968) 117 CLR 173, 175; O’Donovan and Phillips, The Modern Contract of Guarantee (3rd Edition), 122. 3 (1983) 151 CLR 447, 456; see also O’Donovan and Phillips Modern Contract of Guarantee 3rd Edition 128-130. 4 Above, 454-457, 456. 5 Above, 457; see also the comments of Mason J (as he then was), 463. 6 [1949] VLR 242. 7 (1998) 194 CLR 395. 8 [2001] 4 ALL ER 449. 9 Above, 457-458. 10 Horrigan, Bryan, "Adventures in Law and Justice", UNSW Press, 2003, 183-185. -- 9 of 34 -- 10 having explained, or having had explained to the surety, the effect of the transaction.11 Special relationships of sufficient trust and confidence in which one party could abuse that trust and confidence so as to invoke equitable relief for transactions entered into by the other are not a closed category; they could, for example, arise in some parent-child relationships or perhaps in the relationship between a disabled person and carer; many other potential examples can be envisaged. [40] The creditor's knowledge of the existence of such a relationship and the nature of the transaction between the parties to the relationship may establish a rebuttable evidential presumption of undue influence, shifting the evidential burden of proof from the party alleging undue influence to the party denying it. Where this occurs, there may be an obligation on the creditor to inform the surety of the debtor's financial position.12 In Etridge (No. 2) Lord Nicholls held that there are two pre- requisites to such a presumption; not only must there first be a relationship of trust and confidence, the transaction must also not be readily explicable by the relationship of the parties.13 The appellant's contentions [41] The appellant relies on Lord Nicholls' following observations in Etridge (No 2)14 as to the practice of banks in such circumstances: "Accordingly it should become routine practice for banks, if relying on confirmation from their solicitor for their protection, to send to the solicitor the necessary financial information. What is required must depend on the facts of the case. Ordinarily this will include information on the purpose for which the proposed new facility has been requested, the current amount of [the borrower’s] indebtedness, the amount of his current overdraft facility, and the amount and terms of any new facility. If the bank’s request for security arose from a written application by the [borrower] for a facility, a copy of the application should be sent to the solicitor. The bank will, of course, need first to obtain the consent of its customer to this circulation of confidential information. If this consent is not forthcoming the transaction will not be able to proceed."15 [42] The appellant also relies on passages in Yerkey v Jones16 and Garcia v National Australia Bank Limited17 which emphasise the need for a creditor, aware of such an unequal relationship, to explain, or to know that a competent, independent and disinterested third party has explained the transaction to the surety because otherwise to enforce the transaction would be unconscionable. [43] The appellant contends that prior to him entering into the first mortgage, Mr Sarlak had misrepresented to him, by silence, that the amount of the borrowings would be limited to the bank guarantee of $150,000. This is supported by the terms of Mr 11 See Kirby J's discussion in Garcia at 430-431. 12 Garcia, 473 and Yerkey v Jones (1939) 63 CLR 649. 13 Above, 460, [21]. 14 Above, 473. 15 Above, 473. 16 (1939) 63 CLR 649. 17 (1998) 194 CLR 395, Gaudron, McHugh, Gummow and Haynes JJ at [24], [31], [33] and [41] as discussed by Spender J in Ribchenkov v Suncorp-Metway (2000) 175 ALR 650, 664. -- 10 of 34 -- 11 Sarlak’s letter on behalf of the Sarlak Company to Mr Jackson of 3 December 1991 forwarding the Title Deed for Lot 2 to secure this bank guarantee.18 Although Mr Jackson later told Mr Sarlak that the mortgage would cover the entire indebtedness of the Sarlak Company including the indemnity of $150,000, this information was not given to the appellant. The appellant contends that ANZ, through Mr Jackson, was aware of the appellant's relationship of trust and confidence in Mr Sarlak and, as of 3 December 1991, of the potential for the appellant to misunderstand the extent of the borrowings he was securing by the mortgage of Lot 2. ANZ was therefore obliged to disclose the extent of Mr Sarlak's borrowings to the appellant or his solicitor in accordance with the guidelines outlined by Lord Nicholls in Etridge (No 2).19 Neither the appellant nor his solicitor were given these details. Had the appellant been aware of the true extent of the borrowings he was proposing to guarantee, he would have learned that Mr Sarlak had been untruthful and this may have diminished his trust in Mr Sarlak, making it probable that he would have accepted and acted on Mr Kennedy's advice not to mortgage his property. ANZ, he contends, has effectively obtained the guarantee unconscionably. [44] The appellant submits that Mr Sarlak continued to misrepresent relevant matters to the appellant by telling him that the title deed for Lot No 2 was "just sitting there" when it was in the possession of the bank. At the time of the second mortgage Mr Sarlak misrepresented to the appellant that the security sought by the second mortgage was to secure a joint business venture involving the exportation of tallow to Iran. ANZ effectively continued its misrepresentation by silence in obtaining the mortgage of Lot 6 without disclosing to the appellant the extent of the Sarlak company borrowings and again acted unconscionably. [45] The appellant contends that ANZ is not entitled to act on Mr Kennedy’s certificates, because they were based on incomplete information as to the extent of the borrowings. The appellant alternatively contends that ANZ did not rely on those certificates but increased the appellant's loan facilities without regard to them. The learned primary judge's findings [46] Her Honour found that whilst the appellant was generally honest and credible his evidence in respect of the events and circumstances surrounding the signing of the mortgages in 1991 and 1993 must be approached with caution. Mr Sarlak was motivated by self-interest and the learned primary judge regarded his evidence with great caution, looking for verification wherever possible before acting on it. Nor was she impressed with Mr Jackson's evidence, but found it more reliable than Mr Sarlak's evidence when there was a conflict. By contrast, her Honour found Mr Kennedy to be a thorough, careful and totally honest solicitor whose entire evidence she accepted without reservation, rejecting the appellant’s evidence where inconsistent. [47] The learned primary judge found that at the time Mr Sarlak requested the appellant to allow his title deed for Lot 2 to be used to guarantee the dealings in tallow Mr Sarlak: "… was making use of the friendship that existed between Mr Alirezai and him, and the fact that he knew that Mr Alirezai felt a moral obligation towards him, because of the help that he had given 18 See these Reasons, [20]. 19 Above, 473. -- 11 of 34 -- 12 Mr Alirezai by lending him the sum of $50,000 … he had respect for Mr Sarlak and trusted him."20 [48] Her Honour found that the appellant’s Muslim faith and observance of Iranian customs were relevant to explain the appellant’s feeling of being under a moral obligation to assist Mr Sarlak when he requested assistance.21 Her Honour also found that relationship of trust and friendship continued and remained at the time the appellant acted as surety in July 1993 by offering Lots 2 and 6 as security for the BNNUC.22 Her Honour found that the bank was unaware of any difficulty the appellant had in understanding English at the relevant times.23 The appellant did not in any way indicate to Mr Kennedy in any of their dealings that he did not understand Mr Kennedy's advice.24 Her Honour concluded that, although ANZ knew on each occasion that the appellant was of Iranian descent and had granted a mortgage in favour of his friend, Mr Sarlak, who had done him a favour in the past by lending him $50,000, and that ANZ was unaware that the appellant stood to obtain any financial benefit out of providing the surety, these facts were not enough to give ANZ knowledge that the appellant was in a situation of special disadvantage in granting the mortgage. [49] Her Honour also concluded that even if ANZ had knowledge of the appellant’s situation of special disadvantage it did not take unconscientious advantage of its superior bargaining position because it required the appellant to obtain independent legal advice.25 Her Honour found that there was nothing unsatisfactory about the conduct of the Sarlak company accounts at the time the appellant mortgaged his properties and Mr Jackson was not concerned about these accounts because he ensured the debts were adequately secured. [50] Her Honour distinguished Etridge (No 2)26 from the facts of this case as "clearly confined to marriage type relationships and … of no assistance in this matter."27 The grounds of appeal [51] I return now to the specific grounds of appeal. The first is that the learned primary judge erred in concluding that Mr Kennedy had sufficient information to give the appellant the advice required by ANZ before entering into the mortgages of Lots 2 and 6. It is common ground that Mr Kennedy did not know the extent of the borrowings to be secured by the appellant when he advised him. This information could not have affected Mr Kennedy's advice, which was already in strong terms not to enter into the mortgage covering all the Sarlak company debts. The appellant contends that, had he known the extent of the borrowings this would have detracted from his sense of trust of Mr Sarlak and made him more likely to heed his solicitor's advice. That was not, however, the appellant's evidence and nor was it an inference required to be drawn from his or other evidence. The fact that the appellant was not prepared to accept strong advice from his solicitor makes it unlikely that, even had he known the full extent of the debts of Mr Sarlak and the Sarlak company, this 20 Reasons for judgment [84]. 21 Above, [85]. 22 Above, [86]. 23 Above, [87]. 24 Above, [92]. 25 Above, [172]. 26 Above. 27 Reasons for judgment [169]. -- 12 of 34 -- 13 would have affected his determination to assist his friend. In any case, for the reasons given in discussing the third ground of appeal below,28 ANZ's knowledge of the Sarlak company accounts, the nature of the transactions and the appellant's relationship with Mr Sarlak was not such as to alter the general rule discussed earlier in these reasons29 that ANZ was not obliged to disclose the debts being secured by the appellant. Nor was ANZ required in these circumstances to disclose the Sarlak company debts to the appellant or his solicitor. It follows that the first ground of appeal is without substance. [52] The next ground of appeal is that the learned primary judge erred in limiting the scope of the rules concerning unconscionability to marriage or marriage-like relationships. In Etridge (No 2) their Lordships were anxious to put to rest the confusion arising out of the test used in Morgan's case30 of "manifest disadvantage" and to set out the steps a bank should take when put on inquiry as to the equality of the relationship between borrower and proposed surety. As Lord Nicholls' discussion demonstrates,31 this confusion most commonly arises in marriage or marriage-like relationships, but, as I have noted earlier, in my view the rules concerning undue influence and unconscionability are not necessarily limited to marriage or marriage-like relationships.32 Her Honour distinguished Etridge (No 2) because the relationship between the appellant and Mr Sarlak was not one which would put ANZ on inquiry as to the equality of the relationship between Mr Sarlak as borrower and the appellant as surety. Unless the appellant is successful on the third ground of appeal, this ground does not assist the appellant. [53] The third ground of appeal is that her Honour erred in finding that ANZ did not know that the appellant’s relationship with Mr Sarlak was of the type requiring it to be put on inquiry that the appellant may be in a situation of special disadvantage. This ground of appeal is central to the appellant's contentions; the appellant’s argument fails at its threshold if the relationship between Mr Sarlak and the appellant was not of this kind or if ANZ was unaware of the unequal relationship. The appellant has not referred this Court to any case where a relationship genuinely comparable to that between the appellant and Mr Sarlak has been found to be in the category referred to by Lord Nicholls in Etridge (No 2), requiring the creditor with knowledge of the relationship and the proposed financial transactions to take special care. A close friendship between borrower and surety based on shared cultural and religious values does not in itself require a banker to do more than what was done here, namely, ensure the surety obtains independent legal advice on the transactions. [54] ANZ and Mr Jackson knew that Mr Sarlak was the appellant’s good friend who had helped him financially in a time of need and that the appellant wanted to reciprocate. This must have made the appellant's preparedness to mortgage his properties on behalf of Mr Sarlak more readily explicable to ANZ.33 ANZ had notice of a reason for the appellant to have assisted Mr Sarlak in his business dealings. In the circumstances, where ANZ had ensured the appellant was obtaining independent legal advice on the mortgages, Mr Sarlak said he would explain the mortgage of Lot 2 was not limited to the $150,000 guarantee and there was nothing 28 See these Reasons [53]-[55]. 29 See these Reasons [37]. 30 National Westminster Bank plc v Morgan [1985] 1 All ER 821, 826–829. 31 Etridge (No 2), above [25]. 32 See these Reasons, [39]. 33 Etridge (No 2), above, [21]. -- 13 of 34 -- 14 noticeably irregular about the borrowings, ANZ and Mr Jackson were not required to disclose the extent of the Sarlak company borrowings to the appellant or his solicitor. [55] Her Honour was right to conclude on the facts found by her, which were open on the evidence, that ANZ did not know the relationship between Mr Sarlak and the appellant was one where the level of trust and confidence made it objectively unreasonable for a volunteer to provide the surety, requiring ANZ to be on inquiry that the appellant may be in a situation of general disadvantage. In rejecting this ground of appeal, I emphasise I do not support any departure from the practice adopted by ANZ here of ensuring that a surety in such circumstances obtains independent advice before entering into such guarantees. A solicitor giving advice in such a case may well advise that the surety request information from the creditor as to the borrower's debts to the creditor before giving the guarantee or third party mortgage. Where, as here, despite the strong advice to the surety not to give the mortgages because they impose a potential liability for any or all obligations the debtor has to the creditor, the surety remains determined to give the mortgages, there may be no point in requesting information as to the extent of the debtor's obligations to the creditor. [56] The final ground of appeal is that her Honour erred in finding that ANZ was entitled to rely upon the certificate of independent advice. This contention has two limbs. The first turns on grounds of appeal one and three, which have already been rejected, that ANZ knew of the special relationship, was obliged to disclose the Sarlak company’s borrowings to the appellant or Mr Kennedy and not having done so, cannot rely on Mr Kennedy's certificate. The second turns on the appellant’s claim that ANZ had already authorised the borrowings before receiving the certificates of independent advice from Mr Kennedy and did not rely on the certificates. The appellant attempted to demonstrate this contention by reference to the evidence. Mr Jackson said that he would not have authorised the borrowings until he had been made aware of the solicitor’s certificate of independent advice. He was not cross examined extensively about this issue but it can be inferred that, with modern methods of communication including telephone, facsimile and email, he was informed of the signing of the certificates and mortgages before he authorised the Sarlak company borrowings secured by the mortgages. The fact that the certificates were not physically received by ANZ in Albury or entered in ANZ's security register until a date after ANZ's letter authorising the borrowings does not compel a finding that the borrowings were made in the absence of reliance on the solicitor’s certificate of independent advice. To the contrary, Mr Jackson’s evidence, which was not rejected on this point by the trial judge, supports ANZ's reliance on the certificates. This ground is also without substance. [57] It follows that the appeal should be dismissed with costs. [58] JERRARD JA: In this matter I have had the considerable advantage of reading the reasons for judgment of the President, and the orders her Honour proposes. I gratefully adopt the detailed description contained in her judgment of the relevant evidence given in the trial. The President's judgment, and that of the learned trial judge, identify the matters of fact which are the source of the dispute between Mr Alirezai and the ANZ Bank, and which are critical to its resolution. -- 14 of 34 -- 15 General Background [59] Those matters include the following. Mr Sarlak and Mr Alirezai, who communicated in Persian, had an Iranian cultural background in common. As found by the learned trial judge, Mr Jackson of the ANZ Bank knew of that at the latest when he received the certificate of title for Lot 2, which showed Mr Alirezai's name34; and Mr Jackson's evidence was that he was aware “at some time” from conversations with Mr Sarlak that Mr Alirezai was of Iranian descent. Mr Alirezai felt a strong sense of obligation to Mr Sarlak because of Mr Sarlak's assistance with the loan of $50,000 to Mr Alirezai in the late 1980s. Mr Jackson was told by Mr Sarlak, when Mr Sarlak sought a bank guarantee to assist with the planned expectation of tallow by his company to Iran, and when Mr Jackson had told Mr Sarlak that the bank needed more security before it would do that, that Mr Sarlak had a friend who would help him out and for whom Mr Sarlak had done a favour in the past by making a loan of $50,000. Mr Sarlak told Mr Jackson that that friend would be able to offer some supporting security for the bank guarantee that Mr Sarlak wished to be issued to Peerless Holdings Pty Ltd.35 Those remarks by Mr Sarlak of necessity informed Mr Jackson of Mr Sarlak's obvious confidence in the latter's ability to procure security from Mr Alirezai by reason of the expected sense of obligation. The learned trial judge accepted that it was because of that feeling of moral obligation that Mr Alirezai agreed, when asked by Mr Sarlak, to permit his title deed for Lot 2 to be used as security for the $150,000 bank guarantee.36 The Mortgage over Lot 2 [60] Mr Alirezai sent Mr Sarlak that title deed, and he in turn sent it to ANZ on 3 December 1991, as described in the President's judgment. As at that date, it appears that both Mr Sarlak and Mr Alirezai had the common understanding that the property would secure only that bank guarantee, but Mr Jackson disabused Mr Sarlak of that understanding of what the bank proposed to do with that security. This occurred between the receipt of that letter dated 3 December 1991 and 13 December 1991, the date the solicitor, Mr Kennedy, strongly advised Mr Alirezai not to sign the Bill of Mortgage. The learned trial judge accepted that Mr Jackson told Mr Sarlak that the bank would use that security to cover all outstanding debts and liabilities of Sarlak Enterprises, and not just the Peerless bank guarantee, before the mortgage was dispatched to Mr Sarlak for forwarding to Mr Alirezai for the latter's signature.37 The judge also accepted that Mr Sarlak did not demur from Mr Jackson's requirement that Lot 2 be security for all debts. [61] The Bill of Mortgage actually executed by Mr Alirezai on 13 December 1991 was an all moneys mortgage and Ex. 29 describes what Mr Kennedy told Mr Alirezai, namely that the bill of mortgage document imposed a potential liability on Mr Alirezai which extended to any obligations Sarlak Enterprises Pty Ltd owed to the bank, both then and at any future time. Mr Alirezai's evidence was that he understood that "if Joe doesn't pay I have to pay"; and that he understood his land was being put up as security "for that tallow" (AR 87 and 88). He did not describe any deeper understanding, and was cross-examined about what was said to him by Mr Kennedy rather than on what he understood. 34 [22] of the reasons for judgment, at AR 961-2. 35 Reasons for judgment, [22]; AR 961. 36 Reasons for judgment, [26]; AR 962. 37 Reasons for judgment, [28]; AR 963. -- 15 of 34 -- 16 [62] The bank had had no direct dealings with Mr Alirezai at all. It had no reason to believe that Mr Alirezai had any actual knowledge of Mr Sarlak's business debts with the bank, which at 6 December 1991 were an overdraft debt of $245,875 (on an overdraft limit of $200,000), and a $100,000 debt on a commercial bill due 16 March 1992. To this was being added the potential liability on the guarantee. Ex. 13, the diary note prepared 6 December 1991, predicted total debt, as a result of the guarantee, of $534,930; and prime security, including Lot 2, worth $508,560. The learned trial judge found that prior to the granting of the mortgage over Lot 2, the account of Sarlak Enterprises was being conducted close to or above the approved overdraft limit, with increased temporary limits being continually provided by the bank to Sarlak Enterprises; and that Mr Jackson was not concerned about the conduct of Sarlak Enterprises' account, as the bank’s position was protected by its obtaining adequate security from the company to support its indebtedness. The requirements for additional security from Sarlak in December 1991 was made in connection with the latter's request for a bank guarantee in respect of its new venture of exporting tallow.38 [63] The learned trial judge accepted that Mr Sarlak did not tell Mr Alirezai of his conversation with Mr Jackson about the mortgage over Lot 2 being security for all debts of Sarlak Enterprises with the bank,39 and the learned judge accepted that Mr Kennedy did give advice to Mr Alirezai to the effect described in Ex. 29 (namely of the potential liability extending to the future debts of Sarlak Enterprises)40; but the learned judge did not make a finding Mr Alirezai actually grasped that. The judge did find that Mr Alirezai did not give Mr Kennedy any indication that he could not understand the explanations and advice given by Mr Kennedy. Mr Alirezai's own evidence did not accept or acknowledge the clear receipt of advice, which the judge found he was given, not to enter into the transaction. [64] Mr Alirezai's evidence did not demonstrate any knowledge by him at any relevant time of the financial position of either Sarlak Enterprises or of Mr Sarlak. It appeared common ground at the appeal that Mr Alirezai executed that mortgage over Lot 2 in December 1991 despite the attempts by the independent solicitor, Mr Kennedy, to persuade him not to do that, and that Mr Alirezai did so to the bank's knowledge solely as a volunteer gaining no benefit, not known to have any knowledge of the bank debts being secured by the property, and acting only from a sense of moral obligation. I consider the later dealings between the bank, Mr Sarlak, and Mr Alirezai (described below) make reasonable the inference that Mr Alirezai did not understand when executing either mortgage that one all important consequence of doing so was that he would not recover his certificate of title, unencumbered by those now secured debts, until Sarlak Enterprises cleared all its debts to the bank. On its trading history, that would be likely to occur only when Mr Sarlak voluntarily ceased being active in business, i.e. retired. The Mortgage over Lot 6 [65] The second transaction, into which Mr Alirezai entered, in August 1993, was the more important one, in that on this occasion Mr Alirezai agreed to both of his lots being used as security for the debts of Sarlak Enterprises. The circumstances surrounding Mr Sarlak's execution of a mortgage over Lot 6 on 6 August 1993 38 These findings are at [102]-[104]; AR 976-77. 39 At reasons [32]; AR 963. 40 At reasons [45]; AR 966. -- 16 of 34 -- 17 reflected those of 13 December 1991 in that once again Mr Sarlak attended upon Mr Kennedy, once again he was told of the latter's reservations about his executing the mortgage document, and once again he went ahead. Once again Mr Sarlak had been seeking further credit from the bank (in respect of a proposed shipment), and once again Mr Sarlak had suggested to Mr Jackson, in response to the latter's request for further security, that Mr Sarlak would obtain that from Mr Alirezai. Once again, Mr Alirezai organised for the certificate of title for Lot 6 to be sent to Mr Sarlak and it was delivered to the bank. Again, this occurred before the mortgage was executed and the advice given by Mr Kennedy. Once again Mr Alirezai agreed that Mr Kennedy had said: "Do you realise if Joe doesn't pay, you have to pay?"; and Mr Alirezai agreed that he had understood and responded affirmatively. [66] There were some different circumstances in 1993 from those prevailing in 1991. Firstly, although the bank had no reason to grasp that Mr Alirezai might not have continued to be simply one who, from the same sense of moral obligation originally described by Mr Sarlak to Mr Jackson, was willing yet again to put up even more real property as security with no possible material benefit to himself, in fact, and apparently unknown to the bank,41 Mr Sarlak had suggested to Mr Alirezai in early 1993 that they could do business (the export of tallow to Iran) together, and Mr Alirezai had agreed that "we" can borrow against Mr Alirezai's two deeds and "go to the business together".42 Mr Alirezai understood that this was how his two properties were to be used as security, he having been told (untruthfully) by Mr Sarlak in the first part of 1992 that the deed to Lot 2 was "just sitting there". This was said in response to Mr Alirezai's question "What happened to the deed?", a question prompted by Mr Sarlak's having told Mr Alirezai that the tallow shipment had been completed and payment had been received. The judgment of the learned trial judge implies that she accepted the evidence of that conversation given by Mr Alirezai,43 a conclusion I draw because the learned judge held: "I find that it suited Mr Sarlak not to be specific in describing to Mr Alirezai where the deed was." That finding and the implicit acceptance of that evidence given by Mr Alirezai shows that he had a complete misunderstanding of the legal effect of the mortgage he had executed in December 1991 the effect of which Mr Kennedy had endeavoured to explain. It is consistent with Mr Alirezai's description in evidence of what he understood he was doing in the first transaction, (providing security for the purchase of the tallow to the exporter), and consistent with an understanding by him that he could recover his deed should he so choose. Some matters of relevant knowledge, belief, and intent [67] There is no evidence that the bank was led at that time by any information given to it to an appreciation of Mr Alirezai's non-comprehension of the effect of the security he had granted, just as there is no evidence the bank knew Mr Sarlak had proposed a variety of joint venture to Mr Alirezai in early 1993. While Mr Alirezai intended to be less of a volunteer in the August 1993 transaction than may have been apparent to the bank, the evidence shows that in fact no documents were executed of any 41 There was no finding that the bank knew, nor evidence quoted in the reasons for judgment, suggesting it did. 42 Reasons, [51], AR 967. 43 The evidence is at [48] of the reasons; AR 967. -- 17 of 34 -- 18 kind establishing any such joint venture, and no joint venture of any informal variety occurred. Instead, after Mr Alirezai provided his certificates of title and mortgage of Lot 6 as security for the debts of the intended joint venture, (as Mr Alirezai understood it), Mr Alirezai was later told by Mr Sarlak that they could not do any business with the Iranian company. Mr Alirezai took that to mean there was to be no joint venture. [68] The learned trial judge found that Mr Alirezai was certainly made aware of the fact that he risked losing both properties when executing the mortgage over Lot 6. Mr Alirezai had understood from his conversations with Mr Sarlak that the latter was attempting to obtain a bill negotiated not under credit facility ("BNNUC"), and Mr Kennedy's note of the conversation with Mr Alirezai on 6 August 1993 included the following: "Mr Alirezai informed me that he has great faith in the character of Mr Sarlak and that he was well aware of the fact that if something happened to Mr Sarlak's dealings, then he may well lose not only the land which he previously offered as security, but also the house property which was the subject of this present mortgage. I did inform Mr Alirezai that his liability under this particular document would be limited in the same manner as the previously executed mortgage limits his liability to the proceeds of sale of each mortgaged property. Mr Alirezai confirmed that he was aware of all this and was happy to sign the documents in the knowledge that if Mr Sarlak or any associated entity went into bankruptcy or liquidation, he ultimately may also lose the house and the land." (At AR 891) [69] The reference to the limitation of liability was a reflection of Mr Kennedy's efforts on Mr Alirezai's behalf, made in both 1991 and 1993, whereby he secured the bank's agreement that Mr Alirezai's liability would be limited to the proceeds of the sale of the mortgaged property. Mr Alirezai's evidence acknowledged that he was told and understood that fact. [70] In mid-1993 Sarlak Enterprises' debts with the bank were an overdraft debt of $275,649, a residual investment property loan with a balance of $93,872, and a fully drawn advance of $100,000. This was the position when Mr Sarlak enquired about further credit; it was to secure that credit facility that Mr Sarlak obtained the deed to Lot 6 and the executed mortgage. [71] The evidence did not establish that Mr Sarlak had no intention of entering into a joint venture with Mr Alirezai, and accordingly Mr Alirezai's evidence that he thought he would make money out of going into a business of exporting tallow with Sarlak Enterprises was not necessarily a belief based on a misrepresentation by Mr Sarlak. What the evidence establishes is that such a joint venture never eventuated, and that the deed to Lot 6 and mortgage was actually applied by Mr Sarlack to a different purpose entirely of his own and that of Sarlak Enterprises, and which did not include Mr Alirezai. -- 18 of 34 -- 19 Subsequent dealings [72] The subsequent dealings between the bank and Mr Alirezai described in the judgment under appeal show that he received a letter from the bank dated 16 August 1993, forwarded by Mr Sarlak, which referred to an overdraft facility of $450,000, which figure Mr Alirezai queried with Mr Sarlak. This was because the total valuation of Lots 2 and 6 was $420,000. It was shortly after that that Mr Sarlak told Mr Alirezai that they could not do any business in Iran, and nothing more seems to have happened until April 1994. Mr Alirezai then received, via Mr Sarlak, correspondence from the bank showing an overdraft of $600,000 (and a fully drawn advance of $100,000) and on this occasion Mr Alirezai contacted Mr Sarlak and told him he was not going to sign the forwarded documents, which included an acknowledgement of lending facilities to that extent. Then in February 1995, Mr Alirezai received a letter directly from the bank, again seeking an acknowledgment of lending facilities, this time in respect of an overdraft of $720,000 and a fully drawn advance of $100,000; and after speaking with the manager of the Toowoomba branch of the bank, Mr Alirezai declined to sign or return those documents. [73] In June 1995 he received a further letter directly from the bank, again seeking an acknowledgement of lending facilities, now at an overdraft of $590,000 and a fully drawn advance of $100,000. Mr Alirezai did not sign or return that letter but sent a letter to the bank requesting it return of his title deeds. The bank declined to do so. [74] Those later events show Mr Alirezai by then more shrewdly refusing to execute documents sent to him by the bank, and imply that he could understand their contents and converse relevantly with the Toowoomba branch manager of the bank. The evidence describing those dealings is at [69]-[81] of the reasons for judgment. Those dealings suggest that Mr Alirezai grasped that there was a direct connection between the company's overdraft and the security he had provided; although this was during the period in which Mr Alirezai still had reason to believe he may be engaged in a joint venture with Mr Sarlak. For that reason they do not show that Mr Alirezai had any better understanding of the real effect of the mortgage he had executed than he had at the time he asked Mr Sarlak in 1992 "what happened to the deed?" The submissions on appeal [75] Mr Alirezai’s first complaint on the appeal, that there was either actual undue influence exerted over him by Mr Sarlak or that the bank ought to have been put on inquiry about that, cannot be sustained on the evidence described. Mr Alirezai's sense of moral obligation, although exploited by Mr Sarlak, was not an example the exercise of actual undue influence, as that concept is described and discussed in Yerkey v Jones (1939) 63 CLR 649 by Dixon J at 684, in the joint judgment in Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at 404-405, and in the joint judgment of the majority in Bridgewater v Leahy (1998) 158 ALR 66 at [71]- [75]. That it was not a case of actual undue influence is emphasised by the fact that when executing the second mortgage, Mr Alirezai actually hoped to make a profit as part of a joint venture which Mr Sarlak may in fact have contemplated. [76] The facts recounted demonstrate that there is a great deal of force in the submissions by Senior Counsel for the respondent that: -- 19 of 34 -- 20 • On a worst case scenario, accepting everything said by the appellant about unconscionability in relation to the December 1991 transaction, the result was that at that time the bank would have been limited to relying on the security over Lot 2 for the purposes of the $150,000 bank guarantee; but • the subsequent transaction was a completely separate one, in that Mr Alirezai knew that he was providing each of Lot 2 and Lot 6 as security for a different financial transaction; in which • he was advised by an independent solicitor as to its nature, and regardless of what information was or was not provided to him, was in fact informed of the worst case scenario, namely that he could lose both properties; and • the respondent (quite properly) relied on para [172] of the judgment under appeal, namely the conclusion by the learned trial judge that: "Even if it were concluded that the bank did have the knowledge that Mr Alirezai was in a situation of special disadvantage in respect of the granting of each of the mortgages, the bank could not, on any view, be said to have taken unconscientious advantage of its superior bargaining position, when it required Mr Alirezai to take the mortgage to a solicitor to obtain independent legal advice about the transaction: Garcia at 411 and Ribchenkov v Suncorp-Metway Ltd at 644-665." Mr Alirezai’s lack of understanding [77] I accept the force of those submissions and that quoted finding. Nevertheless, they reflect the facts, which are common ground, that Mr Alirezai acted solely from a moral obligation in December 1991, and then later from a misplaced trust in Mr Sarlak and an unsubstantiated belief that they were in some fashion potential partners in August 1993; and further that these were in fact entirely improvident transactions on his behalf on the facts known to the bank on each occasion. It was apparent to the bank that Mr Alirezai simply did as Mr Sarlak asked him. I consider the evidence showed Mr Alirezai did not grasp from the debts owing to the bank and Mr Sarlak’s business practice of trading with a significant debt, that the mortgages he signed meant that realistically his properties were always at risk and would not be returned to his unencumbered beneficial ownership until Mr Sarlak ceased successful business. The respondent did not really contest that on the appeal. [78] However, the respondent contends those matters do not disentitle it to hold its judgment. They rely on the certification to them by Mr Kennedy that he had independently advised Mr Alirezai, and on the fact that (unknown to the bank at the time) that advice was against executing the mortgages. Mr Kennedy's certifications were Ex. 31 and 78, and certified that he was not acting for the bank or Sarlak Enterprises Pty Ltd, that he had independently advised Mr Alirezai regarding the documents set out in an attached schedule; that he had made all enquiries he (Mr Kennedy) believed necessary and proper; and that he considered that his client would execute the documents freely and voluntarily and with full knowledge and understanding of their content and the circumstances under which he was undertaking the liabilities contained in those. Both certificates are in identical form and appear to have been drafted by the bank. The bank certainly advised Mr Sarlak on each occasion that Mr Alirezai would have to take the mortgage to a solicitor and -- 20 of 34 -- 21 that the bank required a letter certifying independent advice from the solicitor consulted by Mr Alirezai. The applicable law [79] Mr Alirezai’s failure to understand that he could not have his title deed back from the bank if the financial ventures he understood they were securing did not go ahead, means that if the relationship between Mr Sarlak and Mr Alirezai is fairly described as being, at the relevant times, one of trust and confidence, then the dealings between him, Mr Sarlak, and the bank resemble much more the second variety of case discussed by Dixon J in Yerkey and Jones (at CLR 684-686) and in the joint judgment in Garcia at [31] – [33]. In the latter case that joint judgment, dealing with circumstances in a relationship of husband and wife, described (at [23]) the law applicable in a situation where there was no actual undue influence but a failure to explain adequately and accurately the suretyship transaction which (the husband) sought to have (the wife) enter for the immediate economic benefit not of the wife but of the husband. That joint judgment described the relevant principle as being that it is unconscionable to enforce a suretyship transaction if it later emerged that (the wife) did not understand the purport and effect of the transaction, if the lender took no steps itself to explain its purport and effect (to the wife) or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. [80] Their Honours wrote (at CLR 409): “And what makes it unconscionable to enforce it in the second kind of case is a combination of circumstances that (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.” [81] The position was further described in that joint judgment in Garcia (at CLR 409 at [33]): "As we have said, undue influence is dealt with separately and differently. Nor does the analysis depend upon identifying the husband as acting as agent for the creditor in procuring the wife's agreement to the transaction. Rather, it depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction, and the creditor being taken to have appreciated that because of the trust and confidence between the surety and debtor the surety may well receive from the debtor no sufficient explanation of the transaction’s purport and effect. To enforce the transaction against a mistaken volunteer, when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable." -- 21 of 34 -- 22 [82] Those principles discussed in that joint judgment in Garcia have been recently and helpfully considered by the Victorian Court of Appeal in Kranz & Anor v National Australia Bank Limited [2003] VSCA 92; No. 5060 of 1994, 25 July 2003. I respectfully agree with the analysis of the law in the proposition in para [31] of the judgment of Charles JA therein, where his Honour wrote: "The principle stated by the High Court in Garcia would make it unconscionable for a bank to enforce a guarantee given by a volunteer if it has not explained the situation to the guarantor, and does not know that an independent person has done so, if the bank knows that there was a relationship of trust and confidence between the guarantor and the debtor whose debt has been guaranteed. In Australia it remains therefore for the debtor to establish that the bank was aware of a relationship that put the bank on enquiry, such as that of husband and wife or solicitor and client, or that there was a relationship of trust and confidence between the debtor and the third party." [83] Referring to those matters described in Garcia at [33], and Kranz at [31], Mr Alirezai was a volunteer, was mistaken about the purport and effect of the transaction (in its long term effect on his security), and the bank knew of the trust and confidence between the two men. The bank's knowledge of that was certainly to that degree whereby it should be taken to appreciate that Mr Alirezai may well not have received from Mr Sarlak any sufficient explanation of the purport and effect of the transaction. That is well demonstrated by the ease with which Mr Sarlak agreed in early December 1991 to the bank's requirement that Lot 2 secure all the debts of Sarlak Enterprises, when it was plain Mr Sarlak had not at that moment been able to communicate with Mr Alirezai at all. [84] I consider that the evidence described establishes that there was a relationship of trust and confidence between Mr Alirezai and Mr Sarlak when each mortgage was entered into, and that that fact had been amply demonstrated to Mr Jackson by Mr Sarlak's confident and accurate predictions that Mr Alirezai would provide security as a volunteer. On each occasion when Mr Sarlak showed that confidence, Mr Jackson could have had no basis for believing that Mr Sarlak had had any prior communication with Mr Alirezai about the request for security then being made for the first time by Mr Jackson. Accordingly Mr Alirezai did establish that the bank was aware of a relationship that put it on inquiry (that proposition was not really disputed on the appeal either, although not conceded). The critical question is the extent of the explanation of the debtor’s circumstances and the effect of giving the security which the bank is required to give such a volunteer, or cause an independent person to give the volunteer, to avoid it becoming unconscientious44 for the bank to enforce that guarantee. What needs to be explained? [85] The respondent bank relies upon the independent solicitor’s certificate and what was in fact explained. That explanation was given in a complete vacuum, in that Mr Kennedy had no idea of Mr Sarlak's financial dealings or the actual debts of Sarlak Enterprises. I do not agree that the evidence justifies the conclusion that had Mr 44 The term preferred in the joint judgment in Tarwar Enterprises Pty Limited v Guachi [2003] HCA 57 at [21]. -- 22 of 34 -- 23 Alirezai been told of those debts or how they arose, on either occasion, that it would have made no difference to him. That was not put to him in cross-examination. [86] As to the explanation of the transaction and its effect which the bank was required to ensure that Mr Alirezai received, the respondent’s Senior Counsel particularly referred the courts to the propositions discussed in The Modern Contract of Guarantee (3rd ed) (referred to by the President in her judgment), and to the undeniable matters that guarantees are not contracts of utmost good faith, that there is no universal obligation upon a creditor to disclose to an intending guarantor all facts relating to its dealings with the principal debtor, and that the law allows a creditor to assume that the proposed surety is acquainted with the principal debtor’s position. Senior Counsel referred to the authoritative judgment of Gibbs CJ in Commercial Bank of Australia v Amadio (1983) 151 CLR 447; and to the lengthy list contained at pages 128-130 of The Modern Contract of Guarantee of matters which courts have held need not be disclosed by a creditor to a surety. That extensive list demonstrates a limited duty on a bank to make disclosure to the intending surety, where that duty arises from the mere relationship between the bank as principal creditor and that intended surety. The cases cited in the footnotes to that text are ones establishing the variety of commercial relationships and prior dealings between the creditor and debtor which the surety is expected to assume may have occurred; and those cases thereby evidence the limit on the duty, to being one to give notice to the surety of unusual or uncommon features in the particular case relating to the particular account which is to be guaranteed. [87] The principles established by those decisions, applicable to commercial relationships, do not identify the applicable principles when the issue is whether it is unconscientious to enforce a surety volunteered in an improvident transaction by a party who did not understand its actual effect. Those latter principles are the ones formulated in Garcia. As Mason J (as he then was) wrote in Amadio (at CLR 463): “But the fact that a bank’s duty to make disclosure to its intending surety, arising from the mere relationship between principal creditor and surety, is so limited has no bearing on the availability of equitable relief on the ground of unconscionable conduct. A bank, though not guilty of any breach of its limited duty to make disclosure to the intending surety, may none the less be considered to have engaged in unconscionable conduct in procuring the surety’s entry into the contract of guarantee.” [88] In Amadio the matters of fact demonstrating the unconscionability of that bank’s conduct in procuring a guarantee were stronger than the matters relied on here by Mr Alirezai. Further, this is not a case in which the bank procured the guarantee. But it is a case in which the bank obtained the significant benefits of security for the existing and future overdraft and other debts of Sarlak Enterprises, when that was not what Mr Alirezai intended to result from his actions. Those debts being guaranteed were extensive, and Mr Alirezai’s real property was the most significant security for those debts. The evidence did not show that when the securities were granted it was probable that those debts could be repaid without any recourse to that security. Why fly blind? [89] The fact that the securities were given in those circumstances shows the limited utility to a person in Mr Alirezai’s position of independent advice which is given -- 23 of 34 -- 24 without knowledge of the financial dealings between the bank and its debtor. Revelation of the fact that the overdraft account had been drawn down and in fact overdrawn for quite some time when Lot 2 was first offered in December 1991, together with specific advice that the mortgage guaranteed that debt as well as the short term liability for the tallow enterprise Mr Alirezai had been told about, and that the mortgage also guaranteed the future indebtedness of the company, could well have had a very different effect on Mr Alirezai’s willingness to honour a moral obligation than resulted from his simply being advised that he should not do so. In writing this I am in no way intending to be critical of the solicitor who provided that advice and who endeavoured to protect Mr Alirezai’s interests as much as the solicitor could. Rather, I am suggesting that it is not sufficient for a bank in those circumstances simply to rely upon the giving of advice where the bank has no reason to believe that either the solicitor who certifies the advice was given, or that the surety who enters into the transaction, understands at all any details of the financial circumstances that make it unlikely the property will ever again be beneficially enjoyed by the surety. Further, I suggest there is authority for the view that the bank cannot simply rely on such advice. [90] Those members of the majority in the High Court in Amadio who decided that appeal on the basis of the unconscionability of enforcing a mortgage and guarantee against the debtor’s parents, when those parents were in a position of special disadvantage or disability vis-à-vis the bank (Mason J at CLR 464, Wilson J at CLR 468, and Deane J at CLR 476-477), considered the extent of independent advice necessary to make acceptance of the volunteered benefit conscionable. Mason J wrote (at CLR 468) that in that case: “…the bank was guilty of unconscionable conduct by entering into the transaction without disclosing such facts as may have enabled the respondents to form a judgment for themselves and without ensuring that they obtained independent advice.” Wilson J wrote (at CLR 469) that: “The circumstances required that the respondents be acquainted with the true financial position of the company and thereby enabled to make an informed decision. Having regard to the special circumstances surrounding the bank’s relationship to Vincenzo, Mr. Virgo was obliged either to ensure that his parents understood what they were doing or to advise them to seek independent advice and allow them the opportunity to do so.” Deane J wrote (at CLR 481) that: “In the present case however, it was, as has been said, evident to the bank that Mr. and Mrs. Amadio stood in need of advice as to the nature and effect of the transaction into which they were entering. It is apparent that any such advice would have included the importance to a guarantor of ascertaining from the bank the state of the customer’s accounts which was being guaranteed and any unusual features of the account.” [91] Those quotations suggest that at least two of the members of that majority who determined the outcome in Amadio on the principles of unconscionability considered that the obligation on the bank was both to disclose the financial information necessary for an informed decision on the effect of providing the -- 24 of 34 -- 25 security, and also to explain its effect or insist upon independent advice being obtained by the proposed surety. The third judge, Deane J, would require that the independent advice include the importance of learning the state of the account from the bank. [92] In this case the bank complied with the second of the two steps specified but not the first. Taking only that second step may be a common commercial practice in such situations but it does not actually accord with those judgments in Amadio. I respectfully observe that the description in them of what constitutes conduct rendering it unconscientious to enforce a security is, of course, consistent with the analysis in Garcia at [31]-[33]. Those decisions establish that a critical matter is the lender’s knowledge that the relationship between the borrower and the person whose property is being volunteered as security is such that the latter may well receive no sufficient explanation of the transaction’s purport and effect from the borrower. Hence the obligation on the lender taking the security to cause this to happen, in order to make the security enforceable. [93] In cases of the present nature this can be ensured by the bank specifying in the certificate the financial information which should be conveyed to the surety and the matters upon which advice should be given, including the likely effect of providing the security. This, of course, would not limit the person providing that advice to those matters specified, but would ensure that the bank volunteered in advance the information it said was relevant to the proposed surety and the matters upon which it acknowledged the surety should be advised in the circumstances. It may be argued that requiring a bank to volunteer information about its customer, the debtor, will require the bank first to obtain that debtor’s permission to reveal that information; but that should not provide any hindrance where both the debtor and the bank, are dealing conscientiously with the proposed surety. It does not appear onerous to require the borrower to agree that the lender be candid with a third party as to the existing liabilities sought to be guaranteed. In any event that obligation was clearly required by those judgments cited from Amadio. [94] Those judgments in Amadio, written with the specific facts of that case in contemplation, necessarily lead to the conclusion that in any situation in which the proposed surety will be unable to make a judgment as to what is in the surety’s own interests without information describing the true financial position of the borrower and bank, it will be necessary for the bank proposing to take the security to make sure that that information is conveyed, as well as independent advice received. The careful submissions of Senior Counsel for the respondent bank urged the view that to require the bank to ensure provisions of the true financial circumstances, including the circumstances in which the security will be returned to the guarantor, would blur the previously clear distinction between, on the one hand, a bank’s limited obligation to describe the debtor’s affairs to a proposed surety (relying for that submission on, inter alia, the remarks of both Gibbs CJ and Mason J in Amadio), and on the other, the responsibilities of the person supplying the independent advice. In my respectful judgment that submission overlooks the implications in the judgments cited from Amadio requiring that financial information be given. The submission certainly reflects what appears to be the commercial practice of banks, namely of providing certificates to be signed by those providing independent advice without knowledge of those financial circumstances to proposed security providers. That practice satisfies only one of the suggested requirements in Amadio. -- 25 of 34 -- 26 [95] It follows that the steps the bank took in this matter, while apparently consistent with commercial practice and one requirement of the law, failed to satisfy another requirement actually cast on the bank. That obligation arises in the circumstances described in Garcia at [31]-[33], and where the transaction’s purport and effect cannot be so sufficiently explained as to allow the volunteer to form a judgment as to the volunteer’s best interests unless the volunteer knows the debt being guaranteed. [96] This requirement is considerably less onerous than that suggested by the House of Lords in Royal Bank of Scotland v Etridge (No 2) [2002] 2 AC 773. In that reported case, the House of Lords heard eight appeals together, seven of those appellants being wives who had agreed to subject property owned by them (usually the interest of each in her matrimonial home) to a charge in favour of a bank to provide security for the payment of her husband’s debt, or those of a company by means of which her husband carried on a business. The passage in the judgment of Lord Nicholls of Birkenhead, cited by the President in her reasons, describes the current requirement of the UK law, namely that the bank provide the wife’s solicitor (who is required to certify in writing that the documents and their practical implications have been explained to the wife) with the financial information that will explain the husband’s financial affairs.45 Lord Nicholls also expressed the obiter view that:46 “….the only practical way forward is to regard banks as ‘put on inquiry’ in every case where the relationship between the surety and the debtor is non-commercial. The creditor must always take reasonable steps to bring home to the individual guarantor the risks he is running by standing as surety. As a measure of protection, this is valuable. But, in all conscience, it is a modest burden for banks and other lenders. It is no more than is reasonably to be expected of a creditor who is taking a guarantee from an individual. If the bank or other creditor does not take these steps, it is deemed to have notice of any claim the guarantor may have that the transaction was procured by undue influence or misrepresentation on the part of the debtor.” [97] That “deemed notice” approach is certainly a far wider proposition than any which can be supported by the observations in Amadio or Garcia. The judgment of Lord Nicholls describes the propositions which he advances as ones which derive from the earlier decision of the House of Lords in Barclays Bank v O’Brien [1994] 1 AC 180. As was noted by Charles JA in his judgment in Kranz & Anor v NAB (at [30]), in Garcia the High Court declined to follow the constructive notice approach favoured in the decision in Barclays Bank v O’Brien. While obviously accepting that, I consider the High Court decisions in Garcia and Amadio themselves have the result that more was required of the bank than it did in this case. [98] I think it very unlikely that had Mr Alirezai been provided with the relevant financial information, and with the clear advice that irrespective of whether or not Mr Sarlak went ahead with either the specific tallow exportation proposed in 1991, or the general business of exporting tallow together proposed in 1993, or whether both proposals were completely abandoned, Mr Alirezai’s properties would be used as security for all past and future debts of Mr Sarlak’s company, that Mr Alirezai 45 Royal Bank of Scotland v Etridge at [79] 46 Royal Bank of Scotland v Etridge at [87] -- 26 of 34 -- 27 would have provided those securities. That was certainly not suggested to Mr Alirezai in cross examination nor submitted in argument on the appeal. For that reason I think it unnecessary that there be any retrial of the bank’s claim to Lot 6, or the counter claims of Mr Alirezai. I would allow his appeal and order: • The order of this court made 17 June 2002 be set aside; • That the plaintiff’s claim against the defendant be dismissed; • That judgment be entered for the plaintiff by counter claim, with orders in that counter claim: (a) declaring that the bill of mortgage executed on or about 6 August 1993 over Lot 6 on RP 803163 registered in the office of the Registrar of Titles under dealing No L684289C is void; (b) setting aside that bill of mortgage over Lot 6; (c) declaring that the first defendant by counter claim held the proceeds of sales of Lot 2 on RP 803163 County of Aubigny, Parish of Drayton, on trust for the plaintiff by counter claim. • That the parties provide written submissions within 21 days as to other terms of the order on the appellant’s counter claim; • That the respondent pay the appellant’s costs of the appeal to be assessed on the standard basis; • That the respondent pay the appellant’s costs of the trial to be assessed on the standard basis. [99] WILSON J: I have read the reasons for judgment of the President and those of Jerrard JA. I agree with the President that the appeal should be dismissed. I shall not restate the facts, which are comprehensively set out in their reasons for judgment, but I shall make some observations on the issues they discuss. [100] Clearly this is not a case of undue influence: the appellant's mind was not overborne when he entered into the mortgages. [101] There are two bases on which the first respondent ("the Bank") might be precluded by its own unconscionable or unconscientious conduct from enforcing the securities - (a) that the Bank knew that the appellant was in a situation of special disadvantage in relation to the transactions so that he could not make a judgment as to what was in his own interests, or it knew that possibility might exist or knew of facts that would raise that possibility in the mind of any reasonable person, and it took unfair advantage of its superior position by entering into the transactions: the Amadio47 principle; and (b) that in the circumstances of a relationship of trust and confidence between the appellant and Mr Sarlak, the appellant being a volunteer and his being mistaken about the purport and effect of the transactions, the Bank was taken 47 The Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 -- 27 of 34 -- 28 to have appreciated that he may well receive insufficient explanation of the purport and effect of the transaction from Mr Sarlak, but did not itself provide such an explanation or know that a third party had done so adequately: the Garcia48 principle (or an extension of it). The Amadio principle [102] Neither at the time the first mortgage was granted nor at the time of the second did the Bank know that the appellant was in any situation of special disadvantage in relation to the transaction. Nor ought it to have been alerted to such a possibility. The trial judge's conclusions in this regard are unimpeachable. Its manager Mr Jackson knew only that both the appellant and Mr Sarlak were of Iranian descent, that they were friends, and that Mr Sarlak had previously done the appellant a favour by lending him $50,000. Mr Sarlak did not tell him that the appellant had any difficulty with the English language, and he had no reason to suspect that he did. In Amadio there was actual misconduct on the part of the debtor of which the creditor was aware and to which it turned a blind eye. Here the Bank was not aware of misrepresentations by Mr Sarlak, and it had no reason to suspect them. [103] The trial judge went on to find that even if the Bank knew that the appellant was in a position of special disadvantage, it could not be said to have taken unconscientious advantage of its own superior position when it required the appellant to obtain independent legal advice. The observations I am about to make on this aspect cannot assist the appellant in the absence of a finding of knowledge of his being in a position of special disadvantage or possibly so. [104] Where a creditor proceeds with a transaction knowing that an intended surety is in a position of special disadvantage, or in circumstances where it ought to be alive to such a possibility, there is an onus on it to show that the transaction was fair, just and reasonable: see, for example, Amadio per Deane J49. One way of doing this is to show that it insisted that the surety have independent advice. [105] Neither the appellant nor his solicitor Mr Kennedy had any information about the financial position of the debtor at the time either mortgage was granted. The Bank took no steps to inquire whether they had such information or to supply it. That the mere relationship of creditor and surety did not oblige it to do so does not resolve the question whether it acted unconscientiously. In Amadio Mason J said50 - “It has been said that this duty to disclose does not require a bank to give information as to matters affecting the credit of the debtor or of any circumstances connected with the transaction in which he is about to engage which will render his position more hazardous (Wythes v. Labouchere,51 per Lord Chelmsford L.C.). No surety is entitled to assume that the debtor has not been overdrawing, the proper presumption being in most instances that he has been doing so 48 Garcia v National Australia Bank Ltd (1998) 194 CLR 395 49 (1983) 151 CLR 447 at 474-5 50 (1983) 151 CLR 447 at 463-4 51 (1859) 3 DeG. & J.593 at p. 609 [44E.R. 1397, at p. 1404] -- 28 of 34 -- 29 and wishes to do so again (London General Omnibus Co. Ltd. v. Holloway)52. But the fact that a bank’s duty to make disclosure to its intending surety, arising from the mere relationship between principal creditor and surety, is so limited has no bearing on the availability of equitable relief on the ground of unconscionable conduct. A bank, though not guilty of any breach of its limited duty to make disclosure to the intending surety, may none the less be considered to have engaged in unconscionable conduct in procuring the surety’s entry into the contract of guarantee.” [106] On each occasion the appellant conversed with Mr Kennedy in English, and he did not give Mr Kennedy any indication that he would not understand the explanation and advice given. The trial judge rejected the submission that he had little or no understanding of the advice he was given and therefore no memory of it. On each occasion the solicitor was successful in having the Bank agree to limit the appellant's liability to the proceeds of sale of the land being charged. On the first occasion the solicitor gave the oral and written advice set out in para 33 of the President's reasons for judgment. Mr Kennedy recorded the following diary note soon after attending on the appellant in relation to the second mortgage - “Mr Alirezai informed me on a number of occasions that despite my reservations about executing the mortgage document, he did intend to execute this mortgage document the same as he executed the one previously dealing with Lot 2. Mr Alirezai informed me that he has great faith in the character of Mr Sarlak and that he was well aware of the fact that if something happened to Mr Sarlak’s dealings, then he may well lose not only the land which he previously offered as security, but also the house property which was the subject of this present mortgage. I did inform Mr Alirezai that his liability under this particular document would be limited in the same manner as the previously executed mortgage limits his liability to the proceeds of sale of each mortgaged property. Mr Alirezai confirmed that he was aware of all of this and was happy to sign the documents in the knowledge that if Mr Sarlak or any associated entity went into bankruptcy or liquidation, he ultimately may also lose the house and the land.”… [107] On each occasion Mr Kennedy signed the certificate of independent advice which had been drafted by the Bank. It was in these terms – 52 [1912] 2 K.B. 72, at pp. 83-84, 87 -- 29 of 34 -- 30 “I certify that in this matter I am not acting for the Bank or Sarlak Enterprises Pty Ltd and that I have independently advised Mohsen Alirezai regarding the documents set out in the schedule below which my Client proposes to execute in your favour to secure the account of Sarlak Enterprises Pty Ltd. After having made all enquiries which I believe necessary and proper, I consider that my Client will execute the documents freely and voluntarily, and with full knowledge and understanding of their content and of the circumstances under which he is undertaking the liabilities contained in them. Yours faithfully ------------------------- SCHEDULE OF DOCUMENTS …” [108] The trial judge considered that Mr Kennedy did not need information about the financial position of the debtor in order to advise the appellant. She said - “[100] On each occasion Mr Kennedy gave advice to Mr Alirezai of the nature of transaction being undertaken by Mr Alirezai and what would happen if Sarlak Enterprises defaulted. Mr Kennedy did not need to be aware of Sarlak Enterprises’ current financial history in order to be able to advise Mr Alirezai, as he did so, on what Mr Alirezai’s financial exposure would be in terms of Lots 2 and 6 being sold by the bank, if Sarlak Enterprises defaulted in meeting its obligations to the bank. It was for Mr Alirezai to make a decision based on his relationship with Mr Sarlak and the little he knew about the business of Sarlak Enterprises, as to whether or not he wanted to put each of Lots 2 and 6 at risk. [101] The fact is that in respect of each of the proposed mortgages, Mr Kennedy attempted to discourage Mr Alirezai from granting the mortgage. The nature of each transaction was such that Mr Alirezai was putting each of Lot 2 and Lot 6 at risk and Mr Kennedy could and did give that advice without the need for detailed consideration of the financial position of Sarlak Enterprises. … [175] It was also pleaded on behalf of Mr Alirezai that it was inequitable for the bank to rely on the certificates of independent advice when it knew that Mr Kennedy and Mr Alirezai had not inquired of the bank in respect of financial information relevant to the existing indebtedness and security position of Sarlak Enterprises. That allegation assumes that Mr Kennedy required that information in order to give the independent legal advice to Mr Alirezai in respect of each mortgage transaction. That assumption is erroneous -- 30 of 34 -- 31 and is disposed of by my finding that on each occasion Mr Kennedy had sufficient information to give the independent legal advice that the bank required be given to Mr Alirezai…” [109] I respectfully disagree with these conclusions. The issue was whether (assuming it had knowledge of the appellant's being in a position of special disadvantage or possibly so) the Bank could rebut the prima facie unfairness or unconscientiousness of its proceeding with the transactions by reliance on the certificates of independent advice. In essence the advice Mr Kennedy gave the appellant was that the securities extended to present and future obligations of the debtor to the Bank and that he stood to lose his land if the debtor defaulted. I cannot accept that the appellant executed the mortgages "with full knowledge and understanding of their content and the circumstances under which he was undertaking the liabilities" when he had no information from which he could assess the magnitude of the risk he was undertaking. The Bank had not itself supplied the appellant or his solicitor with relevant information or taken any steps to ascertain that they had such information; it had no reason to presume that either of them had any such information. In the circumstances the certificates of independent advice may not have been sufficient to rebut the presumption of unfairness or unconscientious conduct on the part of the Bank, even though the appellant granted the mortgages contrary to the strong advice of his solicitor not to do so. [110] On the facts of Amadio at least three members of the High Court regarded the disclosure of financial information as necessary. I refer to the passages from the judgments of Mason, Wilson and Deane JJ quoted by Jerrard JA in his reasons for judgment at para [90]. See also the decision of the New Zealand Court of Appeal in Wilkinson v ASB Bank Ltd53 and that of the House of Lords in Royal Bank of Scotland v Etridge (No 2)54 (both cases in which the role of independent advice in rebutting undue influence was considered). [111] Insistence on a certificate of independent legal advice cannot be a panacea for prima facie unfairness or unconscientious conduct. Nor is it an answer for the creditor to point to the confidential nature of what transpired between the surety and his solicitor. All of the circumstances of the creditor's conduct in proceeding with a transaction must be taken into account, including the precise terms of the certificate and what information the creditor knew or ought reasonably to have assumed was available to the solicitor. Some cases may call for independent financial advice, as well as independent legal advice. The Garcia principle [112] In Garcia a wife executed a mortgage over the matrimonial home which secured all moneys owing to the creditor including moneys owing under future guarantees given by either of them to the creditor. She subsequently signed guarantees in favour of the creditor relating to loans made to businesses conducted by her husband. Some years later the marriage was dissolved and she sought to have the guarantees set aside. The creditor cross-claimed for possession of the mortgaged property and the amount owing under the last of the guarantees and the mortgage. 53 [1998] 1 NZLR 674 at 692 54 [2002] 2 AC 773 at 806 per Lord Nicholls of Birkenhead with whom the other Law Lords agreed -- 31 of 34 -- 32 The High Court (by majority) held that enforcement of any of the relevant guarantees against her would be unconscionable. In doing so it applied the second principle enunciated by Dixon J in Yerkey v Jones.55 The majority said56 - “The principles applied in Yerkey v Jones do not depend upon the creditor having, at the time the guarantee is taken, notice of some unconscionable dealing between the husband as borrower and the wife as surety. Yerkey v Jones begins with the recognition that the surety is a volunteer: a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee… It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.” [113] There are three potential obstacles to the application of the Garcia principle to the present case: (a) the absence of a finding that the appellant was mistaken as to the purport and effect of the transactions; (b) that the principle may be applicable only to marriage and similar intimate relationships; and (c) the absence of a finding that the Bank knew or should have assumed that the relationship between the appellant and Mr Sarlak was one of trust and confidence. [114] As I read the reasons for judgment of Jerrard JA, His Honour would draw the inferences that on the first occasion the appellant did not understand that he would 55 (1930) 63 CLR 649. 56 (1998) 194 CLR 395 at 408-9. -- 32 of 34 -- 33 not recover his certificate of title when the shipment of tallow had been completed and payment had been received and that on the second occasion he did not understand that he would not recover his certificate of title if the mooted partnership with Mr Sarlak did not go ahead. In my respectful opinion it is not open to this Court to draw such inferences. To draw the first inference would be inconsistent with the trial judge's finding that on the first occasion Mr Kennedy gave the appellant advice which included - “My solicitors have informed me the Bill of Mortgage document in its present form imposes a potential liability on me which extends to any obligations Sarlak Enterprises Pty Ltd owes to the Bank both presently and at any time in the future”57 and her rejection of a submission that he had little or no understanding of what Mr Kennedy told him and therefore had no memory of it.58 What he did not appreciate was the magnitude of the risk he was assuming. To draw the second inference would be inconsistent with the appellant’s acknowledgment when he gave the second mortgage in 1993 that he appreciated that if Mr Sarlak or any associated entity went into bankruptcy or liquidation he might ultimately lose his house and land. Moreover, to draw such inferences would be inconsistent with what I understood to be the thrust of the submissions for the appellant – which was not to dispute that the appellant was advised and understood that he was giving “all moneys” mortgages but rather to assert that the Bank knew (or ought to have known) that he was under some misapprehension as to the extent of the debtor’s liabilities to the Bank. [115] The diversity of relationships encompassed by the Garcia principle is ultimately a question for determination in an appropriate case by the High Court. The trial judge considered that it was limited to marriage and similar intimate relationships. This may be too narrow a view in light of this passage in the majority judgment in Garcia – “It will be seen that the analysis of the second kind of case identified in Yerkey v Jones is not one which depends upon any presumption of undue influence by the husband over the wife. As we have said, undue influence is dealt with separately and differently. Nor does the analysis depend upon identifying the husband as acting as agent for the creditor in procuring the wife’s agreement to the transaction.59 Rather, it depends upon the surety being a volunteer and mistaken about the purport and effect of the transaction, and the creditor being taken to have appreciated that because of the trust and confidence between surety and debtor the surety may well receive from the debtor no sufficient explanation of the transaction’s purport and effect. To enforce the transaction against a mistaken volunteer when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable.”60 57 See the written acknowledgement in para 33 of the President’s reasons for judgment. 58 Reasons for judgment para 47. 59 cf Barclays Bank Plc v O’Brien [1994] 1 AC 180 at 194, per Lord Browne-Wilkinson. 60 (1998) 194 CLR 395 at 409 (emphasis added). -- 33 of 34 -- 34 [116] In Kranz v National Australia Bank Ltd61 the Victorian Court of Appeal was asked to apply the principle to the relationship between brothers-in–law, one of whom guaranteed obligations of the other to a bank. The debtor brother-in-law was also the other’s accountant and trusted financial adviser. Charles JA (with whom the other members of the Court agreed) highlighted the words I have underlined in the passage just quoted from Garcia, and concluded that the application of the principle is not to be limited to the most intimate of family relationships.62 However, given the limited information available to the bank in that case, he did not consider that it knew or should have assumed that there was a relationship of trust and confidence between the brothers-in-law so as to bring Garcia into play.63 [117] In the present case the trial judge accepted that the relationship between the appellant and Mr Sarlak was one of trust and confidence. However, she did not find that the Bank knew or should have known that this was so. Such a finding would not have been open in light of her reasons for finding that the Bank did not know the appellant was in any situation of special disadvantage in relation to the transaction. Even if the Garcia principle could apply to a relationship such as that between the appellant and Mr Sarlak, where the Bank did not know (and should not be assumed to have known) that the relationship bore that character, it was not unconscientious of it to proceed with the transactions without itself explaining them or knowing that a third party had done so. [118] In discussing the application of the Amadio principle I expressed reservations about reliance on the certificates of independent advice to rebut the prima facie unfairness or unconscientiousness of the Bank’s proceeding with the transactions. I have similar reservations about whether they could protect the Bank against the charge that it ought not to have assumed that the transactions had been adequately explained to the appellant by Mr Kennedy when it had no reason to think either the appellant or Mr Kennedy had information about the extent of the debtor’s liabilities to it. Conclusion [119] The appeal should be dismissed with costs. 61 [2003] VSCA 92 62 [2003] VSCA 92 per Charles JA at paragraph 22. 63 [2003] VSCA 92 per Charles JA at paragraph 42. -- 34 of 34 --