Farrow Mortgage Services Pty Ltd (in liq) v Grezlo & Peto [1996] QSC 137

IN THE SUPREME COURT OF QUEENSLAND No. 174 of 1991 BETWEEN: FARROW MORTGAGE SERVICES PTY LTD Plaintiff AND: IBOLYA MARGARET GREZLO Defendant No. 777 of 1992 BETWEEN: FARROW MORTGAGE SERVICES PTY LTD (In Liquidation) (ACN 006 125 757) Plaintiff AND: ELEANORA MARGARET PETO and IBOLYA MARGARET GREZLO Defendants JUDGMENT - THOMAS J. Delivered: 9 August 1996 CATCHWORDS: MORTGAGE AND GUARANTEE - Misrepresentations - Equitable defences - Defendants gave securities over the debts of a company of which they were the sole directors - Defendants were sisters. Whether defendants were induced to give the securities by misrepresentations by the bank. Unconscionability - Whether second defendant was under a special disability due to relationship with de facto spouse - Yerkey v. Jones (1939) 63 CLR 649 and Akins v. National Australia Bank (1994) 34 NSWLR 155 discussed - If disability existed, whether it was sufficiently evident to the bank. First defendant induced to give security by improper actions of second defendant and second defendant's de facto spouse - Whether bank fixed with consequences of improper actions - Agency - Whether the bank entrusted the task of obtaining execution of the document to a third party - Whether bank's conduct in relation to the first defendant unconscionable - Commercial Bank of Australia v. Amadio & Anor (1983) 151 CLR 447; Alderton v. Prudential Assurance Co Ltd (1993) 41 FCR 435, Challenge Bank Ltd v. Pandya (1993) 60 SASR 330, 340-343) and Commonwealth Bank of Australia v. Platzer & Anor (Appeal No. 137 of 1995, unreported, judgment delivered 19 July 1996) applied. -- 1 of 42 -- 2 Counsel: Mr J. Bell QC, with him Mr P. Freeburn for the Plaintiff (in both No. 174/91 and No. 777/92) Mr D. Perkins for the Defendant in No. 174/91 and for the second named Defendant in No. 777/92 First Defendant in No. 777/92 self-represented Solicitors: Carter & Newell for the Plaintiff (in both No. 174/91 and No. 777/92) Carrigan & Co for the Defendant in No. 174/91 and for the second named Defendant in No. 777/92. First Defendant in No. 777/92 self-represented. Hearing dates: 20-27 April 1996 -- 2 of 42 -- IN THE SUPREME COURT OF QUEENSLAND No. 174 of 1991 BETWEEN: FARROW MORTGAGE SERVICES PTY LTD Plaintiff AND: IBOLYA MARGARET GREZLO Defendant No. 777 of 1992 BETWEEN: FARROW MORTGAGE SERVICES PTY LTD (In Liquidation) (ACN 006 125 757) Plaintiff AND: ELEANORA MARGARET PETO and IBOLYA MARGARET GREZLO Defendants JUDGMENT - THOMAS J. Delivered 9 August 1996 Persons Concerned............................................................................................................................... 2 Outline of facts..................................................................................................................................... 3 Issues ................................................................................................................................................... 12 Issue 1 - Representations .................................................................................................................... 14 Issue 2 - Failure to advance the entire loan sum ................................................................................ 18 Issue 3 - Farrow causing or conniving at Laxwell's default............................................................... 22 Issue 4 - Excessive expenses ($765,622) for completion .................................................................. 24 Issue 5 - Defence of Ms Grezlo .......................................................................................................... 25 Issue 6 - Defence of Ms Peto.............................................................................................................. 30 "Agency" ............................................................................................................................... 35 Amadio.................................................................................................................................. 37 Orders.................................................................................................................................................. 40 Appendix............................................................................................................................................. 42 -- 3 of 42 -- 2 These two actions were heard together. In the first Farrow seeks possession of land owned by Ms Grezlo and money owing pursuant to a mortgage given by her. In the second action Farrow makes a money claim (now over $3 million) against both Ms Grezlo and her sister Eleanora Peto pursuant to a guarantee. Persons Concerned The plaintiff is a company incorporated in Victoria against which a winding up order was made in June 1990. It will be referred to as "Farrow". Peter Volk was at the material time Farrow's general manager for Queensland. Ibolya Margaret Grezlo is a defendant in both actions. Her age at the relevant time was thirty-four. During the time when the relevant transactions in this matter occurred, and particularly during the period when Michael Kralj lived with her, she reverted to her maiden name of Peto. She is commonly referred to in the evidence as Ibolya, sometimes as Margaret, and the surname Peto is sometimes found in documents. After her relationship with Mr Kralj ceased (in early 1991) she reverted to her former name Grezlo, and she was generally referred to as "Ibolya" or "Ms Grezlo" in evidence during these proceedings. Her family is Hungarian and she was born in former Yugoslavia. Eleanora Margaret Peto (now Arrabal) is a defendant in the second action. She has recently married and her surname is now Arrabal. She is Ms Grezlo's younger sister, and was only twenty- one years old when she was persuaded to sign the guarantee. Her family is Hungarian and she also was born in former Yugoslavia. It will be convenient for the purpose of this judgment to refer to her as Eleanora Peto. Maria Toth (sometimes called Lazar) is an older sister of the defendants. She was initially interested in being involved in the Buderim project, but opted out before the final arrangements. Lazlo Toth is Maria's husband, and was similarly involved in the initial discussions but opted out -- 4 of 42 -- 3 with Maria. Michael Kralj is the person who formed a relationship with Ms Grezlo in early 1989 and who made most of the arrangements, both building and financial, with respect to a project for the acquisition of land and the building of twelve units thereon at Buderim. The loan for this project was granted to a company (Laxwell Pty Ltd), and was guaranteed by the defendants. Outline of facts The relevant events commence in February 1989, by which time Ms Grezlo, who had the care of her three children aged thirteen, eleven and nine, was the owner of a house property at Cashmere (near Sandford). Her marriage with Mr Grezlo had broken up, and she had obtained the home as her property settlement. Michael Kralj formed an association with her and moved into her house in February 1989. He was at that time involved in a large developmental project in Victoria, in conjunction with others, which was financed by Farrow. During a holiday at Maroochydore Ms Grezlo introduced Mr Kralj to Maria and Lazlo Toth. Maria owned land at 44 King Street, Buderim and already had permission and preliminary plans that would enable twelve units to be built upon it. Mr Kralj became very interested in the prospect of a partnership between the four of them to complete the development and it was agreed that he would make preliminary arrangements to canvass the availability of finance. By telephone he made arrangements for a meeting at Farrow's office in Eagle Street, Brisbane. Mr Kralj and Mr Volk were not previously known to one another. The initial meeting occurred on 14 February 1989. Those present were Mr Volk, Mr Kralj, Ms Grezlo, Lazlo Toth and Maria Toth. Mr Kralj produced costings showing an estimated $850,000 for the erection and completion of the units. His estimated profit after sale was of the order of $400,000. The suggestion was that the four mentioned persons would either form a partnership or a company. Mr Volk suggested that more security would be needed (than the land and project itself) to secure the necessary loan. Mr Kralj -- 5 of 42 -- 4 stated that Ibolya had a house worth between $200,000 and $250,000 and that she would give it as a security. This had not previously been discussed with her and she was surprised. More detail will be given later in relation to the discussion that followed. Mr Volk took details of the assets and net worth of Maria Toth and of Ms Grezlo. In the event that a company was to be used, the two directors were to be Ms Grezlo and Maria Toth. The market value of the project land was said to be $250,000, and at that stage the suggested loan was to be of the order of $1.1 million. Over the following few weeks Ms Grezlo was concerned about the security she had been asked to give and about the possible loss of her home. She spoke to Mr Kralj about her concern, but was reassured that there was nothing to worry about. In her words, "He talked me around". However, at the same Maria and Lazlo Toth were not prepared to take the risk and indicated that they would not proceed. The evidence concerning the acquisition of the company and arrangements for appointment of directors is not very satisfactory. It would seem that Laxwell Pty Ltd was acquired as a shelf company and that the necessary work was done by a solicitor, Mr B. Klar. But from whom he received instructions is not clear, and neither is the sequence of events. The evidence of Mr Klar was not particularly helpful. Perhaps his lack of research was contributed to by the fact that his former client Ms Grezlo has owed him a substantial fee for a considerable period. In the event no contemporaneous notes, documents or files were produced by him, and he gave somewhat vague evidence of his recollection of the day when the security documents were signed (24 April 1989). It seems that on 10 February 1989 (prior to the first meeting with Mr Volk) Ms Grezlo and Maria Toth were appointed directors. That would be consistent with the intention at that time that the two couples would each run the partnership or company in equal shares, and that the two women would be the directors. It also seems that the women were to own two shares each and the men one each. That intention changed. Maria Toth is recorded as having ceased to be a director on 21 March 1989 -- 6 of 42 -- 5 and Eleanora Peto is recorded as having been appointed a director on that date. It is highly probable that Eleanora Peto never signed a consent to act as a director and that the necessary documents to achieve this were prepared and signed by someone else. She had no recollection of having signed any such documents, and no evidence was produced of any document bearing her signature (other than of course the guarantee on which she is sued). Her non-participation in her appointment as a director is made all the more likely by the details in the company search which show with respect to that appointment that the date of her birth was "unknown", her place of birth was "unknown", and that she resided at 4 Thomas Court, Cashmere (which was not her address but the address of her sister). Also her name was misspelt. The suggestion that Eleanora Peto be brought in as a second director came from Michael Kralj after Maria Toth indicated that they would not proceed. He and Ms Grezlo invited Eleanora to dinner and asked her to become a director in their company, telling her that this would give her the opportunity to work for the company at above award wages, to have her own motor vehicle (a Vitara) and to have a mobile phone. She was never told (then or later) what a director's duties were. She was simply told that she would have to sign some papers. There is no acceptable evidence that she was told at that stage that as a director she would be required to sign a guarantee. The evidence does not supply a date for that dinner. It is possible that it occurred before the next meeting with Mr Volk, but I think it more likely that it occurred after it. On 6 March 1989 Mr Kralj and Ms Grezlo, again by arrangement made by Mr Kralj, returned to see Mr Volk. Mr Kralj had already advised him that the Toths were out of the arrangement. At this meeting Mr Kralj initially suggested that he and Ms Grezlo should now be the directors. Mr Volk suggested that it would be preferable if he were not a director. The reason why Mr Volk made this suggestion is obscure. It was said to have had something to do with Mr Kralj's existing commitments in Victoria, and the fact that it was intended that Mr Kralj would be the builder for the -- 7 of 42 -- 6 project, but those reasons are not convincing. Mr Kralj then suggested that Eleanora Peto could be used as a director. Mr Volk seems to have been indifferent to the identity of the second director. Importantly, he insisted that whoever they obtained as a director had to give a guarantee. Various further requirements were mentioned in relation to the loan and ultimately the proposal was that a loan to be made to the company (Laxwell), that securities be provided consisting of the project land and units and of Ms Grezlo's home at Cashmere, and guarantees from the two intended directors, Ms Grezlo and Miss Eleanora Peto. At one stage Ms Grezlo asked what was the risk to her house. Mr Volk's response to this question will be considered later. I find that Eleanora Peto was appointed a director (without her participation in the process) on 21 March. It may be inferred that someone, either Mr Kralj or Ms Grezlo, did what was necessary to achieve this end. A feature of the loan is that it was not a fully advanced loan. Interest would only be payable upon the advances as and when they were made, and they would be made progressively according to the progress of the building. The papers suggest that initially an "establishment fee" of $55,000 was mentioned, but when the final offer emerged in Farrow's letter of 29 March 1989 an establishment fee of $80,000 was required. The amount of the loan is described as $1,270,000 "plus capitalised interest of $80,000". This means that the interest expected to be payable over the period of the loan (twelve months) would come to approximately $80,000 (as well as the establishment fee), but none of that interest would need to be paid by the borrower during the twelve-month period. On the due date the amount to be repaid would include this additional $80,000 making a total loan repayment of $1,350,000. Interest would be payable by the borrower before that date only if and to the extent that actual interest at the agreed rate on advances exceeded the estimated $80,000. Farrow's letter of 29 March 1989 describes the advances as being "by way of progress payments on the construction" and indicates that Farrow would retain at times a sufficient portion of the loan as undrawn funds to cover -- 8 of 42 -- 7 the estimated cost of completion of the development. This foreshadows a loan agreement which gave Farrow a valuing role, considerable discretion in the granting or withholding of progress claims, and a potential for disagreement with the builder as to how much should be paid at any particular moment. It is obvious to me that such a loan would put the borrower at the mercy of the lender if the original estimated cost of the project happened to be too low. Both Ms Grezlo and Eleanora Peto signed a formal letter of acceptance of the initial offer on 31 March 1989 on behalf of Laxwell. The formal documents concerning the loan and securities were then prepared by Farrow's solicitors. A building contract between Mr Kralj and Laxwell was prepared dated 5 April 1989 for a price of $850,000, and it was initialled by him and by Ms Grezlo on behalf of Laxwell. The relevant documents which were executed on 24 April 1989 were: Deed of loan dated 24 May 1989 (probably in error, the correct date probably being 24 April); Deed of guarantee given by both defendants dated 24 April 1989; Mortgage given by Ms Grezlo over her land at Cashmere dated 24 April; and Mortgage given by the company over the construction site at Buderim dated 24 April 1989. These were all signed by those associated with the borrowing parties in the office of Klar and Klar on 24 April 1989. Other securities also were given and documents signed which are not presently material. Some of the correspondence between solicitors (especially exhibit 19) suggests that the original shareholdings in Laxwell of $2 each held by Ms Grezlo and Maria Toth, and $1 each by Mr Kralj and Mr Toth, by 21 March 1989 were all assigned to Ms Grezlo. On the other hand Mr Kralj said in evidence, without challenge, that he owned fifty percent of the shares in Laxwell. There does not seem to be any other satisfactory evidence in relation to shareholders' entitlements. I am satisfied that at all material times Mr Kralj was the moving force in the project so far as the borrowers were concerned. He had the necessary knowledge and business experience (both building and financial), as well as a dominant personality. He was in all respects the relevant entrepreneur -- 9 of 42 -- 8 who managed to enlist the support of two women whose main training and occupation had been in hairdressing. He was undoubtedly a de facto director of Laxwell. When Ms Grezlo and Mr Kralj were advised that the documents had been received by Klar and Klar, an early appointment was made for the necessary signatories to attend. In forwarding the relevant documents to Messrs Klar and Klar, Farrow's solicitors stated that execution should take place in circumstances where all parties should read the documents carefully. I infer that Mr Kralj was in a hurry to tie up the loan, and did not want to delay the advance of the funds. When the appointment was made to see Mr Klar, Eleanora Peto was told by Mr Kralj or her sister to attend. Mr Klar explained that the documents were very extensive, that he had not had a sufficient opportunity to peruse them properly, and that if he was to advise them with any degree of thoroughness they could not be signed that day or even the next day. He says, "They wanted to get on with getting the documents signed and returned". I accept this on the footing that such a decision originated from Mr Kralj, but was acquiesced in by the two women who were present. Mr Klar then proceeded to do little more than describe the documents one by one, as for example "This is the mortgage over the property at Cashmere". Mr Klar did not think that he had done any work for Eleanora Peto previously although he may have met her beforehand. He agreed that she was brought along by the others to support the necessary documents that had to be signed. Ms Grezlo and Mr Kralj had simply told her the time and place she had to be in order to sign some documents. There is one particular passage in Mr Klar's evidence as to his "fairly vague" recollection of Eleanora being with him (in the absence of Mr Kralj and Ms Grezlo) to the effect that "she appeared to be nervous and I don't recall the question that was asked but I recall that I gave an answer such as - in relation to liability under the guarantee that there won't be any liability in your hands if all goes well with the construction of the units and the sale of the units . . . but that the whole nature of the guarantee is that if it doesn't go well and there's a shortfall or other problems on -- 10 of 42 -- 9 the whole matter then you will be personally liable for the debt". On the balance of probability I consider that Eleanora Peto was not then Mr Klar's client and that he did not advise her as such. None of the other witnesses suggests that he and Eleanora Peto were alone at any stage. It is possible that such a statement was made, but having regard to the conceded vagueness of the recollection and the absence of notes or other supporting material I am not affirmatively satisfied that an explanation was given to her even to this limited extent. I accept Eleanora Peto's evidence that there was a point during the proceedings at which she asked Mr Klar "Am I signing my life away?" and that his response was to the effect that it would be "okay to sign". I am satisfied that she had no comprehension of the meaning of the documents and only a vague notion of the purpose of the occasion. The documents were all then duly signed and returned to Farrow. In May 1989 $304,000 was advanced, enabling the Buderim property to be purchased from Ms Toth for $250,000 and enabling the existing mortgage on Ms Grezlo's land to be paid out so that Farrow could obtain a first mortgage. A subsequent small advance was made to enable Laxwell to purchase some land at Imbil. Some months went by before building works commenced. The table of payments appended (substantially taken from exhibit 24 with some correction and extension) shows the history of claims by Laxwell and the amounts paid with respect to each claim by Farrow, as well as some other details. By Christmas of 1989 a crisis had developed. Mr Kralj owed a considerable sum to subcontractors which was later estimated to be $269,623. In addition to this, even on the view most favourable for him and the defendants there was still well over $300,000 worth of work to be done before completion. Even that conservative estimate is based on the false assumption that the work so far done had been done properly. The evidence shows that very substantial rectification of existing -- 11 of 42 -- 10 work was necessary. Furthermore, as Farrow had already made progress payments totalling $633,016, the remaining maximum amount of the loan left to be advanced was $216,984. For a combination of reasons, the most telling of which was lack of funds, Mr Kralj was unable to do any further building work. Only some of the roofs had been fixed, and water-damage to timber members and gyprock occurred over the ensuing months. As well, the Maroochy Shire Council building inspector (Mr Blumel) was troubled by a number of defects as to which he was unable to obtain a satisfactory response from Mr Kralj. He left a provisional list of defects on the site on 19 December 1989. These had not been rectified by 5 February 1990, and on that date he caused a "stop work" notice to be placed upon the site. A further inspection in mid-March revealed that the defects had still not been rectified. At the end of January 1990 Farrow had engaged a quantity surveyor (Mr Lukins) to report on completion costs. At that stage he considered that more than $500,000 would be required even on the assumption that work up to that stage had been satisfactorily performed. In March 1990 Farrow took possession of the site and retained Mr Jamieson to make the necessary arrangements to complete the project. He consulted three local builders and finally engaged Barakula to complete. The revised estimate for completion was approximately $766,000, including all necessary rectification. On 23 March 1990 Farrow gave notice of exercise of power of sale with respect to Ms Grezlo's home and caused oral demand to be made for possession by 30 March 1990. In June 1990 Farrow was wound up, but it may be inferred that the liquidator elected to complete the project before attempting to sell it. The units were completed in due course and were sold, many of the sales having been previously arranged by Mr Kralj. However the proceeds of the sales were nowhere near sufficient to cover the blow-out of costs necessary to rectify faulty and weather- damaged work and to complete the project. Notwithstanding proceeds of sale in excess of $1 -- 12 of 42 -- 11 million by 26 November 1990, there was (according to the particulars in the amended writ of summons in the second action) still a debit balance of $934,027.28. The primary interest rate in the loan was 16.25%, provided that it was fully repaid by the due date (4 May 1990). In the event that it was not so paid, the rate was to be 21.25% per annum. By the time of delivery of the first writ (31 March 1992) the amount was $970,060.37, with interest accruing at $564.76 per day. Four years have elapsed since then, and a certificate supplied under clause 6.04 of the schedule to the mortgage and under clause 46 of the guarantee certifies that the amount of Farrow's indebtedness (and in turn that of the guarantors) as at 17 May 1996 is $3,807,116.11. It may be observed that although no claim for relief has been made under the Money Lenders Act, when one takes into account the penalty rate of 21.25%, along with the fact that the "establishment fee" of $80,000 with respect to a twelve-months loan along with the inherent nature of the mortgage which would subject the contractor (and in turn any guarantor) to considerable risk if the original building estimate of costs were to be exceeded, the mortgage may be regarded as a potentially harsh one. In such circumstances a court must be vigilant to ensure that advantage is not taken of the potential guarantors, and that the mortgagee's dealings with the principal creditor are in good faith and in accordance with the contract between those parties. Further facts will be mentioned in discussion of particular issues. Issues I understand the following to be the principal issues alleged on behalf of the defendants. (1) In March 1988 Mr Volk on behalf of Farrow represented that Farrow would advance $1.27 million, that the project was a good one and that Ms Grezlo's home would not be at risk. (2) In breach of the deed of loan Farrow failed and refused to advance the entire loan sum of -- 13 of 42 -- 12 $1.27 million. (3) Laxwell's default was caused, connived at and brought about by - Farrow's delay in paying progress payments; Farrow's loaning money to Laxwell on other projects when it knew that Laxwell could only repay those moneys from the sale of the units at 44 King Street, Buderim at completion of that project; Farrow permitted and encouraged Laxwell to use the progress claims as deposits on other projects (164 King Street and 4 Page Street) when it knew that Laxwell had no other funds; Farrow represented that progress claims could not be paid during December and January because of the Christmas period; Farrow represented that it would fix up all the problems to enable outstanding accounts to be paid and construction to recommence; Farrow failed to reasonably communicate with the defendant and with Laxwell. (4) The amount spent by Farrow ($765,622) in competing the project after taking possession is not recoverable or is excessive. (5) It would be unconscionable to enforce the securities against Ms Grezlo. I understand the primary submission of Mr Perkins, who represented Ms Grezlo, to be based upon Commercial Bank of Australia v. Amadio (1982-1983) 151 CLR 447. It is alleged that she was under a special disadvantage and that Farrow has unconscientiously taken advantage of her. (6) It would be unconscionable to enforce the guarantee against Eleanora Peto. I also understand it to be argued on behalf of Ms Peto (whom I permitted to be represented by her husband, Mr Arrabal) that she had nothing to do with the negotiations, that Farrow had no reasonable basis for believing that these onerous obligations had been or would be explained to her, that they never were explained to her, and that Farrow in effect gave the task of getting her -- 14 of 42 -- 13 signature as guarantor to others and should be held accountable for the fact that she was misled into signing the guarantee without receiving any proper explanation. This also may be described as an Amadio defence, although it may also be formulated in other ways. It should be understood that the case was litigated without strict regard to the pleadings and that the parties were permitted full opportunity to litigate the question whether the dealings were such as to deprive Farrow of the right to rely on the security or the guarantee. It is appropriate to deal with the issues in the order stated above. Issue 1 - Representations The pleadings allege that in March 1988 Mr Volk on behalf of Farrow represented that Farrow would advance $1.27 million, that the project was a good one, and that Ms Grezlo's home would not be at risk. It is said that these representations were false. There is no doubt that the loan was intended to be $1.27 million. The loan agreement makes that clear. That agreement, and also the earlier documents (including the letter of 29 March 1989, exhibit 2 pages 1 to 5), made clear that the advances would be by way of progress payments and that a sufficient portion of the loan would be retained to cover the estimated cost of completion at all stages. Clauses 1.01 to 1.09 of the deed of loan give Farrow the right to withhold further advances in the absence of appropriate certification, and to take into account estimates of current costs, stage of development, and of cost to complete the works. I do not understand any evidence to have been given that any representation was made to any contrary effect. I turn to the alleged representations by Mr Volk that the project was a good one and that Ms Grezlo's home would not be at risk. Evidence was given by all the persons who attended the meetings of 14 February and 6 March. With respect to the first meeting these comprise Volk, Kralj, -- 15 of 42 -- 14 Ms Grezlo and Mr and Mrs Toth; with respect to the second meeting they comprise Volk, Kralj and Ms Grezlo. No one made any notes or wrote any early letters about what was said at the meetings. There are however some particulars which were written by Mr Volk on loan application papers, and personal details taken down by him were signed by Ms Grezlo and Mr and Mrs Toth (but not by Mr Kralj). There are also internal notes including a memo prepared by Mr Volk on 21 March containing the amended details of the loan and proposed securities. However these documents cast no light upon the oral statements, and in particular the alleged "no risk" representation. The only person who fully supports the representation pleaded is Ms Grezlo. Her evidence is to the following effect. After discussion of the project and the mention of estimated profit of $400,000 on it, Mr Volk said that more security would be required; Mr Kralj said that Ibolya had a house at Cashmere and that she would give this as a security; she was surprised because it had not been discussed before; after a few minutes she asked Mr Volk if her house became security was there any risk to her house; he replied that the project looks really good, that the profit was good on it, that there was no risk to her house, and that when it was all finished and completed her mortgage would be cleared off; she did not mention to Mr Volk that the matter had not been discussed previously; Mr Volk's statements made her feel safer, and she considered there was no risk to her house because such a statement was coming from the bank manager himself; the ease of his approval, when compared with her previous unhelpful dealings with bank managers affirmed her belief that the project must be a good one. After the meeting she was very worried, because she had three children and had little else than this property. She spoke with Mr Kralj and he reaffirmed what a good project it was and told her not to worry. She was of the view that the matter was "too big for to comprehend" and he just talked her around; "he was always higher and smarter". Her evidence concerning the meeting of 6 March is that Mr Kralj did most of the talking; that Mr Volk was told that Maria and Lazlo were out of the -- 16 of 42 -- 15 partnership, that a company would now be set up, that Mr Kralj had had talks with Bernard Klar about setting up a company and that Mr Kralj and Ms Grezlo were to be the directors; Mr Volk suggested it would be best if Michael was not a director and that Michael be builder for the project; that when the need for another director was mentioned Mr Kralj suggested that Ms Grezlo's younger sister Eleanora be used as a director; that when securities were discussed Mr Kralj pointed out that there was about $50,000 on Ms Grezlo's property secured to the Commonwealth Bank and it was agreed that that sum should be paid out and that the loan should accommodate it; that Ms Grezlo then asked Mr Volk what was the risk to her house and he replied to the effect that the project was good, that there was a lot of profit in it and that there was no risk; and that once the units were sold the $50,000 that was owed to the Commonwealth Bank would no longer exist as it would be paid off as part of the whole pay-back; and that there was then further discussion about increasing the loan to enable the Buderim property to be purchased from Maria. Only qualified support for Ms Grezlo's account appears in the evidence of her sister Maria. Her evidence is to the effect that Mr Volk liked the drawings that Mr Kralj showed him commenting that there would be no trouble in getting the finance because the project was very good. After the suggestion that Ms Grezlo's house be used as security arose, Ms Grezlo asked "if she can lose the house". Mr Volk said that everything looked very good but that it was policy for the bank to get all the assets together, that it looked very good and that it should not be any problem. Mr Lazlo Toth's evidence is to the effect that when Ms Grezlo's house was mentioned as security she asked, "Can I lose my house?" and "The answer was that there is a possibility to be a danger to the house but the project is looking really good and profitable so he can't see why it would be in danger". In cross-examination he agreed with the formulation of Mr Volk's response as "there was a possibility of her losing her house by providing it as security, but that on the figures provided by Mr Kralj he could not see why that would happen". He also agreed that Mr Volk indicated that more -- 17 of 42 -- 16 steps would need to be taken before finance could be approved. Mr Kralj's evidence concerning the stage at which the additional security of Ms Grezlo's house was raised was to the effect that she first gave him a "big question-mark look" and later asked Mr Volk, "Will there be a risk to my house?". He says that Mr Volk's response was that "He doesn't see there will be a risk as the project is viable. There is profit, and costings seem to be in order. He didn't see there will be a threat in any shape or form to the house". In cross-examination however he agreed that Mr Volk's response was to the effect that there was a possibility of her losing her house by providing it as security, but on the figures provided by Mr Kralj he could not see why that would happen. Mr Volk's evidence was to the effect that Mr Kralj had a "fair bit" of the input at the meeting; that there was a point at which Mr Volk indicated that additional security would be required above the usual securities; that he does not recall any discussion regarding the risk of Ms Grezlo losing her property; and that if she had asked him such a question he would have told her that there was a risk if she was providing it as security. He stated that he would never make the comment that there was no risk. He considered that on the information made available to him the project looked like a good project and he may well have said so. In relation to the estimate of building costs, he simply acted on the figures given him by Mr Kralj, taking him at his word. He said that he was not in a position to check the accuracy of his calculations. It may be noted that no person on behalf of Farrow applied more than a rule of thumb to check the likely level of building costs. The valuation of 17 April by Heron Todd and White adverts to expected sale yields of the units when complete, and briefly adverts to unit building costs. On the whole of the evidence I am satisfied that the most acceptable version of the "risk to the house" issue is that given by Mr Toth. I do not think that any witness consciously told untruths or elaborated although they all tended to see things from their own perspective. Except where there are -- 18 of 42 -- 17 contradictions, I am inclined to accept that all witnesses attempted to tell the truth, but record some reservations with respect to the evidence of Mr Kralj, particularly his evidence in relation to the subsequent administration of the project. Resolution of inconsistencies appears from the particular findings that are stated in these reasons. In my view the essential persuasion of Ms Grezlo that the project was a safe enough one to justify her putting her house on the line came from Mr Kralj, not from Mr Volk. Mr Volk's favourable response to the project as described to him by Mr Kralj may have helped in persuading her to make the eventual fateful decision, but I do not think that this went beyond the bounds of propriety or that it standing alone amounted to unconscientious conduct. I am also satisfied that Mr Volk and Mr Kralj dealt at that time at arms length, and that Mr Volk was unaware of the particulars of the arrangements that had previously been made by Mr Kralj with Farrow's head office in Geelong. I conclude that the representations that were made by Mr Volk were not false, misleading or deceptive. Issue 2 - Failure to advance the entire loan sum The allegation is that in breach of the deed of loan Farrow failed and refused to advance the entire loan sum of $1.27 million. The qualified nature of the obligation to advance has already been noted. (See Special Covenants 1.01 to 1.05 and 1.09 of the schedule to the loan agreement.) The allegation is made in conjunction with the further allegation that Farrow had knowledge of Laxwell's lack of substance and of its awareness that refusal to advance the full amount of the agreed loan would cause cessation of Laxwell's business. I am not satisfied that Farrow breached the terms of the loan by withholding moneys to which Laxwell was entitled. The obligation to advance was tied up with the progress of the building, and trouble was bound to follow if the building costs overran the original estimate. Plainly the costs did overrun. Equally plainly Mr Kralj's performance of the building works was defective. It seems that -- 19 of 42 -- 18 he was absent for significant periods (at one stage a period of eight weeks) leaving the carpenter as the project supervisor. Explanation of the advances is necessarily complex, and is best discussed with reference to the appendix. Payments to Laxwell were made in each instance according to the certification of a valuer (usually Mr Lever) based on the percentage of the contract performed at that stage. That percentage was based upon a method known as the Rawlinson Cost Guide which assesses various elements of construction as comprising given percentages of the total cost price, and estimating the proportion of that element that has been completed at the particular date. When all the components were put together, the percentage of the works performed overall was applied to the contract price of $850,000 plus the value of work to date and the sum to complete always add up to the contract price of $850,000. Mr Kralj concedes that when $80,000 was advanced on 2 November 1989, following a special meeting on the site on 1 November 1989, he had small room for complaint in relation to the quantum of advances compared with the stage the work had proceeded. The allegations in the counterclaim, and to some extent the conduct of the case reflect a fallacious assumption that Laxwell's entitlement to advances was related to the actual costs incurred by the builder. This overlooks the fact that Mr Kralj was the builder, not Laxwell. Laxwell was a borrower with the benefit of the building contract which ought to have been completed for $850,000. It was correct as between Farrow and Laxwell to assume that the amount paid and the amount to complete would add up to $850,000. Thus, when Mr Lever refers to a consensus on 1 November that there was approximately $312,000 left to complete the development, he is referring to that figure in the context of a building contract of $850,000. He was really saying no more than that the job was at that point sixty-three percent finished. The conclusion is inescapable that the costs were running over the original contract estimate. That -- 20 of 42 -- 19 may be one reason why the amount claimed was always considerably in excess of the amount assessed as having been done. The overrun of costs should have been Mr Kralj's problem. But Mr Kralj apparently had no available money of his own and was not going to keep working unless money was supplied through Laxwell, which he was using as his personal instrument. It should be noted that there is a discrepancy between the amount certified and the amount paid with respect to the first progress claim. The amount certified was $52,000, but only $34,500 was paid. This was explained by the fact that by the time of the first progress claim $17,500 more had been drawn on the preliminary items (including purchase of the land, solicitor's fees, payment out of Ms Grezlo's mortgage, purchase of the Imbil land etc) than had originally been allowed for them in the loan. Thus the only money available for the building was $832,500. In turn the first progress payment was reduced by that sum. The reduction of the first progress payment in this way was in accordance with banking practice, which in my opinion typically leans against the customer, but it was not in itself a particularly significant difficulty for Laxwell and it is not seriously suggested that Farrow committed any breach or acted unconscientiously by administering the loan in this way. It follows that the "value of work to date" column would always be at least $17,500 greater than the "paid cumulative" column. Some minor unexplained discrepancies between these two columns appear after 25 September 1989. They do not appear significant, and perhaps similar explanations of advances for other proper purposes would explain them. No particular case of impropriety was suggested on this point. It should also be noted that the discrepancy had disappeared and was slightly in the borrower's favour by the time of claim number 12. There is no evidence, other than with respect to claim number 1, that Farrow withheld any payment of claims as certified by the valuer. Mr Kralj complained that there was general agreement on 1 November that $100,000 should be paid, but it would seem that Mr Lever certified only $80,000. The real position was that Laxwell was let down by its builder who was never capable of -- 21 of 42 -- 20 completing his contract at $850,000. When he ran out of money he simply stopped work. The cessation of the money flow was not due to any proven breach of Farrow's contract with Laxwell. Mr Kralj's cessation of work in turn caused considerable additional loss to Laxwell through weather penetration. It does not seem to have occurred to either of the defendants that Laxwell and Mr Kralj were different entities with different obligations. But in any event they were helpless without his assistance and there was never any realistic commercial possibility that they could terminate his contract engage another builder and hold him liable. The allegation in the defence and the particulars is that Farrow advanced only a total of $604,513 and therefore failed to advance the balance of $245,470. In fact $644,677 was advanced; but the true point is that in the events which happened Farrow was not obliged to continue to make further advances. Some indication of Laxwell's position with respect to the project by March 1990 can be seen from the following figures - (a) Farrow had advanced and Laxwell had spent - $644,677 (b) Laxwell owed to suppliers and subcontractors - $269,623 (c) Cost of completion of project (which Laxwell itself assessed at $323,125) was more likely to be closer to Mr Lukins' figure of - $500,844 Total: $1,415,144 In the event the actual costs of rectification and completion were far higher than this. It may also be noted that Laxwell's own estimate was far in excess of what was left to be loaned. Whilst these figures cannot be reliably transferred back to earlier stages in the work, the considerable discrepancy which it reveals between actual cost and the contract price, and in turn the loan, demonstrates that the real problem was inefficient running of the project by Mr Kralj and a -- 22 of 42 -- 21 very large overrun of costs. It is not shown that Farrow breached its obligations to make advances. Issue 3 - Farrow causing or conniving at Laxwell's default The alleged delay in making progress payments has been sufficiently dealt with by discussion under the previous heading. The defaults relied upon by Farrow include the circumstance that on 15 January 1990, Stegbar, one of Laxwell's creditors, applied for the winding up of Laxwell. That was an event of default under clause 8.04 of the deed of loan and under clause 8.01.3 of both the Grezlo mortgage and the Laxwell mortgage. There is an abundance of evidence that Laxwell's financial situation was such that Farrow was entitled to inspect the site with the valuer and form the view that there were insufficient funds available to complete the project and to exercise its discretion to refuse further advances under the special covenants 1.01 to 1.09 of the schedule to the deed of loan under clauses 7.2.02 to 7.2.05 of each mortgage. The cessation of work was a breach of Laxwell's obligation to carry out the development works in a proper and workmanlike manner as expeditiously as possible (clauses 7.02.04 of the mortgages). Other breaches of this obligation may be found in the circumstances which gave rise to the "stop work" notice issued by the Maroochy Shire Council on 5 February 1990. By 9 February 1990 Laxwell conceded that the project was "under-priced", and that "therefore the amount owing to us from the original loan does not cover all expenses now and to finish the project" (Laxwell's letter of 9 February 1990). By 14 February 1990 it admitted that it was "in financial difficulties" and that there had been "little if any work on site in the last month". The financial details earlier mentioned (pp 20-21) entitled Mr Constable to form the necessary opinion of commercial insolvency on Laxwell's part in March 1990. A report from Touche Ross dated 5 March 1990 entitled Farrow to be of that opinion. -- 23 of 42 -- 22 It is unnecessary to list all the other defaults which are shown. They include failure to repay the principal by 3 May 1990; failing to pay the "further advance" of $765,522 which Farrow had to pay to complete the work; and applying moneys from the loan to other expenses, which may be inferred and which is also supported by an admission in a letter of 17 January 1990. It cannot be said that Farrow caused or connived at any of these defaults. Only brief mention is necessary with respect to a number of particulars supplied by the defendants in relation to this plea. One of these alleged the payment of $28,000 to the wrong bank, but no evidence was given on this point. Another is that there were shortfalls in payments, but the evidence is that all payments were in accordance with certification. It was also alleged that further amounts ($235,000 and $155,000) were advanced to Laxwell knowing that it could only repay that money and interest by completing the 44 King Street project. This relates to further loans granted by Farrow to Laxwell to enable land to be purchased for the conduct of further projects. However this in no way deprived Laxwell of capital which it otherwise would have used on the 44 King street project. These additional loans were discrete and did not disadvantage Laxwell. It is also alleged that Farrow permitted and encouraged Laxwell to use the progress payments as deposits, but there is no satisfactory evidence supporting this allegation. These defaults prima facie entitled Farrow to give notice of its intention to exercise a power of sale, which it did on 24 March 1990. There is evidence that Mr Kralj was able to interest Mr Volk and another representative of Farrow in some further projects which he wished to pursue in November of 1989. This led to the granting of further loans to Laxwell to purchase the properties upon which projects were intended to be carried out in due course. These however did not affect the existing loan, and were the subject of different loans secured by the properties which were acquired with those moneys. It may be inferred that the security of those properties was sufficient to avoid the accrual of any additional liability. -- 24 of 42 -- 23 Certainly no additional or collateral claim has been brought arising out of the additional loans that were granted to Laxwell at that time. It was also suggested in the particulars that Farrow represented that more money would be paid to Laxwell. This appears to stem from a conference held after the difficulties had emerged, when Mr McCoy and/or Mr Constable is alleged to have said that "everything would be all right" during a meeting on 1 February 1990. There is nothing in the way of promise or impropriety on Farrow's part on this point, or of reliance or disadvantage on the defendants' part as a result of this statement. There is no substance in any of the issues that have been raised under this heading. I do not think that the evidence shows that Farrow caused or connived at the defaults which occurred. -- 25 of 42 -- 24 Issue 4 - Excessive expenses ($765,622) for completion There is some conflict of evidence on this issue, inasmuch as one witness, Mr Higgins, suggested that the project could have been completed far more cheaply than it was. Against this there is evidence from Mr Jamieson (the builder who did the work) and Mr Lukins (a quantity surveyor) describing the specific problems that were encountered and expressing the opinion that the costs incurred were reasonable. Mr Higgins seems to be a competent builder, but, as he recognised himself, he had only a superficial association with the work and the site, and did not have specific details to make accurate estimates or quotations. I am left with the impression that had Mr Higgins been brought in as the builder at the stage when Farrow took possession of the site and decided to complete the building, it may well have been completed for an appreciably smaller sum than it in fact was. However Farrow was not obliged to engage Mr Higgins, and it breached no obligations in pursuing the course which followed. Mr Higgins was unclear as to the extent of the rectification work required, and his assessment of work that might be considered necessary at Christmas time 1989 would be very different to that which was in fact necessary in March 1990 after deterioration caused by weather. I do not think that the preliminary estimate that Mr Higgins was able to give is capable of proving bad faith or breach of any obligation on Farrow's part in relation to completing the project so that the value of the units could be realised. Issue 5 - Defence of Ms Grezlo It was submitted for Ms Grezlo that Farrow took advantage of her as an individual and "as a partner in the de facto relationship with Mr Kralj". Her counsel has drawn attention to the following observations in the Commercial Bank of Australia Ltd v. Amadio & Anor (1983) 151 CLR 447. ". . . A transaction will be unconscientious within the meaning of the relevant equitable principles only if the party seeking to enforce the transaction has taken unfair advantage of his superior bargaining power, or of the position of disadvantage in -- 26 of 42 -- 25 which the other party was placed. The principle of equity applies 'whenever one party to the transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests and the other party unconscientiously takes advantage of the opportunity thus placed in his hands." (per Gibbs CJ at p 459) ". . . general principle which may be invoked whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-a-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created. I qualify the word 'disadvantageous' by the objective 'special' in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party." (per Mason J at 462) "The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that disability was sufficiently evident to the stronger party to make it prima facie, unfair or 'unconscientious' that he procure, or accept, the weaker party's assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to sow that the transaction was fair, just and reasonable . . ." (per Deane J at 474, with whom Wilson J agreed) Ms Grezlo was inexperienced in land development. This would have been apparent to Mr Volk from the particulars which she supplied to him, and from the circumstance that the person making most of the arrangements and supplying most of the details was Mr Kralj. Similarly she was inexperienced in funding land development. Her main experience had been as a hairdresser. It was made clear during discussions that Mr Kralj would not be a director. It would also have been apparent that Mr Kralj was the dominant spokesperson for those interested in obtaining the loan, but that would not be a particularly unusual circumstance. I am prepared to infer that Mr Volk had reason to suspect or believe that Mr Kralj and Ms Grezlo were in some type of de facto relationship, although this may not have been explicitly stated. -- 27 of 42 -- 26 I am also satisfied that Ms Grezlo knew she would be risking her assets if she gave the mortgage that was requested. She was not a person totally ignorant of business affairs. She already had a mortgage over her home, and had assisted her husband in building the home and in establishing the asset. She ran her own hairdressing business and had done so for a number of years. From the point of view of Mr Volk and of Farrow, Ms Grezlo would have the opportunity of obtaining independent advice, as the documents were sent to her solicitor who was asked to arrange for signature and was requested to explain the documents. There was however no express advice from Mr Volk to her that she ought to obtain independent legal advice. Mr Kralj was in fact playing a dominant role in Ms Grezlo's personal life at the relevant time, and he used persuasive tactics to bring Ms Grezlo to his way of thinking. Indeed, he resorted to the occasional use of physical force against Ms Grezlo and her children, although not on this particular subject. Ms Grezlo however was not deprived of her will. She saw there was some financial risk but was reassured by Mr Kralj's optimism and superior knowledge. Few commercial ventures are risk-free, and the situation is essentially that of a domestic situation in which the dominant partner talked the other one around. I do not think that Mr Kralj's statements at this time was fraudulent. It was potentially a good project. His estimates of cost, with hindsight were low, but they were within the parameters of estimates for buildings of the kind that was proposed. His essential errors, I think, lay in subsequent inefficiency and poor administration of the project, and perhaps in diverting his energies into too many projects. In short, it was later mismanagement which brought about the disastrous consequences to a potentially profitable project. Against this background questions of undue influence have to be tempered by the fact that the project did look reasonably attractive. When Ms Grezlo, and for that matter Mr Volk applied their respective minds to the proposal, it was not the type of situation (as in Amadio) where the proposed surety, if advised of relevant existing facts concerning the account to -- 28 of 42 -- 27 be guaranteed, would naturally be expected to decline to risk his or her property. In this particular case Ms Grezlo has the additional hurdle that she stood to gain quite significantly from being involved in the arrangement. There was the expected elimination of her existing mortgage, an active directorship in the company and the acquisition of major if not sole ownership of the shares in the company. In the event she participated in the affairs of the company and played a not insignificant role. I do not think that these factors, collectively considered, place Ms Grezlo in a position of special disadvantage as that concept is discussed in Amadio. The defence therefore fails at the threshold. However in case I am wrong in that preliminary conclusion, I shall endeavour to consider the question whether, if a special disability did exist, Farrow through its agent Mr Volk ought to have been aware of it. It was submitted that it should have been obvious to Mr Volk that the three other parties at the first meeting, and Ms Grezlo at the second meeting, were in a disadvantageous position vis-a-vis Mr Kralj; that he was negotiating, in effect, personal guarantees and mortgages whilst side-stepping any personal liability. If there had been fraudulent conduct or duress on the part of Mr Kralj, there were no clear indications of it at the meetings. Even knowledge of the de facto relationship, and the assumption contended for by counsel that because of their central European origin the male was likely to take a dominant role, would not in my view be sufficient to suggest awareness by Mr Volk of a special disability. It has been held that there is no longer a basis for providing special protection in equity to wives in relation to surety transactions, and that no better position exists for cohabitees of whose relationship a creditor is aware (Barclays Bank PLC v. O'Brien (1994) 1 AC 180). This is probably the position in Australia also (cf. Akins v. National Australia Bank (1994) 34 NSWLR 155) although the matter has not been finally settled. Statements made by Dixon J in Yerkey v. Jones (1939) 63 CLR 649 -- 29 of 42 -- 28 which suggest that special rules exist relating to wives who become guarantors for their husbands, and in particular that where a creditor procures a husband to secure a guarantee from his wife the creditor is automatically to be held responsible for any improper or unfair dealing that actually occurs, were held to be no longer applicable in New South Wales. (Akins case above, pp 170-173, per Clarke JA with whom Sheller JA agreed.) This conclusion was reached after discussion of both Amadio and the Barclays Bank case. It was held that since Amadio there is no room to resort to the so-called special rules in Yerkey. Powell JA did not consider that Yerkey established any principle in any event, and regarded the more recent High Court decisions as holding the field. Of course the fact that Amadio provides wider tests covering the field does not necessarily mean that the creditor cannot be held responsible for subsequent unfair dealings without proof of agency. Imputed responsibility may still be found, but on broader notions of accountability and good conscience. I agree with Clarke JA's statement "where . . . a creditor leaves it to the debtor husband to procure the execution of the guarantee and takes no steps to ensure that the wife understands the responsibility and liability that she is undertaking, or that she is independently advised, the view may well be open, depending on the particular facts of the case, that the creditor should be held to be aware of the possibility that the wife was in a position of special disadvantage" and that "if this be correct it is difficult to support the existence of a special rule applying to wives who sign guarantees in respect of their husband's debts". I also consider that as a question of fact rather than legal presumption, a spouse or de facto spouse may be able to demonstrate by only slight evidence that financial decisions were as a matter of course left to the dominant partner and that sufficient trust and confidence was reposed in that person in relation to their financial affairs to justify an inference of undue influence. Lord Browne- Wilkinson asserts in the Barclay's Bank Case (p 188) that "in a substantial proportion of marriages it is still the husband who has the business experience and the wife is willing to follow his advice -- 30 of 42 -- 29 without bringing a truly independent mind and will to bear on financial decision", and considers that a "special tenderness" is still afforded by courts to wives. It is unnecessary for me to express a view on what might be thought to be dangerous generalisations. I do accept however that in the fact- finding process a sensitivity is necessary to the influence that a dominant partner in a relationship with another person may easily exercise when that partner wants a particular financial outcome. In the event Ms Grezlo was not adequately advised on legal matters, and she agreed with Mr Kralj to waive the opportunity that her solicitor offered of giving more adequate advice. This failure cannot entirely be visited upon Farrow. There is no reason to doubt that Ms Grezlo understood that she was signing a guarantee and the general risk to which she was submitting herself. It is true that Mr Volk to a limited extent praised the project and his statements would have had some reassuring effect upon Ms Grezlo. However on the findings (at p 15-17 above), she was told of the possibility of danger, and Mr Volk's statement that "The project is looking really good" was in the context of figures produced by Mr Kralj showing a reasonable profit. In all the circumstances I am unable to hold that Ms Grezlo was under a special disability. I am also of the view that any disability that in fact existed was not sufficiently evident to Farrow to make it prima facie unfair or unconscientious of the bank to take the guarantee (cf Amadio at p 477). Issue 6 - Defence of Ms Peto Eleanora Peto has stronger arguments on this point than Ms Grezlo. She was twenty-one years old when she signed the guarantee on 24 April 1989. She migrated to Australia in her infancy. However she was Australian-educated and obviously has no difficulty in reading and understanding written and spoken English. At the time she signed the guarantee, Ms Peto had no relevant business experience. After leaving school she had completed a hairdresser's apprenticeship (between 1985 and 1988) at a salon owned by her older sisters. She then went on a two months' trip to Europe with Ms Grezlo and had not -- 31 of 42 -- 30 long returned when the present matters arose. As previously indicated (p 5) other persons (Mr Kralj and Ms Grezlo) decided that Eleanora afforded the ideal solution to fill the place of the missing director when Maria Toth withdrew from the project. I have little doubt that she was in effect steamrolled into the position. She was asked, at a dinner at her sister's home, if she would become a director. The only explanation she was given of what was involved was that this would mean that she would be paid a good wage and have her own motor vehicle and mobile phone. She was told little more than that she would have to sign some papers. She was not told what a director's duties were or that the papers she would have to sign would include a guarantee. She was never told that fact clearly by anyone. Mr Klar's later generic description of the documents to be signed was not particularly illuminating, and she was at that stage under the influence of Mr Kralj and her sister, having been told merely the time and place she had to be in order to sign some documents. Her appointment as a director, as earlier noted, seems to have been achieved without any signature and without the supply of relevant details by her. I infer it was done by others. She accepted the position but was not involved in any activities of a kind normally done by directors. She was a director virtually in name only. She did later occasionally sign documents on behalf of the company but on such occasions was indifferent to the content of what she was signing and usually did so after a cursory explanation by someone else of its general nature. Her employment was purely clerical. She did not become aware of the amount of the money that was advanced or of the amount for which she would be potentially liable under the documents that she signed in the solicitor's office, until a later time. Indeed she signed the guarantee in ignorance of its amount, of the rate of interest, of the establishment fee or any other relevant detail. It cannot be said that she did not stand to benefit from becoming involved in the relevant transactions, because she did change her occupation and was paid better wages than she had -- 32 of 42 -- 31 previously received until the company collapsed. But no one explained to her and she was personally unaware of what she would be giving in exchange for these benefits. In short she was at no stage given reliable advice as to the ramifications of what she was taking on when she signed the documents that were placed before her. She derived little more from the visit to the solicitors than that she should sign wherever her name appeared. At material times Ms Peto was young, impressionable, and inexperienced in arrangements of this kind. The bank was a national financial institution. It had through Mr Volk insisted to Mr Kralj and Ms Grezlo that company directors must give personal guarantees for Laxwell's debts. When he last saw Mr Kralj and Ms Grezlo prior to execution of the necessary documents, there was only one director available and it was agreed that another one was necessary. Mr Volk supported the notion that Mr Kralj should not be a director, and beyond this he seems to have been indifferent to the identity of the substitute director or how Mr Kralj and Ms Grezlo might go about getting the necessary assent of such a person to become a director and to give a guarantee. When Eleanora's name was mentioned to him as a possibility Mr Volk made no response except to state that he would need some information on her. However he neither sought nor obtained such information. Normal financial details concerning the replacement guarantor were never obtained. There were no details concerning Eleanora Peto in the initial papers prepared by Mr Volk. The information he had by the time he prepared his memo of 21 March 1989 was limited to her name and address. Farrow's offer of loan (29 March 1989) is similarly limited and includes no more on this point than the assertion that "the advance is to be jointly and severally guaranteed by Eleanora Margaret Peto and Margaret Ibolya Peto". Both these persons signed a standard letter of acceptance on 31 March 1989 which was forwarded to Farrow by Klar and Klar on 7 April 1989. She was first asked to sign a statement of liabilities and assets on 30 January 1990, eight months after she had signed the guarantee. At around this time a request was made to release Eleanora Peto from her -- 33 of 42 -- 32 guarantee in exchange for one offered by Mr Kralj, but this was refused by Farrow. After Farrow referred the matter to their solicitors for preparation of the necessary documents, correspondence ensued, and on 17 April 1989 Klar and Klar confirmed the names and addresses of the two directors and that the six issued shares were owned by Margaret Ibolya Peto. However no attempt was made to find out anything about Eleanor Peto. I can only conclude that Farrow (through Mr Volk) was indifferent to the identity of the second director. It simply insisted that a guarantee be supplied and left it to Mr Kralj and Ms Grezlo to produce someone who was willing to sign the necessary document. Mr Volk knew that they had it in mind to get Ms Grezlo's younger sister. He permitted the matter to be passed over to them. They unfairly overbore her, explaining only the attractive side of the proposal, omitting mention of the disadvantages. In these circumstances can Farrow now rely upon the guarantee that it obtained from Eleanora Peto and hold her responsible for the debt which has accrued against Laxwell which is covered by that guarantee? The question can be approached in a number of ways, but in my view, whichever route is followed, the answer should be "No". There is a tendency to speak somewhat loosely of "the Amadio defence" as if this lays down the criteria that cover all defences. As Mason J pointed out in that case (at p.461) there is a variety of defences and they are not mutually exclusive. Amadio essentially describes an equitable defence, laying down the principal questions that need to be asked when a party makes unconscientious use of its superior position to the detriment of a party who suffers from some special disability or disadvantage. It affords an example of particular facts which were held sufficient to satisfy those tests and there is a temptation to make a point by point factual comparison which is not always rewarding. I shall in due course deal with those principles. There are however other recognised defences under which a lender may be fixed with the consequences of improper -- 34 of 42 -- 33 actions by third parties which may defeat the lender's remedy. There are at least three fairly well identified channels of reasoning by which courts, especially over the last decade, have analysed such cases. 1. where "agency" is established so that the lender is taken to be responsible for the misconduct of the person whom it entrusts with the procurement of the defendant's signature. (The authorities dealing with matters in this way are usefully collected by Heerey J in Alderton v. Prudential Assurance Co Ltd (1993) 41 FCR 435 and by King CJ in Challenge Bank Ltd v. Pandya (1993) 60 SASR 330, 340-343). 2. where conduct exists which makes it unconscionable for the lender to enforce the security. This usually involves analysis of two principal questions - (1) was the defendant under a special disability, and (2) was this sufficiently evident to the lender as to make it unconscionable for the lender to take advantage of the security or guarantee. (This is now commonly called an Amadio defence.) 3. where notice is imputed to the lender of the acts of the person whose impropriety results in the obtaining of the defendant's signature (cf. Barclays Bank v. O'Brien [1993] QB 109; (1994) 1 AC 180). Depending upon the facts, sometimes one of these approaches is more apt than the others. For example a clear case of the first kind might make it unnecessary to pursue other analyses. A considerable degree of overlapping of relevant considerations is unavoidable if more than one route is pursued. 1. "Agency" The term is in inverted commas because, as King CJ points out in the Challenge Bank case it is to be distinguished for present purposes from the test of true agency. The real question in such cases is whether the lender "entrusts another with the task" of obtaining execution of the document (the test usually applied in the cases referred to in Alderton above) or whether the lender is prepared to leave it to another to obtain the necessary signature. In the Challenge Bank case King CJ formulated the following test: "The Court will not enforce a guarantee at the suit of a creditor if it can be shown that the creditor entrusted the task of obtaining the alleged debtor's signature to the relevant document to someone who, as the creditor knew or ought to have known, -- 35 of 42 -- 34 was in a position to influence the debtor or had a motive for or interest in ensuring the execution of the document, and who procured the signature of the debtor by means of undue influence or by means of fraudulent misrepresentation." (Ibid, p.343) The responsibility of the lender for the misrepresentations of such a person was recently recognised by McPherson JA in Commonwealth Bank of Australia v. Platzer & Anor (Appeal No. 137 of 1995, unreported, judgment delivered 19 July 1996). His Honour used words to the effect that the bank "left it" to another person to obtain the necessary signature. There is no doubt that Mr Volk entrusted Mr Kralj and Ms Grezlo with the task of making whatever arrangements they thought fit to have someone else appointed as a director and have that person sign a guarantee (see Outline of facts, p.6). The following is a short list of facts known by Mr Volk which should have aroused suspicions on his part that one or both of them had a motive for ensuring the execution of the necessary guarantee, and that the person they had in mind might be unfairly influenced by them. 1. that Eleanora Peto was the younger sister of Ms Grezlo; 2. that Eleanora Peto was only twenty-one years old (Mr Volk's evidence - "I think I was aware of her age but I am not certain"); 3. that Ms Grezlo and Mr Kralj were living in a de facto relationship and were likely to act in concert; 4. that Ms Grezlo and Mr Kralj stood to gain considerably from the transaction and might therefore have a motive for misleading Ms Peto; 5. that the terms of the loan were complicated and potentially harsh (Mr Volk ought to have known this); 6. that Mr Kralj appeared to be acting on behalf of Laxwell but had given no personal security for the venture he was promoting; 7. that others (the Toths) had withdrawn from the project; -- 36 of 42 -- 35 8. that Mr Kralj and Ms Grezlo had Ms Peto in mind as the replacement director; 9. that Farrow departed from its own procedures in failing to obtain any relevant financial details in relation to Ms Peto; 10. that Ms Peto was never seen or interviewed; 11. in the circumstances there was insufficient reason to think that she would be independently advised. It is true that the documents were sent to a firm of solicitors with an exhortation but that is considerably outweighed by the risk factors summarised above. This would achieve nothing in relation to Eleanora Peto if, as was foreseeable, influence could easily be exercised by Mr Kralj and Ms Grezlo so that Ms Peto received no effective independent advice. There is no doubt that the position was misrepresented by Mr Kralj and Ms Grezlo to Ms Peto, by describing only the advantages and none of the disadvantages. It is unnecessary to repeat the details set out at pages 31-34 above. In my view by permitting Mr Kralj and Ms Grezlo to make whatever arrangements were necessary for persuasion and execution Farrow became liable for the misrepresentations that led Ms Peto to sign the guarantee, and it is fixed with responsibility for those unfair dealings. It would be inequitable to permit Farrow to enforce the guarantee. In short the present case satisfies the tests stated in Alderton above and by McPherson JA in Commonwealth Bank of Australia v. Platzer above. In case this analysis is insufficient, I shall also address the question whether the circumstances satisfy what has been called the Amadio defence. 2. Amadio There are two overriding questions which need to be answered in considering whether the present circumstances fall within the Amadio principle. Concisely stated they are, (1) Was she under a -- 37 of 42 -- 36 special disability? (2) Was the disability sufficiently evident to the bank to make it prima facie unfair and unconscientious to take the guarantee? I conclude that Eleanora Peto was at the material time under a special disability. My reasons are best stated in summary form. These overlap to a considerable extent with the factors already discussed under the previous heading. (a) The bank and Ms Peto did not meet on equal terms. There was a considerable disparity in bargaining power. (b) She was twenty-one years old, impressionable and inexperienced in business. She particularly trusted her older sister who had trained her, employed her and had recently taken her on a trip to Europe. (c) The terms of the loan were risky and harsh (see para (b) below for further discussion). (d) She was given insufficient opportunity to exercise a reasoned independent judgment. Her sister and Mr Kralj initially told her all the advantages and none of the disadvantages. Thereafter she was virtually under their direction. (e) She at no stage understood the nature of the obligations that were created by the documents she was asked to sign, or even the amount of the loan. (f) Farrow did nothing effective to avoid this situation, and at best was indifferent to what happened, so long as it received a signed guarantee. The question whether her disability was sufficiently evident to Farrow to make it unfair for it to take the guarantee is more difficult, but I have concluded that it would be inequitable to permit Farrow to insist upon the benefit of a document obtained in these circumstances, and again will state the main reasons in summary form. Some factors already stated are again relevant to this second question, and will be repeated. -- 38 of 42 -- 37 (a) The bank and Ms Peto did not meet on equal terms. There was a considerable disparity in bargaining power. (b) While the building project may have seemed to be a good project at that stage, the terms of the loan were potentially harsh. (See pp 6-7 and 11 above.) It is worth noting as far as the project is concerned that while Ms Grezlo as a principal shareholder had a significant interest in it, Eleanora Peto had none. It is the terms of the loan and the guarantee that are of primary relevance in her case. The advances were to be discretionary and the prospect of dispute between lender and borrower was greater than in other loans such as fully advanced loans. In the event of dispute, the borrower was virtually at the mercy of the lender. There was a potential for serious consequences if (as was the case) the estimated cost of the project happened to be too low. In short, from the point of view of a properly advised surety, this was a risky bargain. (c) She was easily overborne by the persuasion of her sister and Mr Kralj. They told her only the advantageous side of the proposal, and none of the disadvantages. She did not know what she was signing. (d) Farrow was indifferent to the identity of the extra director and left it to persons who were apparently anxious to obtain the loan to go away and enlist Ms Grezlo's sister. There was in these circumstances at least a strong risk that unfair pressure would be applied. (e) Farrow had no sufficient reason to believe that these onerous obligations would in fact be explained to her. It did not seek or obtain the usual financial details and departed from its usual practices in this respect. (f) Whilst Farrow did not know what arrangements Mr Kralj and Ms Grezlo might make to remunerate Ms Peto, the circumstances were not such as to suggest to Farrow's representative that Ms Peto would be a person who would obtain a substantial benefit from being involved, and certainly not commensurate with the risk she would undertake if she signed the guarantee. (g) As against these factors Farrow was not aware of adverse facts concerning Laxwell or Mr -- 39 of 42 -- 38 Kralj, and in that respect one of the persuasive factors in Amadio is lacking. It is fair to say that on the material supplied to Farrow, the project looked to be a reasonable one. (h) Also tending in Farrow' favour is the fact that it had some reason to expect that at least the opportunity for independent explanation would exist for the person concerned (Ms Peto). But that was a flimsy expectation and is not particularly strengthened by the use of the standard words in the bank's solicitor's letter to Laxwell's solicitor - "Please note that the documents should be executed in the following manner:- All parties should read the documents carefully . . ." (Ex 12) No representative of the bank had even met Eleanora Peto and there was no satisfactory reason for believing that she would be separately represented or advised. The giving or withholding of equitable protection in circumstances like these is an exercise that requires the balancing of multiple factors. The present case is quite dissimilar to Amadio. In a number of respects this defendant's case is weaker, particularly with respect to the second question. On the other hand this is a relatively strong case of advantage being taken of a trusting young relative, and where the circumstances of her signing the vital document come close to a non est factum; and my conclusion is that although Farrow's officers did not actively contribute to any misleading of Eleanor Peto, their preparedness to let the interested parties have a free hand in their dealings with her make it inequitable in the circumstances to allow Farrow to take advantage of that signature. As noted above, it has been suggested, particularly in the English cases, that there are alternative ways of dealing with the problem of imputing responsibility to a bank for the acts of other persons. The Barclay's Bank Case (above) deals with the matter by deeming constructive notice of the facts "if the circumstances are such as to put the creditor on enquiry as to the circumstances in which (the defendant) agreed to stand surety" (at p. 196). Factors considered important in identifying such -- 40 of 42 -- 39 circumstances are whether the transaction is on its face not to the financial advantage of the defendant, and whether there is a substantial risk that in procuring the defendant to act as surety the person in a special relationship with her has committed a legal or equitable wrong that would entitle her to set aside the transaction. I do not adopt those tests as those on which the present case should be decided, but note that even on those tests the defendant would succeed in having the guarantee set aside. Orders There will be orders against the defendant Ibolya Margaret Grezlo in action No. 174 of 1991 for recovery of possession of the land, in a form to be submitted by counsel. In action No. 777 of 1992 there will be judgment against Margaret Ibolya Peto for $3,807,116.11, or such other sum as may be shown to be due as at the date of judgment. There will be judgment for the defendant Eleanora Margaret Peto in this action, and on the counterclaim it will be declared that the guarantee given by her in favour of the plaintiff is void ab initio. I shall hear submissions on costs. -- 41 of 42 -- Appendix Table of Progress Claims Claim No. Date Amount Claimed $ Cumulative Claim $ Sum of this Claim plus Amounts Already Paid $ Value of Work to Date $ Sum to Complete $ Paid on this Claim $ Paid Cumulative $ 1 08.06.89 51,000 51,000 52,000 798,000 34,500 34,500 2 14.08.89 107,000 158,000 141,500 110,000 740,000 58,000 92,500 3 28.08.89 87,000 245,000 179,476 161,500 688,500 51,500 144,000 4 11.09.89 85,000 330,000 228,952 228,952 621,048 67,000 211,000 5 25.09.89 90,000 420,000 300,928 300,000 550,000 70,000 281,000 6 06.10.89 115,700 535,700 396,604 395,000 455,000 95,000 376,000 7 18.10.89 85,000 620,700 460,880 450,000 400,000 56,000 432,000 8 01.11.89 100,000 (verbal) 720,700 532,000 538,000 312,000 80,000 512,000 9 07.11.89 91,250 811,950,00 603,250 561,330 288,670 30,000 542,000 10 23.11.89 137,250 949,200 679,058 624,100 225,900 62,770 604,770 11 14.12.89 95,700 1,044,900 700,470 650,800 199,200 28,246 633,016 12 12.01.90 40,000 1,084,900 673,016 656,300 193,700 11,661 644,677 -- 42 of 42 --