CATCHWORDS

EQUITY - mortgage and guarantee - special disability of guarantor - improper influence - unconscionability - duty to inform guarantor - extent of duty of disclosure - duty of bank to assess viability of principal security - guarantee actually taken as primary security

SOLICITORS - duty of solicitor to advise guarantor

Yerkey v Jones [1939] 63 CLR 649

Wilton v Farnworth [1948] 76 CLR 646

Blomley v Ryan [1956] 99 CLR 362

Goodwin v National Bank of Australasia Ltd [1968] 117 CLR 173

Commercial Bank of Australia Ltd v Amadio & Anor [1983] 151 CLR 447

Louth v Diprose [1992] 175 CLR 621

Beneficial Finance Corporation Ltd v Karavas and ors [1991] 23 NSWLR 256

Union Bank of Australia Ltd v Puddy [1949] VLR 242

McNamara v Commonwealth Trading Bank of Australia [1984-5] 37 SASR 232

Hogan & Anor v Howard Finance Limited & Anor [1987] ASC 55-594

O'Brien & Anor v Hooker Homes Pty Ltd & Ors [1993] ASC 56-217

FRANCESCO TARZIA & ANOR v NATIONAL AUSTRALIA BANK & ANOR

No. G 85 of 1994

EINFELD, OLNEY & von DOUSSA JJ

MELBOURNE (heard in Canberra)

12 OCTOBER 1995

IN THE FEDERAL COURT OF AUSTRALIA     )   

AUSTRALIAN CAPITAL TERRITORY     )    No. G 85 of 1994

DISTRICT REGISTRY                )

GENERAL DIVISION                 )

                        Between:      FRANCESCO TARZIA

                                      First appellant

                                      MARIA ROSA TARZIA

                                      Second appellant

                            And:      NATIONAL AUSTRALIA BANK LIMITED

                                      First respondent

                                      RODNEY JOHN BARNETT

                                      Second respondent

ON APPEAL FROM THE HONOURABLE JUSTICE GALLOP A JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

                      MINUTE OF ORDERS

1.   Appeal dismissed with costs.

Note:    Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules.

EINFELD, OLNEY & von DOUSSA JJ

MELBOURNE (heard in Canberra)

12 OCTOBER 1995

IN THE FEDERAL COURT OF AUSTRALIA   )

AUSTRALIAN CAPITAL TERRITORY        )No. G 85 of 1994

DISTRICT REGISTRY                   )

GENERAL DIVISION                    )

                        Between:      FRANCESCO TARZIA

                                      First appellant

                                      MARIA ROSA TARZIA

                                      Second appellant

                            And:      NATIONAL AUSTRALIA BANK LIMITED

                                      First respondent

                                      RODNEY JOHN BARNETT

                                      Second respondent

ON APPEAL FROM THE HONOURABLE JUSTICE GALLOP A JUDGE OF THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY

                    REASONS FOR JUDGMENT

THE COURT                 MELBOURNE           12 OCTOBER 1995

                     (heard in Canberra)

Introduction

On 25 November 1994 Justice Gallop in the Supreme Court of the Australian Capital Territory refused the application of the appellants to set aside a mortgage and certain guarantees in favour of the first respondent (the bank) and gave judgment for the bank.  The second respondent was the independent solicitor retained to advise the appellants on the guarantees.

The basis of the application to the Supreme Court, and of this appeal, is that these instruments were entered into in circumstances which make it unconscionable for the bank to seek the enforcement of its legal rights under them.  There were in fact three sets of agreements between the appellants and the bank.  The first consisted of a mortgage executed on 25 May 1988 over the appellants' property at 20 Nimmitabel Street, Queanbeyan, New South Wales (the 1988 mortgage) and two guarantees signed on the same day (together the 1988 agreements).  The second agreement, an unlimited guarantee and indemnity, was signed by the appellants and other members of their family on 1 June 1990 (the 1990 guarantee).  The third consisted of a similar guarantee and indemnity dated 18 December 1991 (the 1991 guarantee).  Only the first and third sets of agreements were the subjects of the action and were in issue on this appeal.

The facts

The appellants, husband and wife, migrated to Australia from rural Italy in 1964.  Neither had any formal education and neither has a good command of English, giving evidence at trial through an interpreter.  They have eight children: four sons and four daughters.  Their sole source of independent income is a government pension.  At the time of the trial they were aged 71 and 66 years respectively.

The family company Nimmitabel Investments Pty Ltd (the company), in which the appellants have no financial interest, was incorporated to acquire the business of their eldest son Michael and his wife Ondina who were the original directors of the company and who at the time owned the Lyons Shoprite Supermarket. In 1983 they also purchased several surrounding businesses.  Ondina and Michael have separated since the events involved in this appeal, and Ondina gave evidence for the bank at trial.  The appellants' other sons, Pino, Anthony (Tony) and Frank, became directors of the company later, although Michael retained control of its affairs.

THE 1988 MORTGAGE

The appellants had signed at least five mortgages and two guarantees before 1988.  On at least one occasion, in 1982, the nature of the document was explained to them by a solicitor, in Italian, before signing.  In 1988 Michael applied to the bank for and was granted two loans.  The first was a personal loan to Michael and Ondina for $20,000, apparently to pay out an existing personal debt to Westpac Banking Corporation and reduce other personal debts.  The second was a $220,000 loan to the company for 2 years at 14.5%, apparently to provide working capital and, it seems, to pay some of the company's accrued debts.  These monies were secured by the 1988 agreements and by mortgages over properties belonging to the appellants' sons.  These other mortgages were not contested in these proceedings.

Prior to the execution of the 1988 agreements the appellants and Michael went to the Woden branch of the bank for a meeting with the branch manager, John Sullivan.  According to the findings of the learned trial Judge, during the meeting Sullivan said to the appellants in the presence of Michael:

     You understand that what you are to sign is a guarantee to the bank which in the event of the company, Nimmitabel Investments Pty Limited, not being able to repay its debts to the bank you both will become jointly and severally liable for all of the company's debts to the bank.

Justice Gallop found that as he spoke, Sullivan paused to allow Michael to translate the words into Italian.

The mortgage was thereafter executed in the presence of another officer of the first respondent, Stephen Thomas.  The trial judge concluded that Thomas said words to the appellants at the time of execution in the following general terms:

     Do you know what you are signing?  The bank's taken a mortgage over your property at [Queanbeyan].  What you are signing is a mortgage in favour of the bank as security for a guarantee and indemnity given to the bank for advances to [the company].  If something goes wrong with [the company] and the loan is not repaid, the bank will come along, take your house and sell it.  That's the bottom line.  If the loan is not repaid back to the bank, the bank will sell your house.

At the same time the appellants signed the two guarantees.  Once again Thomas was found to have said to them words to the following effect:

     Do you know what this document is you are signing?  What you are signing is a guarantee and indemnity in favour of the bank for a loan to [the company].  If [the company] does not repay the bank the loan, the bank will look to you to repay the money.

At this meeting with Thomas the appellants were unassisted by a translation.

THE 1990 AGREEMENT

Although no proceedings were brought on the 1990 guarantee, it is pertinent to consider the circumstances in which it was executed.  This guarantee was needed to cover further loans to the company increasing its debt to $250,000 so as to cover both its then fixed rate fixed term loan of $220,000 given in 1988 and a further loan of $30,000.  On 1 June 1990 the appellants, together with Michael and Ondina, Pino and his wife Maria Teresa, Tony and his wife Therese May, and Frank and his wife Teresa Maria, signed a further guarantee specified to be "unlimited" as to amount.  It was explained to all guarantors that an 'unlimited' guarantee was necessary to cover both the principal loans and two years' interest.

This guarantee was executed by the appellants in the company of Michael and a bank officer named Gary Ian Brown.  As the trial Judge found, before the signing, Brown said to the guarantors words to the following effect:

     You have all signed some guarantees before to the bank and understand having signed them, what a guarantee and indemnity is and what borrowings it covers.  As guarantors you know that you are jointly and severally liable for the debt in your own right and that the bank can call upon any security held in support of the guarantee.

During the conversation Brown spoke to the appellants in the following terms:

     Because your house in Nimmitabel Street is the prime supporting security the bank's greatest reliance is on you should anything fall over.

The trial Judge then recorded that "one of the other members of the family, probably Michael", replied:

     Yes it's all right.  They understand.

Brown then said:

     While I hope it will never come to it we have control of your own securities and can sell them if it comes to the bank having to enforce its security.

At no stage did either appellant ask any questions, nor was any part of the discussion translated into Italian.

THE 1991 AGREEMENT

The 1990 loan of $250,000 expired on 31 May 1991, but it was not then repaid and on 4 June 1991, following discussions with Michael, the bank offered the company a further 3 year fixed term loan of the same amount.  The trial judge recorded:

     By that time the company was in deep financial trouble.  At the end of June 1991 it had an accumulated loss of $455,462 and as at 5 January 1992 had an accumulated loss of $449,202.

     The expert evidence ... is that the company could only trade on with the support of its bankers from 1988 and that such support would have had to rely upon external security.  There was only a slight improvement of profit for the 1991 year.

A few months later a further $15,000 overdraft for the company was requested by Michael and in due course approved by the bank.

The bank's final letter of approval, dated 6 December 1991, mirroring, in relation to the securities required, the letter of offer of 4 June, carried the following provision:

     Securities

     Registered Mortgage Debenture number 281-88 over the whole of the companies [sic] assets and an unlimited Guarantee and Indemnity given by Frank Tarzia, Pino Tarzia, Maria Tarzia, Francesco Tarzia, Maria Rosa Tarzia and Michael Tarzia supported by registered mortgage number 615488 over 20 Nimmitabel Street, Queanbeyan NSW and Registered Mortgage number 615906 over 72 Rischbieth Crescent, Gilmore ACT.

     When a Guarantee and Indemnity is taken, the Bank believes the guarantors should be fully aware of their responsibilities and liability under the document.  Accordingly the guarantors are required to choose a Solicitor who is to fully explain and witness the document.

     In respect to what is required when a Solicitor witnesses and explains a guarantee document, we advise that we require in writing from the Solicitor, on the Solicitor's letterheaded paper, that he has:-

         1.   Witnesses the guarantee

         2.   Explained the terms and conditions of the guarantee.

         3.   Made sure that the guarantor is fully aware of their responsibilities under the guarantee and that their assets may be called upon should the borrower default.

         4.   That the guarantee is being signed by the guarantor without any duress being applied by the beneficiary of the guarantee.

     as Maria Tarzia, Francesco Tarzia and Maria Rosa Tarzia are not registered directors of the company they are third party guarantors.  Therefore it is necessary for them to seek the advice of any accountant, to explain the viability of the company.  The accountant is also to provide a letter on his own letterhead stating that he has explained, and the guarantors understand the viability of the company.

Pursuant to this letter Pino arranged for the six named guarantors to visit the second respondent.  The evidence of the Tarzias as to what occurred in this meeting conflicted with the testimony of the second respondent at trial.  In resolving the conflict the trial Judge accepted the evidence of the second respondent and rejected the evidence of the Tarzias, in particular Michael and Pino, of whose credibility he formed an adverse opinion.  His findings in this regard are, perforce, not contested.  Accordingly we present the version of the meeting testified to by the second respondent and accepted by his Honour.

At about 11.30am on 18 December 1991 Michael, Frank, Maria Teresa, Pino and the appellants arrived at the second respondent's office.  They brought with them, and presented to the second respondent, the letter from the bank of 6 December 1991 and the guarantee document.  Once they were all seated, the second respondent said to them:

     This guarantee relates to all advances made by the National Bank in favour of Nimmitabel Investments Pty Limited which I assume is the proprietor of the Lyons supermarket.  Each of you are named as guarantors and that means that once you have signed this document any one of you could be liable for the full amount which might be owing at any time by Nimmitabel to the bank.  I gather that this guarantee is supported by collateral securities which I gather are mortgages over some of your houses.  You should be aware that if you are unable to pay the bank if called upon to do so any of your property which is mortgaged to the bank would be at risk.  In other words, if you can't pay the bank back its money when asked to do so you could lose your houses.

Having been told by Michael that the appellants' house was one of those to secure the loans, he then said to the appellants:

     Mr and Mrs Tarzia, do you realise that in the event of any default on the part of Nimmitabel Investments Pty Limited your house may be at risk?

Mr Tarzia nodded his head in response.  The second respondent then had Michael translate his explanation into Italian with the following words:

     Michael, please tell your parents that what they are signing is a guarantee document.  This guarantee is supported by a mortgage over their house.  In the event that Nimmitabel does not pay what is owing to the bank the bank, under this document, can sue them for what is owing to Nimmitabel.  If they are not able to pay the amount owing the bank could proceed against both of them for the recovery of that money and could sell their house under the terms of its mortgage.

He broke up this explanation into sections so as to allow Michael to translate as he spoke.  He asked Michael whether the appellants had ever signed any similar document before, and was informed that they had.  At no stage did he receive any indication of hesitation, reluctance or lack of understanding of the agreements they were entering.  It seems that the guarantee was executed at the end of this meeting in the presence of the second respondent.

The appellants sued the second respondent for negligent breach of duty in his conduct of the meeting.  That action also failed at the trial and is now also appealed.

The appeal

The appeal can conveniently be divided into the three key propositions for which the appellants contend:

1.   that in the circumstances in which it was executed it is unconscionable for the bank to enforce the 1988 mortgage

2.   in the alternative, that it is unconscionable for the bank to enforce the 1991 guarantee

3.   that the second respondent breached his duty to the appellants by failing properly to advise them in relation to the 1991 guarantee

The appellants accepted, as they were undoubtedly bound to do, his Honour's findings of fact based on credit.

The 1988 agreements

The principal basis for the appeal against the bank is that it had a duty to inform the appellants, or to ensure that they were informed by a qualified professional, of the imprudence of entering the 1988 mortgage and guarantees due to the precarious financial position of the company.

DISCLOSURE

It has often been stated that a guarantee is not a contract of utmost good faith, and in the absence of any specific term of the contract, there is therefore no general obligation of disclosure: Yerkey v Jones [1939] 63 CLR 649; Goodwin v National Bank of Australasia Ltd [1968] 117 CLR 173.  In the usual case the creditor is entitled to assume that the sureties have informed themselves of any relevant facts, including the liquidity and prospects of the debtor.

There are two cases in which this general rule does not assist a creditor.  The first, which arises from Commercial Bank of Australia Ltd v Amadio & Anor [1983] 151 CLR 447 per Gibbs CJ at 457, is where

     ..... 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.  ...

Under this principle creditors have been required to give notice of special arrangements between them and debtors.  In the present case the special circumstance relied on by the appellants is the financial weakness of the company which, as the appellants properly conceded, is one of the categories excluded by the decision in Amadio.  Chief Justice Gibbs made it quite clear, at 455-6, that the creditworthiness of the customer, no matter how poor, is not required to be disclosed in the normal course:

     A surety who guarantees a customer's account with a bank will not expect that the account has not been overdrawn or that the bank is satisfied with the customer's credit, for the probable reason why the bank requires the guarantee is that the customer has been overdrawing his account, and wishes to do so again, and that the bank is not satisfied with his
credit ... The general rule therefore is that a bank is not obliged to disclose to the surety matters affecting the credit of the customer...

See also Mason J at 463.  Without an expanded duty of disclosure, therefore, the fact that the bank did not tell the appellants of the precarious position of the company could not amount to a breach of the bank's duty or itself be a material misrepresentation.

The second case in which an expanded duty of disclosure arises is where the surety is at a special disadvantage to the bank.  In such a case the failure of the creditor to reveal other information may result, in the particular circumstances, in the agreement being regarded by equity as an unconscionable bargain.

On the facts in Amadio it was held that the bank should have known that the sureties would be unlikely to be able to make a decision as to what was in their best interests, and 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 (per Mason J at 468). 

Wilson J put it in the following terms at 469:

     The circumstances required that the respondents be acquainted with the true financial position of the company and thereby enabled to make an informed decision.

The bank in that case should have explained the financial position of the debtor company to the sureties.  Justice Deane said at 480 that had that been done:

     it would be strongly arguable that the guarantee/mortgage could not properly be said either to have resulted from their special disability or to be other than fair, just and reasonable.

It is this expanded equitable duty of disclosure upon which the appellants chiefly rely in this appeal.

UNCONSCIONABILITY

The appellants look to equity to prevent the bank from claiming the benefit of a bargain which in all conscience it ought not be permitted to retain in the circumstances in which it was entered.  The courts have treated sureties such as the appellants as favoured debtors, guarding their interests with "a jealous eye": Union Bank of Australia Ltd v Puddy [1949] VLR 242 per Fullagar J at 247.  In Amadio the High Court considered the elements that will trigger the exercise of this jurisdiction.  According to Mason J at 461:

     ... relief on the ground of "unconscionable conduct" is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage...

Justice Deane made a similar statement of principle at 474:

     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 show that the transaction was fair, just and reasonable...

His Honour made the same point in Louth v Diprose [1992] 175 CLR 621 at 636.

It is convenient to approach this case in a similar manner to Amadio and analyse two key elements to the appellants' argument:

1.   that the appellants were at the relevant time under a relevant special disability in dealing with the bank

2.   that the knowledge of the bank, and the circumstances in which the appellants' consent to the transactions was procured, made the procurement unfair

If shown to exist, these two elements will give rise to the higher duty of disclosure referred to.

SPECIAL DISABILITY

When discussing the notion of disability or disadvantage, Mason J in Amadio gave a relevant explanation at 462:

     I qualify the word "disadvantage" by the adjective "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 emphasize 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...

Often quoted in this regard are the remarks of Fullagar J in Blomley v Ryan [1956] 99 CLR 362 at 405 that relevant weaknesses may arise from

     poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary.

The appellants pointed to several characteristics as constituting their special disability in 1988.  They were then aged 64 and 61 and had a very limited grasp of English.  Evidently they relied to a significant extent on the advice of their sons who were the directors of the debtor company.  Neither appellant had any business experience.

At first glance this list of characteristics gives the appellants a remarkable similarity to the successful guarantors in Amadio, who were described by Mason J at 464:

     ... they were Italians of advanced years, aged 76 and 71 respectively, having a limited command of written English and no experience of business in the field or at the level in which their son and the company engaged.

However, many other factors were also relied on in that case where the guarantors believed that they were committing themselves to securing their son's overdraft to a limit of $50,000 for six months only, and where the Amadios' personal characteristics increased their reliance on their son who lied to them to induce entry into the guarantee.  They were, therefore, under a complete misapprehension as to the risk involved in the guarantee, and had been induced into that belief by the debtor with the assistance, however innocent, of the bank.  They were approached and signed the documents in their kitchen, and there was no attempt on the bank's part to explain the documents or to check that they had been explained.  The Amadios would not have entered the transaction at all if they had known their son's true financial position.  It was this circumstance, made possible and even exacerbated by factors such as age and language difficulties, which constituted the real disadvantage in Amadio:  see also Vadasz v Pioneer Concrete (SA) Pty Ltd High Court unreported 16 August 1995.

It was not suggested in Amadio, and it cannot be the position, that a combination of ignorance of English, age and lack of business experience necessarily puts a person at a special disadvantage in dealings with a bank on a guarantee.  For one thing the description presumably covers a great number of astute and capable Australians.  Age itself does not raise a presumption of weakness, especially in a case such as this where the guarantors were only 61 and 64 and there was no evidence of any specific age-related infirmity.  The same may be said of their ethnicity and fluency in English.  Such factors may contribute to a relevant disadvantage in some people, and not others.

In the present case the appellants were determined by the trial Judge, in the circumstances, not to be in a special situation of disadvantage.  His Honour first recognised their age, limited facility with English, and lack of education.  However, other matters weighed against these disabilities.  They had signed mortgages and guarantees before, and understood their general import.  On at least one such occasion the mortgage had been explained in Italian to them.  There was further evidence from Ondina, Michael's estranged wife, to the effect that the second appellant had expressed concern, both before and after 1988, about the risk of putting her house up for mortgage against the debts of the company. 

Despite the appellants' evidence to the contrary, his Honour concluded that they understood the nature of both the 1988 and 1991 agreements:

     They understood on both occasions that Michael was requiring them to put up their house in Queanbeyan as security for the debts of the Lyons Shoprite to the Bank by way of mortgage over the house and that they were being required to guarantee the obligations of the business to the Bank.

His Honour also concluded that the relationship between Michael and the appellants was not such as to disable the appellantsfrom making a sensible independent decision as to their own interests. In this regard his Honour not only had the advantage of observing the appellants in the witness box but, as his reasons for judgment demonstrate, he reached the view that the factors raised by the appellants were balanced by their prior experience and comprehension of similar transactions, and did not place them at a significant disadvantage.

The question in this appeal is whether this Court should overturn his Honour's finding from these facts that at the relevant times the appellants were not under a special disability.  In Wilton v Farnworth [1948] 76 CLR 646 at 654 Rich J emphasised the advantage enjoyed by a trial Judge in a case of undue influence.  The advantage "in estimating the characters and capacities of those involved in the impugned transaction" was also referred to in assessing a special disability by Justice Deane in Louth at 633.  See also Dawson, Gaudron and McHugh JJ at 641.  More recently, in Beneficial Finance Corporation Ltd v Karavas and ors [1991] 23 NSWLR 256, President Kirby concluded that a trial Judge's finding that a contract is in the circumstances in which it was made 'unjust' should not be disturbed on appeal.  This conclusion was based on the superior ability of the trial Judge to assess the respective capacities of parties called as witnesses, including "their knowledge and means of knowledge" (at 264).  In the absence of any objective fact not taken into account by the trial Judge, who correctly advised himself as to the law, there is in our opinion no basis for disturbing his Honour's conclusion in this case.

POSITION OF THE BANK

Furthermore, the position of the bank in Amadio was different to the bank here.  In circumstances such as these, equity looks to the relative bargaining positions of the parties so that, as Justice Dawson said in Amadio at 489:

     What is necessary for the application of the principle is exploitation by one party of another's position of disadvantage in such a manner that the former could not in good conscience retain the benefit of the bargain.

In that case the bank had been intricately involved with the facade that the debtor had thrown up to give the impression, to the sureties and others, that it was prosperous and successful.  Amongst other things, the bank had selectively dishonoured cheques drawn on the debtor's account to maintain the impression of prosperity while debts accumulated.

In this case there is no clear indication that the bank was even aware of the financial position of the company.  Expert evidence at trial, which Justice Gallop accepted, was that the company was technically insolvent and could only continue trading with the support of its bankers from 1988.  The company's accounts (AB86) show an operating loss in the financial year ending 30June 1988 of $44,129.39.  Other evidence suggested that the netloss for that year was $147,919 (AB422).  As early as September1987 the company's accountant received an opinion from another accountancy firm to the effect that the company was insolvent and would not be able to trade out of its difficulties (AB139).  This information was passed on to Michael (AB140).

However, there was evidence to suggest that the bank, having considered the financial history of the company, and aware that it was trading at a loss, formed a positive view of its prospects.  The bank officer John Sullivan, when he filled in the loan application for the company, included the following comments inserted at different parts of the form (AB255-8):

     Included in the above loss figure is management wages of $86,052 which, after depreciation is taken into consideration business would show a profit situation of $27774...

     Budgets & cash flows produced by the Accountants and our own p.l. indicate that sufficient income will be generated to service our commitments...

     Prospects are considered quite sound as the weekly turnover of the business is gradually increasing.

     Cash flow budget prepared indicates that repayment programme can be met.

     Whilst we would agree that the business had not operated totally satisfactorily in the past, because of the measures now taken to control the business, we see potential herein.  It is also worth noting that in two years time the $72,000 in lease payments will cease thereby giving them greater cash flow.

This evidence gives rise to no inference either that the bank anticipated the financial difficulties that would eventually bankrupt the company, or that its optimism was mala fides or misconceived.  The company was a new customer.  The bank officers involved were unfamiliar with its affairs and they relied on reports of accountants to form a view of its long term viability. The view they formed was not entirely pessimistic, and it has not been suggested, either in cross examination of Sullivan (AB825-830) at trial or in the appeal, that these views were not honestly reached.  Acceptance of the appellants' proposition in this regard would amount to an obligation being cast on a bank taking third party securities to acquaint itself in some detail with the financial situation and commercial and trading prospects of the object of the financial accommodation.  Where this object is real estate, this task can be easily fulfilled by the obtaining of a valuation of the property, not infrequently by the bank's own valuer.  Where, however, the object is a company or a business, only the financial accounts or projections, the creditworthiness of the principals and the available securities will usually enable a bank to assess the viability of the proposed loan.

As it seems to me, it would be impossible for banks to have in-house expertise to completely assess the success prospects of every business presented for financial accommodation, and the hiring of outside experts would be both costly and time consuming.  In the end, the bank would be armed with no guarantee of success but with someone's opinion.  All it could do with relation to third party sureties is to convey its assessmentbased on the advice it had received.  If the assessment was adverse, it is perhaps doubtful that the loan would be advanced at all.  But if because of the collateral securities or for other reasons, the bank did proceed, the result in a case such as this would be to create a conflict between the bank's and the
borrower's assessments which the proposed sureties would have to resolve for themselves.  There was simply no evidence in this trial that if the appellants had been faced with that dilemma, they would have resolved it against their son and his company.  To the extent that there was evidence on the subject, it was to the opposite effect, as the trial Judge rightly found.

A more pertinent assault on the bank might be mounted on the basis that it took from the appellants as secondary security what the evidence established was in fact, and was regarded by the bank as, the primary security for the advances.  This argument would be that the bank misled the appellants by failing to acquaint them with this reality and explain to them, directly or via the second respondent, that they and their property would or were likely to be the real funders of company losses.  In an appropriate case, this may very well provide a successful cause of action but we do not believe that it does so here where it seems that the appellants were left in no doubt as to why their guarantees were being taken and what effect they would have if losses were incurred by the company.

Clearly no great sophistication was employed by the bank in these regards (AB828-829), but anything more was presumably not considered necessary as the transactions were all taking place within a family and there was no reason to believe that the appellants did not understand and freely assent to what was occurring.  Although there was little or no evidence about the knowledge of the appellants of the prospects of the business, and the trial Judge made no finding on the matter, the evidence at the trial does not leave us with any impression that the bank was in a superior position to the appellants in this regard or failed in its duty to make an honest assessment of the prospects for the loans.  The bank clearly thought that the company could service its commitments, but it is in the very nature of collateral guarantees that there is some risk in the primary security.

REASONABLENESS OF THE TRANSACTION

Justice Gallop also found that the bank did not take improper advantage of the appellants:

     The Bank and the secondnamed defendant, in my judgment, have taken all steps reasonably available, admittedly relying upon Michael who was ostensibly capable and honest, to ensure that no unfair or unconscientious advantage was taken.

Unlike the bank in Amadio which failed to give any assistance

     where assistance and advice were plainly necessary if there were to be any reasonable degree of equality between themselves and the bank (477)

the bank in this case rendered assistance and advice to the appellants suitable to their situation, such that having had explained to them the nature of the guarantee and mortgage they were entering, these appellants were in substantially the same position as the bank to assess the risk involved.  The fact that
neither they nor the bank made a detailed investigation of this risk does not create an equity in their favour against the bank.

CONCLUSION

In the absence of any real and special disadvantage in the appellants, or exploitation by the bank, it is not relevant that the appellants were not in this case aware of the precise terms of the agreements they were entering.  As Chief Justice Latham observed in Wilton at 649:

     ..... where a man signs a document knowing that it is a legal document relating to an interest which he has in property, he is in general bound by the act of signature...  In the absence of fraud or some other of the special circumstances of the character mentioned, a man cannot escape the consequences of signing a document by saying, and proving, that he did not understand it.  Unless he was prepared to take the chance of being bound by the terms of the document, whatever they might be, it was for him to protect himself by abstaining from signing the document until he understood it and was satisfied with it.  Any weakening of these principles would make chaos of every-day business transactions.

This is particularly so in the often complicated area of guarantees and mortgages, as Chief Justice Latham also commented in Yerkey v Jones at 662:

     The law of guarantee is particularly complex, and it is doubtful whether any surety ever understands in its full significance the nature of the transaction into which he enters.

In all the circumstances of this case we are not prepared to conclude that the learned trial judge fell into error in deciding that it was not unconscionable for the bank to seek to enforce the 1988 mortgage.

The 1991 guarantee

The position of the bank improves on consideration of the 1991 guarantee.  There was evidence that by that stage the situation of the company had improved slightly and the 1991 application for credit included the following observations by the relevant bank officer:

     ... business traded poorly in 1988 & 1987.  However has been improving since then and traded profitably for 10 months to 30.4.91...

     Cash flow based on the last 10 months figures shows business can service commitments and trade profitably ... Figures show that directors have made the hard decisions to turn business around & therefore warrant our continued support (AB296)

There was similar evidence from Peter Leahy, the bank's district credit manager, who concluded that the 1991 figures:

     would have been a cause for considerable optimism in 1991 from a banking perspective.

In fact there was ample evidence that the actual situation of the company throughout the period was dire, giving rise to the appellants' assertion in this appeal that the bank should have been aware of the situation.  There was no suggestion that this was a case of 'wilful blindness' so that the appellants' argument amounted to a contention that the bank should be held responsible for a failure to communicate a circumstance of which it might or should have been, but was not, aware.

For this guarantee the bank took the significant step of sending a letter not merely advising but requiring the appellants to seek legal and financial advice.  The prudence of this course as a general practice must be vitiated by the fact that it was addressed to the directors of the debtor company and not to the guarantors themselves.  In a case where special disadvantage or undue influence is shown to exist, such a choice may result in the guarantors receiving no benefit from the letter.  However, the evidence in this case is that the letter was translated to the appellants by their son-in-law Cesare Filardo (AB704), providing the appellants with the added advantage of a requirement from the bank that they seek legal and financial assistance.

On or about 18 December 1991 the bank received a letter from the second respondent stating (AB325):

     At the time of explaining the effect of the Guarantee each Guarantor was made fully aware of his or her responsibilities under the Deed of Guarantee and more particularly that the assets of the Guarantors both joint and several could be called upon to make good any amount owing under the deed of Guarantee.

     Furthermore, at the time of execution of the Guarantee by each of the Guarantors the writer satisfied himself that no duress had been placed on any of the parties by your Bank or any servant or agent of that Bank.

It should be noted in passing that this letter does not refer, as was required by the bank's letter of 6 December 1991, to the position of the guarantor in relation to the "beneficiary of the guarantee", that is, the directors of the debtor company.

The bank also received a letter from the company's accountant John Scarano which included this statement:

     This letter is to confirm that discussions have taken place with the directors and the guarantors understand the viability of the company Nimmitabel Investments Pty Limited.

This assurance did not indicate that advice had been provided to the guarantors, and clearly provided no indication that the guarantors were in fact aware of the viability of the company.  However, as the bank was under no duty to ensure that the guarantors understood the creditworthiness of the business, there was, in our opinion, nothing unconscionable about the bank not taking this matter any further.

The case against the second respondent

The appellants alleged that by breaching his duty to them, the second respondent failed to prevent them entering the 1991 guarantee, and should therefore be held liable for the loss they have suffered under it.  The assertion was that the second respondent failed to discharge his duty to them in two regards:  first, he did not ensure that they received advice as to the prudence of entering the agreement, and second, he did not interview the appellants separately from their sons.  In certain circumstances either of these factors could amount to a breach of duty by the solicitor.  However, regard must be had to the circumstances of the case.

It is not generally the task of solicitors to explain the financial result or prudence of the transactions involved in documents they are merely instructed to explain.  Unless they undertake the task of doing so, or are specifically retained to perform it and supplied with the necessary information and documentation, they will not be negligent for failing to do so: Hogan & Anor v Howard Finance Limited & Anor [1987] ASC 55-594 per Hope JA at page 57,539; O'Brien & Anor v Hooker Homes Pty Ltd & Ors [1993] ASC 56-217 at page 58,270.  In certain situations it may be negligent of a solicitor not to ensure that his client has good financial advice, particularly when the client is at a disadvantage with respect to the other parties to the transaction, and where the results are potentially disastrous for the client: McNamara v Commonwealth Trading Bank of Australia [1984-5] 37 SASR 232 at 241 per King CJ.

Often solicitors will not be qualified to assess the financial risks.  In this case the retainer of the solicitor was further limited in that he was aware from the letter of 6 December 1991 that the appellants had been advised to seek expert financial advice from an accountant.  A reasonable practitioner under these circumstances would be entitled to presume that his clients were aware of the need or wisdom of seeking financial advice.  Thus in the absence of any special circumstances, the second respondent was under no duty to proffer advice on the prudence of the transaction.

In its letter of requirements of the solicitor, the bank included its desire for the solicitor to certify that:

     ...the guarantee is being signed by the guarantor without any duress being applied by the beneficiary of the guarantee.

This request would have required that advice be given to the appellants separately from the directors of the debtor company.  A lawyer takes a considerable risk if the actual or effective debtor is allowed to act as the medium through which a document is explained to a guarantor.  The evidence was that on this occasion the translation was in fact an inchoate summary.  In fact the second respondent made no attempt to ascertain whether entry into the guarantee was an exercise of free will on the part of the appellants, or whether they were being controlled or overborne by their sons.

However, it is significant that the trial Judge found that both the appellants understood the nature of the transactions they were entering, and were in fact not placed under duress by their sons or in a situation of special disadvantage.  There was ample evidence to support that finding.  If the advice given to these appellants had been given to more vulnerable guarantors, it may be that a solicitor would incur liability for breach of duty to the clients.  Similarly a bank on notice of such a disability would not get comfort from a letter in the terms of the one the bank received from the second respondent, which did not address the issue at all.

But a guarantor cannot escape liability under a guarantee merely because he was advised as to its effect in the presence of the debtor.  In the absence of any proven special disability or improper influence, or any evidence that the appellants would have acted differently had they been separately advised, the appeal against the primary decision in favour of the second respondent must therefore also fail.

Conclusion

The appeal must be dismissed with costs.

Counsel and solicitor for             Mr G.G. Masterman QC

for the appellants                  instructed by Mr M. van Gelder of Meyer Boettcher & Clapham

Counsel and solicitors for          Mr M. Walton instructed by

the first respondent                  Dibbs Crowther & Osborne by their Canberra agents Abbott Tout Russell Kennedy

Counsel and solicitors for          Mr R.E. Williams QC with

the second respondent               Mr Brewster instructed by R.P. Clunes of Minter Ellison

Date of hearing                       5 April 1995

Date of judgment                    12 October 1995