The Judicial Committee of the Privy Council Decisions

Cornerstone Investments & Finance Company Ltd (Jamaica) [2007] UKPC 49 (16 July 2007)

Privy Council Appeal No 23 of 2006

Estate of Imorette Palmer (deceased) Appellant

v.

Cornerstone Investments & Finance

Company Ltd (Jamaica) Respondent

FROM

THE COURT OF APPEAL OF

JAMAICA

- - - - - - - - - - - - - - - - -

JUDGMENT OF THE LORDS OF THE JUDICIAL

COMMITTEE OF THE PRIVY COUNCIL

Delivered the 16^th July 2007

- - - - - - - - - - - - - - - - -

Present at the hearing:-

Lord Scott of Foscote

Lord Rodger of Earlsferry

Lord Carswell

Lord Brown of Eaton-under-Heywood

Lord Mance

- - - - - - - - - - - - - - - -

[Delivered by Lord Scott of Foscote]

Introduction

1. This appeal from the majority judgment (Harrison JA and Walker JA, Downer JA dissenting) given on 29 July 2005 by the Court of Appeal of Jamaica arises out of a moneylending transaction of 19 November 1997. There are three issues. The first is whether the Moneylending Act of 1938, as amended in 1997 ("the Act"), applies to the transaction. If the Act does apply, the second issue is as to the effect of the Act on the moneylending transaction and on the mortgage and guarantee security given by the appellants in support of it. The third issue, if the effect of the Act is to render the transaction and the security unenforceable, is whether the statutory jurisdiction, available under section 8(3) of the Act (added to the Act by the 1997 amendment) to give relief to the moneylender, should be exercised.
2. The moneylender in the transaction is the respondent, Cornerstone Investments & Finance Co. Ltd. ("Cornerstone"). Cornerstone carries on the business of moneylending and this litigation has its origin in two moneylending transactions that Cornerstone entered into. First, in February 1996 Cornerstone lent $160,000 (references in the judgment to $ are, here and elsewhere, references to US$) to a Mr Desmond Rankine, or perhaps to a company or companies with which Mr Rankine was associated. Their Lordships know little more about this transaction save that in November 1997 the loan of $160,000 was still outstanding. This first transaction is an important part of the background to the second moneylending transaction, the transaction entered into on 19 November 1997, with which the appeal is particularly concerned.
3. In the 19 November 1997 moneylending transaction the borrower was Mr Kenroy Salter. There are two versions of this transaction, one contended for by Cornerstone, the other by the appellants. Whether the Moneylending Act applies to this transaction and, in the end, the result of this appeal, depends on which version is the right one.
4. Version 1 is that Cornerstone advanced to Mr Salter $250,000 of which $90,000 was to be, and was, paid to Mr Salter and $160,000 was to be treated as applied by Mr Salter in taking over from Cornerstone the $160,000 loan owing by Mr Rankine to Cornerstone. Under this version of the transaction there was a novation of the loan of $160,000 by Cornerstone to Mr Rankine, with Mr Salter replacing Mr Rankine as Cornerstone's debtor and replacing Cornerstone as Mr Rankine's creditor. There is no dispute that $90,000 was the only sum actually paid to Mr Salter. This is the version accepted by the majority in the Court of Appeal.
5. Version 2 is that Cornerstone advanced $90,000 to Mr Salter on condition that Mr Salter agreed to guarantee the payment by Mr Rankine of his liabilities in respect of the $160,000 loan and that Mr Salter entered into the required guarantee accordingly.
6. The transaction between Mr Salter and Cornerstone was recorded in two documents, both dated 19 November 1997. There was a Loan Agreement executed by Mr Salter and by Cornerstone, and there was a Guarantee executed by Mr Salter. The terms of these two documents are of critical importance. Under paragraph 1 of the Loan Agreement Cornerstone was expressed to lend Mr Salter the sum of $250,000. The paragraph then continued as follows:

"The loan shall be disbursed in full upon the execution hereof together with the Instrument of Guarantee and Collateral Mortgage hereinafter described, and upon the execution hereof, the loan proceeds shall be deemed to have been received in full by [Mr Salter]."

The "Instrument of Guarantee" and "Collateral Mortgage" there referred to were a guarantee and mortgage to be given by the appellants in support of Mr Salter's liabilities under the Loan Agreement. Their Lordships will refer to these securities in more detail in a moment.

7. There are some oddities in this Loan Agreement which are worth mentioning. The Schedule to the Agreement, which was presumably intended to constitute a synopsis of its essential terms, specifies $250,000 as "The Sum Loaned", 22 per cent per annum as the "Interest Rate" and 18 November 1998 as the "Date of Maturity" of, presumably, the Sum Loaned (18 November 1998 was one year from the date of the Loan Agreement). But there is no mention in the body of the Agreement of the "Date of Maturity" and paragraph 2 says that Mr Salter must repay the loan "on demand". Paragraph 3 says, simply, that "interest shall be payable", without specifying when interest is to be paid.
8. Subject to those oddities the Loan Agreement records a loan of $250,000 repayable on demand with interest at 22 per cent per annum. It does not record actual payment to Mr Salter of the $250,000. The $250,000 is "deemed" to have been received but it is common ground that only $90,000 was actually received by Mr Salter. The Loan Agreement was accompanied by a Statement of Account, also dated 19 November 1997, prepared by Grant, Stewart, Phillips & Co (Cornerstone's attorneys) and sent to Mr Salter. The Statement showed a credit to Mr Salter of the $90,000 and showed that the $160,000 had been "already disbursed". So it had, but not to Mr Salter. The Loan Agreement contained no explanation about the $160,000 that was to be "deemed" to have been received by Mr Salter.
9. The explanation about the $160,000 was contained in the other of the two documents referred to in paragraph 6 above. This was a Guarantee (the Salter Guarantee) executed by Mr Salter on 19 November 1997. The Salter Guarantee was in Cornerstone's usual form. It was expressed to be given by Mr Salter to Cornerstone in consideration of

"… loan and credit facilities to the extent of … [$160,000] … together with interest being granted by [Cornerstone] at the request of [Mr Rankine] … on the terms and conditions established by a Loan Scheme Arrangement made and entered into on or about the 27th day of February 1996 between [Mr Rankine] and [Cornerstone] and contains an undertaking by Mr Salter…"

"… to pay to [Cornerstone] all Principal, interest and other moneys at any time owing or payable by [Mr Rankine] to [Cornerstone] in the event of default by [Mr Rankine] …"

10. The Salter Guarantee is totally inconsistent with the novation analysis on which version 1, described in paragraph 4 above, is based. It makes clear that Mr Rankine remained liable to Cornerstone in respect of the $160,000 and that his liability to Cornerstone had not been discharged by a notional application of the $160,000 said to be part of a $250,000 loan to Mr Salter. If version 1 is right, the Salter Guarantee was pointless and misleading. It speaks of "the event of default" by Mr Rankine (in discharging his obligations to Cornerstone under the February 1996 agreement). If version 1 is right there could have been no such default. It says, in paragraph 2, that Cornerstone "shall not be bound to exhaust its rights" against Mr Rankine. If version 1 is right, Cornerstone had no rights against Mr Rankine. In the face of the Salter Guarantee, the contention that there was a novation of the $160,000 loan, with Mr Salter taking Mr Rankine's place as debtor vis-à-vis Cornerstone and Cornerstone's place as creditor vis-à-vis Mr Rankine is simply unarguable.
11. The two documents must be read together and, so read, support version 2 as reflecting the parties' intentions, namely, that there was an actual loan to Mr Salter of $90,000 and an assumption by Mr Salter of liability for Mr Rankine's obligations to Cornerstone in respect of the $160,000, with Mr Rankine remaining liable to Cornerstone. Accordingly, in respect of the $160,000 Mr Salter's liability was as guarantor for Mr Rankine but with Cornerstone entitled to treat him (Mr Salter) as the principal debtor and primarily liable. Hence the reference in the Loan Agreement to Mr Salter being "deemed" to have received the full $250,000.
12. The conclusion that version 2 represents what Cornerstone and Mr Salter had intended is confirmed by affidavit evidence given by Mr Gordon Brown to the Court of Appeal. Mr Brown had been a partner in Grant, Stewart, Phillips & Co. and had had the conduct of the preparation and execution of the 19 November 1997 documents. He was a member of Cornerstone's legal team in this litigation. His affidavit contained the following important paragraphs:

"6. …The basis for [Cornerstone] granting loan facilities to Mr Salter was his agreement to guarantee existing facilities in the sum of US$160,000.00 owed by one Desmond Rankine to [Cornerstone] ("the Rankine Obligations").

7. …Mr Salter agreed to guarantee the Rankine obligation (sic), and to this end, executed [the Salter Guarantee] ….

8. …it was always understood and agreed that in the event of default by Mr Rankine or his affiliated companies in payment of the Rankine obligations, that the collateral given by [the appellants] would be applied to cover same.

9. …the Rankine Obligations fell into arrear, by reason of which [Cornerstone] took steps to realise its security interest in the collateral provided by [the appellants] and Mr Salter."

(N.B. The reference in para. 9. to "Mr Salter" should presumably have been a reference to Mrs Salter – see para. 13 below)

This evidence, like the Salter Guarantee, flatly contradicts the novation contention. It shows the intention of Cornerstone that Mr Rankine should remain liable in respect of the $160,000 and that Mr Salter's role in that respect was that of guarantor.

13. Security for Mr Salter's liabilities to Cornerstone was provided to Cornerstone by three ladies. They were Imorette Rebecca Palmer (Mr Salter's mother), Marcia Susan Gallimore (the sister of Mr Salter's wife) and Margaret Alison Salter (Mr Salter's wife). The first and second named ladies took out the Originating Summons of 11 May 1999 that commenced this litigation. Mrs Palmer has since died and the appellants before the Board are Mrs Palmer's personal representatives and Mrs Gallimore. The additional security the three ladies gave consisted, first, of a joint and several guarantee and, secondly, of a mortgage of a house and land in Jamaica, namely, Townhouse No 12, Airdrie Mews, registered at Volume 1207 Folio 678 of the Register of Book of Titles. The three ladies, the registered proprietors, were the mortgagors. Both securities were executed on 19 November 1997.
14. Both the guarantee and the mortgage were "all monies" securities, expressed to cover any liabilities of Mr Salter to Cornerstone on any account. Both documents refer to the $250,000 but neither refers to the Loan Agreement or to the Salter Guarantee. The contents of these two documents, to neither of which was Mr Salter a party, do not advance, in either direction, the novation argument. But paragraph 9 of Mr Brown's affidavit shows the intention of Cornerstone and Mr Salter that the three ladies should, via Mr Salter, become guarantors of the Rankine Obligations.
15. For the reasons given, their Lordships have concluded that the transaction recorded by the Loan Agreement, read in conjunction with the Salter Guarantee, was an agreement for an advance to Mr Salter of $90,000 with Mr Salter accepting a suretyship liability for the liabilities of Mr Rankine in respect of the $160,000 but with Cornerstone entitled to treat Mr Salter as the principal debtor not only in respect of the $90,000, but also in respect of the $160,000. Mr Salter was required both to repay the $90,000 and to pay the $160,000 "on demand" together with 22 per cent interest on the whole $250,000.

The 1st issue – Does the Act apply to the moneylending transaction of 19 November 1997?

16. Section 13(1)(i) of the Moneylending Act disapplies the Act in relation to

"any loan … or security for the repayment of money lent at such rate of interest not exceeding such rate per annum as the Minister may by order prescribe".

By the Moneylending (Prescribed Rates of Interest) Order 1997, made on 27 August 1997, the Minister prescribed an interest rate of 25 per cent per annum for the purposes of section 13(1)(i).

17. Section 1 of the Act says that "interest"

"… does not include any sum lawfully charged in accordance with the provisions of this Act by a lender of money for or on account of costs, charges or expenses, but save as aforesaid includes any amount, by whatsoever name called, in excess of the principal paid or payable to a lender in consideration of or otherwise in respect of the loan"

and that "principal" means "in relation to a loan the amount actually lent to the borrower". The rate of interest specified in the Loan Agreement was 22 per cent, lower than the 25 per cent prescribed by the Minister in the 1997 Order. But the $250,000 amount payable by Mr Salter "on demand" included $160,000 in excess of the $90,000 actually lent to Mr Salter. For the purpose of the Act, therefore, the "principal" was the $90,000 and the $160,000 counts as "interest" and takes the rate of interest way above the prescribed rate of 25 per cent. If the "loan" of $250,000 were left outstanding for a year, interest at 22 per cent would amount to $55,000. So $305,000 would be payable by the end of the year, the "Date of Maturity" referred to in the Schedule to the Loan Agreement. But the only loan actually paid to Mr Salter, the "principal" as defined by section 1 of the Act, was $90,000. It follows that $215,000 represents "interest" as defined by the section, and represents a rate of just under 240 per cent. The Act applies to this transaction.

The 2nd Issue – the effect of the Act on the 19 November 1997 transaction

18. Section 2(1) of the Act applies

"Where proceedings are taken in any court … for the recovery of money lent … or the enforcement of any agreement or security made or taken in respect of money lent … and there is evidence which satisfies the court that the interest charged … [is] excessive … or that, in any case, the transaction is harsh and unconscionable"

and enables the court to reopen the transaction, adjust the interest rate and set aside, wholly or in part, or revise or alter any security given or agreement made in respect of the money lent. This provision does not apply, for Cornerstone have not as yet brought proceedings. However section 2(2) enables a court, in which the proceedings referred to in subsection (1) might be taken, to exercise the like powers at the instance of a borrower or surety, e.g. Mr Salter or the three ladies.

19. Section 8 of the Act, the section particularly in play in this appeal, says (in subsection (1)) that:

"… no contract for the repayment by a borrower of money lent to him … or for the payment by him of interest on money so lent and no security given by the borrower … in respect of any such contract shall be enforceable, unless a note or memorandum in writing of the contract containing the particulars required by this section be made and signed personally by the borrower, and unless a copy thereof be delivered or sent to the borrower within seven days of the making of the contract; and no such contract or security shall be enforceable if it is proved that the note or memorandum aforesaid was not signed by the borrower before the money was lent or before the security was given, as the case may be."

Subsection (2) says that the note or memorandum must contain all the terms of the contract and, in particular, inter alia, the amount of the principal and the rate of interest. Subsection (3) enables the court to give relief against the unenforceability brought about by a breach of subsections (1) and (2). That is the third issue to which their Lordships referred in paragraph 1 above.

20. There can be no doubt that if, as their Lordships have concluded, version 2 of the moneylending transaction recorded in the Loan Agreement is correct, subsections (1) and (2) of section 8 render the Loan Agreement unenforceable. The Schedule to the Loan Agreement refers to the sum loaned, the principal, as being $250,000. Applying the section 1 definition, the principal was $90,000. That was the sum actually loaned. The Schedule gives 22 per cent per annum as the interest rate. Applying the section 1 definition the interest rate was almost 240 per cent. Important features of the Loan Agreement were that $160,000 of the $250,000 was not to be paid to Mr Salter, that his liability in respect of the $160,000 was as guarantor of Mr Rankine, although Cornerstone were entitled to treat him as principal debtor, and that Mr Salter's agreement to accept that liability was in consideration of the grant to him of the $90,000 loan. No reference to those terms of the contract appear anywhere in the Loan Agreement.
21. It follows, in their Lordships' opinion, that section 8(1) makes the Loan Agreement unenforceable, subject to the possibility of relief being granted under subsection (3). A question raised before their Lordships was whether section 8(1) in rendering unenforceable any "security given by the borrower" rendered unenforceable securities for the borrower's liabilities given by third parties such as, in the present case, the three ladies. As to this question Miss Phillips very helpfully referred their Lordships to Temperance Loan Fund Ltd v Rose [1932] 2 KB 522, a case in which the Court of Appeal held that if a moneylending transaction were unenforceable by reason of non-compliance by the moneylender with the requirements of section 6 of the Moneylenders Act 1927 (a section in exactly the same terms as section 8(1) and (2) of the Act), the transaction would be equally unenforceable against a person who had guaranteed the payment of the debt. Scrutton LJ (at 529-530) referred to a promissory note that had been signed by a third party and said:

"… that security includes a promise by a third party that he will pay, and the Act says that that security shall be unenforceable unless a memorandum complying with the statute has been signed. That is a sufficient answer to the point made by the moneylenders."

And Slessor LJ (at 533) said that:

"… a security 'given by the borrower' may take the form of a guarantee given by a third party; it is a security given to the moneylender in order that he may lend money to the borrower."

22. Their Lordships are in agreement with the view taken by the Court of Appeal in Temperance Loan Fund Ltd v Rose, consistent with the view taken by an earlier Court of Appeal in Eldridge v Taylor [1931] 2KB 416, also a section 6 case. Accordingly, in agreement with Downer JA in the Court of Appeal, their Lordships conclude that the guarantee and mortgage given by the three ladies to Cornerstone as security for Mr Salter's liabilities under the Loan Agreement are rendered unenforceable by section 8(1) and (2) of the Act.

The third issue – section 8(3) of the Act

23. A view as to whether the relief available under section 8(3) of the Act should be granted needs to be preceded by a brief reference to the history of this litigation.
24. On 21 August 1998 Cornerstone served on the three ladies who had granted the mortgage a Statutory Notice under the Registration of Titles Act. The notice referred to the mortgage (attributing to it the erroneous date of 11 February 1998) and called on them to pay $268,333-32 said to be owing thereunder as at 31 March 1998. That sum represented the $250,000 and $18,333-32 interest thereon. The notice said that default in payment for 30 days would lead to a sale of the property by Cornerstone. The notice was signed by Mr Gordon Brown, the deponent referred to in paragraph 12 above.
25. The ladies, not surprisingly, informed Mr Salter of this development and his attorneys, Watt King & Robinson, wrote a letter dated 9 September 1998 to Grant, Stewart, Phillips & Co. The letter said that all Mr Salter's payments were up-to-date, asked why the Statutory Notice had been given and, also, asked for "copies of the documents evidencing our client's liability to [Cornerstone], including proof of the indebtedness of Desmond Rankine". The terms of the response, a letter dated 21 September 1998 written by Mr Brown, referred to the "two components" of the $250,000 that had been consolidated in "the security in question". A copy of each of the four documents of 19 November 1997 was enclosed with the letter. The "two components" were, plainly, the $90,000 lent to Mr Salter and the $160,000 owing by Mr Rankine.
26. A letter was also written to Grant, Stewart, Phillips & Co. by Patterson Phillipson & Graham, acting for the three ladies. Mr John Graham of that firm has appeared as counsel for the appellants before the Board. The letter referred to the Statutory Notice and Watt King & Robinson's letter of 21 September 1998 and asked for answers to be given to the questions asked by that letter. No information was given by Cornerstone in response to that request save that a copy of the Loan Agreement was sent to Mr Graham. On 20 October 1998 Mr Graham tried again. He asked for details of how the $160,000 "was disbursed to Mr Desmond Rankine". On 13 November 1998 Mr Graham received from Mr Gordon Brown "documentation supporting the advances to Mr Rankine's company". On 25 November 1998 Mr Graham replied, pointing out that it was Mr Rankine's indebtedness, not that of his company, that had been guaranteed. No subsequent information regarding Mr Rankine's indebtedness in respect of the $160,000 was supplied, but by a letter of 11 January 1999 Mr Brown told Mr Graham that "we do not share your views". The letter also said, erroneously, that the mortgaged property had been sold by public auction on 10 December 1998.
27. This state of affairs, and an inability to discover anything precise about the state of account between Mr Rankine and Cornerstone, led the appellants to issue an Originating Summons on 12 May 1999 seeking declarations (i) that the Loan Agreement was unenforceable by virtue of section 8 of the Act (ii) that the guarantee and mortgage were unenforceable for the same reason (iii) alternatively, that the interest charged in respect of the sum actually lent was excessive and that the transaction was harsh and unconscionable and should be reopened, and seeking also an order for the cancellation and delivery up of the mortgage and the delivery up of the Certificate of Title to the mortgaged property.
28. The Originating Summons was supported by affidavits sworn by Mr Salter and by Mrs Gallimore. Mr Salter said in his affidavit that the only loan he had received from Cornerstone was the $90,000 and that the balance of the $250,000, the $160,000, represented a facility that he could draw upon if he needed to do so. He exhibited a copy of the Loan Agreement. His explanation of the $160,000 was flatly inconsistent with the Salter Guarantee. He did not exhibit a copy of the Salter Guarantee nor did he make any reference to it in his affidavit.
29. Mrs Gallimore in her affidavit referred to Mr Salter's affidavit and said that she, her sister and her mother had agreed to provide collateral for a loan of $90,000 to Mr Salter from Cornerstone and that that was all that had been lent to Mr Salter. The balance of the $250,000 had not, she said, been lent to him.
30. The case was heard by Reid J on 28 September 2000. No evidence at all had been filed on behalf of Cornerstone. That is astonishing enough, but even more astonishing is that there was no cross-examination either of Mr Salter or of Mrs Gallimore. The Salter Guarantee was not in evidence before the judge. There was nothing to contradict Mr Salter's affidavit evidence about the $250,000 referred to in the Loan Agreement. Mr Graham was counsel for Mrs Palmer and Mrs Gallimore; Cornerstone was represented by Mrs Sharon Usim, instructed by Chancellor & Co., attorneys. There is a record of the submissions made by Mr Graham but none of the part played by Mrs Usim. Mr Graham drew the judge's attention to section 8 of the Moneylending Act and submitted that "the affidavit evidence not having been denied the Court is obliged to accept that the amount actually loaned was $90,000 and not $250,000" and that section 8(1) of the Act rendered the guarantee and the mortgage unenforceable.
31. The judge accepted these submissions and, without giving any reasons of his own, made orders as asked. He was subjected to fairly stringent criticism by the Court of Appeal for his failure to give reasons but their Lordships think that, in the circumstances as they stood, his failure to do so was understandable. The case was to all intents and purposes undefended. Counsel for Cornerstone could only have resisted the granting of the relief sought by asking for time to file evidence in reply or by cross-examining Mr Salter and Mrs Gallimore. She did neither and the grant of the relief sought, for the reasons that had been advanced by Mr Graham in his submissions, was inevitable.
32. Cornerstone appealed and applied for leave to file evidence before the Court of Appeal. That application was granted, Mr Brown's affidavit sworn on 26 November 2001, exhibiting a copy of the Salter Guarantee, was filed accordingly and the appeal commenced on 29 November 2001. No other attempt was made on Cornerstone's behalf to remedy the inadequacies of the conduct of its case before Reid J. It is apparent that an important part of the Cornerstone case, as it was developed before the Court of Appeal, involved inviting the Court to disbelieve the sworn testimony of Mr Salter and Mrs Gallimore. But these witnesses were entitled, in their Lordships' opinion, to have any alleged inconsistencies, inaccuracies or falsities in their sworn evidence put to them in cross-examination. It is difficult to see what explanation Mr Salter could have given of his contention in his affidavit that the $160,000 part of the $250,000 referred to in the loan agreement had been a credit facility that he could draw upon if he chose, or how he could have reconciled that contention with the contents of the Salter Guarantee. But he should have been given the opportunity to do so before being branded a liar. He was not a party to the litigation and had no counsel appearing for him. As to Mrs Gallimore, there is no evidential reason to infer that she, or her sister or mother, her co-guarantors and mortgagors, had been told anything or knew anything at all, when they executed the security documents on 19 November 1997, about the Rankine liabilities or about the Salter Guarantee.
33. Their Lordships are inclined to think that the procedural options open to Cornerstone to remedy its failure to defend the case at trial were either to ask the Court of Appeal to direct a new trial or to ask the Court of Appeal to direct Mr Salter and Mrs Gallimore to attend the Court of Appeal for cross-examination. Their Lordships must not be taken as indicating any opinion that the Court of Appeal would or should have acceded to either of these applications but, in the absence of success on one or the other, Cornerstone was before the Court of Appeal and has been before the Board ham-strung in its attempts to attack the appellants' case.
34. When the case came on for hearing before the Court of Appeal, the court asked that Cornerstone produce the documents constituting the Loan Scheme Arrangement whereunder the $160,000 had been lent to Mr Rankine. The documents never were produced. As Downer JA pointed out at pages 14 and 15 of his judgment the appellants (respondents in the Court of Appeal) were entitled to these documents and to documents showing the details of the account as between Mr Rankine and Cornerstone (see section 10(1) and (2) of the Act).

The 3rd issue – section 8(3) of the Act

35. Their Lordships must now turn to the question whether in the circumstances of this case the jurisdiction conferred by section 8(3) should be exercised in Cornerstone's favour. In the Court of Appeal only Downer JA gave detailed consideration to this issue. Harrison and Walker JJA did not need to. They had concluded, wrongly in their Lordships' respectful opinion, that the loan to Mr Salter was genuinely a loan of $250,000 and that, since an interest rate of 22 per cent was below the rate prescribed by the Minister, the Act did not apply (s.13(1)(i) of the Act). Both, however, expressed the opinion that, if it had been necessary to do so, they would have exercised the section 8(3) power in Cornerstone's favour.
36. Their Lordships are in substantial agreement with Downer JA on this issue. The relieving discretionary power conferred on the court by section 8(3) is, obviously, particularly apt to cater for accidental inaccuracies in the statement of the amount of the money lent, the rate of interest or the date of the transaction, or of inaccuracies in any other of the matters required by section 8(2) to be included in the subsection (1) note or memorandum. In the present case, however, the failure to comply with the requirements of section 8(2) is substantial. There was a very substantial overstatement of the amount of money actually lent to Mr Salter and, consequently, an enormous understatement of the true interest rate, almost 240 per cent if the calculation is done in accordance with section 1 of the Act.
37. Just as important, however, is that no reference was made in the document constituting the "note or memorandum" of the fact that $160,000 of the $250,000 represented a liability of Mr Rankine, for the repayment of which Mr Salter was making himself liable, and did not represent a loan that would ever be actually paid to Mr Salter. The three ladies were guaranteeing the repayment of Mr Salter's liability in that regard. They were entitled to know that their liability might be triggered by a default on the part of Mr Rankine, an individual of whom there was no evidence that they had ever heard and the state of whose affairs, so far as the evidence goes, they had no knowledge.
38. Miss Phillips tried valiantly to persuade their Lordships that it should be inferred that the three ladies knew all about the Salter Guarantee and knew that the $160,000 owed by Rankine was a constituent part of the $250,000 liability of Mr Salter that their guarantee and mortgage were expressed to cover. She pointed out that their signatures on each of the security documents they had executed had been witnessed by Veronica Morris, an attorney, and that Veronica Morris had formally stated, in an endorsement on the mortgage, that she had explained its contents to Mrs Salter who had said that she "fully understood the content and implication of same …". Veronica Morris also witnessed Mr Salter's signature on the Salter Guarantee. So, Miss Phillips submitted, it should be inferred that Veronica Morris had known all about the Salter Guarantee and the Rankine liabilities and had advised Mrs Salter and the appellants on the matter.
39. But this will not do. Veronica Morris was not a witness. She may or may not have read the Salter Guarantee before witnessing Mr Salter's signature. She may or may not have advised Mrs Salter about the Rankine connection. Mrs Gallimore's evidence of her (Mrs Gallimore's) understanding of the transaction, deposed to in her affidavit, is not consistent with her knowledge of the matters that ought, in their Lordships' opinion, to have been referred to in the note or memorandum of the transaction between Cornerstone and Mr Salter that it was Cornerstone's statutory duty to have prepared. If Mrs Gallimore had been cross-examined and had given answers along the lines of the inferences that Miss Phillips has invited their Lordships to draw, the question of section 8(3) relief might appear differently. But she was not cross-examined and her evidence stands uncontradicted.
40. There is, moreover, an obligation on a creditor to disclose to an intending surety, per Lord Campbell in Hamilton v Watson (1845) 12 C&F 109 at 119 -

"… anything that might not naturally be expected to take place between the parties who are concerned in the transaction, that is, whether there be a contract between the debtor and the creditor, to the effect that his position shall be different from that which the surety might naturally expect"

Vaughan Williams LJ in London General Omnibus Co. Ltd v Holloway [1912] 2KB 72 cited the above passage from Lord Campbell's judgment in Hamilton v Watson and continued (at 79)

"Lord Campbell, it is true, takes as his example of what might not be naturally expected an unusual contract between creditor and debtor whose debt the surety guarantees, but I take it this is only an example of the general proposition that a creditor must reveal to the surety every fact which under the circumstances the surety would expect not to exist, for the omission to mention that such a fact does exist is an implied representation that it does not".

41. It appears to their Lordships that these dicta are relevant to the question whether the court should exercise its power to validate the securities which have become unenforceable by virtue of section 8(1). The fact that Mr Salter's liability in respect of the $160,000 part of the $250,000 related to a sum he had not been lent and from which he had had and would have no benefit, a sum owing to Cornerstone by a third party whose default would trigger the liability of the ladies under their guarantee and mortgage, ought to have been made known to them. Mrs Gallimore's unchallenged evidence at trial was inconsistent with any knowledge by her of that fact. It is impossible to know whether, if the fact referred to had been known to her and her co-guarantors and mortgagors, they would have been willing to give the security that they did.
42. Their Lordships, in agreement with Downer JA, conclude that this is not a case in which it would be equitable to restore the liability of the ladies under their guarantee and mortgage and, therefore, conclude that it would not be equitable to exercise the section 8(3) power to declare the transaction between Mr Salter and Cornerstone to be enforceable. For the same reason their Lordships would, had it been necessary to do so, have exercised the power under section 2(2) of the Act to set aside the guarantee and the mortgage.

Conclusion

43. For the reasons explained their Lordships humbly advise Her Majesty to allow the appeal, set aside the order for costs made by the Court of Appeal and restore the order made by Reid J. Their Lordships will make an order nisi that Cornerstone pay the costs of the appeal to the Board and the costs in the courts below. Cornerstone may apply within 21 days for some other order as to costs to be made but, subject thereto, the costs order referred to will become final.