Australian Finance Direct Ltd Timothy Elderton

[2006] NSWLC 1

Local Court of New South Wales

CITATION:	Australian Finance Direct Ltd Timothy Elderton [2006] NSWLC 1
JURISDICTION:	Civil
PARTIES:	Australian Finance Direct Ltd Timothy Elderton
FILE NUMBER:	5583/05
PLACE OF HEARING:	Downing Centre
DATE OF DECISION:	02/10/2006
MAGISTRATE:	Magistrate H Dillon
CATCHWORDS:	Consumer Credit - Whether contract between supplier of services to consumer discharged or rescinded so as to entitle consumer to terminate contract with credit provider - Whether consumer terminated contract with supplier of services - Whether consumer accepted repudiation of contract by services provider or affirmed the contract
LEGISLATION CITED:	Uniform Consumer Credit Code ss 125
CASES CITED:	McDonald v Dennys Lascellas Ltd (1933) 48 CLR 457 Shevill v Builders Licensing Board (1982) 149 CLR 620
REPRESENTATION:	Mr J White (Counsel) instructed by McKells, Solicitors Self with Mr D Emerson - Elliott (McKenzie friend)
ORDERS:	1. Verdict for the plaintiff in the sum of $29,009 plus interest to be calculated at a rate of 14 per cent per annum from 22 April 2004 (the date of the letter of demand) to the date of judgment. Judgment accordingly.; 2. In relation to costs, the order I propose is the usual order that costs follow the event in a sum agreed or assessed. Parties may have liberty to apply in respect of the proposed order. If the matter is not relisted within 28 days by either party on the question of costs, the proposed order will be executed.

JUDGMENT

1. The plaintiff, Australian Finance Direct Ltd (“AFD”) is a finance company which entered into an arrangement with an unrelated corporation, National Investment Institute Pty Ltd (“NII”) to enable persons applying to undertake courses with NII to finance the fees by way of loans extended to them by AFD. The defendant’s husband, Mr Timothy Elderton, was such a student. Mrs Carolyn Elderton signed an application for finance from the plaintiff on 28 November 2002 to enable Mr Elderton to undertake a course with NII. The application was accepted by AFD and a contract was formed.

2. The loan agreement was for the principal sum of $15,340 with an interest rate payable of 14 per cent upon the principal and a default interest rate of 16 per cent. The period of the loan was specified as being 48 months and monthly repayments of $419.19 were agreed. Mrs Elderton made twelve monthly repayments, one of which was reversed. On 12 January 2004, the plaintiff sent a default notice to her demanding outstanding arrears. No further payments were made by Mrs Elderton. The plaintiff claims the sum of $13545.74 together with interest and costs.

3. Mr Elderton denies liability to the plaintiff on the basis that he asserts that the plaintiff was a linked credit provider (to NII) for the purposes of the Consumer Credit Code (“the Code”) and that he was entitled, pursuant to s.125 of the Code, to terminate the loan contract and did so.

The facts

4. The facts in the matter are, for the most part, not in contest. Mr Elderton is an engineer whose family company failed. In January 2003, he was invited to a seminar by an ex-employee of his who had become an employee of, or consultant to, NII. At that time, he was unable to obtain a loan due to the restrictions placed upon him by Pt X of the Bankruptcy Act. As a result of a successful loan application by his then-wife, Carolyn Elderton, Mr Elderton commenced the NII course he had been invited to undertake. (That loan is the subject of separate proceedings, although both matters were heard together.)

5. His evidence was that he was induced to enter the contract with NII by representations made to him that there would a 100 per cent “money-back guarantee”, that ASIC had approved the courses and that he was guaranteed to make money. It is uncontested that none of these representations was ultimately fulfilled by NII in relation to Mr Elderton after NII collapsed.

6. Having proceeded some way into the course, his Pt X restrictions were lifted and he was invited to undertake a further course offered by NII, at the cost of $55,000. He did not have the money himself and he was told by his ex-employee that he could take out a loan from AFD for the cost of the course. The NII consultant gave him the application form and he applied for the $30,000 loan which is the subject of these proceedings. He commenced that new course in mid-2003. In November 2003, however, NII was placed into receivership and all courses were terminated.

7. On 20 December 2003, Mr Elderton wrote to AFD in the following terms:

As a disgruntled student with [NII and Empower Group], which I believe are now in receivership, I have hereby cancelled my authority to direct debit my bank account. I enrolled in the Gold Plus Affiliate program in May 2003 by financing the $55,000 fee. $25,000 is directly debited by NII via Ezy Pay over 12 months and the balance $30,000 of this is financed through AFD over 48 monthly payments of $829.22…

Please be advised that I have cancelled my authority to direct debit my bank account on the grounds that I have not received what I have paid for. Three months ago, Henry Kaye elevated all members of the 12 month Gold Plus Affiliate Program to his new 24 month Platinum Plus Program. To date, I have only completed 29% of the program but have paid off 32% of the fee. I have not used any of the six property trade opportunities that guarantee a minimum $15,000 gross profit each, nor have I yet used my free consultations with a tax accountant, solicitor and investment adviser, all valued at $7500.

I have also cancelled repayment for the $15,000 Investment Mastery program, which can no longer be completed. The 48 monthly payments of $419.19 were debited from my wife’s account… You should also be aware that my and my wife’s accounts are frozen, pending a separation settlement order.

There is talk that Henry Kaye may continue the affiliate program through some other vehicle. Should this be the case, I (and other affiliates) will be happy to continue with the program and the repayments, as long as the program delivers what we paid for, i.e., course content, property trades, consultations and money back guarantee, etc. Until I receive written confirmation of this and the program is back on track, the direct debit payments will remain suspended…

8. Although in his statement to the Court he asserted that the contract with NII had been terminated, Mr Elderton provided no evidence of having done so. Nothing was presented to the court by way, for example, of a letter to NII or an account of a telephone conversation with an agent of NII or any other sort of communication with that body.

9. The plaintiff concedes that for the purposes of the Code that it was a linked credit provider in relation to NII and that the supply of services by NII was pursuant to a “sales contract” for the purposes of the Code.

The issues

10. Although not specifically raised or particularised in his Notice of Grounds of Defence, the critical issue to be determined is whether Mr Elderton is able to rely on s.125 of the Code to validate his purported termination of the contract with ADF. That the plaintiff fully understood this is apparent from its counsel’s well-prepared and argued written submissions. To his credit, Mr White did not seek to prevent Mr Elderton running the argument despite the inadequacy of the defendant’s pleadings.

11. Section 125(1) provides that if a sale contract is rescinded or discharged and there is a tied loan contract or a tied continuing credit contract made with the purchaser by a linked credit provider of the supplier under the sale contract, the debtor is entitled to terminate the credit contract.

12. The plaintiff denies that there was a rescission of the sale contract between Mr Elderton and NII and further denies that it was discharged. It contends therefore that the remedy provided to consumers under s.125 is unavailable to Mr Elderton. He, on the other hand, asserts that the contract with NII was discharged when that company terminated the courses he was attending.

13. Objection was taken to the defendant being allowed to any further amendment of the defence as the plaintiff was not on notice of any other matter sought to be relied upon by the defendant. The Notice of Grounds of Defence pleads only two matters:

1. The debt claimed by the plaintiff is not owed.
2. The loan agreement relied on by the plaintiff was validly terminated by letter dated 20th December 2003.

14. I upheld the objection. I did not take that course lightly, being well aware that, although he had been aided by a legally qualified McKenzie friend, Mr Elderton was unrepresented and clearly unskilled in litigation. (His McKenzie friend appeared to me to have very limited experience in matters of this kind as well.) Nevertheless, while courts are obliged to offer as much assistance as they can to enable a party to run his, her or its case properly, it cannot offer advantages to unrepresented parties that would be denied to legally represented parties.

15. Clear directions (and indulgences) had previously been given to Mr Elderton to enable him to prepare his case and to get his pleadings and evidence in order. I therefore considered that the prejudice to the plaintiff in allowing Mr Elderton effectively to amend his defence to raise a new, complex issue which the plaintiff was unprepared to meet would be inappropriate. I allowed him to lead evidence of what was said to induce him to enter the contract for the purpose of providing the context in which the transaction with NII had taken place.

16. In any event, even if any amendment had been allowed, in my opinion, for reasons I deal with below, it would not have affected the result.

The submissions

17. The plaintiff conceded that if s.125 was applicable, the defendant must be successful. It contended, however, that there was no rescission or discharge of the contract between NII and Mr Elderton (which is the pre-condition of any entitlement he might have had to terminate his contract with ADF).

18. Put plainly, Mr Elderton’s position is that the contract between himself was discharged or rescinded upon NII terminating the course he was attending when it went into receivership. As I understand the submissions made by the defendant, his principal contention is that the contract was terminated by NII’s breach in failing to provide the services it had contracted to provide. That is to say, his argument appears to be that NII repudiated the contract and that he ultimately accepted that repudiation, thereby rescinding the contract.

19. The plaintiff argues that the plaintiff misunderstands both the concepts of discharge and rescission and that neither concept applies to the facts of this case. This argument made by the plaintiff was not developed in much more detail than that and I was not referred to any authority on this issue by either party.

20. More to the point, the plaintiff further argued that there was no evidence presented that Mr Elderton had done anything to terminate his contract with NII following its closure of the courses he was attending. It argues that, to the contrary, the letter of 20 December 2003, addressed not to NII but to ADF, indicates an intention to keep the contract on foot. It says that unless Mr Elderton brought the contract to an end (or it was discharged in some other way unspecified by the defendant) he cannot seek support from s.125.

Relevant legal principles

21. Section 125(1) of the Code provides as follows:

If a sale contract is rescinded or discharged (whether under this Code or any other law) and there is a tied loan contract or a tied continuing credit contract made with the purchaser by a linked credit provider of the supplier under the sale contract, the debtor is entitled—
(a) in the case of a tied loan contract—to terminate the credit contract; or
(b) in the case of a tied continuing credit contract—to be credited with the amount of credit in relation to the sale contract and the interest charges attributable to that amount.

22. For the defendant to rely on s.125, therefore, he must show that the sale contract, that is, the contract between himself and NII, was rescinded or discharged when he purported to terminate the credit contract with AFD. That requires a consideration of the concepts of “discharge” and “rescission” of a contract. As Mr Elderton is not legally represented, I will attempt as best I can to explicate those concepts in terms an intelligent layperson is capable of understanding.

Discharge of a contract

23. The discharge of a contract means, in general terms, that both parties to a contract are freed from their mutual obligations. This liberation from mutual obligations may come about in a number of ways. When each party has performed its duties under the contract, it is discharged from any further obligations. Parties may also agree to release each other from further obligations. In some circumstances, a contract may be discharged under the doctrine of frustration. Finally, in certain circumstances a breach may operate as a discharge relieving the innocent party of further obligation but not the defaulting party.

24. In this case, there cannot be a discharge by performance on Mr Elderton’s part nor, obviously, has he been able to reach agreement with ADF to release him from any further obligations under the contract. If the contract was discharged at all, it must have been on the basis that the contract with NII was frustrated or that NII’s breach operated to discharge him from further obligation.

25. A breach of contract will not necessarily bring a contract to end, discharging the parties from their obligations under it. In the case of a fundamental breach of contract, the innocent party is faced with an election between affirming the contract by conduct indicating an intention to treat the contract as continuing or treating the contract as having been terminated. In this case, it is self-evident that NII’s failure to provide the very services it had contracted to provide struck at the heart of the contract and constituted a fundamental breach. That raises the question whether, by his conduct, Mr Elderton did anything to indicate to it that he regarded the contract as having come to an end. I will deal with that issue below.

26. A contract may also be discharged by virtue of the doctrine of frustration. In general terms, the doctrine will apply when an intervening or supervening event, entirely unforeseen by the contracting parties, and which was not caused by either party, takes place so as to make performance of the contract impossible or nugatory. That doctrine does not appear to have application in this case as there is no evidence of anything other than NII’s own conduct being the basis for its failure to comply with the terms of its contract with Mr Elderton.

Rescission

27. The concept of “rescission” at law, strictly speaking, relates to the putting to an end of a contract in such a way that it treats the contract as never having existed. This is a rescission ab initio.1 In such cases, the parties are totally discharged from any mutual obligations under the contract. Usually there will be some sort of vitiating factor which gives rise to the right of rescission in this sense, such as a misrepresentation.

28. “Rescission” is also used in a looser sense to mean the termination of a contract for breach or repudiation.2 In such a case, however, the contract is not void ab initio and the innocent party must elect either to terminate or continue the contract. If the contract is affirmed by some expression or conduct of the innocent party there is no “rescission” of the contract and neither party is discharged from its obligations but the innocent party may seek to enforce the terms of the contract.

29. No definition of rescission is provided in the Code.

30. It is critical to understand that a repudiation of a contract by one party does not automatically terminate it, discharging the parties. A contract is repudiated by one party when it evidences an absence of readiness or willingness to perform a fundamental term of a contract. Upon such a repudiation, the innocent party is put to its election whether to terminate the contract or not. In some contracts, provision is made for an automatic termination upon repudiation by one party, but that is not the position under the general law.

31. At common law, the election to terminate must be expressed unequivocally to the promisor either in words or by conduct evidencing a clear intention to terminate the contract. Equivocal words or conduct are insufficient to bring the contract to an end. If no such election is made in clear and unambiguous terms the law regards the contract as still on foot. The contract is not discharged by breach, even of a fundamental term, by one party. That is to say, a contracting party cannot unilaterally bring a contract to an end. It requires the acceptance of the other for the contract to be terminated (or “rescinded” in the wider sense of that term).

Findings and conclusion

32. Mr Elderton was, it seems, induced to enter what appears to have been a type of “get-rich-quick” scheme which, if it enriched anyone, was not him. This case is not an investigation into the bona fides or otherwise of NII. Suffice it to say that he borrowed a significant sum of money from the plaintiff in the hope of making some money quickly, not because he was greedy but because, due to the collapse of his business, he and his family were desperate for income. So the collapse of NII, and with it his hopes of a fast financial recovery, was a double-tragedy for him: not only had he the galling experience of being, as he saw it, abandoned and possibly duped by NII, but he found himself exposed to the demands of ADF for repayment of the loan he taken out with it.

33. It is quite clear that NII repudiated its contract with Mr Elderton. It simply lacked capacity to perform its contractual obligation and was placed in receivership. That, of itself, discharged neither it nor Mr Elderton from the contract. It was then for Mr Elderton, by some unambiguous expression of intention conveyed to NII, or by some unequivocal conduct directed towards NII evidencing an intention to terminate the contract, to demonstrate his election to “rescind” (using the looser definition of that term).

34. The only evidence tendered of some sort of expression to terminate the contract with NII was the letter by Mr Elderton to ADF. Nothing on the letter indicates that a copy was sent to NII or its representatives or that it ever received a copy from Mr Elderton or any other party so as to put it on notice of the contents of the letter.

35. Moreover, the contents of the letter itself are hardly an unambiguous expression of an intention to terminate the contract with NII, even had it been notified to NII. Mr Elderton expresses in it, understandably, a lack of satisfaction with the performance of NII. He informs ADF that he is withdrawing its authority to debit his bank account directly in respect of the loan repayments because of his dissatisfaction with NII, but the letter ends with the more conciliatory (and equivocal) statement that he is prepared to fulfil his part of his bargain with NII if its principal will arrange for the course to continue. This does not appear to be an election to terminate the contract but an affirmation of it directed, nonetheless, to the wrong quarter, namely, ADF.

36. Even if it is assumed (and I think that it is drawing a very long bow to do so) that there was some basis for Mr Elderton to consider that ADF was an intermediary of NII’s, and that it would communicate with NII the contents of the letter of 20 December, that letter could not, in my view, have caused NII to understand that Mr Elderton intended to terminate, discharge or rescind the contract but rather must have given it the impression that his intention was to hold it to its bargain.

37. This was a most unfortunate error on his part. Had he chosen to terminate the contract upon its repudiation by NII, he would have been afforded the protection of s.125 of the Code. One can only have the utmost sympathy for him in the circumstances in which he found himself. Nevertheless, the Court must apply the relevant legal principles to the facts as it has found them to be.

38. In my view, therefore, the contract between Mr Elderton and ADF was not validly terminated by him, as his Notice of Grounds of Defence asserted, by the letter of 20 December 2003.

Verdict and judgment

39. There will a verdict for the plaintiff in the sum of $29,009, plus interest to be calculated at the rate of 14 per cent per annum from 22 April 2004 (the date of the letter of demand) to the date of judgment. Judgment accordingly.

40. In relation to costs, the order I propose is the usual order that costs follow the event in a sum agreed or assessed. Parties may have liberty to apply in respect of the proposed order. If the matter is not relisted within 28 days by either party on the question of costs, the proposed order will be executed.

Post-script

41. Mr Elderton, unfortunately, was not legally represented. I am not aware of what legal advice he received in relation to the matter. This matter raised complex issues of law and it was clearly a disadvantage to him that he was forced to rely upon a McKenzie friend to assist him. The use of McKenzie friends has been criticised often by the superior courts and for good reason: often the advice or assistance they provide is unhelpful. This is not meant as a criticism of Mr Emerson-Elliott but, in general terms, it must be said that McKenzie friends are not welcomed with open arms by courts because it is all too often the case in litigation that “a little knowledge is a dangerous thing.” The other main reason why the use of McKenzie friends is discouraged is that they are not officers of the court and are not subject to professional discipline and frequently do not understand the ethical obligations of lawyers. Some have even been discovered to have actively misled courts.

42. For this reason, it is preferable that indigent parties or persons financially hard-pressed not use McKenzie friends but avail themselves of pro bono schemes provided by major law firms such as Gilbert + Tobin, Clayton Utz and others or such organisations as the Public Interest Advocacy Centre or the Legal Aid Commission.

1 See, for example, McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457.

2 See, for example, Shevill v Builders Licensing Board (1982) 149 CLR 620.