Elders Rural Finance Ltd v Smith

[1997] HCATrans 148

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S214 of 1996

B e t w e e n -

ELDERS RURAL FINANCE LIMITED

Applicant

and

MURRAY JOHN SMITH, MAXWELL ERNEST WALTER SMITH, DARRYL JAMES SMITH and BERYL FLORENCE SMITH (as Co-Executrix of the Estate of the Late Ernest Henry Smith)

Respondents

Application for special leave to appeal

GAUDRON J
McHUGH J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 6 JUNE 1997, AT 11.27 AM

Copyright in the High Court of Australia

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR J. BARTOS, for the applicant.  (instructed by Corrs Chambers Westgarth)

MR P.G. HELY, QC:   If the Court pleases, I appear with MR C.W.J. LEGGAT for the respondent.  (instructed by Andrew Quigley & Co)

GAUDRON J:   Yes, Mr Jackson.

MR JACKSON:   Your Honours, this application concerns the Contracts Review Act 1980 and, in particular, section 7(1) of that Act. It concerns the ambit to be given to the expression in that Act, which your Honours should have at the front of the book, in section 7(1), the expression:

finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made -

Your Honours, there is, in our submission, in relation to the issue a conflict of decisions of the Court of Appeal meriting the grant of special leave.  Could I just indicate to your Honours where that arises from.  The starting point is a statement by your Honour Justice McHugh, with Mr Justice Hope agreeing, in West v AGC (Advances) Ltd (1986) 5 NSWLR 610, at pages 621 and 622. Your Honours, that should be about a third of the way through the book that your Honours have. It is the first case after, I think, the blue divider.

What your Honours will see at page 621, the paragraph commencing between D and E, is your Honour’s observation that:

It is important to bear in mind that it is the contract or its provisions which must be unjust.....“it is not the transaction but the contract which must be initially examined”.

We would invite your Honours to read the remainder of that paragraph, and the full passage to which I wish to refer goes over to the next page to the end of the first new paragraph on page 622.

GUMMOW J:   Of course, one has section 9(2)(1), does one not?

MR JACKSON:   Yes, your Honour, but what one is looking to see is whether in the end the contract is something that can be described as unjust.

GAUDRON J:   The commercial setting, however, is quite different in each of these cases, is it not?  In this case there was an ongoing relationship with respect to the pastoral activities or the farming and grazing activities that was expected would continue in relation to those activities.  The purpose of the loan was a purpose which related to the activities that formed the basis of their relationship, unlike in West’s Case where it was an extraneous project.

MR JACKSON:   Yes.  Your Honour, I accept that the context in which the transaction - if I could use that term for the moment - was entered into was a context where there were persons who had been dealing with us and dealing with us for quite some years and where what was proposed was that the contract related to them buying another property and the probability, no doubt, was that they would continue to deal with us in relation to whatever was the produce of that property.

GAUDRON J:   And it was thought to be to your advantage to continue the relationship, to let the relationship develop so that you could get further business from it.

MR JACKSON:   Well, your Honour, that is probably true of most commercial relationships, no doubt.

GAUDRON J:   But it was not just a borrower/lender relationship is the point I am making to you.

MR JACKSON:   No, your Honour.  I appreciate the point your Honour is putting to me.  What I am seeking to say in response to if it I may is this, that whilst that is the setting in which it occurred, when one comes to look to see what is the thing, as it were, to which ultimately section 7 or section 9 might apply, what one sees is that it has to be, in the end, the contract or the provision of the contract.

GAUDRON J:   But it was a contract for a purpose as distinct from merely a contract secured against a property.

MR JACKSON:   Well, your Honour, the purpose of the contract - and no doubt one can look at it from different points of view - was to provide the finance to enable them to purchase another property.  Now, no doubt the dealings in the items that were produced on the property or finance that might go in a kind of “come and go” account in dealing with those things, and it was something that would give rise to further transactions with us and perhaps to augment the number of transactions on an account which already existed but, in the end, the contract was a contract to provide finance.

What we would seek to say, your Honours, is that that statement which was made by your Honour in West has been applied on a number of occasions including, indeed, the case in which your Honours have just granted special leave, and I was going to take your Honours to that now, in Citicorp Australia Ltd v O’Brien (1996) 40 NSWLR 398, and in the book which your Honours have and it is the part of the case that has not come to the Court, the case as between Citicorp and the O’Briens. What your Honours will see, if I could take your Honours to the last case in the book and, indeed, the last couple of pages of it, page 419, the passage commences just after F and what was said was, “it is difficult to discern” how his Honour “came to conclude that the contract was unjust”. Your Honours, I will not read out the rest of that paragraph but we would invite your Honours to read it. Then, at the top of the next page:

A contract is not unjust within the meaning of the Act because one party has made a good bargain and believes the other party has made a bad one.  To say that, in such a situation, the first party must not enter into the contract is to stifle commerce.

And, your Honours, that passage goes on a little further through that paragraph.

Your Honours, what we would seek to say is the approach taken by the Court of Appeal in Citicorp v O’Brien is an approach which does appear to rely directly on the passage from West v AGC (Advances).  That approach seems to be, in our submission, in conflict with the approach taken in the present case, the approach in the present case turning fundamentally on the fact that if one looked at the transaction from the point of view of the borrowers, the transaction was one that could be regarded as unfair although there was no conduct of ours that could be regarded as falling into that category.

The critical factors, your Honours, were these:  there was a finding by the primary judge there was no overbearing by us in the way the contract was entered into.  That is page 14 of the application book, lines 50 to 54, the last three lines on page 14.  At page 47, your Honours, lines 16 to 21, his Honour found they:

acted freely in the exercise of their economic liberty in deciding to make this purchase and to borrow money.

Your Honours, there was no suggestion that the terms of the contract were themselves in any way inappropriate to such a dealing.  That that is so

appears on the next page, page 48, lines 40 to 50, where his Honour makes it apparent that his view is that the provision applied:

not because of any aspect of the terms of the contract in themselves, but because of the circumstances -

meaning, fundamentally, the situation of the Smiths.

Now, your Honours, what happened, as the passage indicates, was that the respondents found it unreasonably difficult to comply with conditions which were inherently reasonable, and the essence of the finding, your Honours, was that because the lender had a better appreciation of the risk of the transaction to the borrowers, the contract is one that is unjust.  Your Honours, that leaves out of account the fact that borrowers wanted to enter into the transaction and the view taken by the courts below really means that a lender must refuse risky borrowings even when the terms are those that it would offer in a less risky situation.

Your Honours, the case is one of importance, in our submission.  I appreciate the Contracts Review Act applies only to New South Wales but, in our submission, it is a sufficiently important case for the Court to grant special leave.  Could I, with respect, refer your Honours, of course, to section 35A(2) which contemplates that the Court may deal with differences of opinion between different courts or within the one court as to the state of the law.  Your Honours, those are our submissions.

GAUDRON J:   We need not trouble you, Mr Hely.

In the commercial setting of the contract with which this application is concerned, the findings made by Justice Bryson were clearly open.  Given this and given also the nature of the orders which his Honour made, there is no error of principle to be discerned in the majority approach in the Court of Appeal.  Special leave is refused.

MR HELY:   With costs, in my respectful submission.

MR JACKSON:   I have nothing to say, your Honour.

GAUDRON J:   Yes.  With costs.

AT 11.39 AM THE MATTER WAS CONCLUDED